Endologix
ENDOLOGIX INC /DE/ (Form: 10-K, Received: 03/14/2013 16:30:14)
Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
Form 10-K
_______________________________  
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from            to            .
Commission file number: 000-28440
 
_______________________________  
Endologix, Inc.
(Exact name of registrant as specified in its charter)
  _______________________________  
Delaware
 
68-0328265
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
11 Studebaker, Irvine, California 92618
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (949) 595-7200
  _______________________________  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.001 par value
 
The NASDAQ Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None
    _______________________________  
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   x No     o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   o     No   x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
x
Accelerated filer
 
o
 
 
 
 
 
 
Non-accelerated filer
 
o   (Do not check if a smaller reporting company)
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   o     No   x
As of June 30, 2012 , the aggregate market value of the voting stock held by non-affiliates of the Registrant was $955,038,220 (based upon the $15.44 closing price for shares of the Registrant’s Common Stock as reported by the NASDAQ Global Select Market on June 30, 2012, the last trading date of the Registrant’s most recently completed second fiscal quarter).
On February 28, 2013 , approximately 62,654,131 shares of the Registrant’s Common Stock, $0.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Part III of this Annual Report on Form 10-K are incorporated by reference into the Registrant’s Proxy Statement for its Annual Meeting of Stockholders to be held on May 23, 2013 .
 
 
 
 
 



Table of Contents

TABLE OF CONTENTS
Item
Description
Page
 
PART I
 
1.
Business
1A.
1B.
2.
3.
4.
Mine Safety Disclosures
 
 
 
PART II
 
5.
Market for Endologix's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

6.
7.
7A.
8.
9.
9A.
9B.
Other Information
 
 
 
PART III
 
10.
11.
12.
13.
14.
 
 
 
PART IV
 
15.
 
Signatures



Table of Contents

Cautionary Note Concerning Forward-Looking Statements
This Annual Report on Form 10-K 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 from liability 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 “believes,” “expects,” “may,” “will,” “intends,” “plans,” “should,” “could,” “seeks,” “pro forma,” “anticipates,” “estimates,” “continues,” or other variations thereof, including their use in the negative, 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. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions including, among other things:
continued market acceptance of our endovascular systems;
our ability to successfully commercialize products which incorporate the technology obtained as part of the Nellix acquisition;
the level and availability of third party payor reimbursement for our products;
our ability to effectively manage our business and keep pace with our anticipated revenue growth;
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;
our ability to effectively develop new or complementary technologies;
our ability to attract, retain, and motivate qualified personnel;
our ability to manufacture our endovascular systems to meet demand;
the nature of regulatory requirements that apply to us, our suppliers, and competitors, and our ability to obtain and maintain any required regulatory approvals;
our ability to maintain adequate liquidity to fund our operational needs;
our ability to effectively compete with the products offered by our competitors;
general macroeconomic and world-wide business conditions; and
other risks set forth under “Risk Factors” in Item 1A of this Annual Report on Form 10-K.
Our forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ in significant ways from any future results expressed or implied by the forward-looking statements. Unless otherwise required by law, we undertake no obligation to publicly update or revise any forward-looking statements, either as a result of new information, future events, or otherwise after the date of this Annual Report on Form 10-K.
The industry and market data contained in this Annual Report on Form 10-K are based either on our management’s own estimates or on independent industry publications, reports by market research firms, or other published independent sources. Although we believe these sources are reliable, we have not independently verified the information and cannot guarantee its accuracy and completeness, as industry and market data are subject to change and cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process, and other limitations and uncertainties inherent in any statistical survey of market shares. Accordingly, one should be aware that the industry and market data contained in this Annual Report on Form 10-K, and estimates and beliefs based on such data, may not be reliable. Unless otherwise indicated, all information contained in this Annual Report on Form 10-K concerning our industry in general or any segment thereof, including information regarding our general expectations and market opportunity, is based on management’s estimates using internal data, data from industry related publications, consumer research and marketing studies, and other externally obtained data.
***
Endologix ® , AFX ® , IntuiTrak ® , Xpand ® , Powerlink ® , Powerlink XL ® , and Nellix ® are registered trademarks of Endologix, Inc., IntuiTrak Express™, PowerFit™, Ventana™, and their respective logos are trademarks of Endologix, Inc. Other trademarks used in this Annual Report on Form 10-K are the property of their respective holders.

PART I

Item 1.
Business

Company Overview
Endologix, Inc. ("Endologix," the "Company," "we," "us," or "our") is a Delaware corporation with corporate headquarters and production facilities located in Irvine, California. We develop, manufacture, market, and sell innovative medical devices for the treatment of aortic disorders. Our principal product is a stent graft and accompanying delivery system (our "ELG System"), for the treatment of abdominal aortic aneurysms ("AAA") through minimally-invasive endovascular repair ("EVAR"). Sales of our ELG System (including extensions and accessories) to hospitals in the U.S. and Europe, and to third-party international distributors, provide the sole source of our reported revenue.
Our ELG System consists of (i) a self-expanding cobalt chromium alloy stent covered by expanded polytetrafluoroethylene (commonly referred to as "ePTFE") graft material (our "ELG Device") and (ii) an accompanying delivery system. Once our ELG Device is fixed in its proper position within the abdominal aorta, it 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 2013, we commenced a limited market introduction of our next generation device to treat AAA, the Nellix System (see "Nellix" section below).
Market Overview and Opportunity
AAA Background
Atherosclerosis is a disease which results in the thickening and hardening of arteries, which generally is attributable to smoking, high blood pressure, and/or high cholesterol damage. This disease generally progresses with age.
Atherosclerosis reduces the integrity and strength of blood vessel walls, causing the vessel to expand or balloon out, which is known as an "aneurysm". Aneurysms are commonly diagnosed in the aorta, which is the body’s largest artery, extending from the chest to the abdomen. The abdominal aorta is the segment between the renal (kidney) arteries and the area where the aorta divides into the two iliac arteries which travel down the legs. AAA occurs when a portion of the abdominal aorta bulges into an aneurysm because of a weakening of the vessel wall, which may result in life threatening internal bleeding upon rupture.
The overall patient mortality rate for ruptured AAA is approximately 80%, making it among the leading causes of death in the U.S. Once diagnosed, patients with AAA require either non-invasive monitoring, or depending on the size and rate of growth of the AAA, will require EVAR or open surgical repair.
EVAR Versus Open Surgical Repair
Our ELG System is used exclusively for minimally-invasive EVAR procedures, as opposed to open surgical repair of AAA. Open surgical repair is a highly invasive procedure requiring (i) a large incision in the patient’s abdomen, (ii) withdrawal of the patient’s intestines to provide access to the aneurysm, (iii) the cross clamping of the aorta to stop blood flow, and (iv) implantation of a graft which is sutured to the aorta, connecting one end above the aneurysm, to the other end below the aneurysm.
Open surgical repair typically lasts two to four hours, while the typical EVAR procedure lasts one to two hours. After receiving open surgical repair, the patient usually requires a few days in the hospital's surgical intensive care unit (SICU), and the total hospital stay may be four to ten days. Post-procedure convalescence may take another four to six weeks due to the invasiveness of the operation.  By comparison, patients are often discharged a day or two after their EVAR procedure, and once discharged, most patients return to normal activity within two weeks.
Today, approximately 70% of all treated AAAs in the U.S. are repaired through EVAR, and 30% through open surgical repair.  Although EVAR has many key advantages over open surgical repair, many patients are not candidates for EVAR due to the limitations of the current EVAR devices to treat a wide range of AAA anatomies. We are developing new ELG systems that we believe, within the next five years, will allow us to address at least 90% of all diagnosed AAAs.
An article published in the New England Journal of Medicine on January 31, 2008 compared the results of open surgical repair versus EVAR for the treatment of AAA on more than 45,000 patients over a three year period. Among the findings discussed in the article were:
The 30-day mortality rate of all patients in the study undergoing EVAR was approximately 1.2%, as compared to 4.8% for open surgical repair.
Patients treated by EVAR were three times as likely to be discharged to their homes rather than another rehabilitation facility as compared to patients treated with open repair.
The average hospital stay for patients in the study undergoing EVAR was 3.4 days versus 9.3 days for patients undergoing open surgical repair.
Market Size

In the U.S. alone, it is estimated that between 1.2 million and 2.0 million people have an AAA. Over 200,000 people were diagnosed with AAA in the U.S. in 2011. Of those diagnosed with an AAA, approximately 68,000 people underwent an AAA repair procedure in the U.S., of which approximately 44,000 were addressed through EVAR (utilizing an ELG system).

Although AAA is one of the most serious cardiovascular diseases, many AAAs are never detected. Most AAA patients do not have symptoms at the time of their initial diagnosis. AAAs generally are discovered coincidentally during procedures to treat or diagnose unrelated medical conditions.

Since AAAs generally arise in people over the age of 65 and come with little warning, initiatives have been undertaken to increase its screening. The most prominent of these initiatives is the Screening Abdominal Aortic Aneurysms Very Efficiently Act (“SAAAVE”), which was signed into law in the U.S. on February 8, 2006, and began providing coverage on January 1, 2007. SAAAVE provides for a one-time free of charge AAA screening for men who have smoked some time in their life, and men or women who have a family history of the disease. This screening is provided as part of the “Welcome to Medicare” physical.

The age 65 and over population in the U.S. presently numbers approximately 40 million, or 13% of the total population, and is expected to grow to 47 million by 2015. Accordingly, we believe that AAA treatments will naturally increase over time, given this demographic trend.

We estimate that the current annual worldwide EVAR market size for our ELG System is approximately $1.0 billion, which includes an approximate $610 million market size in the U.S. The worldwide aortic stent graft market (including thoracic stent grafts, for which we have future product development plans, but do not currently have an approved product) is expected to grow to $2.0 billion by 2016.
Our Mission
Our mission is to be the leading innovator of medical devices to treat aortic disorders. Key elements of our strategy to accomplish this mission are as follows:
Focus exclusively on the aorta for the commercialization of innovative products.
Design and manufacture ELG Systems that are easy to use and result in excellent clinical outcomes.
Provide exceptional clinical and technical support to physicians through an experienced and knowledgeable sales and marketing organization.
Our Products
Our ELG System
Our ELG System consists of our ELG Device and catheter delivery system, branded under the names Powerlink, IntuiTrak, and AFX. We believe that our ELG System offers the following advantages over competitors:
Anatomical Fixation . Our ELG Device is unique in that the main body of the device sits on the patient's natural aortoiliac bifurcation. This provides a solid foundation for the long-term stability of the device. Alternative ELG devices rely on hooks, barbs and radial force to anchor within the aorta (generally referred to as "proximal fixation") near the renal arteries. We have proven in our clinical studies that anatomical fixation inhibits device migration within the aorta due to the inherent foundational support of the patients own anatomy.
Unique, Minimally Invasive Delivery System . In the majority of procedures, our ELG System requires only a small incision in one leg. The other leg needs only percutaneous placement of a non-surgical introducer sheath, three millimeters in diameter. With the expected FDA approval of our totally percutaneous EVAR in the first half of 2013 (see "PEVAR" section below), we will have the only FDA approval for a label for this advantageous treatment option. Our competitors' ELG systems typically require surgical exposure of the femoral artery in both legs to introduce multiple device components.
Preserves Aortic Bifurcation. Our ELG Device allows for future endovascular procedures when continued access across the aortic bifurcation is required. Approximately 30% to 40% of AAA patients also have peripheral arterial disease (“PAD”).  Our ELG Device is the only one presently available that preserves the physician's ability to go back over the aortic bifurcation for future interventions. This is a meaningful feature of our ELG System, as many AAA patients are today living longer and returning to the hospital for PAD procedures.
See the "Nellix" section below regarding our February 2013 limited market introduction of our next-generation device to treat AAA.
Our ELG Device Extensions and Accessories
Aortic Extensions and Limb Extensions. We offer proximal aortic extensions and limb extensions which attach to the "main body" of our ELG Device, allowing physicians to customize it to fit the patient's anatomy.

Accessories. We offer various accessories to facilitate the optimal delivery of our ELG Device, including compatible guidewires, snares, and catheter introducer sheaths.
Our Product Evolution
Our core ELG System was first commercialized in Europe in 1999 and in the U.S. in 2004. We initially branded it as the Powerlink System ("Powerlink"). As our ELG System evolved, we branded Powerlink under the names Visiflex, IntuiTrak, and AFX. In February 2013, we began the European launch of our next-generation device to treat AAA, branded as Nellix.
Visiflex. Visiflex was our original ELG System.
IntuiTrak . In October 2008, we received FDA approval for IntuiTrak. We received CE Mark approval for IntuiTrak in March 2010, and Shonin approval in December 2012. IntuiTrak provided an updated delivery system that further simplified the implant procedure for physicians and lowered its profile from Visiflex.
AFX. In June 2011 and November 2011, we received FDA approval and CE Mark approval, respectively, for our AFX Endovascular AAA System ("AFX"). We believe AFX provides physicians with further improved vascular access and more precise deployment of our ELG Device, as compared to IntuiTrak. We began a full commercial launch of AFX in the U.S. in August 2011 and in numerous international markets in 2012.
Nellix .  In January 2013, we received CE Mark approval of the Nellix System.  In February 2013, we commenced a limited market introduction of the Nellix System in Europe.  We hope to receive FDA premarket approval in 2016.
We believe that the Nellix System represents groundbreaking technology for EVAR of AAA. Unlike all currently
available ELG devices, which leave the AAA sac fully intact, the Nellix System seals the AAA sac with a biostable polymer to reduce the potential for endoleaks and secondary interventions.

