Endologix
ENDOLOGIX INC /DE/ (Form: 10-Q, Received: 11/01/2013 17:23:46)

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________________________________________________ 
FORM 10-Q
 __________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 000-28440  
 __________________________________________________ 
ENDOLOGIX, INC.
(Exact name of registrant as specified in its charter)  
 __________________________________________________   
Delaware
68-0328265
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
11 Studebaker, Irvine, California 92618
(Address of principal executive offices)
(949) 595-7200
(Registrant’s telephone number, including area code)
    ________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 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 Exchange Act).    Yes   o     No   x
On October 25, 2013 , the re were 63,536,561 sh ares outstanding of the registrant’s only class of common stock.
 
 
 
 
 



ENDOLOGIX, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013

TABLE OF CONTENTS


 
Item
Description
Page
 
 
 
 
 
 
 
Item 1.
 
 
 
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2013 and 2012
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
 
 


Table of Contents

Part I. Financial Information

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





September 30,

December 31,

2013

2012
ASSETS



Current assets:



Cash and cash equivalents
$
49,486


$
45,118

Accounts receivable, net allowance for doubtful accounts of $416 and $472, respectively.
23,568


22,600

Other receivables
312


320

Inventories
18,004


18,087

Prepaid expenses and other current assets
2,024


1,442

Total current assets
93,394


87,567

Property and equipment, net
5,037


4,984

Goodwill
29,067


29,022

Intangibles, net
43,162


43,356

Deposits and other assets
222


174

Total assets
$
170,882


$
165,103





LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Accounts payable
$
5,144


$
6,348

Accrued payroll
10,176


7,825

Accrued expenses and other current liabilities
3,658


3,021

Total current liabilities
18,978


17,194

Deferred income taxes
1,035


1,035

Other liabilities
170



Contingently issuable common stock
57,600


52,400

Total liabilities
77,783


70,629

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. 63,420,674 and 63,068,463 shares issued, respectively. 63,420,674 and 62,573,763 shares outstanding, respectively.
63


63

Additional paid-in capital
306,291


295,338

Accumulated deficit
(212,669
)

(200,014
)
Treasury stock, at cost, 0 and 494,700 shares, respectively.


(661
)
Accumulated other comprehensive loss
(586
)

(252
)
Total stockholders’ equity
93,099


94,474

Total liabilities and stockholders’ equity
$
170,882


$
165,103


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

1

Table of Contents

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









Three Months Ended September 30,

Nine Months Ended September 30,
 
2013

2012

2013

2012
Revenue
$
33,260


$
26,696


$
97,008


$
76,725

Cost of goods sold
7,362


6,444


23,578


18,148

Gross profit
25,898


20,252


73,430


58,577

Operating expenses:







Research and development
5,160


3,076


12,501


11,886

Clinical and regulatory affairs
2,005


1,462


6,558


4,727

Marketing and sales
15,191


12,705


47,235


38,923

General and administrative
5,760


4,942


16,364


13,813

Contract termination and business acquisition expenses






422

Settlement costs


5,000




5,000

Total operating expenses
28,116


27,185


82,658


74,771

Loss from operations
(2,218
)

(6,933
)

(9,228
)

(16,194
)
Other income (expense):







Interest income
13


34


33


24

Interest expense
(7
)



(10
)

(3
)
Other income (expense), net
994


(101
)

2,117


(86
)
Change in fair value of contingent consideration related to acquisition
(7,600
)

990


(5,200
)

(12,700
)
Total other income (expense)
(6,600
)

923


(3,060
)

(12,765
)
Net loss before income tax expense
$
(8,818
)

$
(6,010
)

$
(12,288
)

$
(28,959
)
Income tax (expense) benefit
(172
)

153


(367
)

(297
)
Net loss
$
(8,990
)

$
(5,857
)

$
(12,655
)

$
(29,256
)
Other comprehensive loss (foreign currency translation)
$
(477
)

$
(139
)

$
(334
)

$
(32
)
Comprehensive loss
$
(9,467
)

$
(5,996
)

$
(12,989
)

$
(29,288
)












Basic and diluted net loss per share
$
(0.14
)

$
(0.10
)

$
(0.20
)

$
(0.49
)
Shares used in computing basic and diluted net loss per share
62,730


61,327


62,407


59,224

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


2

Table of Contents

ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)



Nine Months Ended September 30,
 
2013

2012
Operating activities:



Net loss
$
(12,655
)

$
(29,256
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:



Depreciation and amortization
1,787


1,651

Stock-based compensation
6,046


3,522

Change in fair value of contingent consideration related to acquisition
5,200


12,700

Research and development license
752



Changes in operating assets and liabilities:



Accounts receivable
(968
)

(4,074
)
Inventories
93


(957
)
Prepaid expenses and other current assets
(622
)

(479
)
Accounts payable
(1,125
)

(1,983
)
Accrued payroll
2,351


407

Accrued expenses and other current liabilities
637


1,262

Other liabilities
100


(8
)
Accrued settlement cost


5,000

Net cash provided by (used in) operating activities
1,596


(12,215
)
Investing activities:



Purchases of property and equipment
(1,620
)

(1,408
)
Purchase of patent license


(100
)
Business acquisition


(2,367
)
Net cash used in investing activities
(1,620
)

(3,875
)
Financing activities:



Proceeds from sale of stock, net of expenses


40,069

Proceeds from sale of common stock under employee stock purchase plan
1,646


1,409

Proceeds from exercise of stock options
3,160


2,355

Funding of restricted cash account
5,395



Release of restricted cash account
(5,395
)


Net cash provided by financing activities
4,806


43,833

Effect of exchange rate changes on cash and cash equivalents
(414
)

(38
)
Net increase in cash and cash equivalents
4,368


27,705

Cash and cash equivalents, beginning of period
45,118


20,035

Cash and cash equivalents, end of period
$
49,486


$
47,740


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


3

Table of Contents

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

1. Description of Business, Basis of Presentation, and Operating Segment

(a)
Description of Business

Endologix, Inc. (the "Company") is a Delaware corporation with corporate headquarters and production facilities located in Irvine, California. The Company develops, manufactures, markets, and sells innovative medical devices for the treatment of aortic disorders. The Company's principal product (which includes its IntuiTrak ® , AFX ® , Nellix ® , and Ventana™ brands) is a stent graft and catheter delivery system (the "ELG System") for the treatment of abdominal aortic aneurysms ("AAA") through minimally-invasive endovascular repair ("EVAR"). Sales of the Company's ELG System (including device extensions and accessories) to hospitals and third-party distributors provide the sole source of reported revenue.
The Company's ELG System consists of (i) a self-expanding stent covered by graft material (the "ELG Device"); (ii) an accompanying catheter delivery system in which the ELG Device is loaded; and (iii) in the case of the Nellix product a biostable polymer and bag used to seal the aneurysm. Once the ELG Device is fixed in its proper position within the abdominal aorta, it provides a conduit for blood flow and relieves pressure within the weakened or “aneurysmal” section of the vessel wall, greatly reducing the potential for the AAA to rupture.

