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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________________________________________________ 
FORM 10-Q
 __________________________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
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/b4adec8fbebe43d8c379b937fdd231be-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
 
Accelerated Filer
 
Non-accelerated Filer
 
Smaller Reporting Company
 
 
 
 
Emerging Growth Company
 
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      No  x


Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s) (1)
Name of each exchange on which registered
Common Stock
N/A
The Nasdaq Stock Market, LLC

(1)
On July 16, 2020, the ‘NASDAQ Stock Market delisted the Company’s common stock. As of the date of this Form 10-Q, a Form 25 has not been filed with the Securities and Exchange Commission (the “SEC”) to delist the Common Stock of Endologix, Inc. The deregistration of the Common Stock under section 12(b) of the Securities Exchange Act of 1934 will be effective 90 days after filing of the Form 25. Following deregistration of the Common Stock under Section 12(b) of the Securities Exchange Act of 1934, the Common Stock shall remain registered under Section 12(g) of the Securities Exchange Act of 1934. Beginning on July 16, 2020, the Common Stock was quoted on the OTC Pink Market under the symbol “ELGXQ.”
On August 4, 2020, there were 20,657,178 shares outstanding of the registrant’s only class of common stock.
 
 
 
 
 



ENDOLOGIX, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 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)
 
June 30,
2020
 
December 31,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
18,496

 
$
41,560

Restricted cash
1,200

 
1,200

Accounts receivable, net of allowance for doubtful accounts of $3,107 and $1,317, respectively
11,087

 
22,392

Other receivables
275

 
282

Inventories
25,908

 
26,405

Prepaid expenses and other current assets
4,441

 
1,864

Total current assets
$
61,407

 
$
93,703

Property and equipment, net
11,838

 
13,152

Goodwill
120,816

 
120,814

Other intangible assets, net
71,048

 
72,603

Deposits and other assets
662

 
1,124

Operating lease right-of-use assets
5,644


5,768

Total assets
$
271,415

 
$
307,164

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
8,837

 
$
14,024

Accrued payroll
12,990

 
18,232

Accrued expenses and other current liabilities
15,084

 
12,931

Current portion of debt
192,687

 
10,606

Total current liabilities
$
229,598

 
$
55,793

Deferred income taxes
150

 
150

Operating lease liabilities
11,127


11,621

Derivative liabilities

 
940

Other liabilities
1,823

 
2,244

Contingently issuable common stock
300

 
500

Debt

 
172,060

Total liabilities
$
242,998

 
$
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, 19,299,228 and 18,190,054 shares issued, respectively, and 19,173,845 and 18,098,464 shares outstanding, respectively
19

 
18

Treasury stock, at cost, 125,383 and 91,590 shares, respectively
(4,278
)
 
(4,235
)
Additional paid-in capital
738,571

 
730,729

Accumulated deficit
(708,681
)
 
(664,472
)
Accumulated other comprehensive income
2,786

 
1,816

Total stockholders’ equity
$
28,417

 
$
63,856

Total liabilities and stockholders’ equity
$
271,415

 
$
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 June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Revenue
$
24,841

 
$
36,238

 
$
53,351

 
$
71,844

Cost of goods sold
10,688

 
13,254

 
24,066

 
25,661

Gross profit
14,153

 
22,984

 
29,285

 
46,183

Operating expenses:

 

 
 
 
 
Research and development
3,624

 
4,355

 
7,160

 
9,142

Clinical and regulatory affairs
3,071

 
3,647

 
6,236

 
7,432

Marketing and sales
11,610

 
15,920

 
26,106

 
32,706

General and administrative
13,197

 
8,929

 
23,316

 
18,345

Restructuring costs

 

 

 
419

Total operating expenses
31,502

 
32,851

 
62,818

 
68,044

Loss from operations
(17,349
)
 
(9,867
)
 
(33,533
)
 
(21,861
)
Other income (expense):

 

 
 
 
 
Interest expense
(10,863
)
 
(8,857
)
 
(21,390
)
 
(17,347
)
Other expense, net
(65
)
 
(479
)
 