Manufacturing and Supply
All of our commercial products are manufactured, assembled, and packaged at our 60,000 square foot leased facilities in Irvine, California.
We rely on third parties for the supply of certain components used in our ELG System, such as the wire used to form our cobalt chromium alloy stent. While we obtain some of these components from single source suppliers, we believe there are alternative vendors for the supply of the vast majority of our required components. Many of our third party manufacturers go through a formal qualification and approval process, including periodic renewal to ensure fitness for use and compliance with applicable FDA requirements and International Organization for Standardization ("ISO") 13485 requirements, and/or other required quality standards. Additionally, we actively manage supply risk with our key suppliers through a combination of negotiating favorable terms of supply agreements, maintaining strategic inventory levels, and maintaining frequent communications with our suppliers.
Marketing and Sales
We market and sell our ELG System in the U.S. and in several European countries through a direct sales force and network of agents. In certain other European countries and in Asia, South America, and Mexico, we sell our ELG System through exclusive independent distributors. As of February 28, 2013 , we marketed our ELG System in 23 countries outside of the U.S. through 13 independent distributors.
U.S. We market and sell our products in the U.S. through a direct sales force consisting of (as of December 31, 2012 ) 67 sales representatives and 13 clinical specialists. The primary customer and decision maker for ELG systems in the U.S. is the vascular surgeon, and to a lesser extent, the interventional radiologist and cardiologist. Through our direct sales force, we provide clinical support and service to many of the approximately 1,600 hospitals and 4,700 physicians in the U.S. that perform EVAR. Approximately 82% of our revenues for the year ended December 31, 2012 were generated from sales of our ELG System in the U.S.
Europe. Prior to September 2011, our reported revenue to customers outside of the U.S. had been generated exclusively through third-party distributors. As of September 1, 2011, upon mutual agreement for the termination of distribution rights with a significant European distributor, we began direct sales operations in most of Western Europe. Our direct sales, clinical specialists, and training personnel number 20 as of December 31, 2012. Approximately 8% of our revenues for the year ended December 31, 2012 were generated from sales of our ELG System in Europe.
Asia Pacific. We commenced commercial sales in Japan in February 2007 after receipt of Japanese regulatory, or Shonin, approval. We have had limited commercial sales in China since September 2009. Approximately 5% of our revenues for the year ended December 31, 2012 were generated from distributor sales of our ELG System in Asia.

South America and Mexico. We have applicable regulatory approvals for Mexico, Argentina, Brazil, Chile, and Colombia. We commenced sales in South America and in Mexico in December 2007. Approximately 5% of our revenues for the year ended December 31, 2012 were generated from distributor sales of our ELG System in South America and Mexico.
Competition
The medical device industry is highly competitive. Any product we develop that achieves regulatory clearance or approval will have to compete for market acceptance and market share. We believe that the primary competitive factors in the AAA device market segment are:
clinical effectiveness;
product safety, reliability, and durability;
ease of use;
sales force experience and relationships; and
price.
We experience significant competition and we expect that the intensity of competition will increase over time. For example, our major competitors - Medtronic, Inc., W.L. Gore Inc., and Cook Medical Products, Inc. each have obtained full regulatory approval for their ELG systems in the U.S. and Europe. In addition to these major competitors, we also have smaller competitors, and emerging competitors with active ELG system development programs.
Many of our competitors have substantially greater capital resources than we do. Many also have greater resources and expertise in the areas of research and development, obtaining regulatory approvals, manufacturing, marketing, and sales. In addition, these competitors have multiple product offerings, which some physicians may find more convenient when developing business relationships. We also compete with other medical device companies for clinical trial sites and for the hiring of qualified personnel, including sales representatives.
Clinical Trials and Product Developments
Overview
We incurred expenses of $22.9 million in 2012 , $21.2 million in 2011 , and $11.2 million in 2010 , on research and development activities and clinical studies. 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 a key to our future growth and success. Historically, we have focused on developing our ELG Systems to treat infrarenal AAA. However, we expect to devote more resources in the future to develop new technologies to treat juxtarenal aneurysms and diseases of the thoracic aorta.
PEVAR
Vascular access for EVAR requires femoral artery exposure (commonly referred to as surgical “cut-down”) of one or both femoral arteries, allowing for safe introduction of ELG systems. Complications from femoral artery exposure in the setting of EVAR is an inherent risk of current surgical practice.  Percutaneous EVAR ("PEVAR") procedures do not require an open surgical cut-down of either femoral artery, as access to the femoral artery is achieved via a needle-puncture through the skin. Advantages to the patient and to the health care system of an entirely percutaneous procedure include reduced surgical procedure times, less post-operative pain, and fewer access-related wound complications.  To date, there are no ELG systems approved by the FDA for full percutaneous access. We expect to receive a percutaneous indication from the FDA for AFX and IntuiTrak in the first half of 2013.
In January 2013, we announced data from the first prospective, multicenter, randomized clinical trial of PEVAR, using our AFX and IntuiTrak devices.  We expect that this data will be published in full in the Journal of Vascular Surgery during 2013.  Key data points from our clinical trial include:

The trial primary endpoint was met, definitively demonstrating the non-inferiority of PEVAR using the accompanying closure device to surgical access EVAR.
A 94% procedural technical success rate was achieved in a multicenter setting.
Mean procedure time was reduced in PEVAR patients by 34 minutes.  Likewise, mean procedure time to femoral artery hemostasis was reduced following PEVAR by 13 minutes.
PEVAR patients required significantly fewer concomitant procedures.
Favorable trending of PEVAR was observed in several clinical utility outcomes including reduced anesthesia time, reduced blood loss and need for transfusion, shorter hospital length of stay, and less analgesics prescribed for groin pain.
The PEVAR non-inferiority to surgical access EVAR in terms of the procedure success persisted through the final six-month follow-up.
Xpand

The Xpand Renal Stent Graft ("Xpand") is an ePTFE covered balloon expandable renal stent graft used in conjunction with Ventana to treat patients with short aortic juxtarenal abdominal aortic aneurysms ("JAA") or pararenal abdominal aortic aneurysms ("PAA").  
Ventana
The JAA and PAA patient population is a significant and under-served segment of the AAA market. Available industry data suggests that 20% to 30% of diagnosed AAAs are not treatable with currently-approved ELG devices, due to the aneurysm's proximal location to the renal arteries.
The Ventana Fenestrated Stent Graft System (“Ventana”) potentially provides these patients with an innovative and less-invasive alternative to open surgical repair.
In January 2012, we received Investigational Device Exemption ("IDE") approval from the FDA to begin U.S. clinical trials to evaluate Ventana for the EVAR repair of JAA and PAA. In February 2012, we enrolled the first patient in our U.S. clinical trials to evaluate Ventana.
Ventana is designed to be used with AFX and Xpand. Although AFX is commercially available in the U.S. and many international markets, Ventana and Xpand are not yet approved for marketing in the U.S. or abroad, and are restricted to investigational use only. We hope to receive CE Mark approval for Ventana in 2013, and FDA approval for Ventana in 2015.
Nellix
On December 10, 2010, we completed our acquisition of Nellix (refer to the "Nellix Acquisition and Private Placement Transaction" section below). Using the technology we acquired from this acquisition, we developed a next-generation device (the "Nellix System") to treat infrarenal AAA.
We received CE Mark approval of the Nellix System in January 2013, and in February 2013, commenced a limited market introduction of the Nellix System in Europe. We hope to receive an IDE approval from the FDA for the Nellix System in the first half of 2013, and hope to receive FDA premarket approval in the U.S. in 2016.
We believe that the Nellix System represents groundbreaking technology for EVAR of AAA.  Unlike all currently available ELG devices, which leave the AAA sac fully intact, the Nellix System seals the AAA sac with a biostable polymer to reduce endoleaks and secondary interventions.
We believe the other advantages of the Nellix System include: (i) a low profile (17Fr outer diameter), which is beneficial for the delivery of the device; (ii) ease of use and reduced total time of device deployment for physicians; (iii) low expected reintervention rate; and (iv) the potential for reduced CT scan post-procedure follow up.
Nellix Acquisition and Private Placement Transaction
On December 10, 2010, we completed our acquisition of Nellix, Inc. ("Nellix"), by way of a merger of a wholly-owned subsidiary of our company with and into Nellix. As a result of the merger, Nellix became, and is, a wholly-owned subsidiary of our company. Upon the closing of the merger, we issued an aggregate of 2.9 million unregistered shares of our common stock to the former stockholders of Nellix in exchange for all of the outstanding shares of Nellix stock immediately prior to the closing of the merger. In addition, we will be required to issue additional shares of our common stock to the former stockholders of Nellix as contingent consideration upon our achievement of certain defined revenue and regulatory approval milestones involving the technology obtained in the Nellix acquisition.
Also on December 10, 2010, concurrent with the closing of our acquisition of Nellix, we issued and sold to Essex Woodlands Health Ventures Fund VII, L.P. (a significant stockholder of Nellix prior to the merger), an aggregate of 3.2 million unregistered shares of our common stock, resulting in gross proceeds to us of $15.0 million.
Patents and Proprietary Information

We believe that our intellectual property and proprietary information is key to protecting our technology. We are building a portfolio of apparatus and method patents covering various aspects of our current and future technology. In the area of aorta treatment systems (exclusive of Nellix technology), our rights include 42 U.S. issued patents, 18 pending U.S. applications, and 21 foreign patents. Our current aorta treatment related patents have expiration dates from 2013 to 2031. As a result of our acquisition of Nellix, we added additional patents to our portfolio which have evolved to currently include 12 U.S. patents and 12 foreign patents, with expiration dates from 2014 to 2030.  We intend to continue to file patent applications to strengthen our intellectual property position as we continue to develop our technology. 

Our policy is to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications to protect technology, inventions and improvements that are important to the development of our business. We also own trademarks to protect the names of our products. In addition to patents and trademarks, we rely on trade secrets and proprietary know-how.

We seek protection of these trade secrets and proprietary know-how, in part, through confidentiality and proprietary information agreements. We make diligent efforts to require our employees, directors, consultants, and advisors to execute confidentiality agreements upon the start of employment, consulting, or other contractual relationships with us. These agreements provide that all confidential information developed or made known to the individual or entity during the course of the relationship is to be kept confidential and not be disclosed to third parties, except in specific circumstances. In the case of employees and certain other parties, the agreements also provide that all inventions conceived by the individual will be our company's exclusive property.
Third-Party Reimbursement
In the U.S., hospitals are the primary purchasers of our ELG System. Hospitals in turn bill various third-party payors, such as Medicare, Medicaid, and private health insurance plans, for the total healthcare services required to treat the patient's AAA. Government agencies, private insurers and other payors determine whether to provide coverage for a particular procedure and to reimburse hospitals for medical treatment at a fixed rate based on the diagnosis-related group ("DRG") established by the U.S. Centers for Medicare and Medicaid Services ("CMS"). The fixed rate of reimbursement is based on the procedure performed, and is unrelated to the specific medical devices used in that procedure.
Reimbursement of procedures utilizing our ELG System currently is covered under specific DRG codes. Some payors may deny reimbursement if they determine that the device used in a treatment was unnecessary, not cost-effective, or used for a non-approved indication.
In October 2000, the CMS issued ICD-9 procedure code 39.71, "Endovascular implantation of other graft in abdominal aorta" for the proper procedure coding of EVAR for billing purposes. For hospital reimbursement, patients treated with our ELG System are classified under DRG codes 237 or 238, "Major Cardiovascular Procedures with Major Complications" and "Major Cardiovascular Procedures without Major Complications," respectively. In the latest data published by CMS, the national average reimbursement under DRG codes 237 and 238 is approximately $28,300 and $17,100, respectively.
Outside the U.S., market acceptance of medical devices, including EVAR systems, depends partly upon the availability of reimbursement within the prevailing healthcare payment system. Reimbursement levels vary significantly by country, and by region within some countries. Reimbursement is obtained from a variety of sources, including government sponsored healthcare and private health insurance plans.
Government Regulation - Medical Devices
U.S.
Our products are regulated in the U.S. as Class III medical devices by the FDA under the Federal Food, Drug and Cosmetic Act. The FDA classifies medical devices into one of three classes based upon controls the FDA considers necessary to reasonably ensure their safety and effectiveness. Class I devices are subject to general controls such as labeling, adherence to good manufacturing practices and maintenance of product complaint records, but are usually exempt from premarket notification requirements. Class II devices are subject to the same general controls and also are subject to special controls such as performance standards, and FDA guidelines, and may also require clinical testing prior to approval. Class III devices are subject to the highest level of controls because they are life-sustaining or life-supporting devices. Class III devices require rigorous clinical testing prior to their approval and generally require a pre-market approval ("PMA") or PMA supplement approval prior to their sale.
Manufacturers must file an IDE application if human clinical studies of a device are required and if the FDA considers investigational use of the device to represent significant risk to the patient. The IDE application must be supported by data, typically including the results of animal and engineering testing of the device. If the IDE application is approved by the FDA, human clinical studies may begin at a specific number of investigational sites with a maximum number of patients, as approved by the FDA. The clinical studies must be conducted under the review of an independent institutional review board to ensure the protection of the patients’ rights.
Generally, upon completion of these human clinical studies, a manufacturer seeks approval of a Class III medical device from the FDA by submitting a PMA application. A PMA application must be supported by extensive data, including the results of the clinical studies, as well as testing and literature to establish the safety and effectiveness of the device. Our Powerlink and AFX ELG Systems were approved through this PMA process and we anticipate that the Nellix and Ventana devices will likewise go through the PMA process.
FDA regulations require us to register as a medical device manufacturer with the FDA. Additionally, the California Department of Health Services ("CDHS") requires us to register as a medical device manufacturer within the state. Because of this, the FDA and the CDHS inspect us on a routine basis for compliance with Quality System Records ("QSR") regulations. These regulations require that we manufacture our products and maintain related documentation in a prescribed manner with respect to manufacturing, testing and control activities. We have undergone and expect to continue to undergo regular QSR inspections in connection with the manufacture of our products at our facility. Further, the FDA requires us to comply with various FDA regulations regarding labeling. The Medical Device Reporting laws and regulations require us to provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of our devices, as well as product malfunctions that likely would cause or contribute to death or serious injury if the malfunction were to recur. In addition, the FDA prohibits an approved device from being marketed for “off-label” (i.e. unapproved) use.
We are also subject to other federal, state and local laws, regulations, and recommendations relating to safe working conditions, laboratory, and manufacturing practices.

