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, 2020
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 
 __________________________________________________
https://cdn.kscope.io/11014fa7ed771605704b164de4320de0-elgxnewlogoa11.jpg
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
 
x
 
 
 
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 May 18, 2020, there were 19,171,650 shares outstanding of the registrant’s only class of common stock.
 
 
 
 
 



ENDOLOGIX, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2020

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)
 
March 31,
2020
 
December 31,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
40,854

 
$
41,560

Restricted cash
1,381

 
1,200

Accounts receivable, net of allowance for doubtful accounts of $1,596 and $1,317, respectively
18,951

 
22,392

Other receivables
298

 
282

Inventories
24,486

 
26,405

Prepaid expenses and other current assets
2,548

 
1,864

Total current assets
$
88,518

 
$
93,703

Property and equipment, net
12,473

 
13,152

Goodwill
120,783

 
120,814

Other intangible assets, net
72,086

 
72,603

Deposits and other assets
786

 
1,124

Operating lease right-of-use assets
5,707


5,768

Total assets
$
300,353

 
$
307,164

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
12,464

 
$
14,024

Accrued payroll
21,870

 
18,232

Accrued expenses and other current liabilities
16,443

 
12,931

Current portion of debt
167,861

 
10,606

Revolving line of credit
10,519

 

Total current liabilities
$
229,157

 
$
55,793

Deferred income taxes
150

 
150

Operating lease liabilities
11,376


11,621

Derivative liabilities

 
940

Other liabilities
1,866

 
2,244

Contingently issuable common stock
200

 
500

Debt
4,281

 
172,060

Total liabilities
$
247,030

 
$
243,308

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Series DF-1 convertible preferred stock, $0.001 par value, 1,150,000 shares authorized, 14,649 shares issued and outstanding

 

Common stock, $0.001 par value, 170,000,000 shares authorized, 19,215,059 and 18,190,054 shares issued, respectively, and 19,097,506 and 18,098,464 shares outstanding, respectively
19

 
18

Treasury stock, at cost, 117,553 and 91,590 shares, respectively
(4,271
)
 
(4,235
)
Additional paid-in capital
737,599

 
730,729

Accumulated deficit
(682,588
)
 
(664,472
)
Accumulated other comprehensive income
2,564

 
1,816

Total stockholders’ equity
$
53,323

 
$
63,856

Total liabilities and stockholders’ equity
$
300,353

 
$
307,164


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,
 
2020
 
2019
Revenue
$
28,510

 
$
35,606

Cost of goods sold
13,378

 
12,407

Gross profit
15,132

 
23,199

Operating expenses:

 

Research and development
3,536

 
4,787

Clinical and regulatory affairs
3,165

 
3,785

Marketing and sales
14,496

 
16,786

General and administrative
10,119

 
9,416

Restructuring costs

 
419

Total operating expenses
31,316

 
35,193

Loss from operations
(16,184
)
 
(11,994
)
Other income (expense):

 

Interest expense
(10,527
)
 
(8,490
)
Other income (expense), net
(1,122
)
 
318

Change in fair value of contingent consideration related to acquisition
300

 
200

Change in fair value of derivative liabilities
10,175

 
(2,023
)
Loss on debt extinguishment
(730
)
 

Total other expense, net
(1,904
)
 
(9,995
)
Net loss before income taxes
(18,088
)
 
(21,989
)
Income tax expense
(28
)
 
(39
)
Net loss
$
(18,116
)
 
$
(22,028
)
 
 
 
 
Comprehensive loss, net of taxes:
 
 
 
Net loss
(18,116
)
 
(22,028
)
Other comprehensive income (loss) foreign currency translation
748

 
(598
)
Comprehensive loss
$
(17,368
)
 
$
(22,626
)
 


 


Basic and diluted net loss per share
$
(0.90
)
 
$
(2.12
)
Shares used in computing basic and diluted net loss per share
20,067

 
10,374

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,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net loss
$
(18,116
)
 
$
(22,028
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Bad debt expense
438

 
(126
)
Depreciation and amortization
1,192

 
1,735

Stock-based compensation
1,733

 
2,361

Change in fair value of derivative liabilities
(10,175
)
 
2,023

Change in fair value of contingent consideration related to acquisition
(300
)
 
(200
)
Accretion of interest and amortization of deferred financing costs
5,202

 
3,554

Payable in kind interest expense on term loan facility
2,040

 
1,943

Non-cash foreign exchange loss
1,141

 
(400
)
Loss on debt extinguishment
730

 

Non-cash lease expense
48

 
53

Changes in operating assets and liabilities:
 
 
 
Accounts receivable and other receivables
2,860

 
(5,253
)
Inventories
1,826

 
112

Prepaid expenses and other current assets
(409
)
 
(2,367
)
Accounts payable
(1,440
)
 
5,378

Accrued payroll
3,676

 
(1,438
)
Accrued expenses and other liabilities
232

 
995

Net cash used in operating activities
(9,322
)
 
(13,658
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(100
)
 
(107
)
Net cash used in investing activities
(100
)
 
(107
)
Cash flows from financing activities:
 
 
 
Deferred financing costs
(1,379
)
 

Net proceeds from revolving line of credit
10,519

 

Minimum tax withholding paid on behalf of employees for stock-based compensation
(36
)
 
(2
)
Net cash provided by financing activities
$
9,104

 
$
(2
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(207
)
 
(68
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(525
)
 
(13,835
)
Cash, cash equivalents and restricted cash, beginning of period
42,760

 
24,731

Total cash, cash equivalents and restricted cash, end of period
$
42,235

 
$
10,896

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

 
 
Cash and cash equivalents
$
40,854

 
$
9,696

Restricted cash
1,381

 
1,200

Total cash, cash equivalents and restricted cash
$
42,235

 
$
10,896





3




ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2020
 
2019
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
2,361

 
$
2,065

Cash paid for income taxes
94

 
88

Cash paid for amounts included in the measurement of operating lease liabilities
$
874

 
$
849

Non-cash investing and financing activities:

 

Acquisition of property and equipment included in accounts payable
$

 
$
59

Fair value of embedded derivative issued in connection with loan agreements (Note 6)
$
12,016

 
$

Fair value of common and preferred stock issued in connection with loan agreements
$
2,000

 
$

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


4



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

Three Months Ended March 31, 2020
 
Series DF-1 Preferred Stock
 
 Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Treasury
Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’
Equity
 
Issued Shares
 
Par Value
 
Issued Shares
 
Par Value
 
 
 
 
 
Balance at December 31, 2019

 

 
18,190

 
$
18

 
$
730,729

 
$
(664,472
)
 
$
(4,235
)
 
$
1,816

 
$
63,856

Treasury shares purchased

 

 
26

 

 

 

 
(36
)
 

 
(36
)
Deerfield warrants

 

 

 

 
(375
)
 

 

 

 
(375
)
Equity conversion option

 

 

 

 
3,566

 

 

 

 
3,566

Stock-based compensation expense

 

 

 

 
969

 

 

 

 
969

Issuance of restricted stock

 

 
49

 

 

 

 

 

 

Restricted stock expense

 

 

 

 
764

 

 

 

 
764

Issuance of common stock

 

 
950

 
1

 
786

 

 

 

 
787

Issuance of Series DF-1 Preferred Stock
15

 

 

 

 
1,213

 

 

 

 
1,213

Debt issuance costs allocated to equity

 

 

 

 
(53
)
 

 

 

 
(53
)
Net loss

 

 

 

 

 
(18,116
)
 

 

 
(18,116
)
Other comprehensive income

 

 

 

 

 

 

 
748

 
748

Balance at March 31, 2020
15

 

 
19,215

 
$
19

 
$
737,599

 
$
(682,588
)
 
$
(4,271
)
 
$
2,564

 
$
53,323



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




5



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, 2020 and 2019, there were no related party transactions.