(1,187
)
 
(161
)
Change in fair value of contingent consideration related to acquisition
(100
)
 
(300
)
 
200

 
(100
)
Change in fair value of derivative liabilities
2,330

 
872

 
12,505

 
(1,151
)
Loss on debt extinguishment

 
(11,756
)
 
(730
)
 
(11,756
)
Total other expense, net
(8,698
)
 
(20,520
)
 
(10,602
)
 
(30,515
)
Net loss before income taxes
(26,047
)
 
(30,387
)
 
(44,135
)
 
(52,376
)
Income tax benefit (expense)
(46
)
 
3,253

 
(73
)
 
3,214

Net loss
$
(26,093
)
 
$
(27,134
)
 
$
(44,208
)
 
$
(49,162
)
 
 
 
 
 
 
 
 
Comprehensive loss, net of taxes:
 
 
 
 
 
 
 
Net loss
(26,093
)
 
(27,134
)
 
(44,208
)
 
(49,162
)
Other comprehensive income (loss) foreign currency translation
222

 
588

 
970

 
(10
)
Comprehensive loss
$
(25,871
)
 
$
(26,546
)
 
$
(43,238
)
 
$
(49,172
)
 


 


 
 
 
 
Basic and diluted net loss per share
$
(1.26
)
 
$
(1.50
)
 
$
(2.17
)
 
$
(3.44
)
Shares used in computing basic and diluted net loss per share
20,717

 
18,142

 
20,392

 
14,280

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)
 
Six Months Ended June 30,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net loss
$
(44,208
)
 
$
(49,162
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Deferred income taxes

 
(3,380
)
Bad debt expense
1,942

 
605

Depreciation and amortization
2,870

 
3,475

Stock-based compensation
2,656

 
4,884

Change in fair value of derivative liabilities
(12,505
)
 
1,151

Change in fair value of contingent consideration related to acquisition
(200
)
 
100

Accretion of interest and amortization of deferred financing costs
10,199

 
7,239

Payable in kind interest expense on term loan facility
6,331

 
3,883

Non-cash foreign exchange loss
1,214

 
122

Loss on debt extinguishment
730

 
11,756

Non-cash lease expense
107

 
113

Changes in operating assets and liabilities:
 
 
 
Accounts receivable and other receivables
9,321

 
(1,851
)
Inventories
339

 
(463
)
Prepaid expenses and other current assets
(2,231
)
 
587

Accounts payable
(5,079
)
 
1,666

Accrued payroll
(5,224
)
 
(781
)
Accrued expenses and other liabilities
2,416

 
(394
)
Net cash used in operating activities
(31,322
)
 
(20,450
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(103
)
 
(229
)
Net cash used in investing activities
(103
)
 
(229
)
Cash flows from financing activities:
 
 
 
Deferred financing costs
(1,379
)
 
(3,977
)
Proceeds from PPP loan
9,813

 

Proceeds from sale of common stock under employee stock purchase plan
49

 
209

Minimum tax withholding paid on behalf of employees for stock-based compensation
(43
)
 
(94
)
Proceeds from common stock offering and pre-paid warrants, net of expenses paid

 
51,985

Net cash provided by financing activities
$
8,440

 
$
48,123

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(79
)
 
(32
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(23,064
)
 
27,412

Cash, cash equivalents and restricted cash, beginning of period
42,760

 
24,731

Total cash, cash equivalents and restricted cash, end of period
$
19,696

 
$
52,143

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

 
 
Cash and cash equivalents
$
18,496

 
$
50,943

Restricted cash
1,200

 
1,200

Total cash, cash equivalents and restricted cash
$
19,696

 
$
52,143



3




ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(In thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2020
 
2019
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
2,678

 
$
4,398

Cash paid for income taxes
116

 
179

Cash paid for amounts included in the measurement of operating lease liabilities
$
1,580

 
$
1,701

Non-cash investing and financing activities:

 

Acquisition of property and equipment included in accounts payable
$

 
$
77

Fair value of embedded derivative issued in connection with loan agreements (Note 7)
$
12,016