International
Our international sales are subject to regulatory requirements in the countries in which our products are sold. The regulatory review process varies from country to country and may in some cases require the submission of clinical data. In addition, the FDA must be notified of, or approve the export to certain countries of devices that require a PMA, which is not yet approved in the U.S.
In Europe, we need to comply with the requirements of the Medical Devices Directive ("MDD"), and appropriately affix the CE Mark on our products to attest to such compliance. To achieve compliance, our products must meet the “Essential Requirements” of the MDD relating to safety and performance and we must successfully undergo verification of our regulatory compliance, or conformity assessment, by a Notified Body selected by us. The level of scrutiny of such assessment depends on the regulatory class of the product.
In December 1998, we received ISO 9001:1994/ EN46001:1996 certification from our Notified Body with respect to the manufacturing of all of our products in our facilities. In September 2002, we received ISO 9001:1994/ EN46001:1996 and ISO 13485:1996 certification. In December 2005, we received ISO13485:2003 certification. We are subject to continued surveillance by our Notified Body and will be required to report any serious adverse incidents to the appropriate authorities. We also must comply with additional requirements of individual countries in which our products are marketed.
Government Regulation - Anti-Kickback Statute, Federal False Claims Act, and HIPAA

Anti-Kickback Statute
We are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws. In particular, the federal anti-kickback statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for or recommending a good or service, for which payment may be made in whole or in part under federal healthcare programs, such as the Medicare and Medicaid programs. The anti-kickback statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry.
In implementing the statute, the Office of Inspector General ("OIG") has issued a series of regulations, known as the “safe harbors”. These safe harbors set forth provisions that, if all their applicable requirements are met, will assure healthcare providers and other parties that they may not be prosecuted under the anti-kickback statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy all requirements of an applicable safe harbor may result in increased scrutiny by government enforcement authorities. Penalties for violations of the anti-kickback statute include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. Various states have also enacted laws regulating the interactions of medical device companies with healthcare providers to prevent fraud and abuse.

False Claims Act
The federal False Claims Act prohibits persons from knowingly filing or causing to be filed a false claim to, or the knowing use of false statements to obtain payment from, the federal government. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government. These individuals, sometimes known as “relators” or, more commonly, as “whistleblowers”, may share in any amounts paid by the entity to the government in fines or settlement. The number of filings of qui tam actions has increased significantly in recent years, causing more healthcare companies to have to defend a False Claim Act. If an entity is determined to have violated the federal False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Various states have also enacted similar laws modeled after the federal False Claims Act which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor.

Health Insurance Portability and Accountability Act of 1996
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) created two general federal violations, (a) healthcare fraud and (b) false statements relating to healthcare matters, and (c) protects the security and privacy of individually identifiable health information. The applicable requirements of HIPAA are briefly described below.
a)
The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment, and/or exclusion from government sponsored programs.
b)
The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious, or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment.
c)
Standards govern the conduct of certain electronic transmission of health care information and to protect the security and privacy of individually identifiable health information maintained or transmitted by health care providers, health plans, and health care clearinghouses. These standards include: (i) Standards for Electronic Transactions and (ii) Standards for Privacy and Security of Individually Identifiable Information.

i)
The Standards for Electronic Transactions establishes standards for common health care transactions such as claims information, plan eligibility, and payment information. It also establishes standards for the use of electronic signatures, unique identifiers for providers, employers, health plans, and individuals.
ii)
The Standards for Privacy of Individually Identifiable Information restrict our use and disclosure of certain individually identifiable health information. The HIPAA privacy and security regulations establish a uniform federal “floor” and do not supersede state laws that are more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their records containing patient/private health information (“PHI”). As a result, we are required to comply with both HIPAA privacy regulations and varying state privacy and security laws, which include physical and electronic safeguard requirements. These laws contain significant fines and other penalties for wrongful use or disclosure of PHI.
We have implemented and maintain a comprehensive program of oversight and training of our employees to ensure compliance with the foregoing laws and regulations.
Product Liability
The manufacture and marketing of medical devices carries the significant risk of financial exposure to product liability claims. Our products are used in situations in which there is a high risk of serious injury or death. Such risks will exist even with respect to those products that have received, or in the future may receive, regulatory approval for commercial sale. We are currently covered under a product liability insurance policy with coverage limits of $10 million per occurrence and $10 million per year in the aggregate, subject to typical self insured retention amounts.
Employees
As of December 31, 2012 , we had 411 employees (as compared to 370 employees as of December 31, 2011), including 154 in manufacturing, 25 in research and development, 13 in regulatory and clinical affairs, 47 in quality support, 131 in sales and marketing, and 41 in administration. We believe that the success of our business will depend, in part, on our ability to attract and retain qualified personnel. Our employees are not subject to a collective bargaining agreement, and we believe that we have good relations with our employees.
General Information
We were incorporated in California in March 1992 under the name Cardiovascular Dynamics, Inc. and reincorporated in Delaware in June 1993. In January 1999, Cardiovascular Dynamics, Inc. (by then a publicly-traded company) merged with privately held Radiance Medical Systems, Inc., and we changed our name to Radiance Medical Systems, Inc. In May 2002, we merged with then privately held Endologix, Inc., and we changed our name to Endologix, Inc.
Our principal executive office is located at 11 Studebaker, Irvine, California and our telephone number is (949) 595-7200. Our website is located at www.endologix.com. The information on, or that can be accessed through, our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered to be a part hereof.
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K (and related amendments to these reports, as applicable). These reports are available on our website, at www.endologix.com, free of charge as soon as practicable after filing or furnishing with the U.S. Securities and Exchange Commission ("SEC").

All such reports are also available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials filed by us with the SEC at the SEC’s public reference room located at 100 F Street, NE, Washington, D.C., 20549. Information regarding operation of the SEC’s public reference room can be obtained by calling the SEC at 1-800-SEC-0330.

Item 1A.
Risk Factors

Before deciding to invest in our company, or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this Annual Report on Form 10-K and other reports we have filed with the SEC. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also affect our business operations. If any of these risks are realized, our business, financial condition, or results of operations could be seriously harmed and in that event, the market price for our common stock could decline, and you may lose all or part of your investment.
These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K. These factors could cause actual results and conditions to differ materially from those projected in our forward-looking statements.
Risks Related to Our Business
All of our revenue is generated from a limited number of products, and any decline in the sales of these products will negatively impact our business.
We have focused heavily on the development and commercialization of a limited number of products for the treatment of AAA. If we are unable to continue to achieve and maintain market acceptance of these products and do not achieve sustained positive cash flow from operations, we will be constrained in our ability to fund development and commercialization of improvements and other product lines. In addition, if we are unable to market our products as a result of a quality problem or failure to maintain regulatory approvals, we would lose our only source of revenue and our business would be negatively affected.
We are in a highly competitive market segment, which is subject to rapid technological change. If our competitors are better able to develop and market products that are safer, more effective, less costly, easier to use, or otherwise more attractive than any products that we may develop, our business will be adversely impacted.
Our industry is highly competitive and subject to rapid and profound technological change. Our success depends, in part, upon our ability to maintain a competitive position in the development of technologies and products for use in the treatment of AAA and other aortic disorders. We face competition from both established and development stage companies. Many of the companies developing or marketing competing products enjoy several advantages to us, including:
greater financial and human resources for product development, sales and marketing and patent litigation;
greater name recognition;
long established relationships with physicians, customers, and third-party payors;
additional lines of products, and the ability to offer rebates or bundle products to offer greater discounts or incentives;
more established sales and marketing programs, and distribution networks; and
greater experience in conducting research and development, manufacturing, clinical trials, preparing regulatory submissions, and obtaining regulatory clearance or approval for products and marketing approved products.
Our competitors may develop and patent processes or products earlier than us, obtain regulatory clearance or approvals for competing products more rapidly than us, and develop more effective or less expensive products or technologies that render our technology or products obsolete or less competitive. We also face fierce competition in recruiting and retaining qualified scientific, sales, and management personnel, establishing clinical trial sites and patient enrollment in clinical trials, as well as in acquiring technologies and technology licenses complementary to our products or advantageous to our business. If our competitors are more successful than us in these matters, our business may be harmed.
If third-party payors do not provide reimbursement for the use of our products, our revenues may be negatively impacted.
Our success in marketing our products depends in large part on whether domestic and international government health administrative authorities, private health insurers and other organizations will reimburse customers for the cost of our products. Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. Further, many international markets have government managed healthcare systems that control reimbursement for new devices and procedures. In most markets there are private insurance systems as well as government-managed systems. If sufficient reimbursement is not available for our current or future products, in either the U.S. or internationally, the demand for our products will be adversely affected.
We may not realize all of the anticipated benefits of our acquisition of Nellix.
The success of our acquisition of Nellix will largely depend on our ability to realize the anticipated growth opportunities of the Nellix System. Our ability to realize these benefits, and the timing of this realization, depend upon a number of factors and future events, many of which we cannot control. These factors and events include, without limitation:
the results of future clinical trials of the Nellix System.
the receipt of further CE Mark approvals of enhanced versions of the Nellix System from our European Union notified body;
the receipt of approval from the FDA to sell the Nellix System in the U.S.;
obtaining and maintaining patent rights relating to the Nellix technology; and
further developing an effective direct sales and marketing organization in Europe.
Our success depends on the growth in the number of AAA patients treated with endovascular devices.
We estimate that over 200,000 people were diagnosed with AAA in the U.S. in 2012, and approximately 68,000 people underwent aneurysm repair, either via EVAR or open surgical repair. Our growth will depend upon an increasing percentage of patients with AAA being diagnosed, and an increasing percentage of those diagnosed receiving EVAR, as opposed to an open surgical procedure. Initiatives to increase screening for AAA include the Screening Abdominal Aortic Aneurysms Very Efficiently Act (“SAAAVE”), which was signed into law on February 8, 2006 in the U.S.  SAAAVE will provide one-time AAA screening for men who have smoked some time in their life, and men or women who have a family history of the disease.  Screening is provided as part of the “Welcome to Medicare” physical and such coverage began on January 1, 2007. Such general screening programs may never gain wide acceptance. The failure to diagnose more patients with AAA could negatively impact our revenue growth.
Our success depends on convincing physicians to use, and continue to use, our products in more endovascular AAA procedures.
Our AAA products utilize a different fixation approach within the patient's anatomy than competitive products. Due to our favorable clinical results, and product improvements, and an increase in the size of our sales force, we have been able to increase sales at a rate higher than the general growth within our market segment. However, if we are unable to continue convincing physicians to use our products, our business could be negatively impacted.
Our international operations subject us to certain operating risks, which could adversely impact our net sales, results of operations, and financial condition.
Sales of our products outside the U.S. represented approximately 18% of our revenue in 2012 . As of December 31, 2012, we sell our products through 13 distributors located in the following countries outside of the U.S.: Argentina, Brazil, Chile, Colombia, Greece, Japan, Mexico, China, and Turkey. The sales territories authorized within these various distribution agreements cover a total of 23 countries. As of September 1, 2011, we began selling our product in Europe through our own sales force. The sale and shipment of our products across international borders, as well as the purchase of components and products from international sources, subjects us to extensive U.S. and foreign governmental trade, import and export, and custom regulations and laws.
Compliance with these regulations is costly and exposes us to penalties for non-compliance. Other laws and regulations that can significantly impact us include various anti-bribery laws, including the U.S. Foreign Corrupt Practices Act and anti-boycott laws. Any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments, restrictions on certain business activities, and exclusion or debarment from government contracting. Also, the failure to comply with applicable legal and regulatory obligations could result in the disruption of our shipping and sales activities.
In addition, many of the countries in which we sell our products are, to some degree, subject to political, economic or social instability. Our international operations expose us and our distributors to risks inherent in operating in foreign jurisdictions. These risks include:
difficulties in enforcing or defending intellectual property rights;
pricing pressure that we may experience internationally;
a shortage of high-quality sales people and distributors;
changes in third-party reimbursement policies that may require some of the patients who receive our products to directly absorb medical costs or that may necessitate the reduction of the selling prices of our products;
the imposition of additional U.S. and foreign governmental controls or regulations;
economic instability;
changes in duties and tariffs, license obligations and other non-tariff barriers to trade;
the imposition of restrictions on the activities of foreign agents, representatives and distributors;
scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on us;
laws and business practices favoring local companies;
longer payment cycles;
foreign currency translation adjustments;
difficulties in maintaining consistency with our internal guidelines;
difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
the imposition of costly and lengthy new export licensing requirements;
the imposition of U.S. or international sanctions against a country, company, person or entity with whom we do business that would restrict or prohibit continued business with the sanctioned country, company, person or entity; and
the imposition of new trade restrictions.
If we experience any of these risks, our sales in international countries may be harmed and our results of operations would suffer.
If we fail to properly manage our anticipated growth, our business could suffer.
We may experience periods of rapid growth and expansion, which could place a significant strain on our limited personnel, information technology systems, and other resources. In particular, the increase in our direct sales force requires significant management and other supporting resources. Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our development and commercialization goals.
To achieve our revenue goals, we must successfully increase production output as required by customer demand. In the future, we may experience difficulties in increasing production, including problems with production yields and quality control, component supply, and shortages of qualified personnel. These problems could result in delays in product availability and increases in expenses. Any such delay or increased expense could adversely affect our ability to generate revenues.
Future growth will also impose significant added responsibilities on management, including the need to identify, recruit, train, and integrate additional employees. In addition, rapid and significant growth will place a strain on our administrative and operational infrastructure.
In order to manage our operations and growth we will need to continue to improve our operational and management controls, reporting and information technology systems, and financial internal control procedures. If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our operating results and business could suffer.
Our transition to a direct sales force in certain European countries may not be successful or may cause us to incur additional expenses sooner than initially planned. If we are not successful or incur such additional expenses sooner than expected, then our business and results of operations may be materially and adversely affected .
Historically, a significant portion of our revenue to customers outside of the U.S. had been derived from sales to a significant European distributor. We completed the termination of our relationship with such significant distributor in September 2011, and have transitioned to a direct sales force in Austria, Belgium, the Czech Republic, Denmark, France, Germany, Luxemburg, The Netherlands, Romania, Sweden, Switzerland and the United Kingdom.
We may be unable to successfully transition to a direct sales force in such countries, or to continue to successfully place, sell and service our products in such countries through a direct sales force, or to successfully ensure the growth of our direct sales force that may be needed in the future. In addition, we may incur significant additional expenses. Our efforts to successfully expand our direct sales strategy in Europe or the failure to achieve our sales objectives in Europe may adversely impact our revenues, results of operations, and financial condition and negatively impact our ability to sustain and grow our business in Europe.
If we fail to develop and retain our direct sales force, our business could suffer.
We have a direct sales force in the U.S. and in certain European countries. We also utilize a network of third-party distributors for sales outside of the U.S. As we launch new products and increase our marketing efforts with respect to existing products, we will need to retain and develop our direct sales personnel to build upon their experience, tenure with our products, and their relationships with customers. There is significant competition for sales personnel experienced in relevant medical device sales. If we are unable to attract, motivate, develop, and retain qualified sales personnel and thereby grow our sales force, we may not be able to maintain or increase our revenues.
Our third-party distributors may not effectively distribute our products.
We depend in part on medical device distributors and strategic relationships for the marketing and selling of our products outside of the U.S. We depend on these distributors' efforts to market our products, yet we are unable to control their efforts completely. In addition, we are unable to ensure that our distributors comply with all applicable laws regarding the sale of our products. If our distributors fail to effectively market and sell our products, and in full compliance with applicable laws, our operating results and business may suffer.
If clinical trials of our current or future products do not produce results necessary to support regulatory clearance or approval in the U.S. or elsewhere, we will be unable to commercialize these products.
We are currently conducting clinical trials. We will likely need to conduct additional clinical trials in the future to support new product approvals, or for the approval for new indications for the use of our products. Clinical testing is expensive, and typically takes many years, which carries an uncertain outcome. The initiation and completion of any of these studies may be prevented, delayed, or halted for numerous reasons, including, but not limited to, the following:
the FDA, institutional review boards or other regulatory authorities do not approve a clinical study protocol, force us to modify a previously approved protocol, or place a clinical study on hold;
patients do not enroll in, or enroll at the expected rate, or complete a clinical study;
patients or investigators do not comply with study protocols;
patients do not return for post-treatment follow-up at the expected rate;
patients experience serious or unexpected adverse side effects for a variety of reasons that may or may not be related to our products such as the advanced stage of co-morbidities that may exist at the time of treatment, causing a clinical study to be put on hold;
sites participating in an ongoing clinical study may withdraw, requiring us to engage new sites;
difficulties or delays associated with establishing additional clinical sites;
third-party clinical investigators decline to participate in our clinical studies, do not perform the clinical studies on the anticipated schedule, or are inconsistent with the investigator agreement, clinical study protocol, good clinical practices, and other FDA and Institutional Review Board requirements;
third-party organizations do not perform data collection and analysis in a timely or accurate manner;
regulatory inspections of our clinical studies require us to undertake corrective action or suspend or terminate our clinical studies;
changes in federal, state, or foreign governmental statutes, regulations or policies;
interim results are inconclusive or unfavorable as to immediate and long-term safety or efficacy; or
the study design is inadequate to demonstrate safety and efficacy; or
do not meet the study endpoints.
Clinical failure can occur at any stage of the testing. Our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and/or non-clinical testing in addition to those we have planned. Our failure to adequately demonstrate the efficacy and safety of any of our devices would prevent receipt of regulatory clearance or approval and, ultimately, the commercialization of that device or indication for use.