(b) Basis of Presentation

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

Certain prior period operating expense amounts for the three months ended March 31, 2013 have been reclassified between "marketing and sales" and "general and administrative" to conform to current period financial statement presentation.

The interim financial data as of September 30, 2013 is unaudited and is not necessarily indicative of the results for a full year. In the opinion of the Company's management, the interim data includes normal and recurring adjustments necessary for a fair presentation of the Company's financial results for the three and nine months ended September 30, 2013 . Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations relating to interim financial statements.

The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Company's audited Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 , filed with the SEC on March 14, 2013.

(c) Operating Segment

The Company has one reportable operating segment that is focused exclusively on the development, manufacture, marketing, and sale of ELG Systems for the treatment of aortic disorders. For the three and nine months ended September 30, 2013 , all of the Company's revenue and related expenses were solely attributable to these activities. Substantially all of the Company's long-lived assets are located in the U.S.

2. Use of Estimates and Summary of Significant Accounting Policies

The preparation of financial statements in conformity with GAAP requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, the Company's management evaluates its estimates, including those related to (i) collectibility of customer accounts; (ii) whether the cost of inventories can be recovered; (iii) the value of goodwill and intangible assets; (iv) realization of tax assets and estimates of tax liabilities; (v) likelihood of payment and value of contingent liabilities;

4

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



and (vi) potential outcome of litigation. Such estimates are based on management's judgment which takes into account historical experience and various assumptions. Nonetheless, actual results may differ from management's estimates.
The following accounting policies and estimates were used in the preparation of the accompanying Condensed Consolidated Financial Statements:
(a) Cash and Cash Equivalents
The carrying amount of the Company's money market funds is included in cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheets, and approximates its fair value (utilizing Level 1 inputs) because of the ability to immediately convert these money market funds to cash with minimal change in value.
(b) Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount, inclusive of applicable value-added tax ("VAT"), and do not bear interest. Revenue is recorded net of VAT. The allowance for doubtful accounts is management's best estimate of the amount of probable credit losses in existing accounts receivable. Account balances are charged off against the allowance after appropriate collection efforts are exhausted.
(c) Inventories
The Company values inventory at the lower of the actual cost to purchase or manufacture the inventory, or the market value for such inventory. Cost is determined on the first-in, first-out method (FIFO). The Company regularly reviews inventory quantities in process and on hand, and when appropriate, records a provision for obsolete and excess inventory. The provision is based on actual loss experience and a forecast of product demand compared to its remaining shelf life.
(d) Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over the following estimated useful lives:
 
Useful Life
Office furniture
Seven years
Computer hardware
Three years
Computer software
Three to eight years
Production equipment and molds
Three to seven years
Leasehold improvements
Shorter of expected useful life or remaining term of lease
Upon sale or disposition of property and equipment, any gain or loss is included in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
(e) Goodwill and Intangible Assets
Intangible assets with definite lives are amortized over their estimated useful lives using a method that reflects the pattern over which the economic benefit is expected to be realized, and is as follows:
 
Useful Life
Goodwill
Indefinite lived
Trademarks and tradenames
Indefinite lived
In-process research and development
Indefinite lived until commercial launch of underlying technology
Developed technology
Thirteen years
Patents and license
Three to five years
Customer relationships
Three years
Goodwill and other intangible assets with indefinite lives are not subject to amortization, but are tested for impairment annually or whenever events or changes in business circumstances suggest the potential of an impairment.

5

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



The Company completed its annual indefinite lived intangible asset impairment test as of June 30, 2013, with no resulting impairment based on the discounted cash flows expected to be generated by the corresponding intangible assets.
The Company also most recently completed its annual test for impairment of goodwill as of June 30, 2013, with no resulting impairment. The Company's market capitalization was in substantial excess of the value of its total stockholders' equity (the Company has one "reporting unit" for purposes of the goodwill impairment test).
Intangible assets with finite lives are tested for impairment only when impairment indicators are present.
(f) Fair Value Measurements
The Company measures the fair value of its Contingent Payment on a quarterly basis (see Note 9). Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (i) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (ii) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
(g) Contingent Consideration for Business Acquisition
The Company's management determined the fair value of contingently issuable common stock on the Nellix acquisition date (see Note 9) using a probability-based income approach with an appropriate discount rate (determined using both Level 1 and Level 3 inputs). Changes in the fair value of this contingently issuable common stock are determined at each period end and are recorded in the other income (expense) section of the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss, and the long term liabilities section of the accompanying Condensed Consolidated Balance Sheet.
(h) Revenue Recognition
The Company recognizes revenue when all of the following criteria are met:

•     Appropriate evidence of a binding arrangement exists with the customer;
The ELG System has been used by the hospital in an EVAR procedure, or the distributor has assumed title with no right of return;
The sales price for the ELG System (including device extensions and accessories) is established with the customer; and
Collection of the corresponding receivable from the customer is reasonably assured at the time of sale.
For sales made to hospitals, the Company recognizes revenue upon completion of an EVAR procedure, when the ELG Device is implanted in a patient. For sales made to distributors, the Company recognizes revenue when title passes, which is typically at the time of shipment, as this represents the period that the customer has assumed custody of the ELG System, without right of return, and assumed risk of loss.

In the event that the Company enters into a bill and hold arrangement with its customer, which is uncommon, though occurred throughout 2012 for a certain Rest of World ("ROW") distributor (as discussed in Note 7 to the Company's Annual Report on Form 10-K for the year ended December 31, 2012), the following conditions must be met for revenue recognition:

6

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




(i)
The risks of ownership must have passed to the 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 and the date for delivery must be reasonable and consistent with the customer's business purpose;
(v)
The Company must have no remaining specific performance obligations and its earnings process must be complete;
(vi)
The customer's ordered ELG Systems must be segregated from the Company's inventory and not used to fulfill other customer orders; and
(vii)
The ELG Systems must be complete and ready for shipment.