 
$
22,808

Conversion of debt to equity
$

 
$
1,860

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)

Six Months Ended June 30, 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

Employee stock purchase plan

 

 

 

 
50

 

 

 

 
50

Treasury stock purchased

 

 
8

 

 

 

 
(7
)
 

 
(7
)
Stock-based compensation expense

 

 

 

 
723

 

 

 

 
723

Issuance of restricted stock

 

 
76

 

 

 

 

 

 

Restricted stock expense

 

 

 

 
199

 

 

 

 
199

Net loss

 

 

 

 

 
(26,093
)
 

 

 
(26,093
)
Other comprehensive income

 

 

 

 

 

 

 
222

 
222

Balance at June 30, 2020
15

 
$

 
19,299

 
$
19

 
$
738,571

 
$
(708,681
)
 
$
(4,278
)
 
$
2,786

 
$
28,417




















5





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

Six Months Ended June 30, 2019
 
 Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Treasury
Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’
Equity
 
Issued Shares
 
Par Value
 
 
 
 
 
Balance at December 31, 2018
10,388

 
$
10

 
$
640,789

 
$
(599,715
)
 
$
(4,026
)
 
$
2,588

 
$
39,646

Treasury stock purchased

 

 

 

 
(1
)
 

 
(1
)
Stock-based compensation expense

 

 
1,512

 

 

 

 
1,512

Issuance of restricted stock
3

 

 

 

 

 

 

Restricted stock expense

 

 
849

 

 

 

 
849

Net loss

 

 

 
(22,028
)
 

 

 
(22,028
)
Other comprehensive income

 

 

 

 

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

 
$
10

 
$
643,150

 
$
(621,743
)
 
$
(4,027
)
 
$
1,990

 
$
19,380

Employee stock purchase plan
42

 

 
207

 

 

 

 
207

Treasury stock purchased
13

 

 

 

 
(93
)
 

 
(93
)
Stock-based compensation expense

 

 
1,355

 

 

 

 
1,355

Issuance of restricted stock
35

 

 

 

 

 

 

Prepaid warrants

 

 
9,700

 

 

 

 
9,700

Issuance of common stock
6,422

 
6

 
42,279

 

 

 

 
42,285

Shares issued upon conversion of debt
506

 
1

 
1,876

 

 

 

 
1,877

Restricted stock expense

 

 
1,168

 

 

 

 
1,168

Deerfield warrants

 

 
4,854

 

 

 

 
4,854

Debt issuance cost allocated to equity

 

 
(762
)
 

 

 

 
(762
)
Equity conversion option

 

 
18,651

 

 

 

 
18,651

Net loss

 

 

 
(27,134
)
 

 

 
(27,134
)
Other comprehensive income

 

 

 

 

 
588

 
588

Balance at June 30, 2019
17,409

 
$
17

 
$
722,478

 
$
(648,877
)
 
$
(4,120
)
 
$
2,578

 
$
72,076





6



ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
(Unaudited)
1. Description of Business, Basis of Presentation, and Operating Segment
(a) Description of Business

Endologix®, Inc. (the “Company”) is a Delaware corporation with corporate headquarters located in Irvine, California and production facilities located in Irvine, California and Santa Rosa, California. The Company develops, manufactures, markets and sells innovative medical devices for the treatment of aortic disorders. The Company’s products are intended for the minimally-invasive endovascular treatment of abdominal aortic aneurysms (“AAA”). The Company’s AAA products are built on one of two platforms: (i) traditional minimally-invasive endovascular aneurysm repair (“EVAR”); or (ii) endovascular aneurysm sealing (“EVAS”), the Company’s innovative solution for sealing the aneurysm sac while maintaining blood flow. The Company’s current EVAR products include the AFX® Endovascular AAA System, the VELA® Proximal Endograft and the Ovation® Abdominal Stent Graft System. The Company’s current EVAS product is the Nellix® Endovascular Aneurysm Sealing System (the “Nellix EVAS System”). The Company derives all of its reported revenue from sales of its EVAR and EVAS products (including extensions and accessories) to hospitals and third party distributors.