We rely on a single vendor to supply specialized graft material for our product lines, and any disruption in the supply of such material could impair our ability to manufacture our products or meet customer demand for our products in a timely and cost effective manner.

Our reliance on a single source supplier exposes our operations to disruptions in supply caused by:
failure of our supplier to comply with regulatory requirements;
any strike or work stoppage;
disruptions in shipping;
a natural disaster caused by fire, flood or earthquakes; or
a supply shortage experienced by our single source supplier.

Although the supplier is a well-established vendor to the medical device industry and we retain a significant stock of the strata graft material, the occurrence of any of the above disruptions in supply or other unforeseen events that could cause a disruption in the supply from this single source supplier may cause us to halt, or experience a disruption in, manufacturing of AFX, Nellix, Xpand, and Ventana, which would adversely affect our business, financial condition, and results of operations.
If we are unable to protect our intellectual property, our business may be negatively affected.
The market for medical devices is subject to frequent litigation regarding patent and other intellectual property rights. It is possible that our patents or licenses may not withstand challenges made by others or protect our rights adequately.
Our success depends in large part on our ability to secure effective patent protection for our products and processes in the U.S. and internationally. We have filed and intend to continue to file patent applications for various aspects of our technology. However, we face the risks that:
we may fail to secure necessary patents prior to or after obtaining regulatory clearances, thereby permitting competitors to market competing products; and
our already-granted patents may be re-examined, re-issued or invalidated.
We also own trade secrets and confidential information that we try to protect by entering into confidentiality agreements with other parties. However, the confidentiality agreements may not be honored or, if breached, we may not have sufficient remedies to protect our confidential information. Further, our competitors may independently learn our trade secrets or develop similar or superior technologies. To the extent that our consultants, key employees or others apply technological information to our projects that they develop independently or others develop, disputes may arise regarding the ownership of proprietary rights to such information, and such disputes may not be resolved in our favor. If we are unable to protect our intellectual property adequately, our business and commercial prospects will likely suffer.
If our products or processes infringe upon the intellectual property of third parties, the sale of our products may be challenged and we may have to defend costly and time-consuming infringement claims.
We may need to engage in expensive and prolonged litigation to assert or defend any of our intellectual property rights or to determine the scope and validity of rights claimed by other parties. With no certainty as to the outcome, litigation could be too expensive for us to pursue. Our failure to prevail in such litigation or our failure to pursue litigation could result in the loss of our rights that could substantially hurt our business. In addition, the laws of some foreign countries do not protect our intellectual property rights to the same extent as the laws of the U.S., if at all.
Our failure to obtain rights to intellectual property of third parties, or the potential for intellectual property litigation, could force us to do one or more of the following:
stop selling, making, or using products that use the disputed intellectual property;
obtain a license from the intellectual property owner to continue selling, making, licensing, or using products, which license may not be available on reasonable terms, or at all;
redesign our products, processes or services; or
subject us to significant liabilities to third parties.
If any of the foregoing occurs, we may be unable to manufacture and sell our products and may suffer severe financial harm. Whether or not an intellectual property claim is valid, the cost of responding to it, in terms of legal fees and expenses and the diversion of management resources, could harm our business.
We may face product liability claims that could result in costly litigation and significant liabilities.
Manufacturing and marketing of our commercial products, and clinical testing of our products under development, may expose us to product liability claims. Although we have, and intend to maintain, product liability insurance, the coverage limits of our insurance policies may not be adequate and one or more successful claims brought against us may have a material adverse effect on our business and results of operations. Additionally, adverse product liability actions could negatively affect our reputation, continued product sales, and our ability to obtain and maintain regulatory approval for our products.
Our ability to maintain our competitive position depends on our ability to attract and retain highly qualified personnel.
We believe that our continued success depends to a significant extent upon the efforts and abilities of our executive officers, particularly:
John McDermott, our Chief Executive Officer and Chairman of our Board of Directors;
Todd Abraham, our Vice President of Operations;
Robert D. Mitchell, our President of International; and
Stefan G. Schreck, Ph.D., our Vice President of Technology
The loss of any of the foregoing individuals would harm our business. Our ability to retain our executive officers and other key employees, and our success in attracting and hiring additional skilled employees, will be critical to our future success.
Our manufacturing operations, research and development activities, and corporate headquarters, are currently based at a single location that may be at risk from earthquakes.
We currently conduct all of our manufacturing, development and management activities at a single location in Irvine, California, near known earthquake fault zones. Our finished goods inventory is split between our Irvine location and our distribution centers in Memphis, Tennessee and Tilburg, The Netherlands. We have taken precautions to safeguard our facilities, including insurance, health and safety protocols, and off-site storage of computer data. However, any future earthquake could cause substantial delays in our operations, damage or destroy our equipment or inventory, and cause us to incur additional expenses. An earthquake could seriously harm our business and results of operations. The insurance coverage we maintain may not be adequate to cover our losses in any particular case.
    
We are subject to credit risk from our accounts receivable related to our product sales, which include sales within European countries that are currently experiencing economic turmoil.

The majority of our accounts receivable arise from product sales in the U.S. However, we also have significant receivable balances from customers within the European Union, Japan, Brazil, Argentina, and Mexico. Our accounts receivable in the U.S. are primarily due from public and private hospitals. Our accounts receivable outside of the U.S. are primarily due from independent distributors, and to a lesser extent, public and private hospitals. Our historical write-offs of accounts receivable have not been significant.

We monitor the financial performance and credit worthiness of our customers so that we can properly assess and respond to changes in their credit profile. Our independent distributors and sub-dealers operate in certain countries such as Greece and Italy, where economic conditions continue to present challenges to their businesses, and thus, could place in risk the amounts due to us from them. These distributors are owed amounts from public hospitals that are funded by their governments. Adverse financial conditions in these countries may continue, thus negatively affecting the length of time that it will take us to collect associated accounts receivable, or impact the likelihood of ultimate collection.
If any future acquisitions or business development efforts are unsuccessful, our business may be harmed.
As part of our business strategy to be an innovative leader in the treatment of aortic disorders, we may need to acquire other companies, technologies, and product lines in the future. Acquisitions involve numerous risks, including the following:
the possibility that we will pay more than the value we derive from the acquisition, which could result in future non-cash impairment charges;
difficulties in integration of the operations, technologies, and products of the acquired companies, which may require significant attention of our management that otherwise would be available for the ongoing development of our business;
the assumption of certain known and unknown liabilities of the acquired companies; and
difficulties in retaining key relationships with employees, customers, partners, and suppliers of the acquired company.
In addition, we may invest in new technologies that may not succeed in the marketplace. If they are not successful, we may be unable to recover our initial investment, which could include the cost of acquiring the license, funding development efforts, acquiring products, or purchasing inventory. Any of these would negatively impact our future growth and cash reserves.
Risks Related to Our Financial Condition
We have a history of operating losses and may be required to obtain additional funds.
We have a history of operating losses and may need to seek additional capital in the future. Our cash requirements in the future may be significantly different from our current estimates and depend on many factors, including:
the results of our commercialization efforts for our existing and future products;
the need for additional capital to fund future development programs;
the costs involved in obtaining and enforcing patents or any litigation by third parties regarding intellectual property;
the establishment of high volume manufacturing and increased sales and marketing capabilities; and
our success in entering into collaborative relationships with other parties.
To finance these activities, we may seek funds through borrowings or through additional rounds of financing, including private or public equity or debt offerings and collaborative arrangements with corporate partners. We may be unable to raise funds on favorable terms, or at all.
During the recent economic instability, it has been difficult for many companies to obtain financing in the public markets or to obtain debt financing on commercially reasonable terms, if at all. In addition, the sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. If we borrow additional funds or issue debt securities, these securities could have rights superior to holders of our common stock, and could contain covenants that will restrict our operations. We might have to obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to our technologies, product candidates, or products that we otherwise would not relinquish. If we do not obtain additional resources, our ability to capitalize on business opportunities will be limited, and the growth of our business will be harmed.
Current challenges in the credit environment may adversely affect our business and financial condition.
The global financial markets continue to experience unprecedented levels of volatility. Our ability to enter into or maintain existing financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products, or our customers become insolvent. Any deterioration in our key financial ratios, or non-compliance with financial covenants in existing credit agreements could also adversely affect our business and financial condition. While these conditions and the current economic instability have not meaningfully impaired our ability to access credit markets or our operations to date, continuing volatility in the global financial markets could increase borrowing costs or affect our ability to access the capital markets. Current or worsening economic conditions may also adversely affect the business of our customers, including their ability to pay for our products. This could result in a decrease in the demand for our products, longer sales cycles, slower adoption of new technologies, and increased price competition.
We have limited resources to invest in research and development and to grow our business and may need to raise additional funds in the future for these activities.
We believe that our growth will depend, in significant part, on our ability to develop new technologies for the treatment of AAA and other aortic disorders, and technology complementary to our current products. Our existing resources may not allow us to conduct all of the research and development activities that we believe would be beneficial for our future growth. As a result, we may need to seek funds in the future to finance these activities. If we are unable to raise funds on favorable terms, or at all, we may not be able to increase our research and development activities and the growth of our business may be negatively impacted.
Risks Related to Regulation of Our Industry
Healthcare policy changes, including recent federal legislation to reform the U.S. healthcare system, may have a material adverse effect on us.
In response to perceived increases in health care costs in recent years, there have been and continue to be proposals by the federal government, state governments, regulators and third-party payors to control these costs and, more generally, to reform the U.S. healthcare system. Certain of these proposals could limit the prices we are able to charge for our products or the amounts of reimbursement available for our products and could limit the acceptance and availability of our products. Moreover, as discussed below, recent federal legislation would impose significant new taxes on medical device makers such as us. The adoption of some or all of these proposals, including the recent federal legislation, could have a material adverse effect on our financial position and results of operations.
On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (the "PPACA"). The total cost imposed on the medical device industry by the PPACA may be up to approximately $20 billion over ten years. The PPACA includes, among other things, a deductible 2.3% excise tax on any entity that manufactures or imports medical devices offered for sale in the U.S., with limited exceptions, effective January 1, 2013. This excise tax will result in a significant increase in the tax burden on our industry, and if any efforts we undertake to offset the excise tax are unsuccessful, the increased tax burden could have an adverse affect on our results of operations and cash flows. Other elements of the PPACA, including comparative effectiveness research, an independent payment advisory board, payment system reforms including shared savings pilots and other provisions, may significantly affect the payment for, and the availability of, healthcare services and result in fundamental changes to federal healthcare reimbursement programs, any of which may materially affect numerous aspects of our business.
Our future success depends on our ability to develop, receive regulatory clearance or approval for, and introduce new products or product enhancements that will be accepted by the market in a timely manner.
It is important to our business that we continue to build a more complete product offering for treatment of AAA and other aortic disorders. As such, our success will depend in part on our ability to develop and introduce new products. However, we may not be able to successfully develop and obtain regulatory clearance or approval for product enhancements, or new products, or these products may not be accepted by physicians or the payors who financially support many of the procedures performed with our products.
The success of any new product offering or enhancement to an existing product will depend on several factors, including our ability to:
properly identify and anticipate physicians and patient needs;
develop and introduce new products or product enhancements in a timely manner;
avoid infringing upon the intellectual property rights of third parties;
demonstrate, if required, the safety and efficacy of new products with data from preclinical studies and clinical trials;
obtain the necessary regulatory clearances or approvals for new products or product enhancements;
be fully FDA-compliant with marketing of new devices or modified products;
provide adequate training to potential users of our products;
receive adequate coverage and reimbursement for procedures performed with our products; and
develop an effective and FDA-compliant, dedicated marketing and distribution network.
If we do not develop new products or product enhancements in time to meet market demand or if there is insufficient demand for these products or enhancements, our results of operations will suffer.
Our business is subject to extensive governmental regulation that could make it more expensive and time consuming for us to introduce new or improved products.
Our products must comply with regulatory requirements imposed by the FDA in the U.S., and similar agencies in foreign jurisdictions. These requirements involve lengthy and detailed laboratory and clinical testing procedures, sampling activities, an extensive agency review process, and other costly and time-consuming procedures. It often takes several years to satisfy these requirements, depending on the complexity and novelty of the product. We also are subject to numerous additional licensing and regulatory requirements relating to safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. Some of the most important requirements we face include:
FDA Regulations (Title 21 CFR);
European Union CE mark requirements;
Medical Device Quality Management System Requirements (ISO 13485:2003);
Occupational Safety and Health Administration requirements; and
California Department of Health Services requirements.
Government regulation may impede our ability to conduct continuing clinical trials and to manufacture our existing and future products. Government regulation also could delay our marketing of new products for a considerable period of time and impose costly procedures on our activities. The FDA and other regulatory agencies may not approve any of our future products on a timely basis, if at all. Any delay in obtaining, or failure to obtain, such approvals could negatively impact our marketing of any proposed products and reduce our product revenues.
Our products remain subject to strict regulatory controls on manufacturing, marketing and use. We may be forced to modify or recall our product after release in response to regulatory action or unanticipated difficulties encountered in general use. Any such action could have a material effect on the reputation of our products and on our business and financial position.
Further, regulations may change, and any additional regulation could limit or restrict our ability to use any of our technologies, which could harm our business. We could also be subject to new international, federal, state or local regulations that could affect our research and development programs and harm our business in unforeseen ways. If this happens, we may have to incur significant costs to comply with such laws and regulations, which will harm our results of operations.
The misuse or off-label use of our products may harm our image in the marketplace; result in injuries that lead to product liability suits, which could be costly to our business; or result in FDA sanctions if we are deemed to have engaged in such promotion.
The products we currently market have been cleared by the FDA for specific treatments and anatomies. We cannot, however, prevent a physician from using our products outside of those indications cleared for use, known as "off-label" use. There may be increased risk of injury if physicians attempt to use our products off-label. We train our sales force to not promote our products for off-label uses. Furthermore, the use of our products for indications other than those cleared by the FDA may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.
Physicians may also misuse our products or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our products are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. Product liability claims could divert management's attention from our core business, be expensive to defend, and result in sizable damage awards against us that may not be covered by insurance. If we are deemed by the FDA to have engaged in the promotion of our products for off-label use, we could be subject to FDA prohibitions on the sale or marketing of our products or significant fines and penalties, and the imposition of these sanctions could also affect our reputation and position within the industry. Any of these events could harm our business and results of operations and cause our stock price to decline.