In addition to the above requirements, the Company also considers other pertinent factors prior to its recognition of revenue for bill and hold arrangements, such as:

(i)
The date by which payment is expected from the customer, and whether the Company has modified its normal billing and credit terms for the customer;
(ii)
The Company's 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 the Company's 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).
(i) Shipping Costs
Shipping costs billed to customers are reported within revenue, with the corresponding costs reported within costs of goods sold.
(j) Foreign Currency Transactions
The assets and liabilities of the Company's foreign subsidiaries are translated at the rates of exchange at the balance sheet date. The income and expense items of these subsidiaries are translated at average monthly rates of exchange. Gains and losses resulting from foreign currency transactions, which are denominated in a currency other than the respective entity’s functional currency are included in other income (expense), net, within the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss. Foreign currency translation adjustments between the respective entity's functional currency and the U.S. dollar are recorded to accumulated other comprehensive income/(loss) within the stockholders' equity section of the accompanying Condensed Consolidated Balance Sheets. There were no items reclassified out of accumulated other comprehensive income (loss) and into net income (loss) during the three and nine months ended September 30, 2013 and 2012.
(k) Income Taxes
The Company records the estimated future tax effects of temporary differences between the tax basis of assets and
liabilities and amounts reported in the financial statements, as well as operating losses and tax credit carry forwards. The Company has recorded a valuation allowance to fully reduce its net deferred tax assets, because the Company believes that, based upon a number of factors, it is more likely than not that the deferred tax assets will not be realized. If the Company were to determine that it would be able to realize its deferred tax assets in the future, an adjustment to the valuation allowance on its deferred tax assets would increase net income in the period such determination was made. In the event that the Company were assessed interest and/or penalties from taxing authorities, such amounts would be included in "income tax expense" within the Condensed Consolidated Statements of Operations and Comprehensive Loss in the period the notice was received.
(l) Net Loss Per Share
Net loss per common share is computed using the weighted average number of common shares outstanding
during the periods presented. Because of the net losses during the three and nine months ended September 30, 2013 and 2012, options to purchase common stock, restricted stock awards, and restricted stock units were excluded from the computation of net loss per share for these periods because the effect would have been antidilutive.

7

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



(m) Research and Development Costs
Research and development costs, including licensing costs that are solely related to research and development activities are expensed as incurred.
(n) Product Warranty

Within six months of shipment, certain customers may request replacement of products they receive that do not meet product specifications; no other warranties are offered. The Company contractually disclaims responsibility for any damages associated with physicians' use of its ELG System. Historically, the Company has not experienced a significant amount of costs associated with its warranty policy.

3. Stock-Based Compensation

The Company classifies stock-based compensation expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss, based on the department to which the recipient belongs. Stock-based compensation expense included in cost of goods sold and operating expenses during the three and nine months ended September 30, 2013 and 2012 , was as follows:









Three Months Ended

Nine Months Ended

September 30,

September 30,

2013

2012

2013

2012
Cost of goods sold
$
123


$
183


$
500


$
387

Operating expenses:











Research and development
116


165


512


498

Clinical and regulatory affairs
390


67


828


145

Marketing and sales
736


361


2,401


1,041

General and administrative
354


389


1,805


1,451

Total operating expenses
$
1,596


$
982


$
5,546


$
3,135

Total
$
1,719


$
1,165


$
6,046


$
3,522


       
4. Net Loss Per Share
Net loss per share was calculated by dividing net loss by the weighted average number of common shares outstanding for the three and nine months ended September 30, 2013 and 2012 .

Three Months Ended

Nine Months Ended

September 30,

September 30,

2013

2012

2.013

2,012
Net loss
$
(8,990
)

$
(5,857
)

$
(12,655
)

$
(29,256
)
Shares used in computing basic and diluted net loss per share
62,730


61,327


62,407


59,224

Basic and diluted net loss per share
$
(0.14
)

$
(0.10
)

$
(0.20
)

$
(0.49
)


8

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



The following outstanding Company securities were excluded from the above calculations of net loss per share because their impact would have been anti-dilutive:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2013

2012

2013

2012
Common stock options
2,390


3,484


2,411


3,679

Restricted stock awards
398


487


394


487

Restricted stock units
229


419


219


419

  Total
3,017


4,390


3,024


4,585

See Note 9 for a discussion of common stock issuable upon the achievement of certain revenue and regulatory milestones.

5. Balance Sheet Account Detail

(a) Inventories

Inventories are stated at the lower of cost or market value. Inventories consisted of the following:

September 30,
2013

December 31,
2012
Raw materials
$
3,031


$
3,901

Work-in-process
4,953


5,102

Finished goods
10,020


9,084

Inventories
$
18,004


$
18,087


(b) Property and Equipment

Property and equipment consisted of the following:
 
September 30,
2013

December 31,
2012
Production equipment, molds, and office furniture
$
7,668


$
7,256

Computer hardware and software
3,184


2,265

Leasehold improvements
3,055


2,819

Construction in progress (software and related implementation, production equipment, and leasehold improvements)
274


556

Property and equipment, at cost
$
14,181


$
12,896

Accumulated depreciation
(9,144
)

(7,912
)
Property and equipment, net
$
5,037


$
4,984


The Company recognized depreciation expense on property and equipment during the three and nine months ended September 30, 2013 and 2012 as follows:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2013

2012

2013

2012
Depreciation expense
$
475


$
336


$
1,589


$
1,003




9

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



(d) Goodwill and Intangible Assets

The following table is a summary of goodwill, indefinite lived intangible assets, finite lived intangible assets, and related accumulated amortization:  

September 30,
2013

December 31,
2012
Goodwill (1)
$
29,067


$
29,022







Intangible assets:





Indefinite lived intangibles





In-process research and development (2)
$


$
40,100

Trademarks and trade names
2,708


2,708

Total indefinite lived intangibles
$
2,708


$
42,808







Finite lived intangibles





Developed technology (2)
$
40,100


$

Accumulated amortization
(33
)


Developed technology, net
$
40,067


$







Patent
$
100


$
100

Accumulated amortization
(90
)

(75
)
Patent, net
$
10


$
25







License
$
100


$
100

Accumulated amortization
(34
)

(12
)
License, net
$
66


$
88







Customer relationships
$
533


$
522

Accumulated amortization
(222
)

(87
)
Customer relationships, net
$
311


$
435







Intangible assets (excluding goodwill), net
$
43,162


$
43,356

(1) Difference in goodwill value between these dates is solely due to a foreign currency translation adjustment.
(2) Was reclassified in the first quarter of 2013 to finite lived intangibles, which coincided with the European commercial launch of the product (Nellix System) associated with this intangible asset. A significant portion of this intangible asset will not begin amortization until the U.S. launch of this product, currently scheduled for 2016.

The Company recognized amortization expense on intangible assets during the three and nine months ended September 30, 2013 and 2012 as follows:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2013

2012

2013

2012
Amortization expense
$
77


$
52


$
198


$
648


10

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



Estimated amortization expense for the remainder of 2013 and the five succeeding fiscal years is as follows:
 

Amortization Expense
Remainder of 2013
$
64

2014
442

2015
639

2016
953

2017
2,251

2018
3,867

2019 and thereafter
32,238


$
40,454

6. Credit Facilities

In October 2009, the Company entered into a revolving credit facility with Wells Fargo Bank (“Wells”), which was last amended on July 26, 2013, whereby the Company 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 November 15, 2014.

As of September 30, 2013 , the Company 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 carried a 0.2% unused commitment fee though May 19, 2012, when this fee was eliminated. The Wells Credit Facility is collateralized by all of the Company's assets, except its intellectual property.

The Wells Credit Facility contains certain financial covenants requiring the Company in 2013 and 2014 to (i) maintain a minimum quarter-end "current ratio" of current assets to current liabilities; (ii) meet minimum quarterly net operating income (loss) thresholds; and (iii) not exceed an annual limitation on capital expenditures. The Company was in compliance with these covenants for the nine months ended September 30, 2013.

The Wells Credit Facility also contains a “material adverse change” clause (“MAC”). If the Company encounters 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.


11

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



7. Revenue by Geographic Region
The Company's revenue by geographic region, was as follows:
 

Three Months Ended

Nine Months Ended
 
September 30,

September 30,
 
2013

2012

2013

2012
United States
$
26,508


79.7%

$
21,289


79.7%

$
77,578


80.0%

$
63,695


83.0%




















Europe
$
3,471


10.4%

$
2,123


8.0%

$
10,943


11.3%

$
5,683


7.4%




















Rest of World ("ROW"):



















Latin America
$
1,600


4.8%

$
1,670


6.3%

$
3,853


4.0%

$
3,785


4.9%
Asia/Pacific
1,681


5.1%

1,614


6.0%

4,634


4.7%

3,562


4.6%
Total ROW
$
3,281


9.9%

$
3,284


12.3%

$
8,487


8.7%

$
7,347


9.6%




















Revenue
$
33,260


100.0%

$
26,696


100.0%

$
97,008


100.0%

$
76,725


100.0%

U.S. The Company's U.S. sales were solely derived from its sales force, divided among twelve geographic sales regions.

Europe. The Company's European sales were derived from (i) its direct European sales force (including dedicated sales agents) serving much of Western Europe, and (ii) eight independent distributors based in Italy (through June 2012), Greece, Latvia, Poland, Portugal, Romania, Sweden and Turkey.

ROW. The Company's ROW sales were solely derived from independent distributors.

8. Commitments and Contingencies
(a) Leases
The Company leases (i) its administrative, research, and manufacturing facilities in Irvine, California, (ii) its administrative facility in Den Bosch, The Netherlands, and (iii) certain equipment. These agreements are accounted for as operating leases. The Irvine facility lease agreements require the Company to pay operating costs, including property taxes, insurance, and maintenance.
Future minimum payments by year under non-cancelable leases with initial terms in excess of one year were as follows as of September 30, 2013 :
Remainder of 2013
$
165

2014
959

2015
2,000

2016
2,060

2017
2,122

2018
2,122

2019 and thereafter
26,607


$
36,035


On June 12, 2013, the Company entered into a lease agreement for two adjacent office, research and development, and manufacturing facilities in Irvine, California.  The premises consist of approximately 129,000 combined square feet. The lease has a 15 -year term beginning January 1, 2014 and provides for one optional five year extension. The initial base rent under the lease is $ 1.9 million per year, payable in monthly installments, and escalates by 3% per year for years 2015 through 2019, and 4% per year for years 2020 and beyond.  The Company is entitled to rent abatement for the first nine months of the lease. These premises will replace the Company's existing Irvine facilities.


12

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



The terms of this lease agreement provide for $ 6.8 million of landlord-funded improvements (and certain other allowances) to this facility, in order to best suit the Company's requirements. In June 2013, the Company had Wells issue the landlord two letters of credit in the aggregate amount of $5.4 million under its Wells Credit Facility, representing financial collateral while these facility improvements are completed. The Company placed the same amount in a restricted cash account with Wells, in order to fully support these issued, but undrawn, letters of credit. In July 2013, this restricted cash account was fully released under the July 26, 2013 amendment to the Wells Credit Facility.
(b) Employment Agreements and Retention Plan
The Company has entered into employment agreements with its officers and certain other “key employees” under which payment and benefits would become payable in the event of termination by the Company for any reason other than cause, upon a change in control of the Company, or by the employee for good reason. The payment will generally be equal to six months of the employee’s then current salary for termination by the Company without cause and twelve months of salary if upon a change in control of the Company.
(c) Legal Matters
The Company from time to time is involved in various claims and legal proceedings of a nature considered normal and incidental to its business. These matters may include product liability, intellectual property, employment, and other general claims. The Company accrues for contingent liabilities when it is probable that a liability has been incurred and the amount can be reasonably estimated. The accruals are adjusted periodically as assessments change or as additional information becomes available.
LifePort
On December 28, 2012, LifePort Sciences, LLC filed a complaint against the Company in the United States District Court, District of Delaware alleging that certain of the Company's 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 the Company's products. The Company does not believe it infringes on any of these patents and intends to vigorously defend itself in this matter.
At this time, the Company is unable to predict the outcome of this matter, but is of the opinion that the outcome will not have a material adverse effect on its financial position, results of operations, or cash flow. However, in order to avoid further legal costs (recognized within "general and administrative" expenses within the Condensed Consolidated Statements of Operations and Comprehensive Loss) and diversion of management resources, it is reasonably possible that the Company may reach a settlement with LifePort, which could result in a liability. However, the Company cannot presently estimate the amount, or range, of reasonably possible losses due to the nature of this litigation.

9. Contingently Issuable Common Stock
On December 10, 2010 (the “Nellix Closing Date”), the Company completed its acquisition of Nellix, Inc., a pre-revenue, AAA medical device company. The purchase price consisted of 3.2 million of the Company's common shares, issuable to the former Nellix stockholders as of the Nellix Closing Date, then representing a value of $ 19.4 million . Additional payments, solely in the form of the Company's common shares (the “Contingent Payment”), will be made upon the achievement of a revenue milestone and a regulatory approval milestone (collectively, the “Nellix Milestones”).
The ultimate value of the Contingent Payment will be determined on the date that each Nellix Milestone is achieved. The number of issuable shares will be established using an applicable per share price, which is subject to a ceiling and/or floor, resulting in a maximum of 10.2 million shares issuable upon the achievement of the Nellix Milestones.

As of the Closing Date, the fair value of the Contingent Payment was estimated to be $ 28.2 million . As of September 30, 2013 , the Company's stock price last closed at $ 16.14 per share. Thus, had the Nellix Milestones been achieved on September 30, 2013 , the Contingent Payment would have comprised 4.0 million shares, representing a value of $ 64.6 million .
The value of the Contingent Payment is derived using a discounted income approach model, with a range of probabilities and assumptions related to the timing and likelihood of achievement of the Nellix Milestones (which include Level 3 inputs - see Note 2(f) and the Company's stock price (Level 1 input) as of the balance sheet date). These varying probabilities and assumptions and changes in the Company's stock price have required fair value adjustments of the Contingent Payment in periods subsequent to the Nellix Closing Date.

13

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



The per share price of the Company's common stock increased by $1.90 , or 13.3% , between December 31, 2012 and September 30, 2013 . The increase in the value of the Company's common stock was the primary driver affecting the increase in the fair value of the Contingent Payment during the nine months ended September 30, 2013 .
The Contingent Payment fair value will continue to be evaluated on a quarterly basis until milestone achievement occurs, or until the expiration of the "earn-out period," as defined within the Nellix purchase agreement. Adjustments to the fair value of the Contingent Payment are recognized within other income (expense) in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

Fair Value of Contingently Issuable Common Stock
December 31, 2012
$
52,400

Fair value adjustment of Contingent Payment for nine months ended September 30, 2013
5,200

September 30, 2013
$
57,600


10. Income Tax Expense
The Company applied an estimated annual effective tax rate (“ETR”) approach for calculating a tax provision for interim periods. The Company recorded a (provision) for income taxes of $ (0.2) million and $ (0.4) million for the three and nine months ended September 30, 2013 , respectively. The Company's ETR was (2)% and (3)% for the three and nine months ended September 30, 2013 , respectively.  The Company's ETR for the three and nine months ended September 30, 2013 differs from the U.S. federal statutory tax rate of 35% primarily as a result of nondeductible expenses (including the Nellix Contingent Payment), state income taxes, foreign income taxes, and the impact of a full valuation allowance on its deferred tax assets.

The Company has evaluated the available evidence supporting the realization of its deferred tax assets, including the amount and timing of future taxable income, and has determined that it is more likely than not that its net deferred tax assets will not be realized in the U.S. and certain foreign jurisdictions. Due to uncertainties surrounding the realization of the deferred tax assets, the Company maintains a full valuation allowance against substantially all deferred tax assets. If/when the Company determines that it will be able to realize some portion or all of its deferred tax assets, an adjustment to its valuation allowance on its deferred tax assets would have the effect of increasing net income in the period(s) such determination is made.

14


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements
In addition to the historical financial information included herein, this Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on management's reasonable beliefs, as well as on assumptions made by and information currently available to management. We intend the forward-looking statements contained in this Quarterly Report to be covered by the safe harbor provisions of such Acts. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q, including, without limitation, statements under “Management's Discussion and Analysis of Financial Condition and Results of Operations” and statements located elsewhere herein regarding our financial position and business strategy, may constitute forward-looking statements. You generally can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “may,” “will,” “expects,” “intends,” “estimates,” “anticipates,” “plans,” “seeks,” or “continues,” or the negative thereof or variations thereon or similar terminology, although not all forward-looking statements contain these words.
Investors are cautioned not to overly rely on such forward-looking statements. These forward-looking statements are subject to known and unknown risks and uncertainties that could cause our future results to differ materially from our historical results or experiences or those expressed or implied in any forward-looking statements contained in this Quarterly Report. Such risks and uncertainties, include, but are not limited to:

continued market acceptance of our products;
continued growth in the number of patients qualifying for treatment of abdominal aortic aneurysms through our products;
our ability to effectively compete with the products offered by our competitors;
the level and availability of third party payor reimbursement for our products;
our ability to successfully commercialize products which incorporate the technology obtained in the Nellix acquisition;
our ability to effectively develop new or complementary technologies;
changes to our international operations;
our ability to effectively manage our business and keep pace with our anticipated growth;
our ability to develop and retain a direct sales force in the U.S. and select European countries;
the nature of and any changes to legislative, regulatory and other legal requirements that apply to us, our products, our suppliers and our competitors;
the timing of and our ability to obtain and maintain any required regulatory clearances and approvals;
our ability to protect our intellectual property rights and proprietary technologies;
our ability to operate our business without infringing the intellectual property rights and proprietary technology of third parties;
product liability claims and litigation expenses;
reputational damage to our products caused by mis-use or off-label use or government or voluntary product recalls;
our utilization of a single source supplier for specialized components of our product lines;
our ability to attract, retain, and motivate qualified personnel;
our ability to make future acquisitions and successfully integrate any such future-acquired businesses;
our ability to maintain adequate liquidity to fund our operational needs and research and developments expenses; and
general macroeconomic and world-wide business conditions.
Our actual results, performance or achievements may differ materially from any future results, performance or achievements expressed or implied from such forward-looking statements. Important factors that could cause our actual results, performance or achievements to differ materially from our expectations are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 14, 2013, including but not limited to those factors discussed in “Management's Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” “Consolidated Financial Statements” and “Notes to Consolidated Financial Statements.” All subsequent written and oral forward-looking statements attributable to us or by persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We expressly disclaim any intent or obligation to update information contained in any forward-looking statement after the date thereof to conform such information to actual results or to changes in our opinions or expectations. 


15

Table of Contents

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. of our Annual Report on Form 10-K for the year ended December 31, 2012, entitled "Business," for a discussion of:
Market Overview and Opportunity
Our Products
Manufacturing and Supply
Marketing and Sales
Competition
Clinical Trials and Product Developments

Endologix®, AFX® and Nellix® are registered trademarks of Endologix, Inc., and Ventana™ and the respective product logos are trademarks of Endologix, Inc.

Recent Highlights of Our Product Development Initiatives and Regulatory Approvals

Nellix

We received CE Mark approval of the Nellix System in January 2013. In February 2013, we commenced a limited market introduction of the Nellix System in Europe. We hope to receive investigational device exemption ("IDE") approval from the Food and Drug Administration ("FDA") for the Nellix System by the end of 2013, and hope to receive FDA premarket approval ("PMA") in the U.S. in 2016.

We believe that the Nellix System represents groundbreaking technology for endovascular aneurysm repair ("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 procedure time; (iii) low expected reintervention rate; and (iv) the potential for reduced post-procedure follow up.

PEVAR

In April 2013, we received FDA PMA for a broadened indication for our AFX system to include totally percutaneous endovascular aneurysm repair ("PEVAR") for AAA. We have completed the PEVAR training and certification of our U.S. sales force and clinical specialists. In May 2013, we commenced training classes for physicians in the U.S. on the PEVAR procedure.

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. 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, our ELG System is the only one approved by the FDA specifically for full percutaneous access.


16

Table of Contents

Ventana

Our Ventana fenestrated EVAR (FEVAR) system has been used to treat approximately 120 patients world-wide, including 80 in our U.S. IDE study. In reviewing these first 120 global procedures with Ventana, we have seen good overall safety results, but a higher than expected number of renal re-interventions.  We have suspended further enrollment in the Ventana U.S. IDE study and delayed commercial introduction in Europe until we have an opportunity to fully evaluate physician training, clinical indications, and product enhancements. After completing our evaluation, we will meet with regulatory agencies, including the FDA and EU notified bodies. We expect to have an update on our progress and regulatory path toward the end of 2013.
AFX

We plan to commence a limited market introduction of a new aortic extension for the AFX system in the U.S. at the end of 2013. This enhanced device is expected to further simplify the EVAR procedure and provide physicians with improved deployment accuracy.

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 certain royalty fees to third parties, amortization of our developed technology intangible asset, 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, fees for research and development consultants, outsourced and licensed research and development costs, and allocated facilities-related costs. Our research and development activities primarily relate to the development and testing of new devices and methods to treat aortic disorders.
Clinical and Regulatory
Clinical and regulatory expenses 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.
Marketing and Sales
Marketing and sales expenses primarily consist of compensation (including stock-based compensation) and benefits for our sales force, internal sales support functions, and marketing personnel. It also includes costs attributable to marketing our products to our customers and prospective customers.
General and Administrative
General and administrative expenses primarily include compensation (including stock-based compensation) and benefits for personnel that support our general operations such as information technology, executive management, financial accounting, and human resources. General and administrative expenses also include bad debt expense, patent registration fees, legal fees, financial audit fees, insurance costs, recruiting fees, other professional services, the federal Medical Device Excise Tax, and allocated facilities-related expenses.

17

Table of Contents

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 and 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.
For a description of our critical accounting policies and estimates, please refer to the “Critical Accounting Policies and Estimates” section in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2012 Annual Report. There have been no material changes in any of our critical accounting policies and estimates during the nine months ended September 30, 2013.

Results of Operations
Operations Overview - Three and Nine Months Ended September 30, 2013 versus 2012
The following table presents our results of continuing operations and the related percentage of the period's revenue (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

2013

2012

2013

2012
Revenue
$
33,260


100.0%

$
26,696


100.0%

$
97,008


100.0%

$
76,725


100.0%
Cost of goods sold
7,362


22.1%

6,444


24.1%

23,578


24.3%

18,148


23.7%
Gross profit
25,898


77.9%

20,252


75.9%

73,430


75.7%

58,577


76.3%
Operating expenses:

















Research and development
5,160


15.5%

3,076


11.5%

12,501


12.9%

11,886


15.5%
Clinical and regulatory affairs
2,005


6.0%

1,462


5.5%

6,558


6.8%

4,727


6.2%
Marketing and sales
15,191


45.7%

12,705


47.6%

47,235


48.7%

38,923


50.7%
General and administrative
5,760


17.3%

4,942


18.5%

16,364


16.9%

13,813


18.0%
Contract termination and business acquisition expenses


—%



—%



—%

422


0.6%
Settlement costs


—%

5,000


18.7%



—%

5,000


6.5%
Total operating expenses
28,116


84.5%

27,185


101.8%

82,658


85.2%

74,771


97.5%
Loss from operations
(2,218
)

(6.7)%

(6,933
)

(26.0)%

(9,228
)

(9.5)%

(16,194
)

(21.1)%
Total other income (expense)
(6,600
)

(19.8)%

923


3.5%

(3,060
)

(3.2)%

(12,765
)

(16.6)%
Net loss before income tax expense
(8,818
)

(26.5)%

(6,010
)

(22.5)%

$
(12,288
)

(12.7)%

(28,959
)

(37.7)%
Income tax (expense) benefit
(172
)

(0.5)%

153


0.6%

(367
)

(0.4)%

(297
)

(0.4)%
Net loss
$
(8,990
)

(27.0)%

$
(5,857
)

(21.9)%

$
(12,655
)

(13.0)%

$
(29,256
)

(38.1)%

Comparison of the Three Months Ended September 30, 2013 versus 2012
Revenue


Three Months Ended September 30,






2013

2012

Variance

Percent Change


(in thousands)




Revenue

$
33,260


$
26,696


$
6,564


24.6%

Our 24.6% revenue increase of $6.6 million over the prior year period primarily resulted from:

(i) a $5.2 million increase in U.S. sales procedures due to (a) the expansion of our U.S. sales force through the addition of sales representatives and clinical specialists (that exclusively provide field support to our sales representatives, increasing

18

Table of Contents

overall sales force productivity), and (b) the continued physician adoption of AFX which was launched in the U.S. in August 2011; and

(ii) a $1.3 million increase in European sales due to the expansion of our European sales force (which began direct sales activity in September 2011), and to a lesser extent, the limited market introduction of our Nellix System in February 2013.

Cost of Goods Sold, Gross Profit, and Gross Margin


Three Months Ended September 30,






2013

2012

Variance

Percent Change


(in thousands)




Cost of goods sold

$
7,362


$
6,444


$
918


14.2%
Gross profit

25,898


20,252


5,646


27.9%
Gross margin percentage (gross profit as a percent of revenue)

77.9
%

75.9
%




The $0.9 million increase in cost of goods sold was driven by our revenue increase of $6.6 million .

Gross margin for the three months ended September 30, 2013 increased to 77.9% from 75.9% for the three months ended September 30, 2012 . This increase is primarily due to our (i) product mix; (ii) distribution mix with a greater proportion of international revenues derived from direct sales of our ELG system rather than sales to distributors; and (iii) lower inventory reserves.
Operating Expenses


Three Months Ended September 30,






2013

2012

Variance

Percent Change


(in thousands)




Research and development

$
5,160


$
3,076


$
2,084


67.8%
Clinical and regulatory affairs

2,005


1,462


543


37.1%
Marketing and sales

15,191


12,705


2,486


19.6%
General and administrative

5,760


4,942


818


16.6%
Settlement costs



5,000


(5,000
)

(100.0)%
Research and Development. The $2.1 million increase in research and development expenses was primarily attributable to (i) a $1.0 million payment to the licensor of our exclusive polymer license agreement for our Nellix System, and (ii) a new exclusive license agreement of $0.9 million for the future design of our Nellix System.
Clinical and Regulatory Affairs. The $0.5 million increase in clinical expenses is driven by continued patient and outside services costs to support our ongoing clinical trials in addition to an increase in regulatory affairs primarily driven by FDA and CE regulatory activities.
Marketing and Sales . The $2.5 million increase in marketing and sales expenses for the three months ended September 30, 2013 , as compared to the prior year period, was primarily related to (i) increased variable compensation due to our sales growth; and (ii) costs related to the continued growth and development of our direct sales force and clinical personnel worldwide.
We expect that sales and marketing expense will remain significantly above prior year amounts due to (i) the continued expansion of our U.S. and European sales and clinical personnel; (ii) increased activity in U.S. and European trade shows and other marketing initiatives; and (iii) an increase in variable compensation due to our continued sales growth.
General and Administrative . The $0.8 million increase in general and administrative expenses is primarily attributable to (i) the federal Medical Device Excise Tax (which took effect January 1, 2013), and (ii) increased professional and legal service expenses.

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Table of Contents

Settlement Costs. Prior period expense of $5.0 million represents our accrual to settle a patent dispute with Cook Incorporated.

Other income (expense), net


Three Months Ended September 30,






2013

2012

Variance

Percent Change


(in thousands)




Other income (expense), net

$
(6,600
)

$
923


(7,523
)

(>100%)
Other Income (Expense), Net. The other income variance of $(7.5) million between the three months ended September 30, 2013 and 2012 is primarily related to the fair value adjustment of contingent payment of $7.6 million associated with our acquisition of Nellix (see Note 9). Partially offsetting these fair value adjustments in both periods is the remeasurement of certain assets and liabilities that were not transacted in the functional currency of the corresponding operating entity.
Provision for Income Taxes


Three Months Ended September 30,






2013

2012

Variance

Percent Change


(in thousands)




Income tax (expense) benefit

$
(172
)

$
153


$
(325
)

(>100%)
Our income tax (expense) was $(0.2) million and our effective tax rate was (2)% for the three months ended September 30, 2013 . During the three months ended September 30, 2013 and 2012, we had operating legal entities in the U.S., Italy, New Zealand, and the Netherlands (including registered sales branches in certain countries in Europe). We have certain minimum tax liabilities attributable to our operations in these countries and in the U.S.

Comparison of the Nine Months Ended September 30, 2013 versus 2012

Revenue


Nine Months Ended September 30,






2013

2012

Variance

Percent Change


(in thousands)




Revenue

$
97,008


$
76,725


$
20,283


26.4%

Our 26.4% revenue increase of $20.3 million over the prior year period primarily resulted from:

(i) a $13.9 million increase in U.S. sales procedures due to (a) the expansion of our U.S. sales force through the addition of sales representatives and clinical specialists (that exclusively provide field support to our sales representatives, increasing overall sales force productivity), and (b) the continued physician adoption of AFX which was launched in the U.S. in August 2011;

(ii) a $5.3 million increase in European sales due to the expansion of our European sales force (which began direct sales activity in September 2011), and to a lesser extent, the limited market introduction of our Nellix System in February 2013; and
(iii) a $1.1 million increase in ROW driven by increased sales to our Japanese distributor.


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Table of Contents

Cost of Goods Sold, Gross Profit, and Gross Margin


Nine Months Ended September 30,






2013

2012

Variance

Percent Change


(in thousands)




Cost of goods sold

$
23,578


$
18,148


$
5,430


29.9
%
Gross profit

73,430


58,577


14,853


25.4
%
Gross margin percentage (gross profit as a percent of revenue)

75.7
%

76.3
%




The $5.4 million increase in cost of goods sold was driven by our revenue increase of $20.3 million .

Gross margin for the nine months ended September 30, 2013 decreased to 75.7% from 76.3% for the nine months ended
September 30, 2012 . This decrease is primarily due to our product mix and the greater proportion of our total revenue being derived from international sales, as well as certain current period charges in the nine months ended September 30, 2013, aggregating to $1.6 million, to adjust our inventory to its net realizable value.
Operating Expenses


Nine Months Ended September 30,






2013

2012

Variance

Percent Change


(in thousands)




Research and development

$
12,501


$
11,886


$
615


5.2%
Clinical and regulatory affairs

6,558


4,727


1,831


38.7%
Marketing and sales

47,235


38,923


8,312


21.4%
General and administrative

16,364


13,813


2,551


18.5%
Contract termination and business acquisition expenses



422


(422
)

(100.0)%
Settlement costs



5,000


(5,000
)

(100.0)%
Research and Development. The $0.6 million increase in research and development expenses was primarily driven by (i) a new exclusive license agreement of $0.9 million for the future design of our Nellix System; and (ii) a $1.0 million payment to the licensor of our polymer for our Nellix System in the nine months ended September 30, 2013, offset by a related $1.0 million payment to the licensor of our polymer for our Nellix System in the prior year period.
Clinical and Regulatory Affairs. The $1.8 million increase in clinical expenses is driven by continued patient and outside services costs to support our ongoing clinical trials in addition to an increase in regulatory affairs primarily driven by FDA and CE regulatory activities.
Marketing and Sales . The $8.3 million increase in marketing and sales expenses was primarily related to (i) increased variable compensation due to our sales growth; (ii) costs related to the continued growth and development of our direct sales force and clinical personnel worldwide; and (iii) increased marketing costs to support our business.
We expect that sales and marketing expense will remain significantly above prior year amounts due to (i) the continued expansion of our U.S. and European sales and clinical personnel; (ii) increased activity in U.S. and European trade shows and other marketing initiatives; and (iii) an increase in variable compensation due to our continued sales growth.
General and Administrative . The $2.6 million increase in general and administrative expenses is attributable to (i) the federal Medical Device Excise Tax (which took effect January 1, 2013); (ii) additional personnel to support our business growth; and (iii) increased stock-based compensation expense.
Contract Termination and Business Acquisition Expenses. Prior 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.  This transaction allowed us to begin selling our products through the acquired Italian sales force, and to directly contract with sub-dealers in Italy.
Settlement Costs. Prior period expense of $5.0 million represents our accrual to settle a patent dispute with Cook Incorporated.

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Table of Contents


Other income (expense), net


Nine Months Ended September 30,






2013

2012

Variance

Percent Change


(in thousands)




Other income (expense), net

$
(3,060
)

$
(12,765
)

$
9,705


76.0
%
Other Income (Expense), Net. Other expense in the nine months ended September 30, 2013 and 2012 include non-cash fair value adjustments of contingent payment of $(5.2) million and $(12.7) million, respectively, associated with our acquisition of Nellix (see Note 9). Partially offsetting these amounts in both periods are net currency remeasurement of certain assets and liabilities that were not transacted in the functional currency of the corresponding operating entity. Also, included in the nine months ended September 30, 2013 is $1.3 million in other income from a distribution from our former product liability carrier.
Provision for Income Taxes


Nine Months Ended September 30,






2013

2012

Variance

Percent Change


(in thousands)




Income tax (expense)

$
(367
)

$
(297
)

$
(70
)

23.6
%
Our income tax (expense) was $(0.4) million and our effective tax rate was (3)% for the nine months ended September 30, 2013 . During the nine months ended September 30, 2013 and 2012, we had operating legal entities in the U.S., Italy, New Zealand, and the Netherlands (including registered sales branches in certain countries in Europe). We have certain minimum tax liabilities attributable to our operations in these countries and in the U.S.  

Liquidity and Capital Resources
The chart provided below summarizes selected liquidity data and metrics as of September 30, 2013 , December 31, 2012 , and September 30, 2012 :

September 30, 2013

December 31, 2012

September 30, 2012

(in thousands, except financial metrics data)
Cash and cash equivalents
$
49,486


$
45,118


$
47,740

Accounts receivable, net
$
23,568


$
22,600


$
19,616

Total current assets
$
93,394


$
87,567


$
88,298

Total current liabilities
$
18,978


$
17,194


$
18,728

Working capital surplus (a)
$
74,416


$
70,373


$
69,570

Current ratio (b)
4.9


5.1


4.7

Days sales outstanding ("DSO") (c)
65


71


68

Inventory turnover (d)
1.7


1.5


1.3


(a) total current assets minus total current liabilities as of the corresponding balance sheet date.
(b) total current assets divided by total current liabilities as of the corresponding balance sheet date.
(c) accounts receivable, net, divided by the quarter's revenue, then multiplied by the number of days in the quarter.
(d) cost of goods sold for the corresponding three month period ended then multiplied by four, then divided by the average inventory balance for the corresponding period.
Operating Activities
Cash provided by operating activities was $1.6 million for the nine months ended September 30, 2013 , as compared to cash used in operating activities of $12.2 million in the prior year period. The decrease in cash used in operating activities is primarily a function of (i) increased collection levels; (ii) the receipt of a $1.3 million "deemed dividend" from our former products liability carrier; (iii) a decrease in inventory expenditures as compared to the prior year period; (iv) an increase in accrued payroll, offset in part by a reduction in accounts payable.

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Table of Contents

During the nine months ended September 30, 2013 and 2012 , our cash collections from customers totaled $95.5 million and $72.7 million , respectively, representing 98% and 95% of reported revenue for the same periods. Our DSO decreased by six days for the period ended September 30, 2013 , as compared to the period ended December 31, 2012 due to improved European collections as our operational capabilities matured. However, our international customers have significantly longer collection cycles than our U.S. customers.
Investing Activities
Cash used in investing activities for the nine months ended September 30, 2013 was $1.6 million , as compared to cash used in investing activities of $3.9 million in the prior year period, and consisted of (i) machinery and equipment purchases for the production of our ELG Systems in both periods; and (ii) business acquisition of $2.4 million in the nine months ended September 30, 2012.
Financing Activities
Cash provided by financing activities was $4.8 million for the nine months ended September 30, 2013 , as compared to cash provided by financing activities of $43.8 million in the prior year period. In the current period, the Company had $4.8 million of cash proceeds from the exercise of employee stock options and stock purchases under our employee stock purchase plan. During the nine months ended September 30, 2012, the Company received net proceeds of $40.1 million from the private placement of its stock, and $3.8 million of aggregate proceeds from the exercise of employee stock options and stock purchases under our employee stock purchase plan.
Credit Arrangements
See Note 6 to our accompanying Condensed Consolidated Financial Statements.

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 from customers outside of the U.S. is comprised of amounts due from (i) numerous European private and public hospitals, and (ii) amounts due from foreign-based distributors.

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. To determine our allowance for doubtful accounts we consider relevant credit risk factors and other considerations. Our allowance for doubtful accounts of $0.4 million as of September 30, 2013 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.
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 and clinical programs;
the need for additional capital to fund our sales force expansion and marketing;
the need for additional capital to fund business development, strategic acquisitions or licenses;
our capital requirements for the new facility lease;
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 cash resources are adequate to operate our business for at least the next 12 months. While we expect to remain cash flow positive in the second half of the year, we may use cash in the fourth quarter as a result of working capital expansion and planned investments to support the continued growth of our business. In th e 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 efforts.

23

Table of Contents

Contractual Obligations
See Note 8 to our accompanying Condensed Consolidated Financial Statements.
Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements (except 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 Condensed Consolidated Financial Statements.

As of September 30, 2013 , 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 3.
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 September 30, 2013 , 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 September 30, 2013 , our investment portfolio solely consisted of money market instruments.
Foreign Currency Transaction Risk. We consider our direct exposure to foreign exchange rate fluctuations to be minimal. While a majority of our business is denominated in the United States 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.
 
Item 4.
CONTROLS AND PROCEDURES.

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the third quarter of 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

24

Table of Contents

Part II. Other Information  

Item 1.
LEGAL PROCEEDINGS.

The information set forth under Note 8 of the Notes to Condensed Consolidated Financial Statements, included in Part I, Item I of this Report, is incorporated herein by reference.

Item 2.        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On July 24, 2013, pursuant to the terms of a patent license agreement, we issued 48,403 unregistered shares of our common stock to the licensor as partial consideration for the license granted under the agreement. We received no cash proceeds in connection with this issuance. We issued such shares without registration under the Securities Act in reliance upon the exemptions from registration provided under Section 4(2) of the Securities Act and Regulation D promulgated thereunder. The foregoing transaction did not involve any public offering; we made no solicitation in connection with the issuance; we obtained representations from the licensor regarding his investment intent, experience, sophistication and status as an “accredited investor”; and the licensor either received or had access to adequate information about us in order to make an informed investment decision. No underwriting discounts or commissions were paid in conjunction with the issuance.

Item 6.
EXHIBIT INDEX.
The following exhibits are filed or furnished herewith:
 
Exhibit 31.1
 
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
 
 
Exhibit 31.2
 
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
 
 
Exhibit 32.1
 
Certification of Chief Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
 
 
 
Exhibit 32.2
 
Certification of Chief Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
 
 
 
Exhibit 101.INS
 
XBRL Instance Document
 
 
 
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Lin Base Document
 
 
 
Exhibit 101.DEF
 
XBRL Taxonomy Extension Definition Link Base Document
 
 
 
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Link Base Document
 
 
 
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Link Base Document
 

25

Table of Contents


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
ENDOLOGIX, INC.
 
 
November 1, 2013
/s/ John McDermott

 
President and Chief Executive Officer (Duly Authorized Officer)
 
 
 
 
November 1, 2013
 /s/ Shelley B. Thunen   
 
Chief Financial Officer (Principal Financial and Accounting Officer)
 
 


26


Exhibit 31.1
Certification of Chief Executive Officer
I, John McDermott, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Endologix, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principals;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
November 1, 2013
By:
/s/ John McDermott

 
 
John McDermott
 
 
President and Chief Executive Officer (Principal Executive Officer)




Exhibit 31.2
Certification of Chief Financial Officer
I, Shelley B. Thunen, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Endologix, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principals;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
November 1, 2013
By:
/s/ Shelley B. Thunen

 
 
Shelley B. Thunen
 
 
Chief Financial Officer (Principal Financial and Accounting Officer)





 
Exhibit 32.1
Certification of Chief Executive Officer
Pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, John McDermott, certify pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 that:
(1)
The Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013 (the “Quarterly Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 780(d)); and
(2)
The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 1, 2013
By:
/s/ John McDermott
 
 
John McDermott
 
 
President and Chief Executive Officer (Principal Executive Officer)
This certification accompanies the Quarterly Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section.





 
Exhibit 32.2
Certification of Chief Financial Officer
Pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Shelley B. Thunen, certify pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 that:
(1)
The Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013 (the “Quarterly Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 780(d)); and
(2)
The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
   
November 1, 2013
By:
/s/ Shelley B. Thunen

 
 
Shelley B. Thunen
 
 
Chief Financial Officer (Principal Financial and Accounting Officer)
This certification accompanies the Quarterly Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section.