(b) Basis of Presentation

The accompanying Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). These financial statements include the financial position, results of operations and cash flows of the Company, including its subsidiaries, all of which are wholly-owned. All inter-company accounts and transactions have been eliminated in consolidation. For the three and six months ended June 30, 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 six months ended June 30, 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.

Voluntary Petition for Reorganization

As discussed further in Note 3, on July 5, 2020 (the “Petition Date”), the Company and certain of its subsidiaries (collectively, the “Debtors”) commenced voluntary cases (the “Chapter 11 Cases”) under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Northern District of Texas (the “Bankruptcy Court”). The commencement of the Chapter 11 Cases constitutes an event of default or termination event under all debt agreements of the Company. Accordingly, the Company has classified all of its outstanding debt as a current liability on its consolidated balance sheet as of June 30, 2020.

Pursuant to Section 362 of the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed most actions against the Debtors, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Debtors' property. Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors' Chapter 11 Cases also automatically stayed the filing of most legal proceedings and other actions against or on behalf of the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Debtors' bankruptcy estates, unless and until the Court modifies or lifts the automatic stay as to any such claim.

Additionally, as the Chapter 11 Cases commenced on July 5, 2020, during the Company's third quarter, the current financial statements have not been prepared on the basis of ASC Subtopic 852-10, Reorganizations. A Chapter 11 plan of reorganization is likely to materially change the amounts and classifications of assets and liabilities reported in the Company’s subsequent consolidated balance sheet.

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)




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. As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to significant uncertainty. While operating as a debtor-in-possession pursuant to the Bankruptcy Code, the Company may sell, or otherwise dispose of or liquidate, assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in the accompanying consolidated financial statements. In addition, the COVID-19 pandemic has, and continues to have, a material impact on the Company’s business operations, financial position, liquidity, capital resources and results of operations (see Note 3). The risks and uncertainties surrounding the Chapter 11 Cases, the defaults under our debt agreements (see Note 3), and our financial condition, raise substantial doubt as to the Company’s ability to continue as a going concern. The Company’s future plans, including those in connection with the Chapter 11 Cases, are not yet finalized, fully executed or approved by the Bankruptcy Court, and therefore cannot be deemed probable of mitigating this substantial doubt within 12 months of the date of issuance of these financial statements. 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, it will need to obtain additional equity or debt financing. If the Company attempts to obtain additional debt or equity financing, it cannot assume that such financing will be available on favorable terms, if at all.

The interim financial data as of June 30, 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 and six months ended June 30, 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 and six months ended June 30, 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.


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)



(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 June 30, 2020.

3. Bankruptcy Filing
Bankruptcy Petitions
On July 5, 2020 (“Petition Date”), the Company and certain of its affiliates (collectively, the “Debtors”) each filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Northern District of Texas (the “Bankruptcy Court”).

The Debtors filed motions with the Bankruptcy Court seeking authorization to continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Debtors’ chapter 11 cases (the “Chapter 11 Cases”) are being jointly administered under the caption “In re: TriVascular Sales LLC, et. al., Case No. 20-31840-sgj11.”

Operation and Implications of the Bankruptcy Filing
The Debtors will continue to operate their business and manage their property as debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. On July 6, 2020, the Company also filed the Debtors’ Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code [Docket No. 19](the “Plan”) which sets forth a proposed restructuring transaction aimed to address the Company’s outstanding debt structure through a significant de-leveraging and to position the Company for long-term growth. To ensure their ability to continue operating in the ordinary course of business, the Debtors have filed with the Court motions seeking a variety of “first day” relief (collectively, the “First Day Motions”), including to: (a) authorize the Debtors to continue using their existing cash management system, (b) authorize the Debtors to pay pre-petition wages, compensation and employee benefits, (c) establish procedures with respect to the transfer of equity interests, and (d) authorize the Debtors to pay pre-petition amounts owed to certain vendors, suppliers and contract counter-parties in the ordinary course of business as the debts come due.