Our products may in the future be subject to product recalls or voluntary market withdrawals that could harm our reputation, business and financial results .
The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture that could affect patient safety. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious adverse health consequences or death. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found or suspected. A government-mandated recall or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other issues. Recalls, which include corrections as well as removals, of any of our products would divert managerial and financial resources and could have an adverse effect on our financial condition, harm our reputation with customers, and reduce our ability to achieve expected revenues.
We are required to comply with medical device reporting (“MDR”) requirements and must report certain malfunctions, deaths, and serious injuries associated with our products, which can result in voluntary corrective actions or agency enforcement actions .
Under the FDA MDR regulations, medical device manufacturers are required to submit information to the FDA when they receive a report or become aware that a device has or may have caused or contributed to a death or serious injury or has or may have a malfunction that would likely cause or contribute to death or serious injury if the malfunction were to recur. All manufacturers placing medical devices on the market in the European Economic Area are legally bound to report any serious or potentially serious incidents involving devices they produce or sell to the regulatory agency, or Competent Authority, in whose jurisdiction the incident occurred. Were this to happen to us, the relevant regulatory agency would file an initial report, and there would then be a further inspection or assessment if there are particular issues.
Malfunction of our products could result in future voluntary corrective actions, such as recalls, including corrections, or customer notifications, or agency action, such as inspection or enforcement actions. If malfunctions do occur, we may be unable to correct the malfunctions adequately or prevent further malfunctions, in which case we may need to cease manufacture and distribution of the affected products, initiate voluntary recalls, and redesign the products. Regulatory authorities may also take actions against us, such as ordering recalls, imposing fines, or seizing the affected products. Any corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.
We may be subject to federal, state and foreign healthcare fraud and abuse laws and regulations, and a finding of failure to comply with such laws and regulations could have a material adverse effect on our business .
Our operations may be directly or indirectly affected by various broad federal, state or foreign healthcare fraud and abuse laws. In particular, the federal Anti-Kickback Statute prohibits any person from knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, in return for or to induce the referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of an item or service, for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. We are also subject to the federal HIPAA statute, which created federal criminal laws that prohibit executing a scheme to defraud any health care benefit program or making false statements relating to health care matters, and federal “sunshine” laws that require transparency regarding financial arrangements with health care providers, such as the reporting and disclosure requirements imposed by PPACA on drug manufacturers regarding any “transfer of value” made or distributed to prescribers and other health care providers.
In addition, the federal False Claims Act prohibits persons from knowingly filing, or causing to be filed, a false claim to, or the knowing use of false statements to obtain payment from the federal government. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Various states have also enacted laws modeled after the federal False Claims Act.
Many states have also adopted laws similar to each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers as well as laws that restrict our marketing activities with physicians, and require us to report consulting and other payments to physicians. Some states mandate implementation of commercial compliance programs to ensure compliance with these laws. We also are subject to foreign fraud and abuse laws, which vary by country.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us now or in the future, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from governmental health care programs, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results.
Risks Related to Ownership of Our Common Stock
We will be obligated to issue additional shares of our common stock to the former stockholders of Nellix as a result of our satisfaction of certain milestones set forth in the merger agreement with Nellix and the other parties thereto, resulting in stock ownership dilution .
Under the terms of the merger agreement with Nellix and the other parties thereto, we agreed to issue additional shares of our common stock to the former stockholders of Nellix as contingent consideration upon our satisfaction of one or both of two milestones related to the Nellix System and described in the merger agreement, or upon a change of control of our company prior to our completion of one or both milestones. The maximum aggregate number of shares of our common stock issuable to the Nellix stockholders upon our achievement of both milestones, or upon a change of control of our company prior to our achievement of both milestones, is 10.2 million shares.
Issuing additional shares of our common stock to the former stockholders in satisfaction of contingent consideration will dilute the ownership interests of holders of our common stock on the dates of such issuances. If we are unable to realize the strategic, operational and financial benefits anticipated from our acquisition of Nellix, our stockholders may experience dilution of their ownership interests in our company upon any such future issuances of shares of our common stock without receiving any commensurate benefit.
Our operating results may vary significantly from quarter to quarter, which may negatively impact our stock price in the future.
Our quarterly revenues and results of operations may fluctuate due to, among others, the following reasons:
physician acceptance of our products;
the conduct and results of clinical trials;
the timing and expense of obtaining future regulatory approvals;
fluctuations in our expenses associated with expanding our operations;
the introduction of new products by our competitors;
supplier, manufacturing or quality problems with our devices;
the timing of stocking orders from our distributors;
changes in our pricing policies or in the pricing policies of our competitors or suppliers; and
changes in third-party payors' reimbursement policies.
Because of these and possibly other factors, it is likely that in some future period our operating results will not meet investor expectations or those of public market analysts.
Any unanticipated change in revenues or operating results is likely to cause our stock price to fluctuate since such changes reflect new information available to investors and analysts. New information may cause investors and analysts to revalue our business, which could cause a decline in the trading price of our stock.
The price of our stock may fluctuate unpredictably in response to factors unrelated to our operating performance.
The stock market periodically experiences significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may cause the market price of our common stock to drop. In particular, the market price of securities of small medical device companies, like ours, has been very unpredictable and may vary in response to:
announcements by us or our competitors concerning technological innovations;
introductions of new products;
FDA and foreign regulatory actions;
developments or disputes relating to patents or proprietary rights;
failure of our results of operations to meet the expectations of stock market analysts and investors;
changes in stock market analyst recommendations regarding our common stock;
changes in healthcare policy in the U.S. or other countries; and
general stock market conditions and other factors unrelated to our operating performance.
Trading in our stock over the last twelve months has been limited, so investors may not be able to sell as much stock as they wish at prevailing prices.
The average daily trading volume in our common stock for the year ended December 31, 2012 was approximately 447,000 shares. If limited trading in our stock continues, it may be difficult for investors to sell their shares in the public market at any given time at prevailing prices. Moreover, the market price for shares of our common stock may be made more volatile because of the relatively low volume of trading in our common stock. When trading volume is low, significant price movement can be caused by the trading of a relatively small number of shares. Volatility in our common stock could cause stockholders to incur substantial losses.
Some provisions of our charter documents and Delaware law may make takeover attempts difficult, which could depress the price of our stock and inhibit one's ability to receive a premium price for their shares.
Provisions of our amended and restated certificate of incorporation could make it more difficult for a third party to acquire control of our business, even if such change in control would be beneficial to our stockholders. Our amended and restated certificate of incorporation allows our board of directors to issue up to five million shares of preferred stock and to fix the rights and preferences of such shares without stockholder approval. Any such issuance could make it more difficult for a third party to acquire our business and may adversely affect the rights of our stockholders. In addition, our board of directors is divided into three classes for staggered terms of three years. We are also subject to anti-takeover provisions under Delaware law, each of which could delay or prevent a change of control. Together these provisions may delay, deter or prevent a change in control of us, adversely affecting the market price of our common stock.
We do not anticipate declaring any cash dividends on our common stock.
We have never declared or paid cash dividends on our common stock and do not plan to pay any cash dividends in the near future. Our current policy is to retain all funds and any earnings for use in the operation and expansion of our business. Our revolving credit facility contains restrictions prohibiting us from paying any cash dividends without the lender's prior approval. If we do not pay dividends, a return on one's investment may only occur if our stock price rises above the price it was purchased.

Item 1B.
Unresolved Staff Comments

None.

Item 2.
Properties

We lease two adjacent facilities aggregating approximately 60,000 square feet in Irvine, California under separate lease agreements. These Irvine leases expire in August and September 2014, respectively, and may each be renewed for two additional twelve month periods, at our option. We also lease an administrative office of approximately 2,400 square feet on a month-to-month basis in Den Bosch, The Netherlands.
We believe that our current facilities will be adequate and suitable for our operations during 2013, however, we are presently evaluating long-term facility options in the U.S. for potential transition in 2014 to accommodate our continued business growth.

Item 3.     Legal Proceedings

We are from time to time involved in various claims and legal proceedings of a nature we believe are normal and incidental to a medical device business. These matters may include product liability, intellectual property, employment, and other general claims. We accrue for contingent liabilities when it is probable that a liability has been incurred and the amount can be reasonably estimated. The accruals are adjusted periodically as assessments change or as additional information becomes available.

LifePort Sciences LLC v. Endologix, Inc.

On December 28, 2012, LifePort Sciences, LLC ("LifePort") filed a complaint against us in the U.S. District Court, District of Delaware, alleging that certain of our products infringe U.S. Patent Nos. 5,489,295, 6,117,167, 6,302,906, 5,993,481 and 5,676,696, which are alleged to be owned by LifePort. LifePort is seeking an unspecified amount of monetary damages for sale of our products. We do not believe that we infringe on any of these patents and we intend to vigorously defend against this matter.

At this time, we are unable to predict the outcome of this matter, but we believe that the outcome will not have a material adverse effect on our financial position, results of operations, or cash flow. However, in order to avoid further legal costs and diversion of management resources, it is reasonably possible that we may reach a settlement with LifePort, which could result in a liability. However, we cannot presently estimate the amount, or range, of reasonably possible losses due to the nature of this potential litigation settlement.

Cook Incorporated v. Endologix, Inc.
We had been involved in litigation with Cook Incorporated (“Cook”). Cook alleged that we infringed two of its patents, granted in 1991 and 1998, which expired on October 17, 2009 and October 25, 2011, respectively (the “Patent Dispute”). The lawsuit was filed by Cook in the U.S. District Court for the Southern District of Indiana, on October 8, 2009.
On October 16, 2012, the Company entered into a settlement agreement with Cook for the Patent Dispute (the “Settlement Agreement”), which included a full release from liability for all asserted claims. Without admitting any liability, we agreed to make a one-time cash payment to Cook of $ 5.0 million , which occurred in December 2012.
The $ 5.0 million Settlement Agreement is presented in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss) within operating expenses as "settlement costs" for the year ended December 31, 2012 .


Item 4.     Mine Safety Disclosures

Not applicable.


1

Table of Contents

PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities

Our common stock trades on the NASDAQ Global Select Market under the symbol “ELGX.” The following table sets forth the high and low close prices for our common stock as reported on the NASDAQ Global Select Market for the periods indicated.

High

Low
Year Ended December 31, 2011:



First Quarter
$
7.26


$
5.50

Second Quarter
9.30


6.72

Third Quarter
11.17


7.64

Fourth Quarter
11.95


10.00

Year Ended December 31, 2012:



First Quarter
$
14.65


$
11.31

Second Quarter
15.44


13.23

Third Quarter
15.51


11.15

Fourth Quarter
14.66


12.11


On February 28, 2013 , the closing price of our common stock on the NASDAQ Global Select Market was $15.36 per share, and there were 211 holders of record of our common stock.

The following chart compares the yearly percentage change in the cumulative total stockholder return on our common stock for the period from December 31, 2007 through December 31, 2012 , with the cumulative total return on the NASDAQ Composite Index and the NASDAQ Medical Equipment Index for the same period. The comparison assumes $100 was invested on December 31, 2007 in our common stock at the then closing price of $2.80 per share.

Dividend Policy
We have never paid any dividends. We currently intend to retain all earnings, if any, for use in the expansion of our business and therefore do not anticipate paying any dividends in the foreseeable future. Additionally, the terms of our credit facility with Wells Fargo Bank prohibit us from paying cash dividends without their consent.

2

Table of Contents

Item 6. Selected Financial Data
The following selected consolidated financial data has been derived from our audited Consolidated Financial Statements. The audited Consolidated Financial Statements for the fiscal years ended December 31, 2012, 2011, and 2010 are included elsewhere in this Annual Report on Form 10-K. The information set forth below should be read in conjunction with "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 and the Consolidated Financial Statements and Notes thereto in Item 8 .
 
Year Ended December 31,
 
2012

2011

2010

2009

2008
 
(In thousands, except per share data)
Consolidated Statement of Operations Data:









Revenue
$
105,946


$
83,417


$
67,251


$
52,441


$
37,664

Cost of goods sold
25,282


18,746


15,030


13,181


10,380

Gross profit
80,664


64,671


52,221


39,260


27,284

Operating expenses:









Research and development
16,571


16,738


8,997


4,454


3,512

Clinical and regulatory affairs
6,343


4,439


2,169


2,115


2,570

Marketing and sales
53,953


44,655


31,869


26,483


23,794

General and administrative
20,266


15,525


13,410


8,550


9,455

Contract termination and business acquisition expenses
422


1,730







       Settlement costs
5,000









Total operating expenses
102,555


83,087


56,445


41,602


39,331

Loss from operations
(21,891
)

(18,416
)

(4,224
)

(2,342
)

(12,047
)
Other income (expense)
(13,352
)

(10,400
)

(160
)

(71
)

27

Net loss before income tax
(35,243
)

(28,816
)

(4,384
)

(2,413
)

(12,020
)
Income tax (expense) benefit
(531
)

86


15,037


(21
)

28

Net income (loss)
$
(35,774
)

$
(28,730
)

$
10,653


$
(2,434
)

$
(11,992
)
Basic net income (loss) per share
$
(0.60
)

$
(0.51
)

$
0.22


$
(0.05
)

$
(0.28
)
Shares used in computing basic net income (loss) per share
59,811


56,592


48,902


45,194


43,045

Diluted net income (loss) per share
$
(0.60
)

$
(0.51
)

$
0.21


$
(0.05
)

$
(0.28
)
Shares used in computing diluted net income (loss) per share
59,811


56,592


50,544


45,194


43,045

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
2012

2011

2010

2009

2008
 
(In thousands)
Consolidated Balance Sheet Data:









Cash (including restricted cash and cash equivalents)
$
45,118


$
20,035


$
38,191


$
24,065


$
8,111

Accounts receivable, net
22,600


15,542


12,212


8,342


6,371

Total assets
$
165,103


$
130,255


$
134,375


$
51,292


$
37,263

Total liabilities (excluding contingent consideration payable in common stock)
$
18,229


$
14,986


$
11,243


$
8,412


$
11,446

Accumulated deficit
(200,014
)

(164,240
)

(135,510
)

(146,164
)

(143,730
)
Total stockholders’ equity
$
94,474


$
76,569


$
93,903


$
42,880


$
25,817


3

Table of Contents

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and the related notes included in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors including the risks we discuss in Item 1A of Part I, “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Overview
Our Business
Our corporate headquarters and manufacturing facility is located in Irvine, California. We develop, manufacture, market, and sell innovative medical devices for the treatment of aortic disorders. Our principal product is a stent graft and delivery catheter for the treatment of abdominal aortic aneurysms ("AAA") through minimally-invasive endovascular repair.
We sell our products through (i) our direct U.S. and European sales forces and (ii) third-party distributors in Europe, Asia, Latin America, and in other parts of the world.

See Item 1., "Business," for a discussion of:
Market Overview and Opportunity
Our Products
Manufacturing and Supply
Marketing and Sales
Competition
Clinical Trials and Product Developments

2012 Overview
2012 was an important year of revenue growth, business expansion, and infrastructure development. We continued to gain market share in the U.S., while also building our direct sales operations in Europe. Combined with good results in other international markets, we achieved 27% annual revenue growth. We also made substantial progress with our new product pipeline, positioning us for several product launches in 2013.
Characteristics of Our Revenue and Expenses
Revenue
Revenue is derived from sales of our ELG System (including extensions and accessories) to hospitals upon completion of an EVAR procedure, or from sales to distributors upon title transfer (which is typically at shipment), provided our other revenue recognition criteria have been met.
Cost of Goods Sold
Cost of goods sold includes compensation (including stock-based compensation) and benefits of production personnel and production support personnel. Cost of goods sold also includes depreciation expense for production equipment, production materials and supplies expense, allocated facilities-related expenses, and certain direct costs such as shipping.
Research and Development
Research and development expenses consist of compensation (including stock-based compensation) and benefits for research and development personnel, materials and supplies, research and development consultants, 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 consist of compensation (including stock-based compensation) and benefits for clinical and regulatory personnel, regulatory and clinical payments related to studies, and allocated facilities-related costs. Our clinical and regulatory activities primarily relate to studies in order to gain regulatory approval for the commercialization of our devices.
Sales and Marketing
Sales and marketing expenses primarily consist of compensation (including stock-based compensation) and benefits for our sales force, sales support, and marketing personnel. It also includes costs attributable to marketing our products to our customers and prospective customers.
General and Administrative
General and administrative expenses primarily include compensation (including stock-based compensation) and benefits for personnel that support our general operations such as information technology, executive management, financial accounting, customer service, 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.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the 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. While management believes these estimates are reasonable and consistent, they are by their very nature, estimates of amounts that will depend on future events. Accordingly, actual results could differ from these estimates. Our Audit Committee of the Board of Directors periodically reviews our significant accounting policies. Our critical accounting policies arise in conjunction with the following:
Revenue recognition and accounts receivable
Inventory - lower of cost or market
Goodwill and intangible assets - impairment analysis
Income taxes
Stock-based compensation
Contingent consideration for business acquisition
Litigation accruals
Revenue Recognition and Accounts Receivable
We recognize revenue when all of the following criteria are met:

We have appropriate evidence of a binding arrangement with our customer;
The sales price for our ELG System (including extensions and accessories) is established with our customer;
Our ELG System has been used by the hospital in an EVAR procedure, or our distributor has assumed title
with no right of return, as applicable; and
Collection from our customer is reasonably assured at the time of sale.
For sales made to a direct customer (i.e., hospitals), we recognize revenue upon completion of an EVAR procedure, when our ELG Device is implanted in a patient. For sales to distributors, we recognize revenue at the time of title transfer, which is typically at shipment. We do not offer any right of return to our customers, other than honoring our standard warranty.
In the event that we enter into a bill and hold arrangement with our customer, which is uncommon for us, though occurred in 2012 (as discussed in Note 7 to accompanying Consolidated Financial Statements), the following conditions must be met for revenue recognition:
(i)
The risks of ownership must have passed to our customer;
(ii)
The customer must have made a fixed and written commitment to purchase the ELG Systems;
(iii)
The customer must request that the transaction be on a bill and hold basis;
(iv)
There must be a fixed schedule for delivery of the ELG Systems. The date for delivery must be reasonable and must be consistent with the customer's business purpose;
(v)
We have no remaining specific performance obligations and our earnings process is complete;
(vi)
Our customer's ordered ELG Systems must be segregated from our inventory and cannot be used to fulfill other customer orders; and
(vii)
The ELG Systems must be complete and ready for shipment.
In addition to the above requirements, we also consider other pertinent factors prior to our recognition of revenue for bill and hold arrangements, such as:
(i)
The date by which we expect payment, and whether we have modified our normal billing and credit terms for the customer;
(ii)
Our past experiences with, and pattern of, bill and hold transactions;
(iii)
Whether the customer has the expected risk of loss in the event of a decline in the market value of the ELG Systems;
(iv)
Whether our custodial risks are insurable and insured; and
(v)
Whether extended procedures are necessary in order to assure that there are no exceptions to the customer's commitment to accept and pay for the ELG Systems (i.e., that the business reasons for the bill and hold have not introduced a contingency to the customer's commitment).
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to pay amounts due. These estimates are based on our review of the aging of customer balances, correspondence with the customer, and the customer's payment history.
Inventory - Lower of Cost or Market
We adjust our inventory value for estimated amounts of obsolete or unmarketable items. Such assumptions involve projections of future customer demand, as driven by economic and market conditions, and the product's shelf life. If actual demand, or economic or market conditions are less favorable than those projected by us, additional inventory write-downs may be required.
Goodwill and Intangible Assets - Impairment Analysis
Goodwill and other intangible assets with indefinite lives are not subject to amortization, but are tested for impairment
annually as of June 30, or whenever events or changes in circumstances indicate that the asset might be impaired.
We evaluate the possible impairment (i) if/when events or changes in circumstances occur that indicate that the carrying value of assets may not be recoverable; or (ii) in the case of goodwill and indefinite lived intangible assets, our annual impairment assessment date of June 30.
Income Taxes
Our consolidated balance sheets reflect net deferred tax assets that primarily represent the tax benefit of net operating loss carryforwards and credits and timing differences between book and tax recognition of certain revenue and expense items, net of a valuation allowance. When it is more likely than not that all or some portion of deferred tax assets may not be realized, we establish a valuation allowance for the amount that may not be realized. Each quarter, we evaluate the need to retain all or a portion of the valuation allowance on our net deferred tax assets. Our evaluation considers historical earnings, estimated future taxable income and ongoing prudent and feasible tax planning strategies. Adjustments to the valuation allowance increase or decrease net income or loss in the period such adjustments are made. If our estimates require adjustments, it could have a significant impact on our consolidated financial statements.
Changes in tax laws and rates could also affect recorded deferred tax assets in the future. Management is not aware of any such changes that would have a material effect on our consolidated financial statements.
Stock-Based Compensation
We recognize stock-based compensation expense for employees over the equity award vesting period, based on its fair value at the date of grant. For awards granted to consultants, the award is marked-to-market each reporting period, with a corresponding adjustment to stock-based compensation expense. The fair value of equity awards that are expected to vest is amortized on a straight-line basis over (i) the requisite service period or (ii) the period from grant date to the expected date of the completion of the performance condition for vesting of the award. Stock-based compensation expense recognized is net of an estimated forfeiture rate, which is updated as appropriate.
We use the Black-Scholes option pricing model to value stock option grants. The Black-Scholes option pricing model requires the input of highly subjective assumptions, including the expected volatility of our common stock, expected risk-free interest rate, and the option's expected life.
A portion of restricted stock vesting is dependent on us achieving certain regulatory and financial milestones. We use significant judgment in estimating the likelihood and timing of achieving these milestones. Each period, we will reassess the likelihood and estimate the timing of reaching these milestones, and will adjust expense accordingly.
Contingent Consideration for Business Acquisition
We determine the fair value of contingently issuable common stock related to the Nellix acquisition using a probability-based income approach using an appropriate discount rate . Changes in the fair value of the contingently issuable common stock are determined each period end and recorded in the other income (expense) section of the Consolidated Statements of Operations and Comprehensive Income (Loss) and the non-current liabilities section of the Consolidated Balance Sheet.
Litigation Accruals

From time to time we are involved in various claims and legal proceedings of a nature considered normal and
incidental to our business. These matters may include product liability, intellectual property, employment, and other general
claims. We accrue 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.

Results of Operations

Operations Overview - 2012 , 2011 , and 2010
The following table presents our results of continuing operations and the related percentage of the period's revenue (in thousands):

Year Ended December 31,

2012
 
2011
 
2010
Revenue
$
105,946

 
100.0
 %
 
$
83,417

 
100.0
 %
 
$
67,251

 
100.0
 %
Cost of goods sold
25,282

 
23.9
 %
 
18,746

 
22.5
 %
 
15,030

 
22.3
 %
Gross profit
80,664

 
76.1
 %
 
64,671

 
77.5
 %
 
52,221

 
77.7
 %
Operating expenses:

 

 

 

 

 

Research and development
16,571

 
15.6
 %
 
16,738

 
20.1
 %
 
8,997

 
13.4
 %
Clinical and regulatory affairs
6,343

 
6.0
 %
 
4,439

 
5.3
 %
 
2,169

 
3.2
 %
Marketing and sales
53,953

 
50.9
 %
 
44,655

 
53.5
 %
 
31,869

 
47.4
 %
General and administrative
20,266

 
19.1
 %
 
15,525

 
18.6
 %
 
13,410

 
19.9
 %
Contract termination and business acquisition expenses
422

 
0.4
 %
 
1,730

 
2.1
 %
 

 
 %
     Settlement costs
5,000

 
4.7
 %
 

 
 %
 

 
 %
Total operating expenses
102,555

 
96.8
 %
 
83,087

 
99.6
 %
 
56,445

 
83.9
 %
Loss from operations
(21,891
)
 
(20.7
)%
 
(18,416
)
 
(22.1
)%
 
(4,224
)
 
(6.3
)%
Total other expense
(13,352
)
 
(12.6
)%
 
(10,400
)
 
(12.5
)%
 
(160
)
 
(0.2
)%
Net loss before income tax
(35,243
)
 
(33.3
)%
 
(28,816
)
 
(34.5
)%
 
(4,384
)
 
(6.5
)%
Income tax (expense) benefit
(531
)
 
(0.5
)%
 
86

 
0.1
 %
 
15,037

 
22.4
 %
Net income (loss)
$
(35,774
)
 
(33.8
)%
 
$
(28,730
)
 
(34.4
)%
 
$
10,653

 
15.8
 %

Year Ended December 31, 2012 versus December 31, 2011
Revenue

Year Ended December 31,
 

 


2012
 
2011
 
Variance
 
Percent Change

(in thousands)
 

 

Revenue
$
105,946

 
$
83,417

 
$
22,529

 
27.0
%

Our 27.0% revenue increase of $22.5 million over the prior year period resulted from:

(i) $15.4 million increase in U.S. sales due to the (a) expansion of our U.S. sales force through the addition of clinical specialists that exclusively provide field support to our sales representatives, having the impact of increasing overall sales force productivity and (b) the continued market traction of AFX, which was launched in the U.S. in August 2011;

(ii) $4.2 million increase in European sales due to our transition from a third-party distributor to a direct sales organization beginning in September 2011; and

(iii) $2.9 million increase in ROW sales. ROW sales growth is attributable to the July 2012 launch of AFX in Brazil and Argentina, and IntuiTrak orders by our distributor in Japan (in anticipation of its Japanese regulatory approval, which was received in December 2012).
Cost of Goods Sold, Gross Profit, and Gross Margin Percentage

 
Year Ended December 31,
 

 


 
2012
 
2011
 
Variance
 
Percent Change

 
(in thousands)
 

 

Cost of goods sold
 
$
25,282

 
$
18,746

 
$
6,536

 
34.9
%
Gross profit
 
80,664

 
64,671

 
15,993

 
24.7
%
Gross margin percentage (gross profit as a percent of revenue)
 
76.1
%
 
77.5
%
 
(1.4
)%
 

The $6.5 million increase in cost of goods sold was driven by our revenue increase of $22.5 million .

Gross margin for the year ended December 31, 2012 decreased to 76.1% from 77.5% for the twelve months ended December 31, 2011 . This decrease is primarily due to (i) a greater proportion of the total revenue being derived from international sales in 2012 (which have an average sales price below the U.S. sales price); (ii) royalty expenses which were not present for the full prior year period; and (iii) a decline in the average value of the Euro relative to the U.S. dollar in 2012 from 2011. These unfavorable gross margin items were partially offset by a greater proportion of our current period revenue derived from direct sales, as opposed to distributor sales, which typically have a higher average sales price.
Operating Expenses

 
Year Ended December 31,
 

 


 
2012
 
2011
 
Variance
 
Percent Change

 
(in thousands)
 

 

Research and development
 
$
16,571

 
$
16,738

 
$
(167
)
 
(1.0
)%
Clinical and regulatory affairs
 
6,343

 
4,439

 
1,904

 
42.9
 %
Marketing and sales
 
53,953

 
44,655

 
9,298

 
20.8
 %
General and administrative
 
20,266

 
15,525

 
4,741

 
30.5
 %
Contract termination and business acquisition expenses
 
422

 
1,730

 
(1,308
)
 
(75.6
)%
Settlement costs
 
5,000

 

 
5,000

 
100.0
 %
Research and Development. The $0.2 million decrease in research and development expenses was primarily driven by decreasing Ventana development activities, as this device reaches the final stages of development and progresses towards production and commercialization. This decrease was partially offset by a $1.0 million purchase in the current period of an exclusive license to patents covering the polymer used in our Nellix System.
Clinical and Regulatory Affairs. The $1.9 million increase in clinical affairs was primarily driven by the continued enrollment and follow-up costs associated with our PEVAR and Ventana clinical trials and our efforts to achieve CE Mark approval of Ventana and the Nellix System.
Marketing and Sales . The $9.3 million increase in marketing and sales expenses was primarily related to marketing costs to support the growth of our U.S. business, costs related to our direct sales force in Europe (which was largely not present in the prior year period), and an increase in variable compensation expense of $1.2 million, driven by an increase in U.S. revenue of 21% .
General and Administrative . The $4.7 million increase in general and administrative expenses is attributable to (i) additional personnel to support our business growth; (ii) increased travel expenses associated with the expansion of our European operations; and (iii) professional service fees to develop our global legal structure.

Contract Termination and Business Acquisition Expenses .  Current period expense of $0.4 million is associated with professional fees incurred as part of the July 2012 acquisition of our Italian distributor's business.  In the prior year period we early terminated a distribution agreement with two former European distributors for aggregate termination fees of $1.7 million .  These actions allowed us to begin selling our products through our direct sales force in most of western Europe, beginning September, 2011, and in Italy, beginning July, 2012.

Settlement Costs .  Settlement costs of $5.0 million in the current period represents our payment in full to settle a patent dispute with Cook Incorporated. 

Provision for Income Taxes
 
 
Year Ended December 31,
 
 
 
 
2012
 
2011
 
Variance
 
 
(in thousands)
 
 
Income tax (expense) benefit

(531
)

$
86


$
(617
)
For the twelve months ended December 31, 2012 , our provision for income taxes was $0.5 million and our effective tax rate was 1.5% for the year ended December 31, 2012 . During the twelve months ended December 31, 2012 , we had operating legal entities in the U.S., Italy, and The Netherlands (plus registered sales branches of our Dutch entity in certain countries in Europe). We had a single operating legal entity in the U.S. during the prior year period until September 2011, when we formed operating legal entities in The Netherlands to begin direct sales activity in Europe. Accordingly, we have certain minimum tax liabilities attributable to our operations in these countries in 2012 that were not present in 2011. 

Year Ended December 31, 2011 versus December 31, 2010
Revenue
 
 
Year Ended December 31,
 
 
 
 
 
 
2011
 
2010
 
Variance
 
Percent Change
 
 
(in thousands)
 
 
 
 
Revenue
 
$
83,417

 
$
67,251

 
$
16,166

 
24.0
%
Our 24% revenue increase primarily resulted from an increase in U.S. sales due to (i) the expansion of our sales force, (ii) the successful market introduction of additional ELG Device sizes and extensions (beginning in the second half of 2010), and (iii) the successful launch of AFX in August 2011. Though our overall revenue growth was driven by U.S. sales, it was partially offset by our decrease in European sales.
From January 1, through August 31, 2011 (and all prior periods), our European sales were solely derived from independent distributors. From September 1, 2011 through December 31, 2011, our European sales were derived from (i) our developing direct European sales force serving the markets of Austria, Belgium, the Czech Republic, Denmark, France, Germany, Luxemburg, The Netherlands, Romania, Sweden, Switzerland, and the United Kingdom (excluding Northern Ireland), and (ii) four independent distributors serving the markets in Italy, Greece, Turkey, and Ireland.
Cost of Goods Sold, Gross Profit, and Gross Margin Percentage
 
 
Year Ended December 31,
 
 
 
 
 
 
2011
 
2010
 
Variance
 
Percent Change
 
 
(in thousands)
 
 
 
 
Cost of goods sold
 
$
18,746

 
$
15,030

 
$
3,716

 
24.7
%
Gross profit
 
64,671

 
52,221

 
12,450

 
23.8
%
Gross margin percentage (gross profit as a percent of revenue)
 
77.5
%
 
77.7
%
 
(0.2
)%
 

The $3.7 million increase in cost of goods sold was driven by an increase in revenue of $16.2 million . Gross margin for twelve months ended December 31, 2011 remained consistent with the prior year.
Operating Expenses
 
 
Year Ended December 31,
 
 
 
 
 
 
2011
 
2010
 
Variance
 
Percent Change
 
 
(in thousands)
 
 
 
 
Research and development
 
$
16,738

 
$
8,997

 
$
7,741

 
86.0
%
Clinical and regulatory affairs
 
4,439

 
2,169

 
2,270

 
104.7
%
Marketing and sales
 
44,655

 
31,869

 
12,786

 
40.1
%
General and administrative
 
15,525

 
13,410

 
2,115

 
15.8
%
Contract termination and business acquisition expenses
 
1,730

 

 
1,730

 
100.0
%
Research and Development. The $7.7 million increase in research and development expenses was primarily driven by development activities related to the Nellix System, which represented an increase of $7.1 million of total research and development expenses for the year ended December 31, 2011. The remaining increase in research and development, as compared to 2010, is related to services and materials for general research and development activities for our other projects, including Ventana.
Clinical and Regulatory Affairs. The $2.3 million increase in clinical affairs expenses was primarily driven by the continued enrollment and follow up costs associated with our PEVAR clinical trial.
Marketing and Sales . The $12.8 million increase in marketing and sales expenses for the twelve months ended December 31, 2011 as compared to 2010 was primarily related to additional sales personnel related costs. We experienced an increase in variable compensation expense associated with our 29% increase in U.S. revenue for the twelve months ended December 31, 2011, as compared to the prior year. We also had an increase in marketing costs associated with driving U.S. sales growth, and incurred $1.2 million of incremental expenses in 2011 to build our direct sales force in Europe.
General and Administrative . The $2.1 million increase in general and administrative expenses was primarily related to an increase of (i) $1.2 million in legal costs associated with patent disputes; (ii) $0.2 million in consulting and professional services; (iii) $0.1 million in bank fees; (iv) $0.4 million increase in various costs to enhance our information technology infrastructure; and (v) $2.1 million increase in additional personnel costs, including recruitment and relocation expenses to support our U.S. and European business growth. These increases were partially offset by $3.0 million of Nellix acquisition costs that only arose in the prior year.
Contract termination and business acquisition expenses. Upon mutual agreement, we terminated a European distribution agreement, effective September 1, 2011. In connection therewith, we were contractually required to pay this distributor $1.3 million in order to start directly marketing and selling our products within certain Western European countries. Additionally, upon mutual agreement, we early terminated a distribution agreement with an Italian distributor, effective March 31, 2011. We were contractually required to pay this distributor $0.4 million as part of the transfer of distribution rights to another Italian distributor.

  
Liquidity and Capital Resources
The chart provided below summarizes selected liquidity data and metrics as of December 31, 2012 and December 31, 2011 :

December 31, 2012

December 31, 2011

(in thousands, except financial metrics data)
Cash and cash equivalents
$
45,118


$
20,035

Accounts receivable, net
$
22,600


$
15,542

Total current assets
$
87,567


$
55,104

Total current liabilities
$
17,194


$
13,949

Working capital surplus (a)
$
70,373


$
41,155

Days sales outstanding ("DSO") (b)
71


61

Current ratio (c)
5.1


4.0


(a) total current assets at period end minus total current liabilities at period end.
(b) net accounts receivable at period end divided by revenue for the fourth quarter multiplied by 92 days.
(c) total current assets at period end divided by total current liabilities at period end.
Operating Activities
Cash used in operating activities was $18.5 million for the year ended December 31, 2012 , as compared to cash used in operating activities of $22.4 million in the prior year period. The decrease in cash used in operating activities is primarily a function of particularly large inventory expenditures in the prior year period to prepare for our August 2011 launch of AFX, partially offset by a general increase in 2012 expenditures to support our expanding world-wide operations.
During the twelve months ended December 31, 2012 and 2011 , our cash collections from customers totaled $98.9 million and $80.0 million , respectively, representing 93% and 96% of reported revenue for the same periods.
Investing Activities
Cash used in investing activities for the twelve months ended December 31, 2012 was $3.5 million and consisted of (i) machinery and equipment purchases for the production of our ELG Systems; (ii) expenditures for various information technology enhancements; and (iii) the acquisition of our former Italian distributor's business.
Financing Activities
Cash provided by financing activities was $47.4 million for the twelve months ended December 31, 2012 , as compared to cash provided by financing activities of $7.3 million in the prior year period. The $47.4 million of cash provided by financing activities was attributable to our (i) $ 40.1 million of net proceeds from the June 2012 Equity Raise (discussed below); (ii) proceeds of $4.9 million from the exercise of stock options; and (iii) proceeds of $ 2.4 million from our sale of stock through our employee stock purchase plan.
June 2012 Equity Raise
On May 30, 2012, we executed a common stock purchase agreement (the "Stock Purchase Agreement") with Piper Jaffray & Co. ("Piper").   Pursuant to the terms of the Stock Purchase Agreement Piper purchased 2.7 million shares of our common stock at $13.00 per share on June 5, 2012, and subsequently executed an option to purchase an additional 0.4 million shares at the purchase price of $13.00 per share, which closed on June 7, 2012. 
These two transactions resulted in net proceeds to us of $ 40.1 million (the "June 2012 Equity Raise"). We plan to use these proceeds to support our continued growth, which may include sales and marketing expenditures, research and development activities, clinical trials, business expenditures, and administrative and infrastructure investments.
Credit Arrangements
In October 2009, we entered into a revolving credit facility with Wells Fargo Bank (“Wells”), which was last amended on October 9, 2012, whereby we may borrow up to $20.0 million , subject to the calculation and limitation of a borrowing base (the “Wells Credit Facility”). All amounts owing under the Wells Credit Facility will become due and payable upon its expiration on March 31, 2013. As of December 31, 2012 , we did not have any outstanding borrowings under the Wells Credit Facility. Any outstanding amounts under the Wells Credit Facility bear interest at a variable rate equal to the Wells prime rate, plus 1.00% , which is payable on a monthly basis. The Wells Credit Facility is collateralized by all of our assets, except our intellectual property.

The Wells Credit Facility contains financial covenants requiring us to (i) maintain a minimum current ratio of 1.5 , equal to the quotient of modified current assets to current liabilities, as defined in the Wells Credit Facility (the "Current Ratio Covenant"), and (ii) not exceed operating loss amounts (excluding non-cash contingent consideration associated with the acquisition of Nellix) of $6.5 million for the quarter ended March 31, 2012; $11.0 million for the six months ended June 30, 2012; $13.0 million for the nine months ended September 30, 2012; and $13.0 million for the year ended December 31, 2012 (the "Operating Loss Covenant"). The Wells Credit Facility carried a 0.2% unused commitment fee through May 19, 2012, when this fee was eliminated. The Wells Credit Facility also included a negative covenant limiting 2012 capital expenditures to an aggregate $3.0 million.

We were not in compliance with the Operating Loss Covenant for the nine months ended September 30, 2012, and for the year ended December 31, 2012 . We obtained a waiver from Wells for such breaches of the Operating Loss Covenant on October 26, 2012 and February 11, 2013, respectively, whereby Wells agreed to forbear from enforcing their default rights under the Wells Credit Facility. The waiver does not apply to any subsequent breaches of the same provision, nor any breach of any other provision specified within the Wells Credit Facility.
       
The Wells Credit Facility also contains a “material adverse change” clause (“MAC”). If we encounter difficulties that would qualify as a MAC in its (i) operations, (ii) condition (financial or otherwise), or (iii) ability to repay amounts outstanding under the Wells Credit Facility, it could be canceled at Wells' sole discretion. Wells could then elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable and proceed against any collateral securing such indebtedness.

In advance of the March 31, 2013 expiration of the Wells Credit facility, we are presently in process of discussing the terms of extended credit facility with Wells, that we expect will be under comparable terms.    

Credit Risk

The majority of our accounts receivable arise from product sales in the U.S. However, we also have significant
receivable balances from customers within the European Union, Japan, Brazil, Argentina, and Mexico. Our accounts
receivable in the U.S. are primarily due from public and private hospitals. Our accounts receivable outside of the U.S. are
primarily due from independent distributors, and to a lesser extent, public and private hospitals.  Our historical write-offs of accounts receivable have not been significant.

We monitor the financial performance and credit worthiness of our customers so that we can properly assess
and respond to changes in their credit profile. Since our customers operate in certain countries such as Greece and Italy, where adverse economic conditions persist, it increases the risk of our inability to collect amounts due to us from them. To determine our allowance for doubtful accounts we consider these factors and other relevant considerations. Our allowance for doubtful accounts of $0.5 million as of December 31, 2012 , represents our best estimate of the amount of probable credit losses in our existing accounts receivable.
Future Capital Requirements
We believe that the future growth of our business will depend upon our ability to successfully develop new technologies for the treatment of aortic disorders and successfully bring these technologies to market. We expect to incur significant expenditures in completing product development and clinical trials for Ventana and the Nellix System.
The timing and amount of our future capital requirements will depend on many factors, including:

the need for working capital to support our sales growth;
the need for additional capital to fund future development programs;
the need for additional capital to fund our sales force expansion;
the need for additional capital to fund strategic acquisitions;
our requirements for additional facility space or manufacturing capacity;
our requirements for additional information technology infrastructure and systems; and
adverse outcomes from potential litigation and the cost to defend such litigation.
 
We believe that our world-wide cash resources are adequate to operate our business. We presently have several operating subsidiaries outside of the U.S. As of December 31, 2012, these subsidiaries hold an aggregate $2.1 million in foreign bank accounts to fund their local operations. These balances and any changes thereto, are deemed by management to be permanently reinvested in the corresponding country in which our subsidiary operates. Management has no present or planned intention to repatriate these funds into to U.S. However, in the event that we required additional funds in the U.S. and had to repatriate any foreign-held funds to meet those needs, we would then need to accrue, and ultimately pay, incremental income tax expenses on such “deemed dividend,” unless we then had sufficient net operating losses to offset this potential tax liability.

We expect to generate positive cash flows from operations by the second half of 2013 and beyond. However, in the event we require additional financing in the future, it may not be available on commercially reasonable terms, if at all. Even if we are able to obtain financing, it may cause substantial dilution (in the case of an equity financing), or may contain burdensome restrictions on the operation of our business (in the case of debt financing). If we are not able to obtain required financing, we may need to curtail our operations and/or our planned product development.
Contractual Obligations
As of December 31, 2012 , expected future cash payments related to contractual obligations were as follows:
 

Payment due by period at December 31, 2012

Total

Less than 1 Year

1 - 3 Years

3 - 5 Years

After 5 Years
 
(In thousands)
Operating lease obligations
$
1,129


$
655


$
474


$


$

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements (except for operating leases) that provide financing, liquidity, market or credit risk support, or involve derivatives. In addition, we have no arrangements that may expose us to liability that are not expressly reflected in the accompanying Consolidated Financial Statements.

As of December 31, 2012 , we did not have any relationships with unconsolidated entities or financial partnerships, often referred to as "structured finance" or "special purpose entities," established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not subject to any material financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk

We do not believe that we currently have material exposure to interest rate, foreign currency exchange rate or other relevant market risks.
Interest Rate and Market Risk. Our exposure to market risk for changes in interest rates relates primarily to the Wells Credit Facility. All outstanding amounts under the Wells Credit Facility bear interest at a variable rate equal to the Wells prime rate, plus 1.00%, which is payable on a monthly basis. As of December 31, 2012 , we had no amounts outstanding under the Wells Credit Facility. However, if we draw down the Wells Credit Facility, we may be exposed to market risk due to changes in the rate at which interest accrues.
We do not use derivative financial instruments in our investment portfolio. We are averse to principal loss and try to ensure the safety and preservation of our invested funds by limiting default risk, market risk, and reinvestment risk. We attempt to mitigate default risk by investing in only high credit quality securities and by positioning our portfolio to appropriately respond to a significant reduction in the credit rating of any investment issuer or guarantor. At December 31, 2012 , our investment portfolio solely consisted of money market instruments.
Foreign Currency Transaction Risk. While a majority of our business is denominated in the U.S. dollar, a portion of our revenues and expenses are denominated in foreign currencies. Fluctuations in the rate of exchange between the U.S. dollar and the Euro or the British Pound Sterling may affect our results of operations and the period-to-period comparisons of our operating results.


4

Table of Contents


Item 8.         Financial Statements and Selected Supplementary Data

ENDOLOGIX, INC.
FORM 10-K ANNUAL REPORT
For the Fiscal Year Ended December 31, 2012

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page No.
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2012, 2011, and 2010
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2012, 2011, and 2010
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011, and 2010
Notes to Consolidated Financial Statements
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 2012, 2011, and 2010

All other schedules are omitted because the required information is not applicable or the information is presented in the Consolidated Financial Statements or the notes thereto.

5

Table of Contents

Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Endologix, Inc.:
We have audited the accompanying consolidated balance sheet of Endologix, Inc. and subsidiaries as of December 31, 2012, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity, and cash flows for the year ended December 31, 2012. In connection with our audit of the consolidated financial statements, we also have audited the consolidated financial statement schedule of valuation and qualifying accounts. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Endologix, Inc. and subsidiaries as of December 31, 2012, and the results of their operations and their cash flows for the year ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Endologix, Inc's internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2013 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
 
/s/ KPMG LLP

March 14, 2013
Irvine, California

Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Endologix, Inc.:
We have audited Endologix, Inc.'s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Endologix, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Endologix, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Endologix, Inc. and subsidiaries as of December 31, 2012, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity, and cash flows for the year ended December 31, 2012, and our report dated March 14, 2013 , expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

March 14, 2013
Irvine, California










Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Endologix, Inc.:

In our opinion, the consolidated balance sheet as of December 31, 2011 and related consolidated statements of operations and comprehensive income (loss), stockholders' equity and cash flows for each of the two years in the period ended December 31, 2011 present fairly, in all material respects, the financial position of Endologix, Inc. and its subsidiaries at December 31, 2011, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for each of the two years in the period ended December 31, 2011 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express opinions on these financial statements and on the financial statement schedule, based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP
Orange County, California
March 6, 2012


6


ENDOLOGIX, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)

 
 
 
 
 
 
 
December 31,
 
 
2012
 
2011
ASSETS

 

Current assets:
 

 

Cash and cash equivalents
 
$
45,118

 
$
20,035

Accounts receivable, net of allowance for doubtful accounts of $472 and $161, respectively
 
22,600

 
15,542

Other receivables
 
320

 
405

Inventories
 
18,087

 
18,099

Prepaid expenses and other current assets
 
1,442

 
1,023

Total current assets
 
87,567

 
55,104

Property and equipment, net
 
4,984

 
4,454

Goodwill
 
29,022

 
27,073

Intangibles, net
 
43,356

 
43,439

Deposits and other assets
 
174

 
185

Total assets
 
$
165,103

 
$
130,255

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
6,348

 
$
6,377

Accrued payroll
 
7,825

 
6,569

Accrued expenses and other current liabilities
 
3,021

 
1,003

Total current liabilities
 
17,194

 
13,949

Commitments and contingencies
 
 
 
 
Deferred income taxes
 
1,035

 
1,029

Deferred rent
 

 
8

Contingently issuable common stock
 
52,400

 
38,700

Total liabilities
 
70,629

 
53,686

Commitments and contingencies




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

 

Common stock, $0.001 par value; 75,000,000 shares authorized, 63,068,463 and 58,577,484 shares issued, respectively. 62,573,763 and 58,082,784 shares outstanding, respectively.
 
63

 
59

Additional paid-in capital
 
295,338

 
241,441

Accumulated deficit
 
(200,014
)
 
(164,240
)
Treasury stock, at cost, 494,700 shares
 
(661
)
 
(661
)
Accumulated other comprehensive loss
 
(252
)
 
(30
)
Total stockholders’ equity
 
94,474

 
76,569

Total liabilities and stockholders’ equity
 
$
165,103

 
$
130,255

See accompanying notes to these consolidated financial statements.

7

Table of Contents

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








Year Ended December 31,
 
2012

2011

2010
Revenue
$
105,946


$
83,417


$
67,251

Cost of goods sold
25,282


18,746


15,030

Gross profit
80,664


64,671


52,221

Operating expenses:





Research and development
16,571


16,738


8,997

Clinical and regulatory affairs
6,343


4,439


2,169

Marketing and sales
53,953


44,655


31,869

General and administrative
20,266


15,525


13,410

Contract termination and business acquisition expenses
422


1,730



Settlement costs
5,000





Total operating expenses
102,555


83,087


56,445

Loss from operations
(21,891
)

(18,416
)

(4,224
)
Other income (expense):





Interest income
30


23


30

Interest expense
(7
)

(32
)

(16
)
Gain on sale of equipment


141



Other income (expense), net
325


(32
)

(174
)
Change in fair value of contingent consideration
related to acquisition
(13,700
)

(10,500
)


Total other expense
(13,352
)

(10,400
)

(160
)
Net loss before income tax (expense) benefit
$
(35,243
)

$
(28,816
)

$
(4,384
)
Income tax (expense) benefit
(531
)

86


15,037

Net (loss) income
$
(35,774
)

$
(28,730
)

$
10,653

Other comprehensive loss (foreign currency translation)
$
(222
)

$
(30
)

$

Comprehensive income (loss)
$
(35,996
)

$
(28,760
)

$
10,653










Basic net income (loss) per share
$
(0.60
)

$
(0.51
)

$
0.22

Diluted net income (loss) per share
$
(0.60
)

$
(0.51
)

$
0.21

Shares used in computing basic net income (loss) per share
59,811


56,592


48,902

Shares used in computing diluted net income (loss) per share
59,811


56,592


50,544

See accompanying notes to these consolidated financial statements.

8

Table of Contents

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

 
 Common Stock

Additional
Paid-In
Capital

Accumulated
Deficit

Treasury
Stock
 
Accumulated Other Comprehensive Loss

Total Stockholders’
Equity
 
Issued Shares

$0.001 Par Value



 

Balance at December 31, 2009
49,152


$
49


$
189,656


$
(146,164
)

$
(661
)
 
$


$
42,880

Exercise of common stock options
676


1


2,242





 


2,243

Employee stock purchase plan
293




1,117





 


1,117

Sale of common stock
3,171


3


14,987





 


14,990

Issuance of common stock for acquisition
3,199


3


19,385





 


19,388

Stock compensation expense




2,215





 


2,215

Issuance of restricted stock
405


1







 


1

Restricted stock expense




422





 


422

Non-employee stock option expense




(7
)




 


(7
)
Net income






10,653



 


10,653

Balance at December 31, 2010
56,896


$
57


$
230,017


$
(135,510
)

$
(661
)
 
$


$
93,902

Exercise of common stock options
1,394


2


5,322





 


5,324

Employee stock purchase plan
287




1,965





 


1,965

Stock compensation expense




2,851





 


2,851

Restricted stock expense




877





 


877

Non-employee stock option expense




409





 


409

Net loss






(28,730
)


 


(28,730
)
Other comprehensive loss









 
(30
)

(30
)
Balance at December 31, 2011
58,577


$
59


241,441


$
(164,240
)

$
(661
)
 
(30
)

$
76,569

Exercise of common stock options
1,168


1


4,991





 


4,992

Employee stock purchase plan
224




2,369





 


2,369

Sale of common stock
3,105


3


40,066





 


40,069

Stock compensation expense




3,649





 


3,649

Issuance of restricted stock
13









 



Cancellation of restricted stock
(18
)