The Company adopted Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements - (Subtopic 205-40) effective December 31, 2016, which requires the Company to make certain disclosures if it concludes that there is substantial doubt about the entity’s ability to continue as a going concern within 12 months from the date of the issuance of these financial statements. The Company has a history of recurring losses from operations, recurring cash flow losses, and a net capital deficiency. Further, during the three months ended March 31, 2020, the COVID-19 pandemic had a negative impact on the Company’s financial results and business operations, and the Company expects that financial results and business operations will continue to be negatively impacted by the pandemic. As a result, the Company believes that its existing liquidity will not be sufficient to meet anticipated cash needs for at least the next 12 months from the issuance date of these financial statements, thereby raising substantial doubt about the Company’s ability to continue as a going concern.

The consolidated financial statements included herein have been prepared on a going concern basis, which contemplates continuity of operations and the realization of assets and the repayment of liabilities in the ordinary course of business. The Company has not made any adjustments to the accompanying consolidated financial statements related to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company will require additional capital to sustain its operations and make the investments it needs to execute upon its business plan. If the Company is unable to generate sufficient revenue from its existing business plan, the Company will need to obtain additional equity or debt financing. If the Company attempts to obtain additional debt or equity financing, the Company cannot assume that such financing will be available on favorable terms, if at all.

Additionally, due to the substantial doubt about the Company’s ability to continue operating as a going concern, the Company is in default under the Facility Agreement and Credit Agreement with its lender, Deerfield. We have entered into forbearance agreements with Deerfield which provide that Deerfield will not exercise its default rights under the Facility Agreements until June 15, 2020 or earlier upon certain conditions. If Deerfield were to exercise its default rights, such default would result in a cross default under the Company’s 5.00% Notes and 2020 5.00% Voluntary Notes. If Deerfield were to exercise its default rights, other lenders may then declare a default and the Company may be unable to repay the amounts owed without raising additional capital. If the Company is unable to repay the amounts owed, it may be forced to declare bankruptcy. Therefore, the entire amount of borrowings of $135.6 million from Deerfield and the $32.1 million 5% Notes and 2020 5.00% Voluntary Notes as at March 31, 2020 have been classified as current in these financial statements. Further, the Company would be required to pay exit fees totaling $11.1 million under the Facility Agreement and the remaining $0.1 million commitment fee under the Credit Agreement. Deerfield has not declared a default.

6


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



The interim financial data as of March 31, 2020 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, 2020. 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, 2019, filed with the SEC on March 11, 2020 (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 months ended March 31, 2020, all of the Company’s revenue and related expenses were solely attributable to these activities. Substantially all of the Company’s long-lived assets are located in the United States.


2. Use of Estimates and Summary of Significant Accounting Policies
(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 three months ended March 31, 2020.


7


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


3. Balance Sheet Account Detail
(a) Property and Equipment
Property and equipment consisted of the following:
 
March 31,
2020
 
December 31,
2019
Production equipment, molds and office furniture
$
10,919

 
$
10,844

Computer hardware and software
7,895

 
7,897

Leasehold improvements
15,594

 
15,594

Construction in progress (software and related implementation, production equipment and leasehold improvements)
694

 
795

Property and equipment, at cost
35,102

 
35,130

Accumulated depreciation
(22,629
)
 
(21,978
)
Property and equipment, net
$
12,473

 
$
13,152

Depreciation expense for property and equipment for the three months ended March 31, 2020 and 2019 was $0.7 million and $0.9 million, respectively.
(b) Inventories
Inventories consisted of the following:
 
March 31,
2020
 
December 31,
2019
Raw materials
$
5,165

 
$
5,362

Work-in-process
4,463

 
4,132

Finished goods
14,858

 
16,911

Total Inventories
$
24,486

 
$
26,405

(c) Goodwill and Other Intangible Assets
The change in the carrying amount of goodwill for the three months ended March 31, 2020 was as follows:
Balance at December 31, 2019
$
120,814

Foreign currency translation adjustment
(31
)
Balance at March 31, 2020
$
120,783


8


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


Other intangible assets consisted of the following: 
 
March 31, 2020
 
December 31, 2019
 
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

 
(13,797
)
 
53,803

 
67,600

 
(13,467
)
 
54,133

Customer relationships
7,500

 
(3,125
)
 
4,375

 
7,500

 
(2,938
)
 
4,562

Total finite-lived intangible assets
75,100

 
(16,922
)
 
58,178

 
75,100

 
(16,405
)
 
58,695

Other intangible assets, net
$
89,008

 
$
(16,922
)
 
$
72,086

 
$
89,008

 
$
(16,405
)
 
$
72,603

Amortization expense for intangible assets for the three months ended March 31, 2020 and 2019 was $0.5 million and $0.9 million, respectively.
Estimated amortization expense for the 5 succeeding years and thereafter is as follows:
Remainder of 2020
$
2,444

2021
3,276

2022
3,320

2023
3,379

2024
3,499

2025
3,726

Thereafter
38,534

Total
$
58,178

(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, 2020 and December 31, 2019:

 
March 31, 2020
 
December 31, 2019
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingently issuable common stock
(a)
$

 
$

 
$
200

 
$
200

 
$

 
$

 
$
500

 
$
500

Derivative liabilities
(b)
$

 
$

 
2,330

 
2,330

 

 

 
940

 
940

Total financial liabilities
 
$

 
$

 
$
2,530

 
$
2,530

 
$

 
$

 
$
1,440

 
$
1,440

(a)     See Note 9 for additional details.
(b)     See Note 6 for additional details.

9


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


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, 2019
$
500

 
$
940

Retirement due to debt extinguishment


(1,351
)
Additions

 
12,916

Fair value adjustment
(300
)
 
(10,175
)
Balance at March 31, 2020
$
200

 
$
2,330

(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, 2020. The derivative liabilities as of March 31, 2020 is classified within accrued expenses and other current liabilities on the Company’s Condensed Consolidated Balance Sheet.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
The table below summarizes the carrying and fair values of the Company’s debt:
 
March 31, 2020
 
December 31, 2019
 
Carrying value
 
Fair value
 
Carrying value
 
Fair value
Term loan facility
$
135,627

 
$
132,969

 
$
141,274

 
$
131,892

Convertible notes
32,234

 
27,771

 
37,111

 
24,548

Other debt
4,281

 
1,259

 
4,281

 
1,416

 
$
172,142

 
$
161,999

 
$
182,666

 
$
157,856

The fair values of the Company’s 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.

The following table provides quantitative information about Level 3 inputs for fair value measurement of derivative liabilities and term loan facility as of March 31, 2020 and December 31, 2019. Significant increases or decreases in these inputs in isolation could result in a significant impact on our fair value measurement:
 
 
March 31, 2020
 
December 31, 2019
Simulation Input
 
 
 
 
Volatility
(a)
93%
 
50%
Yield
(b)
27%
 
24%

(a)     Based on weighted average of implied and historical volatility, used to forecast variability of Company's future stock price.
(b)     Based on yields from market comparables, adjusted for each instrument's seniority, for discounting future cash flows.

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, 2020 and 2019:

10


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


 
Three Months Ended March 31,
 
2020
 
2019
Cost of goods sold
$
164

 
$
227

Operating expenses:
 
 
 
Research and development
181

 
332

Clinical and regulatory affairs
166

 
186

Marketing and sales
299

 
709

General and administrative
923

 
907

Total operating expenses
1,569

 
2,134

Total
$
1,733

 
$
2,361


5. Net Loss Per Share
The Company computes earnings per share of its common stock and convertible preferred stock using the two-class method required for participating securities. The convertible preferred stock is considered a participating security because any dividends declared will be distributed among the holders of common stock and convertible preferred stock on a pro rata basis based on the number of shares of common stock held by each holder as of the dividend record date. The number of shares of common stock held by each holder will be determined on an as-converted to common stock basis, based on the then-effective Preferred Exchange Rate and without giving effect to the Ownership Cap (see Note 6). Further, the convertible preferred stock does not have a contractual obligation to share in the losses of the Company therefore its impact is excluded from the calculation of earnings per share in periods of net losses.

Because of the net losses in the three months ended March 31, 2020 and 2019, 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,
 
2020
 
2019
Restricted stock awards
2,916

 
2,690

Restricted stock units
101,492

 
6,578

Warrants
1,522,002

 

  Total
1,626,410

 
9,268

For purposes of calculating the maximum dilutive impact, it is presumed that the convertible notes will be settled in common stock, all conversion features within the term loan facility will be exercised and the convertible preferred stock will be converted into its common stock equivalent 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, term loan facility and convertible preferred stock 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,
 
2020
 
2019
Convertible notes
13,049,893

 
755,695

Conversion features under term loan facility
31,430,001

 

Convertible preferred stock
1,464,900

 


11


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


The effect of the contingently issuable common stock (see Note 9) and Nellix Exchanges under the term loan facility (see Note 6) are excluded from the calculation of basic net loss per share until all necessary conditions for issuance have been satisfied.

6. Credit Facilities
Debt consisted of the following:
 
March 31,
2020
 
December 31,
2019
Term loan facility
$
169,895

 
$
167,858

Revolving loan facility
10,519

 

Convertible notes
73,277

 
73,165

Other debt
4,281

 
4,281

Debt discounts and deferred financing costs
(75,311
)
 
(62,638
)
Long-term debt, including current portion
182,661

 
182,666

Less current portion
(178,380
)
 
(10,606
)
Long-term debt
$
4,281

 
$
172,060

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. The Company will be required to pay Deerfield on each of April 2, 2021, April 2, 2022 and April 2, 2023 (the “Maturity Date”), an amortization payment equal to 33.33% of the Term Loan outstanding on such date (or, if on the Maturity Date, the remaining outstanding principal amount of the Term Loan).
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 Term Loan indebtedness under the Restated Facility Agreement (as a last-out waterfall tranche under the Restated Facility Agreement), the “Last Out Waterfall Notes”). Such amounts are being amortized 50% on April 2, 2022 and the remaining 50% on April 2, 2023.
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”). On April 3, 2019, the terms of the Second Facility Amendment became effective.

The Second Facility Amendment provided 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 notes (the “First Out Waterfall Notes”) due on April 2, 2021 decreased from 33.33% to 16.67%  of the First Out Waterfall Notes outstanding on such date, while the percentage of the remainder of the First Out Waterfall Notes due on April 2, 2022 remained at 50% of the First Out Waterfall Notes outstanding on such date.


12


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


The Second Facility Amendment provided 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 (each, a “Deerfield Mandatory Conversion”), up to a maximum aggregate amount of $25.0 million over the Mandatory Conversion Period (the “Mandatory Conversion Feature”).

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 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 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.
On February 24, 2020, the Company and Deerfield entered into a February 2020 Exchange Agreement and Fourth Amendment (the “Fourth Facility Amendment”) to Amended and Restated Facility Agreement and Amendment to First Out Waterfall Notes (as amended to date, the “Fourth Facility Agreement”) and collectively with the Restated Facility Agreement, First Facility Amendment and Second Facility Amendment, the “Deerfield Facility Agreements”). The Fourth Facility Amendment provides for, among other things, the conversion of certain portions of the outstanding convertible debt upon the achievement of certain milestones. In addition, 16.67% of the First Out Waterfall Notes currently due on the first amortization date of April 2, 2021 (the “First Amortization Payment”) will be extended to July 1, 2021. In the event the Company satisfies the Initial Exchange Condition (as defined below) and provided that the Company reports net revenue of at least $142.5 million for the year ended December 31, 2020 and complies with the global excess liquidity requirement (the “Maturity Extension Conditions”), the maturity date shall be extended from April 2, 2023 to December 22, 2023 and the second amortization date shall be extended from April 2, 2022 to April 2, 2023. Further, the Fourth Facility Agreement provides that the interest payment date due April 1, 2020 will be payable in paid-in-kind interest by increasing the principal amount of the loans by an amount equal to the interest that has accrued.

The Fourth Facility Amendment provided for the exchange of the existing notes representing the First Out Waterfall Notes for amended notes (the “Amended First Out Waterfall Notes”). The Amended First Out Waterfall Notes reduced the Fixed Conversion Price under the existing notes from the Fixed Conversion Price to $2.00 (the “New Fixed Conversion Price”); provided that if the Initial Exchange Condition (as defined below) is not met by June 11, 2020, then such price shall revert to the Fixed Conversion Price. The Amended First Out Waterfall Notes provide that the Company may require Deerfield to convert up to $40.0 million of principal amount (the “Forced Conversion Cap”) provided that the arithmetic average of the volume weighted average price of the Company’s common stock on each of the fifteen (15) consecutive trading days ending on the conversion date (the “Forced Conversion 15 Day VWAP”), and the closing price on the conversion date, is greater than 200% of the New Fixed Conversion Price into shares of the Company’s newly created Series DF-1 Preferred Stock, par value $0.001 per share (the “Preferred Stock”), at a price per share equal to the product of (i) the Preferred Exchange Rate (as defined below) and (ii) and 85% of the lesser of the closing price of the common stock on such conversion date (the “Closing Price”) and the Forced Conversion 15 Day VWAP, provided that such lesser price is greater than or equal to 170% of the New Fixed Conversion Price and other conditions are met (each such conversion, a “Forced Conversion”). A Forced Conversion may only occur once every 31 calendar days and any individual Forced Conversion may not exceed the lesser of (i) $3.5 million or (ii) the Forced Conversion Cap less any prior Forced Conversions or Discretionary Conversions (as defined below). The Fourth Facility Amendment also removed the Mandatory Conversion Feature.

13


ENDOLOGIX, INC.
NOTES TO 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 $60.0 million (less any amounts converted pursuant to Forced Conversions) of the Company’s outstanding debt (any such conversion, a “Discretionary Conversion”) into, at Deerfield’s option and subject to the Ownership Cap (as defined below), shares of Common Stock at a rate equal to the greater of the New Fixed Conversion Price and 85% of the 15 Day VWAP, provided that such conversion price is not less than the Floor Price (as defined below) (the “Discretionary Common Conversion Rate”) or shares of Preferred Stock at a rate (the “Discretionary Preferred Conversion Rate”) equal to the product of (i) the Preferred Exchange Rate (as defined below) multiplied by (ii) the Discretionary Common Conversion Rate.

The Preferred Stock is convertible into common stock at an initial rate of 100 shares of common stock for each share of Preferred Stock, as may be adjusted pursuant to the Certificate of Designation of Preferences, Rights and Limitations of Series DF-1 Preferred Stock (the “Certificate of Designation”) (the “Preferred Exchange Rate”). Pursuant to the Certificate of Designation, 1,150,000 shares of Preferred Stock have been authorized for issuance and shall be designated from the 5,000,000 shares of preferred stock authorized to be issued under the Amended and Restated Certificate of Incorporation. The Preferred Stock does not possess any voting rights. The Preferred Stock is subject to customary adjustments for stock events. The Preferred Stock provides that in no event may Deerfield convert the Preferred Stock 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 “Ownership Cap”). Upon voluntary or involuntary liquidation, holders are entitled to receive the Liquidation Amount ($0.001 per share) plus dividends declared but unpaid, and thereafter participate with the common stock on an as converted basis. There are no deemed liquidation provisions contemplated by the Certificate of Designation. The Amended 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 at the current conversion price to Deerfield may, at its option, convert into 1,430,001 shares of common stock at the Discretionary Common Conversion Rate, or the equivalent number of shares of Preferred Stock at the Discretionary Preferred Conversion Rate.

The Fourth Facility Amendment provides that, in the event that on or prior to the ninetieth (90th) day following the receipt of regulatory approval to sell Alto in the United States, but in any event no later than June 30, 2020, net sales of Alto shall be in excess of $1.0 million (the “Initial Exchange Condition”), Deerfield will exchange 8.333% of the principal amount of the First Out Waterfall Notes, including any such principal that has resulted from payment-in-kind (“PIK”) interest payments made on or prior to such date, plus any accrued PIK interest thereon through such exchange date into shares of Preferred Stock (the “Initial Exchange”) at a rate equal to the Preferred Exchange Rate multiplied by $0.8282 (the “Floor Price”). In addition, upon consummation of the Initial Note Exchange, payment of the remaining portion of the First Amortization Payment will be extended until the Second Amortization Date (as defined in the Facility Agreement) and maturity date in accordance with the Facility Agreement. On March 13, 2020, the Company obtained FDA approval to sell Alto in the United States.

In addition, in the event that the Initial Exchange has occurred and the Company completes the first submission to the FDA of a full PMA application with respect to the Nellix EVAS System on or prior to September 30, 2021, Deerfield will exchange $2.5 million into shares of Preferred Stock (the “Nellix Submission Exchange”) at a rate (the “Conditional Exchange Rate”) equal to the product of the (i) Preferred Exchange Rate multiplied by (ii) the 85% of the lesser of (x) the Closing Price and (y) the 15 Day VWAP (the “Conditional Price”). In the event that the Initial Exchange and the Nellix Submission Exchange have occurred and the Company receives the PMA from the FDA with respect to the Nellix EVAS System as shall be necessary for the sale of the Nellix EVAS System in the United States on or prior to June 30, 2022 (the “Nellix Approval Exchange Condition”), Deerfield will exchange $7.5 million into shares of Preferred Stock (the “Nellix Approval Exchange”) at the Conditional Exchange Rate. In the event that the Initial Exchange, the Nellix Submission Exchange and the Nellix Approval Exchange have occurred and net sales of the Nellix EVAS System are in excess of $10.0 million within nine months of satisfaction of the Nellix Approval Exchange Condition, Deerfield will exchange $10.0 million into shares of Preferred Stock (the “Nellix Sales Exchange”, together with the Nellix Submission Exchange and the Nellix Approval Exchange, the “Nellix Exchanges”) at the Conditional Exchange Rate. Notwithstanding the above, none of the foregoing exchanges shall take place if the Conditional Price at the time of such exchange is less than the Floor Price.


14


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


The Fourth Facility Amendment provides that if, during the period beginning on the first business day following satisfaction of the Initial Exchange Condition and ending on the date that is three months thereafter, the Company completes an equity financing resulting in net proceeds to the Company of at least $5.0 million and subject to certain other conditions set forth in the Fourth Facility Amendment, then Deerfield will exchange $0.50 of principal of First Out Waterfall Notes for each $1 of net proceeds up to an aggregate of $20 million in net proceeds into shares of Preferred Stock at a rate equal to the Preferred Exchange Rate multiplied by the lowest price per share of common stock purchased in such financing, provided that such price per share is not less than the Floor Price. Deerfield would also receive the number of such other securities, if any, issued with each share of common stock sold in such financing for each as-converted share of Common Stock issued to Deerfield.

Further, the Fourth Facility Amendment also provides, upon signing, the Company shall pay a restructuring fee of $2.0 million in cash or a combination of shares of common stock at the Floor Price and shares of Preferred Stock at a rate equal to the product of the Floor Price multiplied by the Preferred Exchange Rate. The Company elected to satisfy the fee by issuing 950,000 shares of common stock and 14,649 shares of Preferred Stock at signing.

The Fourth Facility Amendment provides that, upon the satisfaction of the Initial Exchange Condition, the Company will amend the outstanding 2017 Deerfield Warrants and 2018 Deerfield Warrants to reduce the exercise price of the Warrants to $1.50. All other material terms and conditions of the 2017 Deerfield Warrants and 2018 Deerfield Warrants remain the same.

The Fourth Facility Amendment also provides that, upon completion of the Initial Note Exchange, the remaining interest payments on the First Out Waterfall Notes will be due monthly. For 18 months beginning with the first calendar month following completion of the Initial Note Exchange the Company will, subject to certain conditions precedent, make such interest payments in shares of Preferred Stock at a rate equal to the product of (i) the Preferred Exchange Rate as of the interest payment date multiplied by (ii) ninety percent (90%) of the lesser of (a) the closing price on the date immediately preceding the interest payment date and (b) the 15 Day VWAP immediately preceding the interest payment date (the “18 Months Interest Exchange”).

The Company evaluated the accounting for Fourth Facility Amendment transaction and determined it represented an extinguishment of the previously issued First Out Waterfall Notes under the Second Facility Amendment, primarily due to the addition and significance of the conversion features as described above. During the three months ended March 31, 2020, the Company recorded a loss on debt extinguishment of $3.4 million, which includes the $2.0 million restructuring fee paid in common stock and Preferred Stock and change in fair value of the Deerfield Warrants of $0.5 million, offset by the removal of $1.4 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 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 March 31, 2020 and March 31, 2019, the Company did not convert any principal amounts.
As of March 31, 2020, the Company had a carrying amount of $135.6 million, inclusive of deferred financing costs of $2.4 million, related to the Term Loan. As of March 31, 2020, annual interest expense on the Term Loan will range from $5.3 million to $34.7 million from the effectiveness of the Fourth Facility Amendment date through maturity.
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.

15


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


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, which was further reduced by the Fourth Facility Amendment (as amended, the “2017 Deerfield Warrants” and the “2018 Deerfield Warrants”; collectively, the “Deerfield Warrants”) as summarized below:
 
Number of shares of common stock
 
Original Exercise Price
 
Second Amendment Exercise price
 
Fourth Amendment Exercise Price
2017 Deerfield Warrants
647,001

 
$
92.31

 
$
6.61

 
$
1.50

2018 Deerfield Warrants
875,001

 
$
47.11

 
$
6.61

 
$
1.50

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.
As a result of the amendment to the Deerfield Warrants in connection with entry into the Fourth Facility Amendment, the change in fair value in the Deerfield Warrants was $0.5 million. The foregoing was charged to loss on debt extinguishment

The Fourth Facility Amendment provides that the Company will amend the strike price on the 2017 Warrants and 2018 Warrants. The current strike price on the Deerfield Warrants is $6.61 but will be reduced to $1.50 upon satisfaction of the Initial Note Exchange Condition. Due to the existence of this contingent adjustment provision the Deerfield Warrants are classified as derivative liabilities and are subject to subsequent remeasurement


16


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


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 Fourth 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 Discretionary Conversion, Nellix Exchanges and 18 Months Interest Exchange effectively provided the holders with embedded put option derivatives meeting the definition of an “embedded derivative” pursuant to ASC 815. Consequently, the embedded derivatives were bifurcated and accounted for separately. The Fourth 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 the First Amortization Date). This feature remained substantively the same as outlined under the previous Second Facility Amendment. The Company concluded that this provision meets the definition of a derivative and requires bifurcation and separate accounting pursuant to ASC 815.

On February 24, 2020, the Company measured the fair value of the above embedded derivatives at $12.0 million and recorded the amount within accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheet.

For the three months ended March 31, 2020 and 2019, the Company recorded income of $10.2 million and expense of $2.0 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.

The value of the above derivative liabilities were estimated using a “with” and “without” approach utilizing observable and unobservable inputs causing this to be a Level 3 measurement. In the “with” scenario, the fair value the Deerfield notes host instrument was estimated, including the cash flows resulting from the bifurcated embedded derivatives. In the “without” scenario the value of the Deerfield notes host instrument absent the embedded derivatives were estimated. The difference between the values estimated in the “with” and “without” scenarios represents the value of the derivative liabilities. In each approach, the Deerfield notes host instrument was valued using a Monte Carlo simulation in a risk-neutral framework, simulating future stock prices using Geometric Brownian Motion. Changes in the value of the derivative liabilities were primarily driven by changes in the Company’s stock price, expected volatility, and market yields.

Deerfield Revolver

On the Restated Agreement Date, the Company entered into a Credit Agreement (the “Restated Credit Agreement”) with Deerfield ELGX Revolver, LLC (“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.

On February 24, 2020, the Company entered into a Fourth Amendment to Credit Agreement (the “Fourth Credit Amendment”) with Deerfield Revolver and certain funds managed by Deerfield Management Company, L.P., dated as of August 9, 2018. The Fourth Credit Amendment includes conforming revisions to reflect the changes in the Fourth Facility Amendment. In addition, the Fourth Credit Amendment provides that if the Company satisfies the Maturity Extension Conditions, the credit agreement maturity date will extend to the earlier of (i) December 22, 2023 or (ii) the date the loans pursuant to the Facility Agreement have been repaid in full.


17


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


The borrowing base consists of eligible accounts, eligible inventory and eligible equipment. 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 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 have 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 March 31, 2020. The Deerfield Credit Agreements also contain 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 March 31, 2020, the Company had 10.5 million outstanding borrowings and 0.7 million in deferred financing costs relating to the ABL Facility. The remaining borrowings available was 4.5 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 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 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 “2019 Exchange Agreement”) providing for the exchange of the holders’ 3.25% Senior Notes for new 5.00% Voluntary Convertible Senior Notes due 2024 (the “2019 5.00% Voluntary Notes”) and new 5.00% Mandatory Convertible Senior Notes due 2024 (the “5.00% Mandatory Notes”, and together with the 2019 5.00% Voluntary Notes, the “2019 5.00% Notes”) which was completed on April 3, 2019.


18


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


On February 24, 2020, the Company and three investors holding $11.0 million of the principal amount of the Company’s 3.25% Senior Notes entered into an Exchange Agreement (the “2020 Exchange Agreement”) providing for the exchange of the holders’ existing notes for new 5.00%  Voluntary Convertible Senior Notes due 2024 (the “2020 5.00% Voluntary Notes”).

As of March 31, 2020, the Company had outstanding borrowings of $0.1 million related to the remaining 3.25% Senior Notes. There were no principal payments due during the term.

2020 5.00% Convertible Senior Notes due 2024

On February 24, 2020, the Company and three investors holding approximately $11.0 million of the principal amount of the Company’s 3.25% Senior Notes due 2020 (the “Holders”) entered into an Exchange Agreement (the “2020 Exchange Agreement”) providing for the exchange of the Holders’ existing notes (the “Existing Notes”) for new 5.00% Voluntary Convertible Senior Notes due 2024 (the “2020 5.00% Voluntary Notes”). Pursuant to the 2020 Exchange Agreement, on February 24, 2020, the exchanging Holders are exchanging all outstanding principal plus accrued and unpaid interest under the Existing Notes into the same amount of principal of 2020 5.00% Voluntary Notes pursuant to the 2020 Exchange Agreement. The 2020 5.00% Voluntary 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 and Rule 506 thereunder.

The 2020 5.00% Voluntary Notes will be governed by an Indenture (the “2020 Indenture”), by and between the Company and Wilmington, as trustee. The 2020 5.00% Voluntary 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 April 1, 2020. The 2020 5.00% Voluntary Notes will mature on April 2, 2024, unless earlier purchased, redeemed or converted in accordance with the terms of the 2020 Indenture. The 2020 Indenture governing the 2020 5.00% Voluntary Notes will contain customary terms and covenants and events of default.

The 2020 5.00% Voluntary Notes will be convertible at the option of each Holder into shares of common stock 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 2020 Indenture) and for certain other customary circumstances of conversion, each Holder may not convert more than 30% the initial aggregate principal amount of its outstanding 2020 5.00% Voluntary Notes per calendar quarter (a “2020 Voluntary Conversion”). Beginning January 1, 2024, until the close of business on the business day immediately preceding the maturity date, the 2020 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 2020 5.00% Voluntary Notes in a 2020 Voluntary Conversion is 0.4445 shares of the Company’s common stock per $1.00 principal amount of the 2020 5.00% Voluntary Notes, which is equivalent to an initial conversion price per share equal to $2.25 (the “2020 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 2020 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 2020 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 110% of the Conversion Price (subject to adjustment upon the occurrence of certain specified events) (the “2020 Voluntary Conversion Threshold”).

The 2020 5.00% Voluntary Notes will be secured by the Company’s assets pursuant to a Junior Lien Security Agreement by and between the Company and Wilmington, as collateral agent (the “JLSA”). The JLSA grants a second lien on the Company’s assets that is second in priority to the security interests granted (i)_to Deerfield, as agent, pursuant to the Amended and Restated Guaranty and Security Agreement, dated August 9, 2018, by and among the Company, its subsidiaries and Deerfield, as agent, as amended to date and (ii) to Deerfield ELGX Revolver, LLC, as agent (“Deerfield ELGX”), pursuant to the Guaranty and Security Agreement, dated as of August 9, 2018, by and among the Company, its subsidiaries and Deerfield ELGX, as agent. as amended to date. In connection with the issuance of the 2020 5.00% Voluntary Notes, the parties entered into Subordination and Intercreditor Agreement, dated as of February 24, 2020, by and among the Company, Deerfield, Deerfield ELGX and Wilmington, as collateral agent (the “Subordination Agreement”). The Subordination Agreement contains customary provisions associated with the subordination of the security interest of the 2020 5.00% Voluntary Notes.


19


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


The 2020 Indenture will provide that in no event may a Holder convert 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.

The Company evaluated the accounting for the 2020 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 three months ended March 31, 2020, the Company recorded a gain on debt extinguishment of $2.7 million relating to the exchange of debt instruments.

Upon issuance, the Company was not required to separate the conversion options from the 2020 5.00% Voluntary Notes under ASC 815, “Derivatives and Hedging”. However, because the Company has the ability to settle the 2020 5.00% Voluntary 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 2020 5.00% Voluntary 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 2020 5.00% Voluntary 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 $8 million resulting in a $3.6 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 2020 5.00% Voluntary Notes. Debt issuance costs totaled $120 thousand 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, $66 thousand attributable to the indebtedness was recorded as deferred financing costs, to be subsequently amortized as interest expense over the term of the 2020 5.00% Voluntary Notes, and $53 thousand attributable to the equity component was recorded as a reduction to additional paid-in-capital in stockholders’ equity. During the three months ended March 31, 2020, there was no conversion to common stock.

As of March 31, 2020, the Company had outstanding borrowings of 4.5 million, and deferred financing costs of $0.1 million, related to the 2020 5.00% Voluntary Notes. There were no principal payments due during the term. Annual interest expense on these 2020 5.00% Voluntary Notes will range from $0.9 million to $2.9 million through maturity.

2019 5.00% Convertible Senior Notes due 2024

On April 3, 2019, the Company completed the transactions contemplated by the 2019 Exchange Agreement, issuing $25.0 million of principal amount of the 5.00% Mandatory Notes and $42.0 million of principal amount of the 2019 5.00% Voluntary Notes to the holders. The exchanging holders received $900 principal amount of 2019 5.00% Notes for every $1000 principal amount of 3.25% Senior Notes plus accrued interest.

The 2019 5.00% Voluntary Notes and 5.00% Mandatory Notes are governed by separate Indentures (respectively, the “2019 5.00% Voluntary Notes Indenture” and “5.00% Mandatory Notes Indenture”, and collectively, the “2019 Indentures”), each dated April 3, 2019, by and between the Company and Wilmington Trust, National Association, as trustee. The 2019 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 2019 Indentures, shares of common stock or paid in kind. The 2019 5.00% Notes mature on April 3, 2024, unless earlier purchased, redeemed or converted in accordance with the terms of the Indentures. The 2019 Indentures governing the 5.00% Notes contain customary terms and covenants and events of default.


20


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


The 2019 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 2019 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 2019 5.00% Voluntary Notes per calendar quarter (a “2019 Voluntary Conversion”). Thereafter, until the close of business on the business day immediately preceding the maturity date, the 2019 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 2019 5.00% Voluntary Notes in a 2019 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 “2019 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 2019 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 2019 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 “2019 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 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 2019 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 March 31, 2020, there was no conversion to common stock.


21


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


As of March 31, 2020, the Company had a carrying amount of $27.6 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.

Principal Maturities of Long-term Debt

The aggregate principal maturities of long-term debt as of March 31, 2020 are as follows:
 
Term loan facility
 
Convertible notes
 
Other debt
 
Total
Year ending December 31,
 
 
 
 
 
 
 
2020
$

 
$
150

 
$

 
$
150

2021
21,099

 

 

 
21,099

2022
74,398

 

 

 
74,398

2023
74,398

 

 
4,281

 
78,679

2024

 
73,126

 

 
73,126

 
$
169,895

 
$
73,276

 
$
4,281

 
$
247,452

    
Due to the substantial doubt about the Company’s ability to continue operating as a going concern, the Company is in default under the Facility Agreement and Credit Agreement with its lender, Deerfield. We have entered into forbearance agreements with Deerfield which provide that Deerfield will not exercise its default rights under the Facility Agreements until June 15, 2020 or earlier upon certain conditions. If Deerfield were to exercise its default rights, such default would result in a cross default under the Company’s 5.00% Notes and 2020 5.00% Voluntary Notes. If Deerfield were to exercise its default rights, other lenders may then declare a default and the Company may be unable to repay the amounts owed without raising additional capital. If the Company is unable to repay the amounts owed, it may be forced to declare bankruptcy. Therefore, the entire amount of borrowings of $135.6 million from Deerfield and the $32.1 million 5% Notes and 2020 5.00% Voluntary Notes as at March 31, 2020 has been classified as current in these financial statements. Further, the Company would be required to pay exit fees totaling $11.1 million under the Facility Agreement and the remaining $0.1 million commitment fee under the Credit Agreement. Deerfield has not declared a default.

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:


22


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


 
Three Months Ended March 31,
 
2020
 
2019
 
Implant-based
 
Shipment-based
 
Total
 
Implant-based
 
Shipment-based
 
Total
United States
$
18,324

 
$
305

 
$
18,629

 
$
22,463

 
$
323

 
$
22,786

International
$
2,992

 
$
6,889

 
$
9,881

 
$
3,807

 
$
9,013

 
$
12,820

Total Revenue
$
21,316

 
$
7,194

 
$
28,510

 
$
26,270

 
$
9,336

 
$
35,606



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 ‘s-Hertogenbosch, 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, 2020.

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 3 years to 9 years, some of which include options to extend the lease term for up to five years.

For the three months ended March 31, 2020, components of facility lease costs consist of $0.8 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, 2020:
Remainder of 2020
$
2,708

2021
3,751

2022
3,860

2023
2,949

2024
2,848

2025
2,905

2026 and thereafter
9,433

Total lease payments
$
28,454

Less: Imputed Interest
(15,145
)
Present value of operating lease liabilities
$
13,309

As of March 31, 2020, the current portion of the Company’s operating lease liabilities was $1.9 million and is classified within accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheets.


23


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


As of March 31, 2020, the weighted-average remaining lease term was 7.6 years and weighted-average discount rate was 22.1%.

(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 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, the Company filed its response brief to plaintiff’s appeal. The Appellate Court’s hearing on the appeal occurred in February 2020, and the Company expects the Appellate Court’s decision to be rendered later in 2020. The Company believes these lawsuits are without merit and continues to defend itself vigorously.

Stockholder Derivative Litigation

As of June 11, 2017, four stockholders 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.


24


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


(e) Concentrations of Risk and Major Customer 

For the three months ended March 31, 2020 and 2019, there was one customer that represented 10% or more of consolidated revenue. As of March 31, 2020 and December 31, 2019, there was one 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 Note 3 for further details. As of March 31, 2020, the fair value of the contingently issuable common stock was presented in non-current liabilities.

At March 31, 2020 the Company’s stock price closed at $0.69 per share. Thus, had the PMA Milestone been achieved on March 31, 2020 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 $0.2 million.
 

25


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



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 $28 thousand and provision for income taxes of $39 thousand for the three months ended March 31, 2020 and 2019, respectively. The Company’s ETR was (0.14)% and (0.2)% for the three months ended March 31, 2020, and 2019, respectively. The Company’s ETR for the three months ended March 31, 2020 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 against a substantial portion of its deferred tax assets as of March 31, 2020. 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.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.  ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating incomes taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.  ASU 2019-12 is effective in 2021 and interim periods within that year, and permits for early adoption.  The Company elected to early adopt ASU 2019-12, effective for the quarter ended March 31, 2020, on a prospective approach. Therefore, the Company is no longer applying the exception to the intraperiod tax allocation rules which used to apply when the Company had pre-tax book losses in continuing operations and gains in other components of income.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The CARES Act also contained modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The modifications to Section 163(j) increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income. The Company is currently evaluating the impact of the CARES Act, but at present does not expect that the provisions of the CARES Act would result in a material impact on the financial statement.

11. Restructuring Charges
In the three months ended March 31, 2020 and 2019, the Company recorded $0.0 million and $0.4 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 September 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, 2020, the Company estimated that it will incur a total of $16.7 million in restructuring charges upon the completion of the plan, of which $16.7 million has already been incurred since the first quarter of 2016.


26


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


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, 2020:

One-time termination benefits
Accrual balance as of December 31, 2019
$
90

Utilization
(10
)
Accrual balance as of March 31, 2020
$
80


The accrual balance as of March 31, 2020 is classified within accrued expenses and other current liabilities on the Company’s Condensed Consolidated Balance Sheet.

12. Subsequent Events

PPP Loan

On May 5, 2020, the Company entered into a promissory note (the “Promissory Note”) with Bank of America, N.A., dated May 1, 2020, that provides for a loan in the amount of $9.8 million (the “PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The PPP Loan matures on May 5, 2022 and bears interest at a rate of 1.0% per annum. Monthly amortized principal and interest payments are deferred for six months after the date of disbursement. The Promissory Note contains events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the use of PPP Loan amount shall be limited to certain qualifying expenses. All or a portion of the PPP Loan may be forgiven upon application by the Company beginning 60 days, but not later than 120 days, after loan approval and upon documentation of expenditures in accordance with certain specified requirements. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the eight week period beginning on the date of loan approval. Not more than 25% of the forgiven amount may be for non-payroll costs. The amount of the PPP Loan eligible to be forgiven will be reduced if the Company’s full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. The Company will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, in accordance with the amortization schedule described above. The Company intends to apply for forgiveness of a portion of the loan in accordance with the terms of the CARES Act to the extent applicable.

Additionally, on May 5, 2020, the Company entered into the Amendment to Facility Agreements, dated as of May 4, 2020, among the Company, the guarantors party thereto, the lenders party thereto, Deerfield ELGX Revolver, LLC and Deerfield Private Design Fund I.V., L.P. (the “Amendment”). The Amendment amends the Credit Agreement, dated August 9, 2018, by and among the Company, certain of its subsidiaries, the lenders party thereto and Deerfield ELGX Revolver, LLC and amends the Term Loan Facility Agreement, dated as of August 9, 2018, among the Company, certain of its subsidiaries, the lenders party thereto and Deerfield Private Design Fund I.V., L.P., as amended from time to time, to permit the company to incur indebtedness in the form of the PPP Loan.    

Deerfield Forbearance Agreements

On May 26, 2020, we entered into forbearance agreements with Deerfield which provide that Deerfield will not exercise its default rights under the Facility Agreements until June 15, 2020 or earlier upon certain conditions. If the event that we are unable to reach an agreement with Deerfield prior to expiration of the forbearance, or if we are unable to extend the forbearance, Deerfield may exercise its default rights under the Facility Agreements. As of March 31, 2020, we had approximately $180.4 million outstanding under the Deerfield Agreements. Additionally, we would be required to pay exits fees totaling $11.1 million under the Facility Agreement and the remaining $0.1 million commitment fee under the Credit Agreement. If Deerfield were to exercise its default rights, such default would result in a cross default under our 5.00% Notes and our 5.00% Voluntary Notes. As of March 31, 2020, we had $62.0 million outstanding under our 5.00% Notes and $11.1 million outstanding under our 5.00% Voluntary Notes.

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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.


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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, 2019, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 11, 2020, and in this Quarterly Report on Form 10-Q for the fiscal period ended March 31, 2020, including but not limited to those factors discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” “Consolidated Financial Statements” and “Notes to Consolidated Financial Statements.” All subsequent written and oral forward-looking statements attributable to us or by persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.

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

Overview
Our Business
We develop, manufacture, market and sell innovative medical devices for the treatment of aortic disorders. Our products are intended for the minimally invasive endovascular treatment of AAA. Our AAA products are built on one of two platforms:
Traditional minimally-invasive endovascular aneurysm repair (“EVAR”); 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 the Annual Report, 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 Quarterly Report on Form 10-Q, “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® EndoVascular Aneurysm Sealing System has a CE Mark and is an investigational device in the United States. The Ovation Alto® System has obtained FDA approval in the United States and is presently an investigational device in the EU.

Impact of COVID-19 Pandemic

During the first quarter of 2020, we were subject to challenging social and economic conditions created as a result of the novel strain of coronavirus, SARS-CoV-2 (“COVID-19”). The resulting impact of the COVID-19 outbreak created various financial impacts to our operations as a result of taking necessary precautions for essential personnel to operate safely both in person as well as remotely. Cost incurred include items like incremental payroll costs, consulting support, IT infrastructure and facilities related costs.


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The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, employee or industry events, and effect on our vendors, all of which are uncertain and cannot be predicted. To date, we have experienced a number of deferred or cancelled procedures as a result of the strain put on the healthcare system. There can be no assurances these procedures will be rescheduled when healthcare systems normalize. We may experience constrained supply or curtailed customer demand that could materially adversely impact our business, results of operations and overall financial performance in future periods. Specifically, we may experience impact from changes in how we and companies worldwide conduct business due to the COVID-19 pandemic, including but not limited to restrictions on travel and in-person meetings, production delays, closures of manufacturing facilities, warehouses and logistics supply and distribution chains and staffing shortages, decreases or delays in customer demand and spending, difficulties or changes to our sales process and customer support. As of the filing date of this Form 10-Q, the extent to which COVID-19 may impact our financial condition or results of operations or guidance is uncertain. The effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. See Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business.

Highlights of Our Product Development Initiatives, Clinical Trials and Regulatory Approvals

Overview
Our focus is to continually develop innovative and cost-effective medical devices for the treatment of aortic disorders. We believe that our ability to develop new technologies is key to our future growth and success. Historically, we have focused on developing our EVAR and EVAS products to treat infrarenal AAA, including initial development of products to treat complex AAA anatomies. However, we expect to devote more resources in the future to developing, enhancing and obtaining expanded indications for our current EVAR and EVAS products and to develop new product indications to treat more complex anatomies. We have the following trials in process to build independent and collective clinical and economic evidence of clinical safety and effectiveness:
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 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 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, ever reported at two years (96.6%) 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 “Nellix 3.5 EVAS System.” The Nellix 3.5 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 Nellix 3.5 EVAS System for the endovascular treatment of infrarenal AAA. EVAS2 will prospectively evaluate the refined IFU and the Nellix 3.5 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 and completed enrollment in May 2020.

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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 3.5 EVAS System.
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. The results of the study were also formally published in the Annals of Vascular Surgery in October 2019. 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 United States 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 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 outside of the United States in a clinical investigation setting with pre-screened patients that adhere to the current anatomical indications for use. 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.
In June 2019, we announced that the CE Mark for the Nellix EVAS System had been reinstated by GMED, the EU Notified Body for the Nellix EVAS System. The reinstatement followed an assessment of clinical evidence.
In August 2019, we announced that we have received IDE approval from the FDA to commence a new pivotal study to evaluate the safety and effectiveness of the Nellix Chimney EndoVascular Aneurysm Sealing System ("ChEVAS") for the endovascular treatment of complex AAA. The ChEVAS system is an endovascular AAA therapy designed to combine the Nellix 3.5 endograft with parallel visceral stents to enable treatment of patients with juxta-renal, para-renal, and suprarenal AAA. The application of EVAS for patients with complex aneurysms is expected to offer innovative new technology to a group of patients that are underserved by the current standard of care.


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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 2019. Based on those who completed follow-up, the one-year freedom from Aneurysm Related Complications (“ARC”) shows that overall the AFX System has a comparable 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.
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, (“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 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 reinstated, effective immediately.
Additionally, in December 2016, we placed a temporary hold on shipments of AFX and AFX2 to complete an investigation of quality concerns with some sizes of these devices. Subsequently, we removed the temporary hold and resumed shipments of all sizes of AFX and the smaller diameter sizes of AFX2 and initiated a voluntary recall: of (i) the small remaining quantity of original AFX Strata; and (ii) the larger diameter sizes of AFX2. In January 2017, we removed the temporary hold and resumed shipments of the remaining larger diameter sizes of AFX2.
In July 2018, we 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 were required in addition to the Safety Notice. The guidance provided in the July 2018 Safety Notice remains current.

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On October 8, 2019, our AFX2 product received a 3-year shelf-life approval from the FDA. On October 28, 2019, the FDA issued a safety update pertaining to our AFX system, in which the FDA referenced data from an integrated healthcare system (Rothenberg et. al.), published in a conference abstract and presented at American College of Surgeons Clinical Congress 2019 on October 28, 2019. The FDA interpreted such data as suggesting that there “may be a higher than expected risk of Type III endoleaks occurring with the use of AFX with Duraply and AFX2 endovascular grafts.” Both we and the FDA noted meaningful limitations in the referenced data, including with respect to our currently commercially available AFX2 system. We are assessing the referenced data and comparing them to our own multiple data sets, including data from the LEOPARD trial (the only randomized controlled trial of EVAR providing the highest level evidence on AFX Duraply and AFX2 systems), real-world data from a vascular registry, our benchmarked complaint data, and meta-analyses of current literature. The FDA safety update does not constitute a recall or correction to the AFX System, including the AFX2 system.
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 3-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. These results 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;
1.3% major adverse events;
No deaths;
No proximal endoleaks;
No limb occlusion;
Low readmission rate of 3.9%; and
100% procedural success.

33



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 anatomies 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 had been treated with 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 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 September 2019 and December 2019, the Effectiveness of Custom Seal with Ovation: Review of Evidence (“ENCORE,”) reports regarding the study of polymer endovascular aneurysm repair (“Polymer EVAR”) using Ovation System were published in the Journal of Vascular Surgery. ENCORE is a pooled retrospective analysis of the 5 prospective clinical trials and registries and encompasses 1,296 patients, nearly 160 centers and over 200 investigators in the United States, Europe and Latin America. The studies within ENCORE had predefined follow-up periods ranging from 1 month to up to 5 years, and across the studies the median follow up was greater than 2 years. 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.

In March 2020, we announced FDA approval for our Alto Abdominal Stent Graft System. Approval was based on our regulatory submission that includes the ELEVATE IDE clinical study. Pursuant to the terms of approval, the first 100 patients after commercial launch will be included in a post approval imaging study to determine consistency in device selection between Endologix’s internal imaging services and those of the implanting physicians.


34



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. Our global revenue does not reflect a significant degree of seasonality. However, for our implant-based revenue, the number of medical procedures incorporating our products is generally lower during summer months. We believe that this trend may be due to the summer holiday season in Europe and the United States.
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 and allocated facilities-related expenses.

Results of Operations
In December 2019, a novel strain of coronavirus, which causes COVID-19, was identified. Due to the rapid and global spread of the virus, on March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. To slow the proliferation of COVID-19, governments have implemented extraordinary measures, which include the mandatory closure of businesses, restrictions on travel and gatherings, and quarantine and physical distancing requirements. In addition, in March 2020, the U.S. Surgeon General and the American College of Surgeons issued guidance advising that elective surgical procedures be curtailed or deferred and hospitals in the U.S. and globally have, to varying degrees, suspended elective surgeries. While certain abdominal aortic aneurysm procedures treating larger-diameter or ruptured aneurysms are deemed essential and certain surgeries, like in cases of trauma, cannot be delayed, we are seeing a significant reduction in procedural volumes as hospital systems and/or patients elect to defer abdominal aortic aneurysm procedures with smaller-diameter, less-severe aneurysms. As a result of these measures, we have experienced substantial reductions in procedural volumes and anticipate this trend will continue during the pandemic. In addition, restrictions on the ability to travel as well as the temporary closures of our facilities and the facilities of our suppliers has adversely affected our business. Further, due to the travel restrictions and physical distancing requirements, the Company has been limited in its ability to train and educate surgeons on the Company’s surgical techniques and products, which may impact its ability to scale demand once healthcare services return to normal. These restrictions have also impacted the Company’s manufacturing capabilities and distribution and warehousing operations as it reduces capacity and implements policies to prioritize the health and safety of employees and contractors.


35



Although the cumulative impact of these disruptions has had a significant impact on our business, as of the date of this filing, due to uncertainties regarding the duration and scope of the current COVID-19 pandemic, the Company cannot predict the specific extent to which the COVID 19 pandemic will have on its business and financial results.

Operations Overview - Three Months Ended March 31, 2020 versus 2019

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,
 

2020
 
2019
 
Revenue
$
28,510


100.0
 %

$
35,606


100.0
 %
 
Cost of goods sold
13,378


46.9
 %

12,407


34.8
 %
 
Gross profit
15,132


53.1
 %

23,199


65.2
 %
 
Operating expenses:









 
Research and development
3,536


12.4
 %

4,787


13.4
 %
 
Clinical and regulatory affairs
3,165


11.1
 %

3,785


10.6
 %
 
Marketing and sales
14,496


50.8
 %

16,786


47.1
 %
 
General and administrative
10,119


35.5
 %

9,416


26.4
 %
 
Restructuring costs


 %

419


1.2
 %
 
Total operating expenses
31,316


109.8
 %

35,193


98.8
 %
 
Loss from operations
(16,184
)

(56.8
)%

(11,994
)

(33.7
)%
 
Total other expense, net
(1,904
)

(6.7
)%

(9,995
)

(28.1
)%
 
Net loss before income taxes
(18,088
)

(63.4
)%

(21,989
)

(61.8
)%
 
Income tax expense
(28
)

(0.1
)%

(39
)

(0.1
)%
 
Net loss
$
(18,116
)

(63.5
)%

$
(22,028
)

(61.9
)%
 
Comparison of the Three Months Ended March 31, 2020 versus 2019         `        
Revenue

Three Months Ended March 31,
 
 
 
 

2020
 
2019
 
Variance
 
Percent Change

(in thousands)
 

 

Revenue
$
28,510

 
$
35,606

 
$
(7,096
)
 
(19.9
)%
United States Sales. Net sales totaled $18.6 million in the three months ended March 31, 2020, a 18.4% decrease from 22.8 million in net sales in the three months ended March 31, 2019, largely driven by the impact case deferrals related to the COVID-19 pandemic.
International Sales. Net sales of products in our international regions totaled $9.9 million in the three months ended March 31, 2020, a 22.7% decrease from $12.8 million in net sales of products in our international regions in the three months ended March 31, 2019. The decrease was primarily driven by product sunsets in Latin America, exit of South Korea and the impact of COVID-19 pandemic.

36




Cost of Goods Sold, Gross Profit, and Gross Margin

Three Months Ended March 31,
 
 
 
 

2020
 
2019
 
Variance
 
Percent Change

(in thousands)
 

 

Cost of goods sold
$
13,378

 
$
12,407

 
$
971

 
7.8
 %
Gross profit
15,132

 
23,199

 
(8,067
)
 
(34.8
)%
Gross margin percentage (gross profit as a percent of revenue)
53.1
%
 
65.2
%
 

 

Gross margin percentage for the three months ended March 31, 2020 decreased to 53.1% from 65.2% for the three months ended March 31, 2019. The decrease in gross profit margin was primarily attributable to unfavorable geographic mix and lower volumes in the three months ended March 31, 2020 compared to prior year period.
Operating Expenses

Three Months Ended March 31,
 
 
 
 

2020
 
2019
 
Variance
 
Percent Change

(in thousands)
 

 

Research and development
$
3,536

 
$
4,787

 
$
(1,251
)
 
(26.1
)%
Clinical and regulatory affairs
3,165

 
3,785

 
(620
)
 
(16.4
)%
Marketing and sales
14,496

 
16,786

 
(2,290
)
 
(13.6
)%
General and administrative
10,119

 
9,416

 
703

 
7.5
 %
Restructuring costs


419


(419
)

(100.0
)%
Research and Development. The $1.3 million decrease in research and development expenses for the three months ended March 31, 2020, as compared to the prior year period, was attributable to timing of project spending and prudent expense management.

Clinical and Regulatory Affairs. The $0.6 million decrease in clinical and regulatory affairs expenses for the three months ended March 31, 2020, as compared to the prior year period, was attributable to expense timing and prudent expense management.

Marketing and Sales. The $2.3 million decrease in marketing and sales expenses for the three months ended March 31, 2020, as compared to the prior year period, was attributable to lower sales volume, lower headcount and prudent expense management.

General and Administrative. The $0.7 million increase in general and administrative expenses for the three months ended March 31, 2020, as compared to the prior year period was primarily attributable to higher legal and finance costs associated with debt restructuring.

Restructuring costs. The $0.4 million decrease in restructuring costs for the three months ended March 31, 2020, as compared to the prior year period was attributable to one-time restructuring activities in 2019.


37



Other Expense, Net

Three Months Ended March 31,
 
 
 
 

2020
 
2019
 
Variance
 
Percent Change

(in thousands)
 

 

Other expense, net
$
(1,904
)

$
(9,995
)
 
$
8,091

 
(81.0)%
Other expense, net of $1.9 million for the three months ended March 31, 2020 consists primarily of interest expense of $10.5 million, foreign currency translation loss of $1.1 million and loss on debt extinguishment of $0.7 million, which was partially offset by income from changes in fair value of derivative liabilities of $10.2 million and fair value of contingent consideration related to the Nellix acquisition of $0.3 million. Other expense. net of $10.0 million for the three months ended March 31, 2019 consists primarily of interest expense of $8.5 million and expense from changes in fair value of derivative liabilities of $2.0 million, which was partially offset by the fair value of contingent consideration related to the Nellix acquisition of $0.2 million.

Income Tax Expense


Three Months Ended March 31,
 
 
 
 

2020
 
2019
 
Variance
 
Percent Change

(in thousands)
 

 

Income tax expense
$
(28
)
 
$
(39
)
 
$
11

 
<100%

Our income tax expense was $28 thousand and our effective tax rate was (0.14)% for the three months ended March 31, 2020 due to our tax positions in various jurisdictions. During the three months ended March 31, 2020 and 2019, 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, 2020, December 31, 2019 and March 31, 2019:
 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
 
(in thousands, except financial metrics data)
Cash, cash equivalents and restricted cash
$
42,235

 
$
42,760

 
$
10,896

Accounts receivable, net
$
18,951

 
$
22,392

 
$
25,991

Total current assets
$
88,518

 
$
93,703

 
$
69,961

Total current liabilities
$
229,157

 
$
55,793

 
$
44,153

Working capital surplus
$
(140,639
)
 
$
37,910

 
$
25,808

Current ratio
0.4

 
1.7

 
1.6

Days sales outstanding (“DSO”)
60

 
58

 
65

Inventory turnover
2.1

 
1.8

 
1.7

Operating Activities