In general, as debtors-in-possession under the Bankruptcy Code, the Debtors are authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Pursuant to first day and second day motions filed with the Bankruptcy Court, the Bankruptcy Court authorized the Company to conduct its business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing the Company to: (i) obtain debtor-in-possession financing, (ii) pay employee wages and benefits, (iii) fund customer and subscriber programs, (iv) pay vendors and suppliers in the ordinary course for all goods and services going forward, and (v) pay critical vendors, utilities, and taxes in the ordinary course.

Debtor-In-Possession Financing

In connection with the Chapter 11 Cases, on July 5, 2020, the Bankruptcy Court entered an interim order (the “Interim Order”) approving the Company’s debtor-in-possession financing (“DIP Financing”) pursuant to terms set forth in a secured priming, delayed draw term loan debtor-in-possession credit agreement, dated as of July 8, 2020 (the “DIP Credit Agreement”), by and among the Company, as borrower, each lender from time to time party to the DIP Credit Agreement, including, but not limited to Deerfield, Deerfield Private Design Fund III, L.P., and Deerfield Partners, L.P. (collectively, the “DIP Lenders”) and Deerfield., as agent (the “DIP Agent”) for itself and the DIP Lenders. The DIP Lenders comprise 100% of the lenders under the Deerfield Facility Agreement and Deerfield Credit Agreement (“Existing Facility Agreement”).

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)




The DIP Credit Agreement, subject to the conditions therein, provides for senior secured term loans in the aggregate principal amount of up to $130,800,000 in post-petition financing, consisting of: (i) an initial term loan of $10 million advanced on the closing date, (ii) a delayed draw term loan commitment of $20.8 million, the draw of which is subject to certain conditions, including the occurrence of entry of a final order and occurrence of September 1, 2020 and (iii) a roll-up loan refinancing, in part, term loans under the Existing Facility Agreement, which roll-up loan will be in the aggregate principal amount of $100,000,000 and advanced upon entry of a final order (collectively, the “DIP Loans”). The Company is also required to pay the DIP Lenders a closing fee equal to 2.0% of the aggregate committed loan amount, less the amount of the roll-up loan.

The proceeds of the DIP Loans will be used for: (i) the payment of the allowed administrative costs and expenses of the Chapter 11 Case (including the carve-out), (ii) the payment of certain payments pursuant to first day orders, (iii) the payment of adequate protection payments as set forth in financing orders, (iv) current interest and fees due to the DIP Agent and the DIP Lenders pursuant to the terms of the DIP Credit Agreement, (v) working capital purposes and, (vi) upon entry of a final order, as a deemed repayment and refinancing of a portion of the outstanding indebtedness under the Existing Facility Agreement in an aggregate amount equal to $100,000,000, in each case, consistent with the budget (as in effect from time to time and subject to the permitted variance) and financing orders.

The maturity date of the DIP Credit Agreement is the earliest of: (i) October 5, 2020; (ii) the date of acceleration of the DIP Loans and termination of the commitments under the DIP Credit Agreement following an event of default thereunder; (iii) the effective date of a plan of reorganization or liquidation confirmed in any of the Chapter 11 Case, (iv) the consummation of a sale of all or substantially all of the assets of the Debtors pursuant to section 363 of the Bankruptcy Code or otherwise, other than in connection with a confirmed plan of reorganization or liquidation in the Chapter 11 Cases or as otherwise approved by the Agent in its reasonable discretion (v) the date of termination of the Restructuring Support Agreement, (vi) without the Agent’s prior written consent, the date of filing or express written support by any Debtor of a plan of liquidation or reorganization and related disclosure statement, or order of dismissal and (vii) the date that is 60 days after the Petition Date (or such later date as agreed to by the Lenders), unless a final order has been entered by the Bankruptcy Court on or prior to such date.

The outstanding principal amount of the DIP Loans will bear interest from the date of each loan’s disbursement at per annum rate equal to LIBOR plus twelve percent (12%). Upon an event of default, all obligations under the DIP Credit Agreement will bear interest at a rate equal to then current interest rate applicable thereto plus two percent (2.0%) per annum.

4. Balance Sheet Account Detail
(a) Property and Equipment
Property and equipment consisted of the following:
 
June 30,
2020
 
December 31,
2019
Production equipment, molds and office furniture
$
10,937

 
$
10,844

Computer hardware and software
7,907

 
7,897

Leasehold improvements
15,594

 
15,594

Construction in progress (software and related implementation, production equipment and leasehold improvements)
684

 
795

Property and equipment, at cost
35,122

 
35,130

Accumulated depreciation
(23,284
)
 
(21,978
)
Property and equipment, net
$
11,838

 
$
13,152


Depreciation expense for property and equipment for the three months ended June 30, 2020 and 2019 was $0.6 million and $0.9 million, respectively. For the six months ended June 30, 2020 and 2019, depreciation expense for property and equipment was $1.3 million and $1.8 million, respectively.


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)



(b) Inventories
Inventories consisted of the following:
 
June 30,
2020
 
December 31,
2019
Raw materials
$
5,480

 
$
5,362

Work-in-process
4,916

 
4,132

Finished goods
15,512

 
16,911

Total Inventories
$
25,908

 
$
26,405


(c) Goodwill and Other Intangible Assets
The change in the carrying amount of goodwill for the six months ended June 30, 2020 was as follows:
Balance at December 31, 2019
$
120,814

Foreign currency translation adjustment
2

Balance at June 30, 2020
$
120,816


Other intangible assets consisted of the following: 
 
June 30, 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

 
(14,647
)
 
52,953

 
67,600

 
(13,467
)
 
54,133

Customer relationships
7,500

 
(3,313
)
 
4,187

 
7,500

 
(2,938
)
 
4,562

Total finite-lived intangible assets
75,100

 
(17,960
)
 
57,140

 
75,100

 
(16,405
)
 
58,695

Other intangible assets, net
$
89,008

 
$
(17,960
)
 
$
71,048

 
$
89,008

 
$
(16,405
)
 
$
72,603


Amortization expense for intangible assets for the three months ended June 30, 2020 and 2019 was $1.0 million and $0.9 million, respectively. For the six months ended June 30, 2020 and 2019, amortization expense for intangible assets was $1.6 million and $1.7 million, respectively.
Estimated amortization expense for the 5 succeeding years and thereafter is as follows:
Remainder of 2020
$
1,629

2021
3,276

2022
3,319

2023
3,378

2024
3,497

2025
3,724

Thereafter
38,317

Total
$
57,140



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)



(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 June 30, 2020 and December 31, 2019:

 
June 30, 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)
$

 
$

 
$
300

 
$
300

 
$

 
$

 
$
500

 
$
500

Derivative liabilities
(b)
$

 
$

 

 

 

 

 
940

 
940

Total financial liabilities
 
$

 
$

 
$
300

 
$
300

 
$

 
$

 
$
1,440

 
$
1,440


(a)     See Note 10 for additional details.
(b)     See Note 7 for additional details.
Changes in the fair value of the Company’s Level 3 liabilities were as follows:
 
Contingently issuable common stock
(a)
 
Derivative liabilities
(b)
Balance at December 31, 2019
$
500

 
$
940

Retirement due to debt extinguishment


(1,351
)
Additions

 
12,916

Fair value adjustment
(200
)
 
(12,505
)
Balance at June 30, 2020
$
300

 
$

(a)     See Note 10 for additional details.
(b)     See Note 7 for additional details.
There were no transfers of financial assets or liabilities into or out of Level 3 during the six months ended June 30, 2020.
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:
 
June 30, 2020
 
December 31, 2019
 
Carrying value
 
Fair value
 
Carrying value
 
Fair value
Term loan facility
$
143,301

 
$
115,765

 
$
141,274

 
$
131,892

Convertible notes
35,293

 
30,247

 
37,111

 
24,548

Other debt
14,093

 
11,169

 
4,281

 
1,416

 
$
192,687

 
$
157,181

 
$
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 7 for further details. The carrying value of the Company’s Revolving loan facility approximates fair value.






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)



5. 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 six months ended June 30, 2020 and 2019: