Endologix
ENDOLOGIX INC /DE/ (Form: 10-K, Received: 02/29/2016 06:11:54)


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
Form 10-K
_______________________________  
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from            to            .
Commission file number: 000-28440
_______________________________  
Endologix, Inc.
(Exact name of registrant as specified in its charter)
  _______________________________  
Delaware
 
68-0328265
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
2 Musick, Irvine, California 92618
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (949) 595-7200
  _______________________________  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.001 par value
 
The NASDAQ Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None
    _______________________________  
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   x No     o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   o     No   x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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 Act).    Yes   o     No   x
As of June 30, 2015 , the aggregate market value of the voting stock held by non-affiliates of the Registrant was $1,039,556,978 (based upon the $15.34 closing price for shares of the Registrant’s Common Stock as reported by the NASDAQ Global Select Market on June 30, 2015 , the last trading date of the Registrant’s most recently completed second fiscal quarter).
On February 25, 2016 , approximately 81,705,771 shares of the Registrant’s Common Stock, $0.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Part III of this Annual Report on Form 10-K are incorporated by reference into the Registrant’s Proxy Statement for its Annual Meeting of Stockholders to be held on June 2, 2016 .
 
 
 
 
 





TABLE OF CONTENTS

Item
Description
Page
PART I
 
1.
1A.
1B.
2.
3.
4.
 
 
 
PART II
 
5.
6.
7.
7A.
8.
9.
9A.
9B.
 
 
 
PART III
 
10.
11.
12.
13.
14.
 
 
 
PART IV
 
15.
 





Cautionary Note Concerning Forward-Looking Statements
In addition to historical information, this Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by the use of forward-looking terminology such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “projects,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology, or by discussions of strategies, opportunities, plans or intentions. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements. We have based these forward-looking statements largely on our current expectations based on information currently available to us and projections about future events and trends affecting the financial condition of our business. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. These forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Actual results could differ materially from those projected in forward-looking statements as a result of the following factors, among others:
risks associated with our recently completed merger with TriVascular Technologies, Inc. (“TriVascular”), including but not limited to the failure to realize anticipated revenue, operating and cost synergies and other potential benefits of the merger; costs, fees, expenses and charges associated with the merger which may negatively impact our financial condition and operating results; and business disruption after the merger, including adverse effects on employee retention and business relationships with suppliers, customers and other business partners;
failure to realize the anticipated benefits from previous business combination transactions, including our acquisition of Nellix, Inc. (“Nellix”);
continued market acceptance, use and endorsement of our products;
quality problems with our products;
consolidation in the health care industry;
the success of our clinical trials relating to products under development;
our ability to maintain strong relationships with certain key physicians;
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 effectively develop new or complementary products and technologies;
our ability to manufacture our endovascular systems to meet demand;
changes to our international operations including currency exchange rate fluctuations;
our ability to effectively manage our business and keep pace with our anticipated growth;
our ability to develop and retain a direct sales force in the United States and select European countries;
the nature of and any changes to domestic and foreign legislative, regulatory and other legal requirements that apply to us, our products, our suppliers and our competitors;
the timing of and our ability to obtain and maintain any required regulatory clearances and approvals;
our ability to protect our intellectual property rights and proprietary technologies;
our ability to operate our business without infringing the intellectual property rights and proprietary technology of third parties;
product liability claims and litigation expenses;
reputational damage to our products caused by the use, mis-use or off-label use or off-label use of our products or government or voluntary recalls of our products;
our utilization of 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

You are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that may affect our business, operating results and financial condition, including without limitation the risks set forth under “Risk Factors” in Item 1A of this Annual Report on Form 10-K, for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, the forward-looking statements herein may not prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.
Our forward-looking statements speak only as of the date each such statement is made. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations, except as required by applicable law or the rules and regulations of the SEC and The NASDAQ Stock Market, LLC.
The industry and market data contained in this Annual Report on Form 10-K are based either on our management’s own estimates or on independent industry publications, reports by market research firms, or other published independent sources. Although we believe these sources are reliable, we have not independently verified the information and cannot guarantee its accuracy and completeness, as industry and market data are subject to change and cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process, and other limitations and uncertainties inherent in any statistical survey of market shares. Accordingly, one should be aware that the industry and market data contained in this Annual Report on Form 10-K, and estimates and beliefs based on such data, may not be reliable.


PART I

Item 1.
Business

Company Overview
Endologix, Inc. (“Endologix,” the “Company,” “we,” “our” or “us”) is a Delaware corporation with corporate headquarters and production facilities located in Irvine, California. We develop, manufacture, market, and sell innovative medical devices for the treatment of aortic disorders. Our products are intended for the minimally invasive endovascular treatment of abdominal aortic aneurysms ("AAA"). The AAA products are built on one of two platforms: (1) traditional minimally-invasive endovascular repair (“EVAR”) or (2) endovascular sealing (“EVAS”), our innovative solution for sealing the aneurysm sac while maintaining blood flow through two blood flow lumens. Our current EVAR products include the Endologix AFX Endovascular AAA System (“AFX”), the VELA Proximal Endograft (“VELA”) and the Endologix Powerlink with Intuitrak Delivery System (“Intuitrak”). Our current EVAS product is the Nellix EndoVascular Aneurysm Sealing System (“Nellix EVAS System”). Sales of our EVAR and EVAS platforms (including extensions and accessories) to hospitals in the U.S. and Europe, and to third-party international distributors, provide the sole source of our reported revenue.
Our EVAR products consist of (i) a cobalt chromium alloy stent covered by expanded polytetrafluoroethylene (commonly referred to as "ePTFE") graft material (“Stent Graft”) and (ii) an accompanying delivery system. Once fixed in its proper position within the abdominal aorta, our EVAR device provides a conduit for blood flow, thereby relieving pressure within the weakened or “aneurysmal” section of the vessel wall, which greatly reduces the potential for the AAA to rupture.
Our EVAS product consists of (i) bilateral covered stents with endobags, (ii) a biocompatible polymer injected into the endobags to seal the aneurysm and (iii) a delivery system and polymer dispenser. Our EVAS product seals the entire aneurysm sac, effectively, excluding the aneurysm sac and reducing the likelihood of future aneurysm rupture. Additionally, it has the potential to reduce the need for post procedural re-interventions.
Within our EVAR platform, AFX is marketed in the United States, Europe, New Zealand, Japan and Latin America, and Intuitrak sales are currently limited to Japan. In February 2013, we commenced a market introduction in Europe of the Nellix EVAS System. In December 2013, we received Investigational Device Exemption (“IDE”) approval in the United States to begin a clinical trial for the Nellix EVAS System, which commenced in January 2014. This clinical trial is fully enrolled and the 1-Year follow-up is complete. In October 2015, we received U.S. Food and Drug Administration (“FDA”) approval for the AFX2 Bifurcated Endograft System for the treatment of AAA. In December 2015, we received Shonin approval for AFX from the Japanese Ministry of Health, Labor and Welfare and entered into a distribution arrangement with a Japanese distributor to introduce AFX in the Japanese market in the first quarter of 2016.
Merger with TriVascular Technologies, Inc.
On February 3, 2016, we completed our previously announced merger with TriVascular. TriVascular is a medical device company developing and commercializing innovative technologies to significantly advance minimally invasive treatment of AAA. TriVascular developed its technology platform leveraging engineering principles utilized in many industries, including aerospace, aircraft and automotive, and applied these concepts with the goal of designing an optimal solution for AAA therapy to address unmet clinical needs. TriVascular’s Ovation, Ovation Prime and Ovation iX Systems and their related components (collectively, the “TriVascular Ovation System”) is TriVascular’s solution for the treatment of AAA. The Ovation System is an FDA-approved, stent graft platform that provides an innovative and effective alternative to conventional devices. It is designed to specifically address many of the limitations associated with conventional EVAR devices and expand the pool of patients eligible for EVAR.
TriVascular’s differentiated platform, by virtue of its low profile, flexible delivery system and novel sealing mechanism, offers physicians and patients eligible for EVAR a new solution to AAA repair, and has the added benefit of being able to treat a broader population of patients. The Ovation System consists of a main aortic body, injected with a conformable polymer, and typically two iliac limbs. These components, delivered sequentially through the lowest profile FDA-approved delivery system, allow for customization to an individual patient’s unique anatomy. TriVascular received CE Mark approval in August 2010 and began commercial sales of its Ovation System in Europe in September 2010. In October 2012, TriVascular received approval from the FDA for the Ovation System for the treatment of AAA and began commercial sales in the United States in November 2012. TriVascular sells its products through its direct U.S., Canadian and European sales forces and through third-party distributors in Europe and in other parts of the world.

1



We believe the merger with TriVascular is compelling because, among other things, we anticipate it will:
Enhance our growth opportunities.  We expect to leverage the combined company’s global sales force and marketing capabilities to expand awareness of and access to our product offerings. We intend to leverage the combined company’s innovation capabilities and deep pipeline of new technologies to enhance our product offerings in the estimated $3 billion market for the treatment of AAA. We anticipate multiple product launches over the next 24 months.
Enhance and leverage our technology.  We expect the combined company to be an innovation leader with broad clinical indications for the treatment of AAA. We and TriVascular have significant clinical evidence for our products and we expect the combined company will own over 370 issued and pending patents.
Drive significant operating synergies.  We intend to leverage the combined company’s strong technology and commercial capabilities. We expect that the combined company will realize more than $30 million of annual synergies by 2017, resulting from, among other things, anticipated reductions in general and administrative expenses and sales and marketing expenses and manufacturing economics of scale, and that the TriVascular merger will be EBITDA accretive in 2018.

Pursuant to the Agreement and Plan of Merger, dated October 26, 2015 (the “Merger Agreement”), among Endologix, TriVascular and Teton Merger Sub, Inc., a wholly-owned subsidiary of Endologix (“Merger Sub”), effective February 3, 2016, Merger Sub merged with and into TriVascular (the “Merger”) with TriVascular surviving the Merger as a wholly-owned subsidiary of Endologix. At the effective time of the Merger, each outstanding share of common stock of TriVascular (other than shares for which appraisal rights under Delaware law were properly exercised) was converted into the right to receive (i) $0.34 in cash and (ii) 0.631 shares of our common stock (the “Merger Consideration”). We paid approximately $106.8 million in aggregate consideration, consisting of approximately $7.4 million in cash and 13.6 million shares of our common stock.

Five days prior to the effective time of the Merger, the vesting of each outstanding option to purchase TriVascular common stock accelerated in full. Each stock option exercised in accordance with its terms prior to the effective time of the Merger was converted into the right to receive the Merger Consideration. Five days prior to the effective time of the Merger, the vesting of each outstanding TriVascular restricted stock unit accelerated in full. The number of shares of TriVascular common stock subject to each restricted stock unit was issued to the holder of the restricted stock unit, and such shares of TriVascular common stock were automatically converted into the right to receive the Merger Consideration.

In connection with the Merger, we appointed Christopher G. Chavez, formerly a director of TriVascular, to Class II of our board of directors, effective as of the closing of the Merger. We appointed Mr. Chavez to our board of directors pursuant to the Merger Agreement, which required that we take all appropriate actions at or prior to the closing of the Merger to appoint Mr. Chavez to our board of directors, effective as of the effective time of the Merger.

This Annual Report on Form 10-K relates to our fiscal year ended December 31, 2015, which was completed prior to consummation of the merger with TriVascular. The first periodic report that will include results of operations for TriVascular will be our Quarterly Report on Form 10-Q for the quarter ending March 31, 2016.
Our Mission
Our mission is to be the leading innovator of medical devices to treat aortic disorders. Key elements of our strategy to accomplish this mission are as follows:

Focus exclusively on the aorta for the commercialization of innovative products.
Design and manufacture EVAR and EVAS products that are easy to use and deliver excellent clinical outcomes.
Design EVAR and EVAS products to expand into the treatment of complex anatomies.
Provide exceptional clinical and technical support to physicians through an experienced and knowledgeable sales and clinical organization.
Market Overview and Opportunity
AAA Background
Atherosclerosis is a disease which results in the thickening and hardening of arteries, which generally is attributable to genetics, smoking, high blood pressure, and/or high cholesterol damage. This disease generally progresses with age. According to AHA Scientific Statement estimates, it affects 5% to 6% of the population over 65.

2



Atherosclerosis reduces the integrity and strength of blood vessel walls, causing the vessel to expand or balloon out, which is known as an "aneurysm". Aneurysms are commonly diagnosed in the aorta, which is the body’s largest artery, extending from the chest to the abdomen. The abdominal aorta is the segment between the renal (kidney) arteries and the area where the aorta divides into the two iliac arteries which travel down the legs. AAA occurs when a portion of the abdominal aorta bulges into an aneurysm because of a weakening of the vessel wall, which may result in life threatening internal bleeding upon rupture. AAA is more common in men than women.

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

According to a paper titled Elective Versus Ruptured Abdominal Aortic Aneurysm Repair: A 1-Year Cost-Effectiveness Analysis, the overall patient mortality rate for ruptured AAA is approximately 80%, making it among the leading causes of death in the U.S. Once diagnosed, patients with AAA require either non-invasive monitoring, or, depending on the size and rate of growth of the AAA, EVAR or EVAS or open surgical repair.
EVAR and EVAS Versus Open Surgical Repair
Our EVAR and EVAS products are used exclusively for minimally-invasive procedures, as opposed to open surgical repair of AAA. Open surgical repair is a highly invasive procedure requiring (i) a large incision in the patient’s abdomen, (ii) withdrawal of the patient’s abdominal organs to gain access to the aneurysm, (iii) the cross clamping of the aorta to stop blood flow, and (iv) implantation of a synthetic graft which is sutured to the aorta, connecting one end above the aneurysm, to the other end below the aneurysm.
Open surgical repair typically lasts two to four hours, while the typical EVAR and EVAS procedure lasts one to two hours. After receiving open surgical repair, the patient usually requires a few days in the hospital's surgical intensive care unit, and the total hospital stay may be four to ten days. Post-procedure convalescence may take another four to six weeks due to the invasiveness of the operation. By comparison, patients are often discharged a day or two after their EVAR and EVAS procedure, and once discharged, most patients return to normal activity within two weeks.
We estimate that approximately 70% of all treated AAAs in the U.S. are repaired through EVAR, and 30% through open surgical repair. Although EVAR and EVAS have many key advantages over open surgical repair, many patients are not candidates for EVAR and EVAS due to the limitations of current EVAR devices to treat a wide range of AAA anatomies. We are developing new products to address these more challenging anatomies, those with aortic neck length less than 10mm, that we believe, upon development, will allow us to increase the treatable aneurysm market.
An article published in the New England Journal of Medicine on January 31, 2008 compared the results of open surgical repair versus EVAR for the treatment of AAA on more than 45,000 patients over a three year period. Among the findings discussed in the article were:

The perioperative mortality rate of all patients in the study undergoing EVAR was approximately 1.2%, as compared to 4.8% for open surgical repair.
Patients treated by EVAR were three times as likely to be discharged to their homes rather than another rehabilitation facility as compared to patients treated with open repair.
The average hospital stay for patients in the study undergoing EVAR was 3.4 days versus 9.3 days for patients undergoing open surgical repair.
Market Size
We estimate the global Endovascular AAA market potential to be $2.7 billion. We estimate the traditional aneurysm market potential, defined as aneurysms with aortic neck length greater than or equal to 10mm, to be $1.5 billion. The majority of diagnosed aneurysms in this market can be treated with currently available EVAR products. We estimate that a $1.2 billion market opportunity exists for the treatment of challenging anatomies, defined as aneurysms with neck lengths less than 10mm. Currently, there are limited options with available EVAR products to treat these short or no neck aortic aneurysms. Below is a table summarizing the market potential and penetration by aneurysm type.

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Market Description ($ in millions)
Penetrated
Unpenetrated
Total
Traditional
$
1,222

$
327

$
1,549

Complex
340

859

1,199

Total
$
1,562

$
1,186

$
2,748


In 2015, we estimate there were approximately 205,000 AAA (EVAR and surgical repair) procedures globally.

In the U.S. alone, it is estimated that between 1.2 million and 2.0 million people have an AAA and over 200,000 people are diagnosed with AAA in the U.S. annually. Of those diagnosed with an AAA, approximately 68,000 people underwent an AAA repair procedure in the U.S., of which approximately 51,000 were addressed through EVAR.

According to U.S. Census Bureau estimates, the age 65 and over population in the U.S. presently numbers approximately 46 million, or 15% of the total population, and is expected to grow to 49 million by 2016. Accordingly, we believe that AAA treatments will naturally increase over time, given this demographic trend.

Since AAAs generally arise in people over the age of 65 and come with little warning, initiatives have been undertaken to increase its screening. The most prominent of these initiatives is the Screening Abdominal Aortic Aneurysms Very Efficiently Act (“SAAAVE”), which was signed into law in the U.S. on February 8, 2006, began providing coverage on January 1, 2007 and was updated effective January 1, 2014. SAAAVE provides for a one-time free of charge AAA screening for men who have smoked some time in their life, and men or women who have a family history of the disease.
Our Products
Our EVAR Platform
Our EVAR products consist of our EVAR Stent Graft and catheter delivery system, branded under the names Powerlink, IntuiTrak, AFX and VELA Proximal Endograft (“VELA"). We believe that our EVAR Platform offers the following advantages over competitors:

Anatomical Fixation . Our EVAR products are unique in that the main body of the device sits on the patient's natural aortoiliac bifurcation. This provides a solid foundation for the long-term stability of the device. Alternative EVAR devices rely on hooks, barbs and radial force to anchor within the aorta (generally referred to as "proximal fixation") near the renal arteries. We have proven in our clinical studies that anatomical fixation inhibits device migration within the aorta due to the inherent foundational support of the patient’s own anatomy.
Unique, Minimally Invasive Delivery System . Our AFX product is the only EVAR device with 17F introducer access on the ipsilateral side and 9F introducer access on the contralateral side. Competitive products require between 12F and 22F access on the ipsilateral side and between 11F and 18F on the contralateral side.
Preserves Aortic Bifurcation. Our EVAR Stent Grafts allow for future endovascular procedures when continued access across the aortic bifurcation is required. Approximately 30% to 40% of AAA patients also have peripheral arterial disease (“PAD”).  Our EVAR Stent Graft is the only one presently available that preserves the physician's ability to go back over the aortic bifurcation for future interventions. This is a meaningful feature of our EVAR Stent Graft, as many AAA patients are today living longer and returning to the hospital for PAD procedures.
PEVAR - Endologix is the only company that has conducted a US IDE randomized clinical trial and obtained FDA approval for a total percutaneous indication for use (“PEVAR”) specific to our EVAR System. We are now able to train physicians on PEVAR, thus enabling physicians to appropriately learn the technique and properly apply it. Unique to our EVAR System, physicians have the option of treating patients with PEVAR, or with a small incision in only one groin (and percutaneous placement of a non-surgical introducer sheath in the other groin, 3mm in diameter).

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Our EVAS Platform
Our EVAS product is based on the Nellix EVAS System to seal the aneurysm and provide blood flow to the legs through two blood lumens.

Biostable Polymer provides extended fixation and long-term stability . Currently available devices leave the AAA sac untreated, yet intact, while the EVAS product seals the aneurysm sac.
Predictable Procedure. The device and procedure steps are relatively simple and intuitive, making procedure times predictable.
Potentially reduce endoleaks and secondary interventions. Our EVAS product seals the entire aneurysm, reducing the likelihood of many causes of secondary intervention in EVAR procedures. This can potentially reduce long-term follow-up requirements.
Low profile introducer. Our EVAS product is beneficial for the delivery of the devices in tight access arteries, reducing risk of vascular injuries to the patient.

Our EVAR and EVAS Extensions and Accessories
Aortic Extensions and Limb Extensions. We offer proximal aortic extensions and limb extensions which attach to the "main body" of our EVAR Device, allowing physicians to customize it to fit the patient's anatomy. In February 2014, we launched a new proximal extension in the U.S., VELA, designed specifically for the treatment of proximal aortic neck anatomies. VELA features a circumferential graft line marker and controlled delivery system that enable predictable deployment and final positional adjustments. We began a commercial introduction of VELA in Europe in January 2015.

Accessories. We offer various accessories to facilitate the optimal delivery of our EVAR products, including compatible guidewires, snares, and catheter introducer sheaths.
Our Product Evolution
Our core EVAR product was first commercialized in Europe in 1999 and in the U.S. in 2004. We initially branded it as the Powerlink System ("Powerlink System for AAA"). As our EVAR products evolved, we branded them under the names Powerlink System with Visiflex Delivery System, IntuiTrak, and AFX.
 
Powerlink System for AAA. Powerlink System for AAA was our original EVAR Product.
IntuiTrak . In October 2008, we received FDA approval for IntuiTrak. We received CE Mark approval for IntuiTrak in March 2010, and Japanese Shonin approval in December 2012. IntuiTrak provided an updated delivery system that further simplified the implant procedure for physicians.
AFX. In June 2011 and November 2011, we received FDA approval and CE Mark approval, respectively, for AFX and we received Japanese Shonin approval in December 2015. We believe AFX provides physicians with improved vascular access and sealing, as compared to IntuiTrak. We began a full commercial launch of AFX in the U.S. in August 2011 and in numerous international markets in 2012. In addition, we entered into a distribution arrangement with a Japanese distributor to introduce AFX in the Japanese market in the first quarter of 2016.
Our core EVAS Platform, branded as the Nellix EVAS System, was first commercialized in Europe in February 2013.

Nellix EVAS System . In February 2013, we received CE Mark approval of the Nellix EVAS System, and we commenced a limited market introduction of the Nellix EVAS System in Europe and a controlled commercial launch is underway. In December 2013, we received IDE approval in the United States to begin a clinical trial which commenced in January 2014. Enrollment in the IDE study was completed in November 2014. In the third quarter of 2015, we obtained IDE continued access approval for additional patients. The 30-day safety results for the Nellix EVAS System were recently published in the Journal of Vascular Surgery, which results showed low morbidity and mortality and high procedural success rates. Based upon current assumptions and timelines, we anticipate receiving FDA premarket approval in late 2016 or the first quarter of 2017.
ChEVAS . ChEVAS is a new procedure whereby physicians use the Nellix EVAS System together with branch stent grafts to treat patients with complex aortic anatomies. Physicians are leading a new clinical trial called ASCEND (Aneurysm Study for Complex AAA: Evaluation of Nellix Durability) to evaluate the clinical performance of ChEVAS. Preliminary results from the ASCEND study are expected to be presented in 2016.

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Manufacturing and Supply
All of our commercial products are manufactured, assembled, and packaged at our 129,000 square foot leased facilities in Irvine, California. As a result of our merger with TriVascular, we acquired TriVascular’s manufacturing facility in Santa Rosa, California.
We rely on third parties for the supply of certain components used in our EVAR and EVAS Systems, such as the wire used to form our cobalt chromium alloy stent and the raw material used in the manufacturing of polymer. While we obtain many of these components from single source suppliers, we believe there are alternative vendors for the supply of the vast majority of our required components. Many of our third party manufacturers go through a formal qualification and approval process, including periodic renewal to ensure fitness for use and compliance with applicable FDA requirements and International Organization for Standardization ("ISO") 13485 requirements, and/or other required quality standards. Additionally, we actively manage supply risk with our key suppliers through a combination of negotiating favorable terms of supply agreements, maintaining strategic inventory levels, and maintaining frequent communications with our suppliers.

Marketing and Sales
We market and sell our products in the U.S. and in 12 Western European countries (United Kingdom, Ireland, France, Germany, Italy, Portugal, Switzerland, Netherlands, Austria, Belgium, Luxembourg, and Monaco) through a direct sales force and network of agents. In 8 other European countries, Japan, 4 Latin American countries, and 5 other Asian countries we sold our EVAR products through exclusive independent distributors or agents. In 2015, we marketed our products in 30 countries outside the US. We market our EVAS products through direct sales, agents and distributor channels in Europe and our independent agent in New Zealand.
U.S. We market and sell our products in the U.S. through a direct sales force. The primary customer and decision maker for our products is the vascular surgeon, and to a lesser extent, the cardiovascular surgeon, interventional radiologist and interventional cardiologist. Through our direct sales force, we provide clinical support and service to many of the approximately 1,600 hospitals and approximately 4,000 physicians in the U.S. that perform EVAR. Approximately 70% of our revenues for the year ended December 31, 2015 were generated from sales of our EVAR and EVAS products in the U.S.
Europe. Prior to September 2011, our reported revenue to customers outside of the U.S. had been generated exclusively through third-party distributors. As of September 1, 2011, upon mutual agreement for the termination of distribution rights with a European distributor, we began direct sales operations in most of Western Europe. Approximately 20% of our revenues for the year ended December 31, 2015 were generated from sales of our EVAR and EVAS products in Europe.
Asia Pacific. We commenced commercial sales in Japan in February 2007 upon receipt of Japanese regulatory, or Shonin, approval. We have had limited commercial sales in China since September 2009 and we terminated our distributor agreement with our Chinese distributor in 2013. Approximately 6% of our revenues for the year ended December 31, 2015 were generated from distributor sales of our EVAR and EVAS products in Asia Pacific.

South and Central America and Mexico. We have applicable regulatory approvals for Mexico, Argentina, Brazil, Chile, Peru, Ecuador, Venezuela, Costa Rica, Panama and Colombia. We commenced sales in South America and in Mexico in December 2007. Approximately 4% of our revenues for the year ended December 31, 2015 were generated from sales of our EVAR products in South America and Mexico.

See Note 7 of the Notes to the Consolidated Financial Statements for a tabular summary of our revenue by geographic region for the fiscal years 2015 , 2014 and 2013 .
Competition
The medical device industry is highly competitive. Any product we develop that achieves regulatory clearance or approval will have to compete for market acceptance and market share. We believe that the primary competitive factors in the AAA device market segment are:

clinical effectiveness;
product safety, reliability, and durability;
ease of use;
sales force experience and relationships; and
price.

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We experience significant competition and we expect that the intensity of competition will increase over time. For example, our major competitors, Medtronic, Inc., W.L. Gore Inc., and Cook Medical Products, Inc., each have obtained full regulatory approval for their EVAR products in the U.S. and/or other international markets. In addition to these major competitors, we also have smaller competitors, and emerging competitors with active EVAR system development programs.
Our major competitors have substantially greater capital resources than we do and also have greater resources in the areas of research and development, obtaining regulatory approvals, manufacturing, marketing, and sales. In addition, these competitors have multiple product offerings, which some physicians and hospitals may find more convenient when developing business relationships. We also compete with other medical device companies for clinical trial sites and for the hiring of qualified personnel, including sales representatives and clinical specialists.

Product Developments and Clinical Trials
Overview
We incurred expenses of $41.8 million in 2015 , $34.9 million in 2014 , and $24.9 million in 2013 , on research and development activities and clinical studies. Our focus is to continually develop innovative and cost-effective medical devices for the treatment of aortic disorders. We believe that our ability to develop new technologies is a key to our future growth and success. Historically, we have focused on developing our EVAR and EVAS to treat infrarenal AAA including initial development of products to treat complex AAAs. However, we expect to devote more resources in the future to continue to develop, enhance and obtain expanded indications for our current EVAR and EVAS products and to develop new product indications to treat more challenging anatomies.
Nellix EVAS System
On December 10, 2010, we completed our acquisition of Nellix (refer to the section entitled "Nellix Acquisition and Private Placement Transaction" section below). Using the technology we acquired in the Nellix acquisition, we developed the Nellix EVAS System, a next-generation device, to treat infrarenal AAA. We have the following trials in process to build independent and collective clinical and economic evidence of clinical safety and effectiveness:

EVAS FORWARD IDE - Pivotal clinical trial to evaluate the safety and effectiveness of the Nellix EVAS System. The study is a prospective single arm registry which enrolled 179 patients at 29 centers in the U.S.; Canada and Europe, of which 26 are in the U.S. In November 2014, we completed enrollment in the EVAS FORWARD IDE. The patients in this study will be followed for one-year, after which we will submit the final module of the premarket approval (“PMA”) to the FDA. The first patient was treated in January 2014, enrollment was completed in November 2014 and patient follow-up is scheduled for one-year post treatment.
EVAS FORWARD Global Registry -This study is designed to provide real world clinical results to demonstrate the effectiveness and broad applicability of the Nellix EVAS System. This registry is designed to include 300 patients enrolled in up to 30 international centers. The first patient in the registry was treated in October 2013. The study utilizes an independent core lab and includes follow-up to five years. In September 2014, we announced completion of patient enrollment in the Nellix EVAS FORWARD global registry.
AFX
In February 2014, we launched a new proximal extension in the U.S., VELA, designed to be used in conjunction with our AFX bifurcated device. VELA features a circumferential graft line marker and controlled delivery system that enable predictable deployment and final positional adjustments. We began a commercial introduction of VELA in Europe in January 2015.
In September 2014, we announced a new clinical study called LEOPARD (Looking at EVAR Outcomes by Primary Analysis of Randomized Data). The study will provide a real-world comparison of the AFX system versus other commercially available EVAR devices. The LEOPARD study is designed to randomize and enroll up to 800 patients at 80 leading centers throughout the United States and commenced in the first quarter of 2015. The centers will be a mix of our current and new customers, with each investigator selecting one competitive device to randomize against AFX. The LEOPARD study is being led by an independent steering committee of leading physicians who will be involved with the study and responsible for presenting the results over the five-year follow-up period.
PEVAR
Vascular access for EVAR previously required femoral artery exposure (commonly referred to as surgical “cut-down”) of one or both femoral arteries, allowing for safe introduction of the EVAR product. Complications from femoral artery exposure during EVAR procedures 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 and closure

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with use of a suture-mediated device. 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. 
In April 2013, we announced FDA approval of the PEVAR indication for use for our AFX and Intuitrak products. Trial results show the safety and effectiveness of our device and PEVAR procedure facilitated with a suture-mediated closure device, and showed significantly reduced surgical procedure time compared to surgical EVAR. Other trends favoring PEVAR include less medication prescribed for post-operative groin pain, reduced blood loss, less hospitalization time, and overall lower incidence of complications. To date, no other company has conducted a randomized prospective FDA trial to specifically obtain approval for a PEVAR indication.

Ventana
In January 2012, we received IDE approval from the FDA to begin U.S. clinical trials to evaluate Ventana Fenestrated Stent Graft System (“Ventana”) for the EVAR repair of juxtarenal abdominal aortic aneurysms and pararenal abdominal aortic aneurysms.  In February 2012, we enrolled the first patient in our U.S. clinical trial to evaluate Ventana.  We received CE Mark approval for Ventana in April 2013.  In April 2013 the company announced that, after completing approximately half of the U.S. IDE patients, it would temporarily suspend enrollment in the Ventana U.S. IDE clinical trial and delayed the limited market introduction of Ventana in Europe.  Preliminary data suggested  that the trial would not meet its efficacy endpoint, due to a higher number of renal re-interventions than were allowed. We announced in 2014 that we were stopping the Ventana program and shifting our development efforts for the paravisceral segment on a Nellix based solution.

Nellix Acquisition and Private Placement Transaction
On December 10, 2010, we completed our merger with Nellix. Upon the closing of the merger, we issued an aggregate of 2.9 million unregistered shares of our common stock to the former stockholders of Nellix in exchange for all of the outstanding shares of Nellix stock immediately prior to the closing of the merger. On June 17, 2014, we issued an additional 2.7 shares of our common stock to the former shareholders of Nellix upon achievement of a revenue-based milestone. In addition, the Nellix merger agreement requires us to issue additional shares of our common stock to the former stockholders of Nellix as contingent consideration upon our receipt of PMA for the Nellix EVAS System.

Patents and Proprietary Information
We believe that our intellectual property and proprietary information is key to protecting our technology. We continue to build a portfolio of apparatus and method patents covering various aspects of our current and future technology. In the area of aorta treatment systems (exclusive of Nellix technology), our rights include 35 U.S. issued patents, 11 pending U.S. applications, 29 foreign patents and 10 pending foreign patent applications. Our current aorta treatment related patents have expiration dates from 2016 to 2031. As a result of our acquisition of Nellix, we added additional patents to our portfolio which have evolved to currently include 19 U.S. patents 19 pending U.S. applications, and 10 foreign patents, with expiration dates from 2016 to 2030. We intend to continue to file patent applications to strengthen our intellectual property position as we continue to develop our technology, while simultaneously avoiding paying unnecessary fees to maintain patents and applications when we believe it is not in our best interest.
Our policy is to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications to protect technology, inventions and improvements that are important to the development of our business. We also own trademarks to protect the names of our products. In addition to patents and trademarks, we rely on trade secrets and proprietary know-how.
We seek protection of these trade secrets and proprietary know-how, in part, through confidentiality and proprietary information agreements. We make diligent efforts to require our employees, directors, consultants, and advisors to execute confidentiality agreements upon the start of employment, consulting, or other contractual relationships with us. These agreements provide that all confidential information developed or made known to the individual or entity during the course of the relationship is to be kept confidential and not be disclosed to third parties, except in specific circumstances. In the case of employees and certain other parties, the agreements also provide that all inventions conceived by the individual will be our company's exclusive property.

Third-Party Reimbursement

In the U.S., hospitals are the primary purchasers of our EVAR and EVAS Systems. Hospitals in turn bill various third-party payors, such as Medicare, Medicaid and private health insurance plans, for the total healthcare services required to treat the patient's AAA. Government agencies, private insurers and other payors determine whether to provide coverage for a particular procedure and to reimburse hospitals for medical treatment. While hospitals are often reimbursed at a fixed rate based on the

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diagnosis-related group ("DRG") established by the U.S. Centers for Medicare and Medicaid Services ("CMS"), other insurers may negotiate differing approaches with hospitals. The fixed rate of reimbursement is based on the procedure performed, and is unrelated to the specific medical devices used in that procedure.

Reimbursement of procedures utilizing our EVAR and EVAS products currently are covered. Some payors may deny reimbursement if they determine that the device used in a treatment was unnecessary, not cost-effective, or used for a non-approved indication.
Beginning on October 1, 2015, CMS started requiring those who make claims for reimbursement to use ICD-10 codes to designate diagnosis and treatment of Medicare beneficiaries. The following are the ICD-10-PCS codes associated with the endovascular treatment of abdominal aneurysms utilizing Endologix devices indicated for that treatment.
ICD-10 PCS
Description
Abdominal Aorta
04V03DZ
Restriction of Abdominal Aorta, with Intraluminal Device, Percutaneous Approach
04V04DZ
Restriction of Abdominal Aorta, with Intraluminal Device, Percutaneous Endoscopic Approach
04V03DJ
Restriction of Abdominal Aorta, with Intraluminal Device, Temporary, Percutaneous Approach
04V04DJ
Restriction of Abdominal Aorta, with Intraluminal Device, Temporary, Percutaneous Endoscopic Approach
04U03JZ
Supplement of Abdominal Aorta with Synthetic Substitute, Percutaneous Approach
04U04JZ
Supplement of Abdominal Aorta with Synthetic Substitute, Percutaneous Endoscopic Approach
CMS reimburses these hospital inpatient procedures utilizing the following MS-DRGs. National average reimbursement values are shown.
Aortic and Heart Assist Procedures Except Pulsation Balloon with MCC
$37,095
Aortic and Heart Assist Procedures Except Pulsation Balloon without MCC
$23,058
Outside the U.S., market acceptance of medical devices, including EVAR and EVAS systems, depends partly upon the availability of reimbursement within the prevailing healthcare payment system. Reimbursement levels vary significantly by country, and by region within some countries. Reimbursement is obtained from a variety of sources, including government sponsored healthcare and private health insurance plans.
Presently, the European Union ("EU") is considering substantial updating of regulations for the sale and reimbursement of medical devices in EU countries. The legislation will harmonize such regulations throughout all EU countries. It is expected that the new regulations will require: (i) stricter guidelines for clinical evidence supporting device efficacy; (ii) more powers for regulatory assessment bodies; (iii) stronger supervision of manufacturers, importers and distributors, and (iv) an extended database for medical devices and better traceability throughout the supply chain. The European Commission proposals are being discussed in the European Parliament and in the European Council. They are expected to be adopted sometime in 2016 and would then gradually come into effect from 2017 to 2020.

Government Regulation - Medical Devices

Our medical devices are subject to regulation by various government agencies, including the FDA and similar agencies within governments outside the U.S. Each of these agencies requires us to comply with laws and regulations governing the development, qualification, manufacturing, labeling, marketing, and distribution of our medical devices.
U.S.
In the U.S., medical devices are regulated by the FDA under the Federal Food, Drug and Cosmetic Act. The FDA classifies medical devices into one of three classes based upon controls the FDA considers necessary to reasonably ensure their safety and effectiveness. Class I devices are subject to general controls such as labeling, adherence to good manufacturing practices and maintenance of product complaint records, but are usually exempt from premarket notification requirements. Class II devices are subject to the same general controls and also are subject to special controls such as performance standards, FDA guidelines,

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and may also require clinical testing prior to approval. Class III devices are subject to the highest level of controls because they are life-sustaining or life-supporting devices. Class III devices require rigorous clinical testing prior to their approval and generally require a premarket approval ("PMA") or PMA supplement approval prior to marketing for sale.
Authorization to commercially distribute a medical device in the U.S. is generally received in one of two ways. The first, known as premarket notification (i.e., the 510(k) process), requires us to submit data to the U.S. FDA to demonstrate that our medical device is substantially equivalent to another medical device that is legally marketed in the U.S. The U.S. FDA must issue a finding of substantial equivalence before we can commercially distribute our medical device. Devices that receive a finding of substantial equivalence are referred to as 510(k)-cleared devices. Modifications to medical devices cleared under the 510(k) process can be made under the 510(k) process, or without the 510(k) process if the changes do not significantly affect safety or effectiveness.
The second process, known as premarket approval (i.e., the PMA process), requires us to collect and submit nonclinical and human clinical data on the medical device for its intended use to demonstrate that it is safe and effective. Human clinical data must be collected in compliance with FDA IDE regulations. The IDE application must be supported by data, typically including the results of animal and engineering testing of the device. If the IDE application is approved by the FDA, human clinical studies may begin at a specific number of investigational sites with a maximum number of patients. The clinical studies must be conducted under the review of an independent institutional review board to ensure the protection of the patients’ rights. In the PMA process, the U.S. FDA will approve the medical device and thereby authorize its commercial distribution in the U.S. if it determines that the probable benefits outweigh the risks for the intended patient population, and, therefore, makes a determination of reasonable assurances of safety and effectiveness. The PMA process takes longer and is more expensive than the 510(k) process. Our Powerlink, Intuitrak and AFX EVAR Systems were approved through this PMA process. The Nellix EVAS System is currently engaged in the PMA process and will be made commercially available in the United States following PMA approval.
We are required to register as a medical device manufacturer with the FDA. Additionally, the California Department of Health Services ("CDHS") requires us to register as a medical device manufacturer. Because of this, the FDA and the CDHS routinely inspect us for compliance with Quality System regulations. These regulations require that we manufacture our products and maintain related documentation in a prescribed manner with respect to manufacturing, testing and control activities. We have undergone and expect to continue to undergo regular Quality System inspections in connection with the manufacture of our products at our facility. Further, the FDA requires us to comply with various regulations regarding labeling. The Medical Device Reporting (“MDR”) laws and regulations require us to provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of our devices, as well as product malfunctions that likely would cause or contribute to death or serious injury if the malfunction were to recur. Although physicians are permitted to use their medical judgment to apply medical devices to indications other than those cleared or approved by the FDA, we are prohibited from promoting products for such “off-label” uses, and can only market our products for the 510(k)-cleared or PMA-approved indications for use.
International
Internationally, our medical devices are subject to regulatory requirements in the countries in which they are sold. The requirements and regulatory approval processes vary from country to country.
In the EU, one regulatory approval process exists. We must comply with the requirements of the Medical Devices Directive ("MDD"), and appropriately affix the CE Mark on our products to attest to such compliance. To obtain a CE Mark, our products must meet minimum standards of safety, performance, and quality (i.e., "Essential Requirements"), and then comply with defined conformity assessment routes. A notified body, selected by us, assesses our Quality Management System and our product conformity to the Essential Requirements and the requirements of the MDD. The notified body must perform regular inspections to verify compliance. The EU government ministries of health ("Competent Authorities") oversee human clinical studies and post-market surveillance of approved products, referred to as Vigilance Reporting. We are required to report device failures and serious adverse events potentially related to product use to responsible Competent Authorities. We also must comply with additional requirements of individual countries in which our products are marketed. Our Powerlink and AFX EVAR Systems and Nellix EVAS System were approved through the CE marking process.
To be sold in Japan, most medical devices must undergo thorough safety examinations and demonstrate medical efficacy before they are granted approval, or "S honin ." In Japan, the Ministry of Health, Labor, and Welfare ("MHLW"), with administration by the Pharmaceutical and Medical Devices Agency, regulates medical devices under the Pharmaceuticals and Medical Device Law ("PMD"). Our quality management system and product conformity to the PMD are overseen by MHLW and Pharmaceutical and Medical Devices Agency ("PMDA"). Our Powerlink and AFX EVAR Systems were approved through the S honin process. The Nellix EVAS System requires future approval through the process in order to be commercially available in Japan.
To be sold in China, all medical devices are required to have licenses from the China Food and Drug Administration ("CFDA") (formerly State Food & Drug Administration or SFDA). Quality system, premarket testing and clinical investigation are required for Class II and III devices. CFDA released a new regulation on Innovative Medical Device Registration Applications ("IMDR")

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in March 2014, which Endologix may utilize to register its product in China. Class II and III submissions will have a full application review conducted; this will include a technical and administrative review. Novel and high-risk products may also be subject to an Expert Panel Meeting (which may result in an additional 4 to 6 months to the review process), and CFDA may conduct an onsite QMS audit of manufacturing facilities. The Nellix EVAS System requires future approval through the process in order to be commercially available in China.
We are also subject to other local, state, federal and international regulations relating to a variety of areas including laboratory practices, manufacturing practices, medical device export, quality system practices, as well as health care reimbursement and delivery of products and services.
U.S. and Foreign Government Regulations - Healthcare Fraud and Abuse and Privacy Laws

Healthcare Fraud and Abuse
We are subject to various U.S. and foreign governmental laws and regulations relating to the manufacturing, labeling, marketing and selling of our products, non-compliance with which could adversely affect our business, financial condition and results of operations. We have implemented and maintain a comprehensive compliance program that includes ongoing risk assessment, development of relevant policies, monitoring, and training of our employees to ensure compliance with U.S. and foreign laws and regulations.
Various U.S. federal and state laws and regulations pertaining to health care fraud and abuse govern how we can and cannot do business in the U.S. and globally, including the federal False Claims Act, which prohibits the submission of false or otherwise improper claims for payment to a federally-funded health care program, the federal Anti-Kickback Statute, which prohibits offers to pay or receive remuneration of any kind for the purpose of inducing or rewarding referrals of items or services reimbursable by a Federal health care program, and similar state false claims and anti-kickback laws and regulations that apply to state funded health care programs. Violations of these laws and regulations are punishable by criminal and/or civil sanctions, including, in some instances, fines, imprisonment and, within the U.S., exclusion from participation in federal and/or state health care programs, including Medicare and Medicaid. The interpretation and enforcement of these laws and regulations are uncertain and subject to rapid change.
We conduct a significant amount of sales activity outside of the U.S. We intend to continue to pursue growth opportunities internationally, including in emerging markets. Our international operations are, and will continue to be, subject to a complex set of laws and regulations, including:
Foreign medical reimbursement policies and programs;
Complex data privacy requirements and laws;
Ever-changing and contradictory country-specific guidelines, transparency requirements and laws;
The Foreign Corrupt Practices Act, a U.S. law, which prosecutes U.S. companies who engage in bribery when doing business with physicians, distributors, agents, and other third parties outside the U.S. Many physicians outside the U.S. are considered government officials, and U.S. companies, together with individuals who engaged in the bribery, face civil and criminal sanctions both in the U.S. and any country where bribery of a government official violates the law of that country;
Foreign anti-corruption laws, such as the UK Bribery Act; and
Trade protection measures, including import or export restrictions or sanctions, that may restrict us from doing business in and/or shipping products to certain parts of the world.

The foregoing are subject to change and evolving interpretations and any violation thereof could subject us to financial or other penalties.
US and Foreign Privacy Laws
We are subject to various U.S. federal and state privacy and security laws and regulations that protect the security and privacy of individually identifiable health information. We are mindful that our systems require significant resources and oversight to protect employee, patient, physician and customer information. If we fail to maintain or protect our information systems and data integrity effectively, we could lose existing customers, have difficulty preventing, detecting, and controlling fraud, have disputes with customers, physicians, and other health care professionals, have regulatory sanctions or other penalties imposed, have increases in operating expenses, incur expenses or lose revenues as a result of a data privacy breach, or suffer other adverse consequences.

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We are also impacted by the privacy and security requirements of countries outside the U.S. Privacy standards in Europe and Asia are becoming increasingly strict. Enforcement actions and financial penalties related to privacy in the EU are growing, and foreign governmental authorities are regularly passing new laws and restrictions relating to privacy requirements and standards. The management of cross border transfers of information among and outside of EU member countries is becoming more complex, which may complicate our consulting arrangements with physicians or our clinical research activities, as well as product offerings that involve transmission or use of clinical data.
Any significant breakdown, intrusion, interruption, corruption, or destruction of our systems or information could have a material adverse effect on our business, results of operations and financial condition. Thus, we will continue our efforts to comply with all applicable privacy and security laws and regulations. To the best of our knowledge at this time, we do not expect that the ongoing cost and impact of assuring compliance with applicable privacy and security laws and regulations will have a material impact on our business, results of operations or financial condition.
Product Liability
The manufacture and marketing of medical devices carries the significant risk of financial exposure to product liability claims. Our products are used in situations in which there is a high risk of serious injury or death. Such risks will exist even with respect to those products that have received, or in the future may receive, regulatory approval for commercial sale. We are currently covered under a product liability insurance policy with coverage limits of $20 million per occurrence and $20 million per year in the aggregate, subject to customary deductible of $250,000.
Employees
As of December 31, 2015 , we had 619 employees (as compared to 590 employees as of December 31, 2014 ), including 226 in manufacturing, 44 in research and development, 34 in regulatory and clinical affairs, 69 in quality support, 185 in sales and marketing, and 61 in administration. We believe that the success of our business will depend, on our ability to attract and retain qualified personnel. Our employees are not subject to a collective bargaining agreement, and we believe that we have good relations with our employees.
General Information
We were incorporated in California in March 1992 under the name Cardiovascular Dynamics, Inc. and reincorporated in Delaware in June 1993. In January 1999, Cardiovascular Dynamics, Inc. (by then a publicly-traded company) merged with privately held Radiance Medical Systems, Inc., and we changed our name to Radiance Medical Systems, Inc. In May 2002, we merged with then privately held Endologix, Inc., and we changed our name to Endologix, Inc.
Our principal executive office is located at 2 Musick, Irvine, California and our telephone number is (949) 595-7200. Our website is located at www.endologix.com. The information on, or that can be accessed through, our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered to be a part hereof.
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and related amendments to these reports, as applicable, available on our website, at www.endologix.com, free of charge as soon as practicable after filing or furnishing such reports with the U.S. Securities and Exchange Commission ("SEC").

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

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


Item 1A.
Risk Factors

Before deciding to invest in our company, or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this Annual Report on Form 10-K and other reports we have filed with the SEC. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also affect our business operations. If any of these risks are realized, our business, financial condition, or results of operations could be seriously harmed and, in that event, the market price for our common stock could decline and you may lose all or part of your investment.

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These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K. These factors could cause actual results and conditions to differ materially from those projected in our forward-looking statements.
Risks Related to the Recently Completed Merger with TriVascular
We may be unable to successfully integrate our operations or realize the anticipated revenue, operating synergies and other potential benefits of our recently completed merger in a timely manner or at all. As a result, our business, results of operations and financial condition may be adversely affected.
The success of our recently completed merger with TriVascular will depend, in part, on our ability to achieve the anticipated revenue, operating synergies and other potential benefits of the merger. Achieving the anticipated potential benefits of the merger will depend in part upon whether we are able to integrate our operations in an efficient and effective manner. The integration process may not be completed smoothly or successfully. The necessity of coordinating geographically separated organizations, systems and facilities and addressing possible differences in business backgrounds, corporate cultures and management philosophies may increase the difficulties of integration. We operate numerous systems, including those involving accounting and finance, sales, billing, payroll, employee benefits and regulatory compliance. We may also have inconsistencies in standards, controls, procedures or policies that could affect our ability to maintain relationships with customers and employees or to achieve the anticipated benefits of the merger. We may have difficulty in integrating our commercial organizations, including in particular distribution arrangements. The integration of certain operations requires the dedication of significant management resources, which may temporarily distract management’s attention from our day-to-day business. Employee uncertainty and lack of focus during the integration process may also disrupt our business. Any inability of our management to integrate successfully our operations or to do so within a longer time frame than expected could have an adverse effect on our business, results of operations and financial condition. The integration also may result in unanticipated expenses, liabilities, competitive responses and loss of customer relationships. Even if our operations are integrated successfully with TriVascular’s, we may not be able to realize the full benefits of the transaction, including the anticipated operating and cost synergies, growth opportunities or long-term strategic benefits of the merger. An inability to realize the full extent of, or any of, the anticipated benefits of the merger, as well as any delays encountered in the integration process, could have an adverse effect on our business, results of operations and financial condition.
Our future results will suffer if we do not effectively manage our expanded operations as a result of the merger.
As a result of the merger, the size of our business has increased significantly. Our future success depends, in part, upon our ability to manage this expanded business, which will pose substantial challenges for our management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. We may be unable to realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the merger.
In addition, effective internal controls are necessary for us to provide reliable and accurate financial reports. The integration of combined businesses is likely to result in our systems and controls becoming increasingly complex and more difficult to manage. We devote significant resources and time to comply with the internal control over financial reporting requirements of the Sarbanes-Oxley Act of 2002. However, we cannot be certain that these measures will ensure that we design, implement and maintain adequate control over our financial processes and reporting in the future. Any difficulties in the assimilation of combined businesses into our control system could harm our operating results or cause us to fail to meet our financial reporting obligations.
If goodwill or other intangible assets that we record in connection with the merger become impaired, we could be required to take significant charges against earnings.
In connection with the accounting for the merger, we expect to record a significant amount of goodwill and other intangible assets. Under U.S. generally accepted accounting principles, we must assess, at least annually and potentially more frequently, whether the value of our goodwill and other indefinite-lived intangible assets have been impaired. Amortizing intangible assets will be assessed for impairment in the event of an impairment indicator. Any reduction or impairment of the value of goodwill or other intangible assets will result in a charge against earnings, which could adversely affect our operating results and financial condition in future periods.



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We have incurred and expect to continue to incur significant transaction and integration-related costs in connection with the merger and the integration of our operations.
We have incurred and expect to continue to incur a number of non-recurring costs associated with the merger and integrating our operations. The substantial majority of non-recurring expenses resulting from the merger will be comprised of transaction costs related to the merger, employment-related costs, and facilities and systems consolidation costs. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of our businesses should allow us to offset incremental transaction and integration-related costs over time, this net benefit may not be achieved in the near term, or at all.
The surviving corporation following our merger with TriVascular, which is a wholly-owned subsidiary of our company, possesses not only all of the assets, but also all of the liabilities of TriVascular. Discovery of previously undisclosed or unknown liabilities could have an adverse effect on our business, operating results and financial condition.
Business combination transactions involve risks, including inaccurate assessment of undisclosed, contingent or other liabilities or problems. As a result of our merger with TriVascular, we acquired not only all of the assets, but also all of the liabilities of TriVascular. Although we conducted a due diligence investigation of TriVascular and its known and potential liabilities and obligations prior to completing the merger, it is possible that undisclosed, contingent or other liabilities or problems may arise which we were previously unaware. These undisclosed liabilities could have an adverse effect on our business, results of operations and financial condition.
Risks Related to Our Business
All of our revenue is generated from a limited number of products, and any decline in the sales of these products will negatively impact our business.
We have focused heavily on the development and commercialization of a limited number of products for the treatment of AAA. If we are unable to continue to achieve and maintain market acceptance of these products and do not achieve sustained positive cash flow from operations, we will be constrained in our ability to fund development and commercialization of improvements and other product lines. In addition, if we are unable to market our products as a result of a quality problem or failure to maintain regulatory approvals, we would lose our only source of revenue and our business would be negatively affected.
We are in a highly competitive market segment, which is subject to rapid technological change. If our competitors are better able to develop and market products that are safer, more effective, less costly, easier to use, or otherwise more attractive than any products that we may develop, our business will be adversely impacted.
Our industry is highly competitive and subject to rapid and profound technological change. Our success depends, in part, upon our ability to maintain a competitive position in the development of technologies and products for use in the treatment of AAA and other aortic disorders. We face competition from both established and development stage companies. Many of the companies developing or marketing competing products enjoy several advantages to us, including:
greater financial and human resources for product development, sales and marketing and patent litigation;
greater name recognition;
long established relationships with physicians, customers, and third-party payors;
additional lines of products, and the ability to offer rebates or bundle products to offer greater discounts or incentives;
more established sales and marketing programs, and distribution networks;
greater experience in conducting research and development, manufacturing, clinical trials, preparing regulatory submissions, and obtaining regulatory clearance or approval for products and marketing approved products; and
greater buying power and influence with suppliers.

Our competitors may develop and patent processes or products earlier than us, obtain regulatory clearance or approvals for competing products more rapidly than us, and develop more effective or less expensive products or technologies that render our technology or products obsolete or less competitive. We also face fierce competition in recruiting and retaining qualified scientific, sales, and management personnel, establishing clinical trial sites and patient enrollment in clinical trials, as well as in

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acquiring technologies and technology licenses complementary to our products or advantageous to our business. If our competitors are more successful than us in these matters, our business may be harmed.
If third-party payors do not provide reimbursement for the use of our products, our revenues may be negatively impacted.
Our success in marketing our products depends in large part on whether domestic and international government health administrative authorities, private health insurers and other organizations will reimburse customers for the cost of our products. Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. Further, many international markets have government managed healthcare systems that control reimbursement for new devices and procedures. In most markets, there are private insurance systems as well as government-managed systems. If sufficient reimbursement is not available for our current or future products, in either the United States or internationally, the demand for our products will be adversely affected.
We may never realize the expected benefits of our business combination transactions.
In addition to developing new products and growing our business internally, we have sought to grow through combinations with complementary businesses. Examples include, in addition to our recently completed merger with TriVascular, our merger with Nellix in 2010. Such business combination transactions involve risks, including the risk that we may fail to realize some or all of the anticipated benefits of the transaction. For example, the success of our recent business combination transactions largely depends on our ability to realize anticipated growth opportunities for existing products and potential new products. Our ability to realize these benefits, and the timing of this realization, depend upon a number of factors and future events, many of which we cannot control. These factors and events include, without limitation, the results of clinical trials, the receipt of applicable regulatory approvals, obtaining and maintaining intellectual property rights and further developing an effective sales and marketing organization in global markets. Although we carefully plan our business combination trasnactions, we may be unable to realize the expected benefits of such transactions.
Our success depends on the growth in the number of AAA patients treated with endovascular devices.
We estimate that over 200,000 people are diagnosed with AAA in the United States annually, and approximately 68,000 people underwent aneurysm repair, either via EVAR or open surgical repair. Our growth will depend upon an increasing percentage of patients with AAA being diagnosed, and an increasing percentage of those diagnosed receiving EVAR, as opposed to an open surgical procedure. Initiatives to increase screening for AAA include SAAAVE, which was signed into law on February 8, 2006 in the United States. SAAAVE will provide one-time AAA screening for men who have smoked some time in their life, and men or women who have a family history of the disease. Screening is provided as part of the “Welcome to Medicare” physical and such coverage began on January 1, 2007. Such general screening programs may never gain wide acceptance. The failure to diagnose more patients with AAA could negatively impact our revenue growth.
Our success depends on convincing physicians to use, and continue to use, our products in more endovascular AAA procedures.
Our AAA products utilize a different fixation approach within the patient’s anatomy than competitive products. Due to our favorable clinical results, and product improvements, and an increase in the size of our sales force, we have been able to increase sales at a rate higher than the general growth within our market segment. However, if we are unable to continue convincing physicians to use our products, our business could be negatively impacted. Additionally, if we fail to maintain our working relationships with health care professionals, many of our products may not be developed and marketed in line with the needs and expectations of the professionals who use and support our products, which could cause a decline in our earnings and profitability. The research, development, marketing, and sales of many of our new and improved products is dependent upon our maintaining working relationships with health care professionals. We rely on these professionals to provide us with considerable knowledge and experience regarding the development, marketing, and sale of our products. Physicians assist us as researchers, marketing and product consultants, inventors, and public speakers. If we are unable to maintain our strong relationships with these professionals and continue to receive their advice and input, the development and marketing of our products could suffer, which could have a material adverse effect on our consolidated earnings, financial condition, and/or cash flows.
Quality problems with our products could harm our reputation and erode our competitive advantage, sales, and market share.
         The manufacture of many of our products is highly complex and subject to strict quality controls, due in part to rigorous regulatory requirements. In addition, quality is extremely important due to the serious and costly consequences of a product failure. Problems can arise during the manufacturing process for a number of reasons, including equipment malfunction, failure to follow protocols and procedures, raw material problems or human error. If these problems arise or if we otherwise fail to

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meet our internal quality standards or those of the FDA or other applicable regulatory body, which include detailed record-keeping requirements, our reputation could be damaged, we could become subject to a safety alert or a recall, we could incur product liability and other costs, product approvals could be delayed and our business could otherwise be adversely affected.

Our international operations involve operating risks, which could adversely impact our net sales, results of operations, and financial condition.
Sales of our products outside the United States represented approximately 30% of our revenue in 2015 . As of December 31, 2015 , we sold our products through 39 distributors located in the following countries outside of the United States: Argentina, Brazil, Chile, Columbia, Czech Republic, Israel, Japan, Mexico, Latvia, Romania, Puerto Rico, Poland, Sweden, Portugal, Spain, Slovakia, Norway, Italy, Hungary, Greece, Thailand, Singapore, Malaysia, Hong Kong, Australia and Turkey. The sales territories authorized within these various distribution agreements cover a total of 31 countries. The sale and shipment of our products across international borders, as well as the purchase of components and products from international sources, subjects us to extensive United States and foreign governmental trade, import and export, and custom regulations and laws.
Pursuant to the SEC rules regarding disclosure of the use of certain minerals in our products, known as "conflict minerals,” which are mined from the Democratic Republic of the Congo and adjoining countries, we are now required to disclose the procedures we employ to determine the sourcing of such minerals and metals produced from those minerals. The implementation of these rules could adversely affect the sourcing, supply, and pricing of materials used in our products. Although we intend to disclose that we utilized certain of the four conflict minerals in our products in our conflict minerals report for the 2015 calendar year, we have been unable in all instances to determine that our sources of these minerals have been certified as “conflict free.” We may continue to face difficulties in gathering this information in the future.
Compliance with these regulations is costly and exposes us to penalties for non-compliance. Other laws and regulations that can significantly impact us include various anti-bribery laws, including the United States Foreign Corrupt Practices Act and anti-boycott laws and similar laws in foreign jurisdictions. Any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments, restrictions on certain business activities, and exclusion or debarment from government contracting. Also, the failure to comply with applicable legal and regulatory obligations could result in the disruption of our shipping and sales activities.
Substantially all of our sales outside of the United States are denominated in local currencies. Measured in local currency, a substantial portion of our international sales was generated in Europe (and primarily denominated in the Euro) and in Japan. The United States dollar value of our international sales varies with currency exchange rate fluctuations. Decreases in the value of the United States dollar to the Euro or the British Pound Sterling have the effect of increasing our reported revenues even when the volume of international sales has remained constant. Increases in the value of the United States dollar relative to the Euro or the British Pound Sterling, as well as other currencies, have the opposite effect and, if significant, could have a material adverse effect on our reported revenues and results of operations.
In addition, many of the countries in which we sell our products are, to some degree, subject to political, economic or social instability. Our international operations expose us and our distributors to risks inherent in operating in foreign jurisdictions. These risks include:
difficulties in enforcing or defending intellectual property rights;
pricing pressure that we may experience internationally;
a shortage of high-quality sales people and distributors;
changes in third-party reimbursement policies that may require some of the patients who receive our products to directly absorb medical costs or that may necessitate the reduction of the selling prices of our products;
the imposition of additional United States and foreign governmental controls or regulations;
economic instability;
changes in duties and tariffs, license obligations and other non-tariff barriers to trade;
the imposition of restrictions on the activities of foreign agents, representatives and distributors;
scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on us;
laws and business practices favoring local companies;

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longer payment cycles;
difficulties in maintaining consistency with our internal guidelines;
difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
the imposition of costly and lengthy new export licensing requirements;
the imposition of United States or international sanctions against a country, company, person or entity with whom we do business that would restrict or prohibit continued business with the sanctioned country, company, person or entity; and
the imposition of new trade restrictions.

If we experience any of these risks, our sales in international countries may be harmed and our results of operations would suffer.
If we fail to properly manage our anticipated growth, our business could suffer.
We may experience periods of rapid growth and expansion, which could place a significant strain on our limited personnel, information technology systems, and other resources. In particular, the increase in our direct sales force requires significant management and other supporting resources. Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our development and commercialization goals.
To achieve our revenue goals, we must successfully increase production output as required by customer demand. In the future, we may experience difficulties in increasing production, including problems with production yields and quality control, component supply, and shortages of qualified personnel. These problems could result in delays in product availability and increases in expenses. Any such delay or increased expense could adversely affect our ability to generate revenues.
Future growth will also impose significant added responsibilities on management, including the need to identify, recruit, train, and integrate additional employees. In addition, rapid and significant growth will place a strain on our administrative and operational infrastructure.
In order to manage our operations and growth, we will need to continue to improve our operational and management controls, reporting and information technology systems, and financial internal control procedures. If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our operating results and business could suffer.
If we fail to develop and retain our direct sales force, our business could suffer.
We have a direct sales force in the United States and in certain European countries. We also utilize a network of third-party distributors for sales outside of the United States. As we launch new products and increase our marketing efforts with respect to existing products, we will need to retain and develop our direct sales personnel to build upon their experience, tenure with our products, and their relationships with customers. There is significant competition for sales personnel experienced in relevant medical device sales. If we are unable to attract, motivate, develop, and retain qualified sales personnel and thereby grow our sales force, we may not be able to maintain or increase our revenues.
Our third-party distributors may not effectively distribute our products.
We depend in part on medical device distributors and strategic relationships for the marketing and selling of our products outside of the United States and outside of certain countries in Europe. We depend on these distributors’ efforts to market our products, yet we are unable to control their efforts completely. In addition, we are unable to ensure that our distributors comply with all applicable laws regarding the sale of our products. If our distributors fail to effectively market and sell our products, and in full compliance with applicable laws, our operating results and business may suffer.
If clinical trials of our current or future products do not produce results necessary to support regulatory clearance or approval in the United States or elsewhere, we will be unable to commercialize these products.
We are currently conducting clinical trials. We will likely need to conduct additional clinical trials in the future to support new product approvals, for the approval for new indications for the use of our products, or support the use of existing products. Clinical testing is expensive, and typically takes many years, which carries an uncertain outcome. The initiation and completion of any of these studies may be prevented, delayed, or halted for numerous reasons, including, but not limited to, the following:
the FDA, institutional review boards or other regulatory authorities do not approve a clinical study protocol, force us to modify a previously approved protocol, or place a clinical study on hold;

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patients do not enroll in, or enroll at the expected rate, or complete a clinical study;
patients or investigators do not comply with study protocols;
patients do not return for post-treatment follow-up at the expected rate;
patients experience serious or unexpected adverse side effects for a variety of reasons that may or may not be related to our products such as the advanced stage of co-morbidities that may exist at the time of treatment, causing a clinical study to be put on hold.
sites participating in an ongoing clinical study may withdraw, requiring us to engage new sites;
difficulties or delays associated with establishing additional clinical sites;
third-party clinical investigators decline to participate in our clinical studies, do not perform the clinical studies on the anticipated schedule, or are inconsistent with the investigator agreement, clinical study protocol, good clinical practices, and other FDA and Institutional Review Board requirements;
data collection analysis in a timely or accurate manner;
regulatory inspections of our clinical studies require us to undertake corrective action or suspend or terminate our clinical studies;
changes in federal, state, or foreign governmental statutes, regulations or policies;
interim results are inconclusive or unfavorable as to immediate and long-term safety or efficacy;
the study design is inadequate to demonstrate safety and efficacy; or
do not meet the study endpoints.

Clinical failure can occur at any stage of the testing. Our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and/or non-clinical testing in addition to those we have planned. Our failure to adequately demonstrate the efficacy and safety of any of our devices would prevent receipt of regulatory clearance or approval and, ultimately, the commercialization of that device or indication for use.
We rely on single vendors to supply several components for our product lines, and any disruption in the supply of such materials could impair our ability to manufacture our products or meet customer demand for our products in a timely and cost effective manner.
Our reliance on single source suppliers exposes our operations to disruptions in supply caused by:
failure of our suppliers to comply with regulatory requirements;
any strike or work stoppage;
disruptions in shipping;
a natural disaster caused by fire, flood or earthquakes; or
a supply shortage experienced by a single source supplier.

Although we take reasonable efforts to mitigate risk, a significant extending interruption from key suppliers could impact our ability to manufacture and adversely affect our business, financial condition, and results of operations.
If we are unable to protect our intellectual property, our business may be negatively affected.
Our success depends significantly on our ability to protect our intellectual property and proprietary technologies. Our policy is to obtain and protect our intellectual property rights. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, and nondisclosure, confidentiality and other contractual restrictions, to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Our pending U.S. and foreign patent applications may not issue as patents or may not issue in a form that will be advantageous to us. Any patents we have obtained, or will obtain, may be challenged by re-examination, inter partes review, opposition or other administrative proceeding, or in litigation. Such challenges could result in a determination that the patent is invalid. In addition, competitors may be able to design alternative methods or devices that avoid infringement of our patents. To the extent our intellectual property protection offers inadequate protection, or is found to be invalid, we are exposed to a greater risk of direct competition. If our intellectual property does not provide adequate protection against our competitors’ products, our competitive position could be adversely affected, as could our business. Both the patent application process and the process of managing patent disputes can be time consuming and expensive. Furthermore, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the

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United States. In addition, changes in U.S. patent laws could prevent or limit us from filing patent applications or patent claims to protect our products and/or technologies or limit the exclusivity periods that are available to patent holders.
We also own trade secrets and confidential information that we try to protect by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants and other parties. However, such agreements may not be honored or, if breached, we may not have sufficient remedies to protect our confidential information. Further, our competitors may independently learn our trade secrets or develop similar or superior technologies. To the extent that our employees, consultants or others apply technological information to our projects that they develop independently or others develop, disputes may arise regarding the ownership of proprietary rights to such information, and such disputes may not be resolved in our favor. If we are unable to protect our intellectual property adequately, our business and commercial prospects will likely suffer.
The medical device industry is subject to extensive patent litigation, and if our products or processes infringe upon the intellectual property of third parties, the sale of our products may be challenged and we may have to defend costly and time-consuming infringement claims.
We may need to engage in expensive and prolonged litigation to assert or defend any of our intellectual property rights or to determine the scope and validity of rights claimed by other parties. With no certainty as to the outcome, litigation could be too expensive for us to pursue. Our failure to prevail in such litigation or our failure to pursue litigation could result in the loss of our rights that could substantially hurt our business. In addition, the laws of some foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States, if at all.
Our failure to obtain rights to intellectual property of third parties, or the potential for intellectual property litigation, could force us to do one or more of the following:
stop selling, making, or using products that use the disputed intellectual property;
obtain a license from the intellectual property owner to continue selling, making, licensing, or using products, which license may not be available on reasonable terms, or at all;
redesign our products, processes or services; or
subject us to significant liabilities to third parties.

If any of the foregoing occurs, we may be unable to manufacture and sell our products and may suffer severe financial harm. Whether or not an intellectual property claim is valid, the cost of responding to it, in terms of legal fees and expenses and the diversion of management resources, could harm our business.
We may face product liability claims that could result in costly litigation and significant liabilities.
Manufacturing and marketing of our commercial products, and clinical testing of our products under development, may expose us to product liability claims. Although we have, and intend to maintain, product liability insurance, the coverage limits of our insurance policies may not be adequate and one or more successful claims brought against us may have a material adverse effect on our business and results of operations. Additionally, adverse product liability actions could negatively affect our reputation, continued product sales, and our ability to obtain and maintain regulatory approval for our products.
Our ability to maintain our competitive position depends on our ability to attract and retain highly qualified personnel.
We believe that our continued success depends to a significant extent upon the efforts and abilities of our executive officers, particularly John McDermott, our Chief Executive Officer and Chairman of our Board of Directors.    
The loss of Mr. McDermott would harm our business. Our ability to retain our executive officers and other key employees, and our success in attracting and hiring additional skilled employees, will be critical to our future success.
If our facilities or systems are damaged or destroyed, we may experience delays that could negatively impact our revenues or have other adverse effects.
Our facilities and systems may be affected by natural or man-made disasters. We currently conduct all of our manufacturing, development and management activities at a single location in Irvine, California, near known earthquake fault zones. Our finished goods inventory is split between our Irvine location and our distribution centers in Memphis, Tennessee and Tilburg, The Netherlands. We have taken precautions to safeguard our facilities and systems, including insurance, health and safety protocols, and off-site storage of computer data. However, our facilities and systems may be vulnerable to earthquakes, fire, storm, power loss, telecommunications failures, physical and software break-ins, software viruses and similar

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events which could cause substantial delays in our operations, damage or destroy our equipment or inventory, and cause us to incur additional expenses. In addition, the insurance coverage we maintain may not be adequate to cover our losses in any particular case and may not continue to be available to use on acceptable terms, or at all.
Failure to protect our information technology infrastructure against cyber-based attacks, network security breaches, service interruptions, or data corruption could significantly disrupt our operations and adversely affect our business and operating results.
We rely on information technology and telephone networks and systems, including the Internet, to process and transmit sensitive electronic information and to manage or support a variety of business processes and activities, including sales, billing, customer service, procurement and supply chain, manufacturing, and distribution. We use enterprise information technology systems to record, process, and summarize financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal, and tax requirements. Our information technology systems, some of which are managed by third-parties, may be susceptible to damage, disruptions or shutdowns due to computer viruses, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, telecommunication failures, user errors or catastrophic events. We are not aware of any breaches of our information technology infrastructure. Despite the precautionary measures we have taken to prevent breakdowns in our information technology and telephone systems, if our systems suffer severe damage, disruption or shutdown and we are unable to effectively resolve the issues in a timely manner, our business and operating results may suffer.
We are subject to credit risk from our accounts receivable related to our product sales, which include sales within European countries that are currently experiencing economic turmoil.
The majority of our accounts receivable arise from product sales in the United States. However, we also have significant receivable balances from customers within the European Union, Japan, Brazil, and Argentina. Our accounts receivable in the United States are primarily due from public and private hospitals. Our accounts receivable outside of the United States are primarily due from public and private hospitals and to a lesser extent independent distributors. Our historical write-offs of accounts receivable have not been significant.
We monitor the financial performance and credit worthiness of our customers so that we can properly assess and respond to changes in their credit profile. Our independent distributors and sub-dealers operate in certain countries such as Greece and Italy, where economic conditions continue to present challenges to their businesses, and thus, could place in risk the amounts due to us from them. These distributors are owed amounts from public hospitals that are funded by their governments. Adverse financial conditions in these countries may continue, thus negatively affecting the length of time that it will take us to collect associated accounts receivable, or impact the likelihood of ultimate collection.
Consolidation in the health care industry could have an adverse effect on our revenues and results of operations.
The health care industry has been consolidating, and organizations such as GPOs, independent delivery networks, and large single accounts continue to consolidate purchasing decisions for many of our health care provider customers. As a result, transactions with customers are larger, more complex, and tend to involve more long-term contracts. The purchasing power of these larger customers has increased, and may continue to increase, causing downward pressure on product pricing. If we are not one of the providers selected by one of these organizations, we may be precluded from making sales to its members or participants. Even if we are one of the selected providers, we may be at a disadvantage relative to other selected providers that are able to offer volume discounts based on purchases of a broader range of medical equipment and supplies. Further, we may be required to commit to pricing that has a material adverse effect on our revenues and profit margins, business, financial condition and results of operations. We expect that market demand, governmental regulation, third-party reimbursement policies and societal pressures will continue to change the worldwide health care industry, resulting in further business consolidations and alliances, which may exert further downward pressure on the prices of our products and could adversely impact our business, financial condition, and results of operations.
If any future acquisitions or business development efforts are unsuccessful, our business may be harmed.
As part of our business strategy to be an innovative leader in the treatment of aortic disorders, we may need to acquire other companies, technologies, and product lines in the future. Acquisitions involve numerous risks, including the following:
the possibility that we will pay more than the value we derive from the acquisition, which could result in future non-cash impairment charges;
difficulties in integration of the operations, technologies, and products of the acquired companies, which may require significant attention of our management that otherwise would be available for the ongoing development of our business;

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the assumption of certain known and unknown liabilities of the acquired companies; and
difficulties in retaining key relationships with employees, customers, partners, and suppliers of the acquired company.

In addition, we may invest in new technologies that may not succeed in the marketplace. If they are not successful, we may be unable to recover our initial investment, which could include the cost of acquiring the license, funding development efforts, acquiring products, or purchasing inventory. Any of these would negatively impact our future growth and cash reserves.
Risks Related to Our Financial Condition
We have a history of operating losses and may be required to obtain additional funds to pursue our business strategy.
We have a history of operating losses and may need to seek additional capital in the future. We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 24 months. However, we may need to obtain additional financing to pursue our business strategy, to respond to new competitive pressures or to act on opportunities to acquire or invest in complementary businesses, products or technologies. Our cash requirements in the future may be significantly different from our current estimates and depend on many factors, including:
the results of our commercialization efforts for our existing and future products;
the revenues generated by our existing and future products;
the need for additional capital to fund future development programs;
the need to adapt to changing technologies and technical requirements, and the costs related thereto;
the costs involved in obtaining and enforcing patents or any litigation by third parties regarding intellectual property;
the establishment of high volume manufacturing and increased sales and marketing capabilities; and
whether we are successful if we enter into collaborative relationships with other parties.

In addition, we are required to make periodic interest payments to the holders of our senior convertible notes and to make payments of principal upon conversion or maturity. We may also be required to purchase our senior convertible notes from the holders thereof upon the occurrence of a fundamental change involving our company. To finance the foregoing, we may seek funds through borrowings or through additional rounds of financing, including private or public equity or debt offerings and collaborative arrangements with corporate partners. We may be unable to raise funds on favorable terms, or at all.
The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. If we borrow additional funds or issue debt securities, these securities could have rights superior to holders of our common stock, and could contain covenants that will restrict our operations. We might have to obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to our technologies, product candidates, or products that we otherwise would not relinquish. If we do not obtain additional resources, our ability to capitalize on business opportunities will be limited, and the growth of our business will be harmed.
Changes in the credit environment may adversely affect our business and financial condition.
Our ability to enter into or maintain existing financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products, or our customers become insolvent. Any deterioration in our key financial ratios, or non-compliance with financial covenants in existing credit agreements could also adversely affect our business and financial condition. While these conditions and the current economic instability have not meaningfully impaired our ability to access credit markets or our operations to date, continuing volatility in the global financial markets could increase borrowing costs or affect our ability to access the capital markets. Current or worsening economic conditions may also adversely affect the business of our customers, including their ability to pay for our products. This could result in a decrease in the demand for our products, longer sales cycles, slower adoption of new technologies, and increased price competition.
We have limited resources to invest in research and development and to grow our business and may need to raise additional funds in the future for these activities.
We believe that our growth will depend, in significant part, on our ability to develop new technologies for the treatment of AAA and other aortic disorders, and technology complementary to our current products. Our existing resources may not allow us to conduct all of the research and development activities that we believe would be beneficial for our future growth. As a result, we may need to seek funds in the future to finance these activities. If we are unable to raise funds on favorable terms, or

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at all, we may not be able to increase our research and development activities and the growth of our business may be negatively impacted.
The accounting method for convertible debt securities that may be settled in cash, such as our senior convertible notes, is the subject of recent changes that could have a material effect on our reported financial results.
In May 2008, the Financial Accounting Standards Board ("FASB"), issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as Accounting Standards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20. Under ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as our senior convertible notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for our senior convertible notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of such notes. As a result, we will be required to record a greater amount of non-cash interest expense in current periods presented as a result of the accretion of the discounted carrying value of our senior convertible notes to their face amount over the term of such notes. We will report lower net income in our financial results because ASC 470-20 will require interest to include both the current period’s accretion of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results and the market price of our common stock.
In addition, under certain circumstances, convertible debt instruments (such as the notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the notes, then our diluted earnings per share would be adversely affected.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our debt.
Our ability to make scheduled payments of the principal of, to pay interest on, to pay any cash due upon conversion of or to refinance our indebtedness, including the senior convertible notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
The expense and potential unavailability of insurance coverage for our company may have an adverse effect on our financial position and results of operations.
While we currently have insurance for our business, property, directors and officers, and product liability, insurance is increasingly costly and the scope of coverage is narrower, and we may be required to assume more risk in the future. If we are subject to claims or suffer a loss or damage in excess of our insurance coverage, we will be required to cover the amounts outside of or in excess of our insurance limits. If we are subject to claims or suffer a loss or damage that is outside of our insurance coverage, we may incur significant costs associated with loss or damage that could have an adverse effect on our financial position and results of operations. Furthermore, any claims made on our insurance policies may impact our ability to obtain or maintain insurance coverage at reasonable costs or at all. We do not have the financial resources to self-insure, and it is unlikely that we will have these financial resources in the foreseeable future. Our product liability insurance covers our products and business operations, but we may need to increase and expand this coverage commensurate with our expanding business.

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Risks Related to Regulation of Our Industry
Healthcare policy changes, including recent federal legislation to reform the United States healthcare system, may have a material adverse effect on us.
In response to perceived increases in health care costs in recent years, there have been and continue to be proposals by the federal government, state governments, regulators and third-party payors to control these costs and, more generally, to reform the United States healthcare system. Certain of these proposals could limit the prices we are able to charge for our products or the amounts of reimbursement available for our products and could limit the acceptance and availability of our products. Moreover, as discussed below, recent federal legislation would impose significant new taxes on medical device makers such as us. The adoption of some or all of these proposals, including the recent federal legislation, could have a material adverse effect on our financial position and results of operations.
On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (the “PPACA”). The total cost imposed on the medical device industry by the PPACA may be up to approximately $20 billion over ten years. The PPACA includes, among other things, a deductible 2.3% excise tax on any entity that manufactures or imports medical devices offered for sale in the United States, with limited exceptions, effective January 1, 2013. This excise tax will result in a significant increase in the tax burden on our industry, and if any efforts we undertake to offset the excise tax are unsuccessful, the increased tax burden could have an adverse affect on our results of operations and cash flows. Other elements of the PPACA, including comparative effectiveness research, an independent payment advisory board, payment system reforms including shared savings pilots and other provisions, may significantly affect the payment for, and the availability of, healthcare services and result in fundamental changes to federal healthcare reimbursement programs, any of which may materially affect numerous aspects of our business.
On December 18, 2015, President Obama signed the Consolidated Appropriations Act of 2016, which imposed a two-year moratorium on the 2.3% excise tax beginning on January 1, 2016 and ending on December 31, 2017. Upon the end of this period we believe the PPACA could continue to have an adverse affect on our results of operations and cash flows.
Our future success depends on our ability to develop, receive regulatory clearance or approval for, and introduce new products or product enhancements that will be accepted by the market in a timely manner.
It is important to our business that we continue to build a more complete product offering for treatment of AAA and other aortic disorders. As such, our success will depend in part on our ability to develop and introduce new products. However, we may not be able to successfully develop and obtain regulatory clearance or approval for product enhancements, or new products, or these products may not be accepted by physicians or the payors who financially support many of the procedures performed with our products.
The success of any new product offering or enhancement to an existing product will depend on several factors, including our ability to:
properly identify and anticipate physicians and patient needs;
develop and introduce new products or product enhancements in a timely manner;
avoid infringing upon the intellectual property rights of third parties;
demonstrate, if required, the safety and efficacy of new products with data from preclinical studies and clinical trials;
obtain the necessary regulatory clearances or approvals for new products or product enhancements;
be fully FDA-compliant with marketing of new devices or modified products;
provide adequate training to potential users of our products;
receive adequate coverage and reimbursement for procedures performed with our products; and
develop an effective and FDA-compliant, dedicated marketing and distribution network.

If we do not develop new products or product enhancements in time to meet market demand or if there is insufficient demand for these products or enhancements, our results of operations will suffer.
Our business is subject to extensive governmental regulation that could make it more expensive and time consuming for us to introduce new or improved products.

23



Our products must comply with regulatory requirements imposed by the FDA in the United States, and similar agencies in foreign jurisdictions. These requirements involve lengthy and detailed laboratory and clinical testing procedures, sampling activities, an extensive agency review process, and other costly and time-consuming procedures. It often takes several years to satisfy these requirements, depending on the complexity and novelty of the product. We also are subject to numerous additional licensing and regulatory requirements relating to safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. Some of the most important requirements we face include:
FDA Regulations (Title 21 CFR);
European Union CE mark requirements;
Other international regulatory approval requirements;
Medical Device Quality Management System Requirements (21 CFR 820, ISO 13485:2003, IOS 13485:2012, and other similar international regulations);
Occupational Safety and Health Administration requirements; and
California Department of Health Services requirements.

Government regulation may impede our ability to conduct continuing clinical trials and to manufacture our existing and future products. Government regulation also could delay our marketing of new products for a considerable period of time and impose costly procedures on our activities. The FDA and other regulatory agencies may not approve any of our future products on a timely basis, if at all. Any delay in obtaining, or failure to obtain, such approvals could negatively impact our marketing of any proposed products and reduce our product revenues.
Our products remain subject to strict regulatory controls on manufacturing, marketing and use. We may be forced to modify or recall our product after release in response to regulatory action or unanticipated difficulties encountered in general use. Any such action could have a material effect on the reputation of our products and on our business and financial position.
Further, regulations may change, and any additional regulation could limit or restrict our ability to use any of our technologies, which could harm our business. We could also be subject to new international, federal, state or local regulations that could affect our research and development programs and harm our business in unforeseen ways. If this happens, we may have to incur significant costs to comply with such laws and regulations, which will harm our results of operations.
The misuse or off-label use of our products may harm our image in the marketplace; result in injuries that lead to product liability suits, which could be costly to our business; or result in FDA sanctions if we are deemed to have engaged in promotion of such off-label uses.
The products we currently market have been cleared or approved by the U.S. FDA and international regulatory authorities for specific treatments and anatomies. We cannot, however, prevent a physician from using our products outside of those cleared/approved indications for use, known as “off-label” use. There may be increased risk of injury if physicians attempt to use our products off-label. We train our sales force to not promote our products for off-label uses. Furthermore, the use of our products for indications other than those cleared/approved by the FDA or international regulatory authorities may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.
Physicians may also misuse our products or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our products are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. Product liability claims could divert management’s attention from our core business, be expensive to defend, and result in sizable damage awards against us that may not be covered by insurance. If we are deemed by the FDA to have engaged in the promotion of our products for off-label use, we could be subject to FDA prohibitions on the sale or marketing of our products or significant fines and penalties, and the imposition of these sanctions could also affect our reputation and position within the industry. Any of these events could harm our business and results of operations and cause our stock price to decline.
Our products may in the future be subject to product recalls or voluntary market withdrawals that could harm our reputation, business and financial results.
The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture that could affect patient safety. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious adverse health consequences or death. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found or suspected. A government-mandated recall or voluntary recall by us or one of our

24



distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other issues. Recalls, which include corrections as well as removals, of any of our products would divert managerial and financial resources and could have an adverse effect on our financial condition, harm our reputation with customers, and reduce our ability to achieve expected revenues.
We are required to comply with medical device reporting (“MDR”) requirements and must report certain malfunctions, deaths, and serious injuries associated with our products, which can result in voluntary corrective actions or agency enforcement actions.
Under the FDA MDR regulations, medical device manufacturers are required to submit information to the FDA when they receive a report or become aware that a device has or may have caused or contributed to a death or serious injury or has or may have a malfunction that would likely cause or contribute to death or serious injury if the malfunction were to recur. All manufacturers placing medical devices on the market in the European Economic Area are legally bound to report any serious or potentially serious incidents involving devices they produce or sell to the regulatory agency, or Competent Authority, in whose jurisdiction the incident occurred. Were this to happen to us, the relevant regulatory agency would file an initial report, and there would then be a further inspection or assessment if there are particular issues.
Malfunction of our products could result in future voluntary corrective actions, such as recalls, including corrections, or customer notifications, or agency action, such as inspection or enforcement actions. If malfunctions do occur, we may be unable to correct the malfunctions adequately or prevent further malfunctions, in which case we may need to cease manufacture and distribution of the affected products, initiate voluntary recalls, and redesign the products. Regulatory authorities may also take actions against us, such as ordering recalls, imposing fines, or seizing the affected products. Any corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.
We may be subject to federal, state and foreign healthcare fraud and abuse laws and regulations, and a finding of failure to comply with such laws and regulations could have a material adverse effect on our business.
Our operations may be directly or indirectly affected by various broad federal, state or foreign healthcare fraud and abuse laws. In particular, the federal Anti-Kickback Statute prohibits any person from knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, in return for or to induce the referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of an item or service, for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. We are also subject to the federal HIPAA statute, which created federal criminal laws that prohibit executing a scheme to defraud any health care benefit program or making false statements relating to health care matters, and federal “sunshine” laws that require transparency regarding financial arrangements with health care providers, such as the reporting and disclosure requirements imposed by PPACA on drug manufacturers regarding any “transfer of value” made or distributed to prescribers and other health care providers.
In addition, the federal False Claims Act prohibits persons from knowingly filing, or causing to be filed, a false claim to, or the knowing use of false statements to obtain payment from the federal government. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Various states have also enacted laws modeled after the federal False Claims Act.
Many states have also, adopted laws similar to each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers as well as laws that restrict our marketing activities with physicians, and require us to report consulting and other payments to physicians. Some states mandate implementation of commercial compliance programs to ensure compliance with these laws. We also are subject to foreign fraud and abuse laws, which vary by country. For instance, in the European Union, legislation on inducements offered to physicians and other healthcare workers or hospitals differ from country to country. Breach of the laws relating to such inducements may expose us to the imposition of criminal sanctions.
The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Moreover, recent health care reform legislation has strengthened these laws. Further, we expect there will continue to be federal and state laws and/or regulations, proposed and implemented, that could impact our operations and business. The extent to which future legislation or regulations, if any, relating to health care fraud abuse laws and/or enforcement, may be enacted or what effect such legislation or regulation would have on our business remains uncertain. If our operations are found to be in violation of

25



any of the laws described above or any other governmental regulations that apply to us now or in the future, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from governmental health care programs, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results.
We may be subject to federal health information privacy and security laws and regulations, and a finding of failure to comply with such laws and regulations could have a material adverse effect on our business.
The HIPAA statute, and its implementing regulations, safeguard the privacy and security of individually-identifiable health information. Certain of Endologix’s operations may be subject to these requirements. Penalties for noncompliance with these rules include both criminal and civil penalties. In addition, the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”) expanded federal health information privacy and security protections. Among other things, HITECH makes certain of HIPAA’s privacy and security standards directly applicable to “business associates”-independent contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also set forth new notification requirements for health data security breaches, increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to enforce HIPAA and seek attorney’s fees and costs associated with pursuing federal civil actions.
Risks Related to Our Common Stock
We will be obligated to issue additional shares of our common stock to the former stockholders of Nellix as a result of our satisfaction of a certain milestone set forth in the merger agreement with Nellix and the other parties thereto, resulting in stock ownership dilution.
Under the terms of the merger agreement with Nellix and the other parties thereto, we agreed to issue additional shares of our common stock to the former stockholders of Nellix as contingent consideration upon our satisfaction of one or both of two milestones related to the Nellix System and described in the merger agreement, or upon a change of control of our company prior to our completion of one or both milestones. On June 17, 2014, we issued an additional 2.7 million shares of our common stock to the former stockholders of Nellix upon achievement of a revenue-based milestone. One additional regulatory related milestone remains, and the maximum aggregate number of shares of our common stock remaining issuable to the former Nellix stockholders upon our achievement of such regulatory milestone, or upon a change of control of our company prior to our achievement of such milestone, assuming the average per share closing price of our common stock (as determined under the terms of the Nellix merger agreement) at such time is 1.5 million shares.
Issuing additional shares of our common stock to the former stockholders in satisfaction of contingent consideration dilutes the ownership interests of holders of our common stock on the dates of such issuances. If we are unable to realize the strategic, operational and financial benefits anticipated from our acquisition of Nellix, our stockholders may experience dilution of their ownership interests in our company upon any such future issuances of shares of our common stock without receiving any commensurate benefit.
Our operating results may vary significantly from quarter to quarter, which may negatively impact our stock price in the future.
Our quarterly revenues and results of operations may fluctuate due to, among others, the following reasons:
physician acceptance of our products;
the conduct and results of clinical trials;
the timing and expense of obtaining future regulatory approvals;
fluctuations in our expenses associated with expanding our operations;
the introduction of new products by our competitors;
the timing of product launch may lead to excess or obsolete inventory;
supplier, manufacturing or quality problems with our devices;
the timing of stocking orders from our distributors;
changes in our pricing policies or in the pricing policies of our competitors or suppliers; and
changes in third-party payors’ reimbursement policies.


26



Because of these and possibly other factors, it is likely that in some future period our operating results will not meet investor expectations or those of public market analysts.
Any unanticipated change in revenues or operating results is likely to cause our stock price to fluctuate since such changes reflect new information available to investors and analysts. New information may cause investors and analysts to revalue our business, which could cause a decline in the trading price of our stock.
The price of our stock may fluctuate unpredictably in response to factors unrelated to our operating performance.
The stock market periodically experiences significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may cause the market price of our common stock to drop. In particular, the market price of securities of small medical device companies, like ours, has been very unpredictable and may vary in response to:
announcements by us or our competitors concerning technological innovations;
introductions of new products;
FDA and foreign regulatory actions;
developments or disputes relating to patents or proprietary rights;
maintain the effectiveness of our Quality System;
failure of our results of operations to meet the expectations of stock market analysts and investors;
changes in stock market analyst recommendations regarding our common stock;
the conversion of some or all of our senior convertible notes and any sales in the public market of shares of our common stock issued upon conversion of such notes;
changes in healthcare policy in the U.S. or other countries; and
general stock market and economic conditions and other factors unrelated to our operating performance.

These factors may materially and adversely affect the market price of our common stock.
Trading in our stock over the last twelve months has been limited, so investors may not be able to sell as much stock as they wish at prevailing prices.
The average daily trading volume in our common stock for the twelve months ended December 31, 2015 was approximately 783,287 shares. If limited trading in our stock continues, it may be difficult for investors to sell their shares in the public market at any given time at prevailing prices. Moreover, the market price for shares of our common stock may be made more volatile because of the relatively low volume of trading in our common stock. When trading volume is low, significant price movement can be caused by the trading of a relatively small number of shares. Volatility in our common stock could cause stockholders to incur substantial losses.
Some provisions of our charter documents and Delaware law may make takeover attempts difficult, which could depress the price of our stock and inhibit one’s ability to receive a premium price for their shares.
Provisions of our amended and restated certificate of incorporation could make it more difficult for a third party to acquire control of our business, even if such change in control would be beneficial to our stockholders. Our amended and restated certificate of incorporation allows our board of directors to issue up to five million shares of preferred stock and to fix the rights and preferences of such shares without stockholder approval. Any such issuance could make it more difficult for a third party to acquire our business and may adversely affect the rights of our stockholders. In addition, our board of directors is divided into three classes for staggered terms of three years. We are also subject to anti-takeover provisions under Delaware law, each of which could delay or prevent a change of control. Together these provisions may delay, deter or prevent a change in control of us, adversely affecting the market price of our common stock.

27



We do not anticipate declaring any cash dividends on our common stock.
We have never declared or paid cash dividends on our common stock and do not plan to pay any cash dividends in the near future. Our current policy is to retain all funds and any earnings for use in the operation and expansion of our business. Our revolving credit facility contains restrictions prohibiting us from paying any cash dividends without the lender’s prior approval. If we do not pay dividends, a return on one’s investment may only occur if our stock price rises above the price it was purchased.

Item 1B.
Unresolved Staff Comments

None.

Item 2.
Properties
On June 12, 2013, we 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 5 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. We received a rent abatement for the first nine months of the lease. Refer to Note 8 of the Notes to the Consolidated Financial Statements for further discussion of properties.

We leased two adjacent facilities aggregating approximately 57,000 square feet in Irvine, California under separate lease agreements where manufacturing was held. We exited one of these leases in December 2014 and the other lease in April 2015. The Company's Rosmalen facility is an administrative office of approximately 2,900 square feet and in August 2015, the Company extended the lease term for Rosmalen facility until December 2020.
As a result of our merger with TriVascular, we acquired approximately 110,000 square feet of research and development and manufacturing facilities in Santa Rosa, California under an operating lease scheduled to expire in February 2018, which may be renewed for an additional five years.
We believe that all of our facilities and equipment are in good condition, suitable and adequate for there purposes, and are maintained on a consistent basis for sound operations.

Item 3.     Legal Proceedings

Refer to Note 8 of the Notes to the Consolidated Financial Statements for discussion of legal proceedings.


Item 4.         Mine Safety Disclosures

Not applicable.


28



PART II

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

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

High

Low
Year Ended December 31, 2014



First Quarter
$
17.90


$
12.52

Second Quarter
15.21


11.89

Third Quarter
15.46


10.60

Fourth Quarter
15.79


10.66

Year Ended December 31, 2015



First Quarter
$
17.07


$
13.93

Second Quarter
17.92


15.04

Third Quarter
15.44


11.71

Fourth Quarter
13.98


8.54


On February 25, 2016 , the closing price of our common stock on the NASDAQ Global Select Market was $8.11 per share, and there were 210 holders of record of our common stock.
The following chart compares the yearly percentage change in the cumulative total stockholder return on our common stock for the period from December 31, 2010 through December 31, 2015 , with the cumulative total return on the NASDAQ Composite Index and the NASDAQ Medical Equipment Index for the same period. The comparison assumes $100 was invested on December 31, 2010 in our common stock at the then closing price of $7.15 per share.
 
Comparison of 5 Year Cumulative Total Return*
Among Endologix, Inc., the NASDAQ Composite Index, and the NASDAQ Medical Equipment Index
*$100 invested on December 31, 2010 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Dividend Policy
We have never paid any dividends. We currently intend to retain all earnings, if any, for use in the expansion of our business and therefore do not anticipate paying any dividends in the foreseeable future. Additionally, the terms of our credit facility with Bank of America prohibit us from paying cash dividends without their consent.
 

29



Item 6.
Selected Financial Data
The following selected consolidated financial data has been derived from our audited Consolidated Financial Statements. The audited Consolidated Financial Statements for the fiscal years ended December 31, 2015, 2014, and 2013 are included elsewhere in this Annual Report on Form 10-K. The information set forth below should be read in conjunction with "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 and the Consolidated Financial Statements and Notes thereto in Item 8 .
 
Year Ended December 31,
 
 
2015

2014

2013

2012

2011
 
 
(In thousands, except per share data)


 
Consolidated Statement of Operations Data:









 
Revenue
$
153,612


$
147,588


$
132,257


$
105,946


$
83,417

 
Cost of goods sold
51,821


41,801


32,750


25,282


18,746

 
Gross profit
101,791


105,787


99,507


80,664


64,671

 
Operating expenses:









 
Research and development
26,421


21,616


16,199


16,571


16,738

 
Clinical and regulatory affairs
15,418


13,243


8,679


6,343


4,439

 
Marketing and sales
78,213


73,411


63,588


53,953


44,655

 
General and administrative
29,581


26,663


21,409


20,266


15,525

 
Contract termination and business acquisition expenses
5,071






422


1,730

 
       Settlement costs






5,000



 
Total operating expenses
154,704


134,933


109,875


102,555


83,087

 
Loss from operations
(52,913
)

(29,146
)

(10,368
)

(21,891
)

(18,416
)
 
Total other income (expense)
(6,848
)

(3,334
)

(5,710
)

(13,352
)

(10,400
)
 
Net loss before income tax benefit (expense)
(59,761
)

(32,480
)

(16,078
)

(35,243
)

(28,816
)
 
Income tax benefit (expense)
9,337


62


10


(531
)

86

 
Net loss
$
(50,424
)

$
(32,418
)

$
(16,068
)

$
(35,774
)

$
(28,730
)
 
Basic and diluted net loss per share


$
(0.75
)

$
(0.50
)

$
(0.26
)

$
(0.60
)

$
(0.51
)
 
Shares used in computing basic and diluted loss per share
67,671


65,225


62,607


59,811


56,592

 
 
 
 
 
December 31,
 
 
2015

2014

2013

2012

2011
 
Consolidated Balance Sheet Data:
(In thousands)
 
Cash and cash equivalents and marketable securities
$
177,321


$
86,669


$
126,465


$
45,118


$
20,035

 
Accounts receivable, net
$
28,531


$
26,113


$
24,972


$
22,600


$
15,542

 
Total assets
$
335,817


$
248,209


$
256,197


$
165,103


$
130,255

 
Convertible Notes
$
172,515

 
$
70,407


$
67,101


$


$

 
Total liabilities
$
232,510


$
124,059


$
151,556


$
70,629


$
53,686

 
Accumulated deficit
$
298,924


$
248,500


$
216,082


$
200,014


$
164,240

 
Total stockholders’ equity
$
103,307


$
124,150


$
104,641


$
94,474


$
76,569

 

30



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

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

Overview
Our Business
Our corporate headquarters and manufacturing facility is located in Irvine, California. We develop, manufacture, market, and sell innovative medical devices for the treatment of aortic disorders. Our principal products are intended for the treatment of abdominal aortic aneurysms ("AAA"). Our AAA products are built on one of two platforms: (1) traditional minimally-invasive endovascular repair ("EVAR") or (2) endovascular sealing (“EVAS”), our innovate solution for sealing the aneurysm sac while maintaining blood flow through two blood flow lumens.
We sell our products through (i) our direct U.S. and European sales forces and (ii) third-party international distributors and agents in other parts of the world.

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

Endologix®, AFX® and Nellix® are registered trademarks of Endologix, Inc., and Intuitrak™, VELA™ and the respective product logos are trademarks of Endologix, Inc.
2015 Overview
2015 was an important year of advancing our new product pipeline, global expansion, and business development. A solid year in the U.S. combined with strong results in international markets, resulted in 4% annual revenue growth, 8% on a constant currency basis. We also made substantial progress with our new product pipeline, positioning us for product launches in 2016. On February 3, 2016, we consummated the merger with TriVascular which expanded our sales force, product pipeline and new technologies to enhance our growth.
Characteristics of Our Revenue and Expenses
Revenue
Revenue is derived from sales of our EVAR and EVAS products (including extensions and accessories) to hospitals upon completion of each AAA repair procedure, or from sales to distributors upon title transfer (which is typically at shipment), provided our other revenue recognition criteria have been met.
Cost of Goods Sold
Cost of goods sold includes compensation (including stock-based compensation) and benefits of production personnel and production support personnel. Cost of goods sold also includes depreciation expense for production equipment, production materials and supplies expense, allocated facilities-related expenses, and certain direct costs such as shipping.
Research and Development
Research and development expenses consist of compensation (including stock-based compensation) and benefits for research and development personnel, materials and supplies, research and development consultants, outsourced and licensed

31



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, regulatory costs related to registration and approval activities, and allocated facilities-related costs. Our clinical and regulatory activities primarily relate to gaining regulatory approval for the commercialization of our devices.
Marketing and Sales
Marketing and Sales expenses primarily consist of compensation (including stock-based compensation) and benefits for our sales force, clinical specialist, 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 and legal fees, financial audit fees, insurance, recruiting fees, other professional services, the federal Medical Device Excise Tax, and allocated facilities-related expenses.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. While management believes these estimates are reasonable and consistent, they are by their very nature, estimates of amounts that will depend on future events. Accordingly, actual results could differ from these estimates. Our Audit Committee of the Board of Directors periodically reviews our significant accounting policies. Our critical accounting policies arise in conjunction with the following:
Revenue recognition and accounts receivable
Inventory - lower of cost or market
Goodwill and intangible assets - impairment analysis
Income taxes
Stock-based compensation
Contingent consideration for business acquisition
Litigation accruals
Revenue Recognition and Accounts Receivable
We recognize revenue when all of the following criteria are met:
We have appropriate evidence of a binding arrangement with our customer;
The sales price for our EVAR and EVAS products (including extensions and accessories) is established with our customer;
Our EVAR and EVAS product has been used by the hospital in an AAA repair procedure, or our distributor
has assumed title with no right of return, as applicable; and
Collection from our customer is reasonably assured at the time of sale.

For sales made to a direct customer (i.e., hospitals), we recognize revenue upon completion of an AAA repair procedure, when our EVAR or EVAS product is implanted in a patient. For sales to distributors, we recognize revenue at the time of title transfer, which is typically at shipment. We do not offer any right of return to our customers, other than honoring our standard warranty.


32



We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to pay amounts due. These estimates are based on our review of the aging of customer balances, correspondence with the customer, and the customer's payment history.
Inventory - Lower of Cost or Market
We adjust our inventory value for estimated amounts of obsolete or unmarketable items. Such assumptions involve projections of future customer demand, as driven by economic and market conditions, and the product's shelf life. If actual demand, or economic or market conditions are less favorable than those projected by us, additional inventory write-downs may be required.
Goodwill and Intangible Assets - Impairment Analysis
Goodwill and other intangible assets with indefinite lives are not subject to amortization, but are tested for impairment
annually as of June 30, or whenever events or changes in circumstances indicate that the asset might be impaired.
We evaluate the possible impairment of definite-lived intangible assets if/when events or changes in circumstances occur that indicate that the carrying value of assets may not be recoverable. The impairment reviews require significant estimates about fair value, including estimates of future cash flows, selection of appropriate discount rates, and estimates of long-term growth rates. If actual results, or the forecasts and estimates used in future impairment analysis, are lower than the original estimates used to assess the recoverability of these assets, we could incur impairment charges.
Income Taxes
Our consolidated balance sheets reflect net deferred tax assets that primarily represent the tax benefit of net operating loss carryforwards and credits and timing differences between book and tax recognition of certain revenue and expense items, net of a valuation allowance. When it is more likely than not that all or some portion of deferred tax assets may not be realized, we establish a valuation allowance for the amount that may not be realized. Each quarter, we evaluate the need to retain all or a portion of the valuation allowance on our net deferred tax assets. Our evaluation considers historical earnings, estimated future taxable income and ongoing prudent and feasible tax planning strategies. Adjustments to the valuation allowance increase or decrease net income or loss in the period such adjustments are made. If our estimates require adjustments, it could have a significant impact on our consolidated financial statements.
Changes in tax laws and rates could also affect recorded deferred tax assets in the future. Management is not aware of any such changes that would have a material effect on our consolidated financial statements.
Stock-Based Compensation
We recognize stock-based compensation expense for employees based on fair value at the date of grant. For awards granted to consultants, the award is marked-to-market each reporting period, with a corresponding adjustment to stock-based compensation expense. The fair value of equity awards that are expected to vest is amortized on a straight-line basis over (i) the requisite service period or (ii) the period from grant date to the expected date of the completion of the performance condition for vesting of the award. Stock-based compensation expense recognized is net of an estimated forfeiture rate, which is updated as appropriate.
We use the Black-Scholes option pricing model to value stock option grants. The Black-Scholes option pricing model requires the input of subjective assumptions, including the expected volatility of our common stock, expected risk-free interest rate, and the option's expected life. The fair value of our restricted stock is based on the closing market price of our common stock on the date of grant. A portion of restricted stock vesting is dependent on us achieving certain regulatory and financial milestones. We use judgment in estimating the likelihood and timing of achieving these milestones. Each period, we will reassess the likelihood and estimate the timing of reaching these milestones, and will adjust expense accordingly.

Contingent Consideration for Business Acquisition
We determine the fair value of contingently issuable common stock related to the Nellix acquisition using a probability-based income approach and an appropriate discount rate. Changes in the fair value of the contingently issuable common stock are determined each period end and recorded in the other income (expense) section of the Consolidated Statements of Operations and Comprehensive Loss and the current and non-current liabilities section of the Consolidated Balance Sheet. The fair value of the contingent consideration liability could be impacted by changes such as: (i) fluctuations in the price of our common stock, or (ii) the timing of achieving the underlining milestones.
Litigation Accruals
From time to time we are involved in various claims and legal proceedings of a nature considered normal and

33



incidental to our business. These matters may include product liability, intellectual property, employment, and other general
claims. We accrue for contingent liabilities when it is probable that a liability has been incurred and the amount can
be reasonably estimated. The accruals are adjusted periodically as assessments change or as additional information becomes
available.
 
Results of Operations
Operations Overview - 2015 , 2014 , and 2013
The following table presents our results of continuing operations and the related percentage of the period's revenue (in thousands):

Year Ended December 31,

2015

2014

2013
Revenue
$
153,612


100.0%

$
147,588


100.0%

$
132,257


100.0%
Cost of goods sold
51,821


33.7%

41,801


28.3%

32,750


24.8%
Gross profit
101,791


66.3%

105,787


71.7%

99,507


75.2%
Operating expenses:











Research and development
26,421


17.2%

21,616


14.6%

16,199


12.2%
Clinical and regulatory affairs
15,418


10.0%

13,243


9.0%

8,679


6.6%
Marketing and sales
78,213


50.9%

73,411


49.7%

63,588


48.1%
General and administrative
29,581


19.3%

26,663


18.1%

21,409


16.2%
Contract termination and business acquisition expenses
5,071


3.3%



—%



—%
Total operating expenses
154,704


100.7%

134,933


91.4%

109,875


83.1%
     Loss from operations
(52,913
)

(34.4)%

(29,146
)

(19.7)%

(10,368
)

(7.8)%
Total other income (expense)
(6,848
)

(4.5)%

(3,334
)

(2.3)%

(5,710
)

(4.3)%
Net loss before income tax benefit
(59,761
)

(38.9)%

(32,480
)

(22.0)%

(16,078
)

(12.2)%
Income tax benefit
9,337


6.1%

62


—%

10


—%
Net loss
$
(50,424
)

(32.8)%

$
(32,418
)

(22.0)%

$
(16,068
)

(12.1)%
Year Ended December 31, 2015 versus December 31, 2014
Revenue

 
Year Ended December 31,
 

 


 
2015
 
2014
 
Variance
 
Percent Change

 
(in thousands)
 

 

Revenue
 
$
153,612

 
$
147,588

 
$
6,024

 
4.1%
Our 4.1% revenue increase of $6.0 million over the prior year period primarily resulted from:
(i) a $2.9 million increase in ROW sales volume driven by new distributor contract in Japan; and
(ii) a $2.0 million increase in Europe sales volume due to strong sales growth related to Nellix offsetting unfavorable foreign currency; and
(iii) a $1.1 million increase in U.S. due to continued physician adoption of AFX.
Our 2015 revenue includes an unfavorable foreign currency impact of $5.7 million when compared to 2014, representing revenue growth of 8% on constant currency basis.

34



Cost of Goods Sold, Gross Profit, and Gross Margin Percentage

 
Year Ended December 31,
 

 


 
2015
 
2014
 
Variance
 
Percent Change

 
(in thousands)
 

 

Cost of goods sold
 
$
51,821

 
$
41,801

 
$
10,020

 
24.0%
Gross profit
 
101,791

 
105,787

 
(3,996
)
 
(3.8)%
Gross margin percentage (gross profit as a percent of revenue)
 
66.3
%
 
71.7
%
 
(5.4
)%
 

The $10.0 million increase in cost of goods sold was driven by our revenue increase of $6.0 million and $7.9 million inventory write-offs for 2015.
Gross margin for the year ended December 31, 2015 decreased to 66.3% from 71.7% in prior year. The increase in cost of goods sold, and corresponding decrease to gross margin, is largely due to a $7.9 million increase in the reserve for product inventory related to our global transition to DURAPLY™ ePTFE Graft Material for the AFX® Endovascular AAA System, a reserve for product inventory related to product transition and a provision for Nellix inventory that will become obsolete due to quality and process improvements. The decrease is also due to product and geography mix with a greater proportion of sales from international markets, which have lower average selling prices; in addition, Nellix has a higher cost to produce compared to AFX.
Operating Expenses

 
Year Ended December 31,
 

 


 
2015
 
2014
 
Variance
 
Percent Change

 
(in thousands)
 

 

Research and development
 
$
26,421

 
$
21,616

 
$
4,805

 
22.2%
Clinical and regulatory affairs
 
15,418

 
13,243

 
2,175

 
16.4%
Marketing and sales
 
78,213

 
73,411

 
4,802

 
6.5%
General and administrative
 
29,581

 
26,663

 
2,918

 
10.9%
Contract termination and business acquisition expenses
 
5,071

 


5,071

 
100.0%
Research and development. The $4.8 million increase in research and development expenses was attributable to increased personnel, facility costs and continued product development investments related to Nellix and AFX.
Clinical and regulatory affairs. The $2.2 million increase in clinical and regulatory affairs was primarily driven by increased personnel, and costs related to the support of our ongoing clinical activities, such as EVAS FORWARD IDE and LEOPARD.
Marketing and sales . The $4.8 million increase in marketing and sales expense, was driven by costs related to continued growth and development of our worldwide direct sales force, travel and tradeshows and other global marketing activities. Our 2015 marketing and sales expenses include a favorable foreign currency impact of $3.0 million when compared to 2014.
General and administrative . The $3.0 million increase in general and administrative expenses is attributable to additional personnel in U.S. and Europe to support our business growth, professional fees, litigation costs, stock-based compensation and investment in information technology projects. Our 2015 general and administrative expenses include a favorable foreign currency impact of $0.6 million when compared to 2014.
Contract termination and business acquisition. The $5.1 million increase in contract termination and business acquisition expense was attributable to $3.1 million for our Trivascular business acquisition and $1.9 million for a contract termination fee with a distributor in Japan.

35



Other income (expense), net


Year Ended December 31,






2015

2014

Variance

Percent Change


(in thousands)




Other income (expense), net

$
(6,848
)

$
(3,334
)

$
(3,514
)

105.4%
Other income (expense), Net. Other Expense for the year ended December 31, 2015 includes interest expense associated with our convertible notes of $7.5 million due to interest on 2.25% Convertible Senior Notes (the “2.25% Senior Notes”) and 3.25% Convertible Senior Notes (the “3.25% Senior Notes”), a non-cash expense of $0.1 million related to the fair value of the Nellix contingent consideration offset by $0.5 million  currency re-measurement gain of certain assets and liabilities that were not transacted in the functional currency of the corresponding operating entity and $0.2 million on interest income. Other expense for the year ended December 31, 2014 includes a $5.7 million currency re-measurement loss of certain assets and liabilities that were not transacted in the functional currency of the corresponding operating entity, along with interest expense associated with our 2.25% Senior Notes of $5.7 million. This is offset by a non-cash benefit of $7.9 million, which reflects a decrease in the fair value of the Nellix contingent consideration, related to the decrease in our stock price during the year ended December 31, 2014.
Provision for Income Taxes


Year Ended December 31,






2015

2014

Variance

Percent Change


(in thousands)




Income tax benefit

$
9,337


$
62


$
9,275


>100%
For the twelve months ended December 31, 2015 , our provision for income taxes was a $9.3 million benefit and our effective tax rate was 15.6% for the year ended December 31, 2015 . The increase in our income tax benefit of $9.3 million was due to our recognition of a deferred tax liability of $9.6 million as a result of the temporary difference between the carrying value and the tax basis of the 3.25% Senior Notes. This liability which was recorded as an adjustment to the additional paid-in capital resulted in a reduction of our valuation allowance which was recorded as a benefit to income tax expense in 2015.
Year Ended December 31, 2014 versus December 31, 2013
Revenue


Year Ended December 31,






2014

2013

Variance

Percent Change


(in thousands)




Revenue

$
147,588


$
132,257


$
15,331


11.6%
Our 11.6% revenue increase of $15.3 million over the prior year period resulted from volume increases caused by:
(i) a $13.0 million increase in Europe due to the expansion of our European sales force and market introduction of our Nellix System in February 2013;
(ii) a $3.1 million increase in U.S. due to Nellix clinical sales of $2.0 million. The remaining increase is due to continued physician adoption of AFX which was launched in the U.S. in August 2011; and
(iii) a $0.8 million decrease in ROW as a result of lower in sales volume to Japan, partially offset by an increase in sales volume to Latin America.
Cost of Goods Sold, Gross Profit, and Gross Margin Percentage


Year Ended December 31,






2014

2013

Variance

Percent Change


(in thousands)




Cost of goods sold

$
41,801


$
32,750


$
9,051


27.6%
Gross profit

105,787


99,507


6,280


6.3%
Gross margin percentage (gross profit as a percent of revenue)

71.7
%

75.2
%

(3.5
)%



36



The $9.1 million increase in cost of goods sold was driven by our revenue increase of $15.3 million .

Gross margin for the year ended December 31, 2014 decreased to 71.7% from 75.2% in prior year. The decrease is primarily due to the inventory write-off of $4.7 million in the third quarter of 2014, for product inventory that was replaced with our new DURAPLY™ ePTFE Graft Material for the AFX® Endovascular AAA System. The decrease is also due to product and geography mix with a greater proportion of sales from international markets, which have lower average selling prices; in addition, Nellix has a higher cost to produce compared to AFX.
Operating Expenses


Year Ended December 31,






2014

2013

Variance

Percent Change


(in thousands)




Research and development

$
21,616


$
16,199


$
5,417


33.4%
Clinical and regulatory affairs

13,243


8,679


4,564


52.6%
Marketing and sales

73,411


63,588


9,823


15.4%
General and administrative

26,663


21,409


5,254


24.5%
Research and development. The $5.4 million increase in research and development expenses was attributable to increased personnel, facility costs and continued product development investments related to Nellix and AFX.
Clinical and regulatory affairs. The $4.6 million increase in clinical and regulatory affairs was primarily driven by increased personnel, and costs related to the support of our ongoing clinical trials. In Q4, we also incurred business development costs of $2.5 million for the rights to acquire future regulatory approval of AFX in Japan.
Marketing and sales . The $9.8 million increase in marketing and sales expense, was driven by costs related to continued growth and development of our worldwide direct sales force, travel and tradeshows and other marketing costs to support our business.
General and administrative . The $5.3 million increase in general and administrative expenses is attributable to additional personnel in U.S. and Europe to support our business growth, professional fees, audit fees, and increased stock-based compensation expense.
Other income (expense), net


Year Ended December 31,






2014

2013

Variance

Percent Change


(in thousands)




Other income (expense), net

$
(3,334
)

$
(5,710
)

2,376


(41.6)%
Other income (expense), Net. Other Income for the year ended December 31, 2014 includes a $5.7 million currency remeasurement loss of certain assets and liabilities that were not transacted in the functional currency of the corresponding operating entity, along with interest expense associated with our convertible notes of $5.7 million . This is offset by a non-cash benefit of $7.9 million , which reflects a decrease in the fair value of the Nellix contingent consideration, related to the decrease in our stock price during the year ended December 31, 2014.
Provision for Income Taxes


Year Ended December 31,






2014

2013

Variance

Percent Change


(in thousands)




Income tax benefit

$
62


$
10


$
52


>100%
For the twelve months ended December 31, 2014 , our provision for income taxes was $62,000 and our effective tax rate was 0.2% for the year ended December 31, 2014 . During the twelve months ended December 31, 2014 and 2013, we had operating legal entities in the U.S., Italy, New Zealand, and The Netherlands (plus registered sales branches of our Dutch entity in certain countries in Europe). During the twelve months ended December 31, 2014, we also had an operating legal entity in Poland.
 

37



Liquidity and Capital Resources
The chart provided below summarizes selected liquidity data and metrics as of December 31, 2015, 2014, and 2013 :

December 31, 2015

December 31, 2014

December 31, 2013

(in thousands, except financial metrics data)
Cash and cash equivalents
$
124,553


$
26,798


$
95,152

Marketable securities
$
52,768


$
59,871


$
31,313

Accounts receivable, net
$
28,531


$
26,113


$
24,972

Total current assets
$
237,461


$
147,767


$
173,633

Total current liabilities
$
50,855


$
29,624


$
67,335

Working capital surplus (a)
$
186,606


$
118,143


$
106,298

Current ratio (b)
4.7


5.0


2.6

Days sales outstanding ("DSO") (c)
67


62


65

Inventory turnover (d)
1.8


1.6


1.7

(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) net accounts receivable at period end divided by revenue for the fourth quarter multiplied by 92 days.
(d) cost of goods sold divided by the average inventory balance for the corresponding period.

Year Ended December 31, 2015 versus December 31, 2014

Operating Activities
Cash used in operating activities was $31.1 million for the year ended December 31, 2015 , as compared to cash used in operating activities of $26.3 million in the prior year period. The increase in cash usage was primarily due to (i) funding the increased net loss of  $50.4 million , (ii) an increase in accounts receivable and other receivables of  $3.2 million and (iii) non-cash deferred income taxes of $9.6 million . These increases in cash usage were partially offset by non-cash stock-based compensation of  $9.3 million , depreciation and amortization of  $5.9 million , a decrease in inventory expenditures of $3.5 million , an increase in accounts payable of  $8.3 million  and non-cash accretion of interest on convertible note of  $4.3 million .
During the twelve months ended December 31, 2015 and 2014 , our cash collections from customers totaled $152.7 million and $147.4 million , respectively, representing 99% and 100% of reported revenue for the same periods.
Investing Activities
Cash provided by investing activities for the twelve months ended December 31, 2015 was $2.9 million and consisted of proceeds from maturity of marketable securities of $89.7 million . This is offset by (i) purchases of marketable securities of $82.6 million and (ii) machinery and equipment purchases for $4.2 million .
Financing Activities
Cash provided by financing activities was $126.7 million for the twelve months ended December 31, 2015 , as compared to cash provided by financing activities of $2.1 million in the prior year period. Cash provided by financing activities for twelve months ended December 31, 2015 consisted of (i) proceeds of $3.0 million from our sale of stock through our employee stock purchase plan; (ii) proceeds of $2.9 million from the exercise of stock options; and (iii) net proceeds from issuance of convertible debt of 121.4 million , offset by  $0.5 million  used to pay minimum tax withholdings on behalf of employees for restricted stock units vested during the period. For the twelve months ended December 31, 2014 , cash provided by financing activities was $2.1 million and consisted of (i) proceeds of $2.6 million  from our sale of stock through our employee stock purchase plan and (ii) proceeds of  $1.8 million  from the exercise of stock options, offset in part by $2.3 million used to pay minimum tax withholdings on behalf of employees for restricted stock units vested during the period.

38




Year Ended December 31, 2014 versus December 31, 2013

Operating Activities
Cash used in operating activities was $26.3 million for the year ended December 31, 2014 , as compared to cash provided by operating activities of $1.5 million in the prior year period. The decrease in cash provided by operating activities is primarily a function of (i) an increase in inventory expenditures of $12.5 million; and (ii) change in contingent consideration for Nellix Purchase of $7.9 million as compared to cash provided in the prior period of $8.5 million (discussed in Note 9 of the Notes to the Consolidated Financial Statements); offset primarily by accretion on interest related to convertible notes of $3.3 million; and non-cash foreign exchange unrealized losses of $5.7 million as compared to a gain in the prior period of $1.7 million.
During the twelve months ended December 31, 2014 and 2013, our cash collections from customers totaled $147.4 million and $129.7 million, respectively, representing 100% and 98% of reported revenue for the same periods.
Investing Activities
Cash used in investing activities for the twelve months ended December 31, 2014 was $43.3 million and consisted of (i) purchases of marketable securities of $121.0 million; (ii) machinery and equipment purchases for $13.5 million; and (iii) purchase of Intuitrak Shonin for $1.0 million. That is offset by maturity of marketable securities of $92.2 million. Cash used in investing activities for the twelve months ended December 31, 2013 was $34.2 million and consisted of (i) purchase of marketable securities for $31.3 million; and (ii) machinery and equipment for $2.9 million.
Financing Activities
Cash provided by financing activities was $2.1 million for the twelve months ended December 31, 2014 , as compared to cash provided by financing activities of $82.5 million in the prior year period. Cash provided by financing activities for twelve months ended December 31, 2014 consisted of (i) proceeds of $2.6 million from our sale of stock through our employee stock purchase plan and (ii) proceeds of $1.8 million from the exercise of stock options, offset in part by $2.3 million used to pay minimum tax withholdings on behalf of employees for restricted stock units vested during the period. For the twelve months ended December 31, 2013, cash provided by financing activities consisted primarily of $86.3 million of net proceeds from the public offering that occurred on December 10, 2013.

Credit Arrangements
See Note 6 of the Notes to the Consolidated Financial Statements. T he Company was in compliance with all debt covenants as of December 31, 2015 .
Future Capital Requirements
We believe that the future growth of our business will depend upon our ability to successfully develop new technologies for the treatment of aortic disorders and successfully bring these technologies to market. We expect to incur significant expenditures in completing product development and clinical trials for the Nellix EVAS System. Also, as a result of the completion of the merger with TriVascular, our future capital requirements are expected to increase.
The timing and amount of our future capital requirements will depend on many factors, including:
the need for working capital to support our sales growth;
the need for additional capital to fund future development programs;
the need for additional capital to fund our sales force expansion;
the need for additional capital to fund strategic acquisitions;
our requirements for additional facility space or manufacturing capacity;
our requirements for additional information technology infrastructure and systems; and
adverse outcomes from potential litigation and the cost to defend such litigation.
 
We believe that our world-wide cash resources are adequate to operate our business. We presently have several operating subsidiaries outside of the U.S. As of December 31, 2015 , these subsidiaries hold an aggregate $8.0 million in foreign bank accounts to fund their local operations. These balances related to undistributed earnings, are deemed by management to be permanently reinvested in the corresponding country in which our subsidiary operates. Management has no present or planned intention to repatriate foreign earnings into the U.S. However, in the event that we required additional funds in the U.S. and had to repatriate any foreign earnings to meet those needs, we would then need to accrue, and ultimately pay, incremental

39



income tax expenses on such “deemed dividend,” unless we then had sufficient net operating losses to offset this potential tax liability.
In the event we require additional financing in the future, it may not be available on commercially reasonable terms, if at all. Even if we are able to obtain financing, it may cause substantial dilution (in the case of an equity financing), or may contain burdensome restrictions on the operation of our business (in the case of debt financing). If we are not able to obtain required financing, we may need to curtail our operations and/or our planned product development.
Contractual Obligations
Contractual obligation payments by year with initial terms in excess of one year were as follows as of December 31, 2015 (in thousands):
 
Payments due by period
 
 
Contractual Obligations
Total
2016
2017
2018
2019
2020
2021 and thereafter
Long-term debt obligations
$211,250
$—
$—
$86,250
$—
$125,000
$—
Interest on debt obligations
26,135
6,003
6,003
6,003
4,063
4,063
Operating lease obligations
35,125
2,500
2,462
2,389
2,390
2,500
22,884
Total
$272,510
$8,503
$8,465
$94,642
$6,453
$131,563
$22,884
Refer to Note 6 of the Notes to the Consolidated Financial Statements for a discussion of long-term debt obligations and Note 8 of the Notes to the Consolidated Financial Statements for a discussion of operating lease obligations.

Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements (except for operating leases) that provide financing, liquidity, market or credit risk support, or involve derivatives. In addition, we have no arrangements that may expose us to liability that are not expressly reflected in the accompanying Consolidated Financial Statements.
As of December 31, 2015 , we did not have any relationships with unconsolidated entities or financial partnerships, often referred to as "structured finance" or "special purpose entities," established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not subject to any material financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We do not believe that we currently have material exposure to interest rate or foreign currency transaction risks.
Interest Rate Risk. We have investments in U.S. Government and agency securities, corporate bonds and other debt securities. As a result, we are exposed to potential loss from market risks that may occur as a result of changes in interest rates, changes in credit quality of the issuer or otherwise.
We generally place our marketable security investments in high quality credit instruments, as specified in our investment policy guidelines. A hypothetical 100 basis point decrease in interest rates would result in an approximate $170,663 increase in the fair value of our investments as of December 31, 2015 . We believe, however, that the conservative nature of our investments mitigates our interest rate exposure, and our investment policy limits the amount of our credit exposure to any one issuer (with the exception of U.S. agency obligations) and type of instrument. We do not expect any material loss from our marketable security investments and therefore believe that our potential interest rate exposure is limited. We intend to hold the majority of our investments to maturity, in accordance with our business plans.
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.
We are also exposed to market risk for changes in interest rates on our credit facility with Bank of America, N.A. (the “BofA Credit Facility”). All outstanding amounts under the BofA Credit Facility bear interest at a variable rate equal to the LIBOR Daily Floating Rate plus 2.50 percentage point(s). As of December 31, 2015 , we had no amounts outstanding under the BofACredit Facility. However, if we draw down the BofA Credit Facility, we may be exposed to market risk due to changes in the rate at which interest accrues.

40



Our Senior Notes bear fixed interest rates, and therefore, would not be subject to interest rate risk. The capped call transactions are derivative instruments that qualify for classification within stockholders’ equity because they meet an exemption from mark-to-market derivative accounting. The settlement amounts for the capped call transactions are each determined based upon the difference between a strike price and a traded price of the Company’s common stock.
Foreign Currency Transaction Risk. While a majority of our business is denominated in the U.S. dollar, a portion of our revenues and expenses are denominated in foreign currencies. Fluctuations in the rate of exchange between the U.S. dollar and the Euro or the British Pound Sterling may affect our results of operations and the period-to-period comparisons of our operating results. Foreign currency transaction gains and losses are caused by transactions denominated in a currency other than the functional currency and must be remeasured at each balance sheet date or upon settlement. Foreign currency transaction realized and unrealized gains and losses resulted in approximately $0.5 million of gain in 2015 , primarily related to intercompany payables and receivables associated with our European operations. We expect to continue to limit our exposure through future settlements.

41




Item 8.         Financial Statements and Selected Supplementary Data

ENDOLOGIX, INC.
FORM 10-K ANNUAL REPORT
For the Fiscal Year Ended December 31, 2015

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Item
Page

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

42



Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Endologix, Inc.:
We have audited the accompanying consolidated balance sheets of Endologix, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule of valuation and qualifying accounts. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Endologix, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Endologix, Inc’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 
/s/ KPMG LLP

February 26, 2016
Irvine, California


43



Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Endologix, Inc.:
We have audited Endologix, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Endologix, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Endologix, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Endologix, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015, and our report dated February 26, 2016 , expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

February 26, 2016
Irvine, California

44



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



December 31,


2015

2014
ASSETS




Current assets:




Cash and cash equivalents

$
124,553


$
26,798

Marketable securities

52,768


59,871

Accounts receivable, net of allowance for doubtful accounts of $226 and $185, respectively

28,531


26,113

Other receivables

375


498

Inventories

27,860


31,325

Prepaid expenses and other current assets

3,374


3,162

Total current assets

$
237,461


$
147,767

Property and equipment, net

23,355


25,696

Goodwill

28,685


28,866

Intangibles, net

42,118


43,465

Deposits and other assets

4,198


2,415

Total assets

$
335,817


$
248,209






LIABILITIES AND STOCKHOLDERS’ EQUITY




Current liabilities:






Accounts payable

$
17,549


$
11,027

Accrued payroll

13,030


13,337

Accrued expenses and other current liabilities

5,576


5,260

Contingently issuable common stock

14,700



Total current liabilities

$
50,855


$
29,624

Deferred income taxes

879


879

Deferred rent

8,051


8,060

Other liabilities

210


489

Contingently issuable common stock



14,600

Convertible notes

172,515


70,407

Total liabilities

$
232,510


$
124,059

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; 100,000,000 shares authorized, 68,235,179 and 67,321,769 shares issued, respectively. 68,034,386 and 67,159,511 shares outstanding, respectively.

68


67

Additional paid-in capital

404,462


372,639

Accumulated deficit

(298,924
)

(248,500
)
Treasury stock, at cost, 200,793 and 162,258 shares, respectively.

(2,809
)

(2,328
)
Accumulated other comprehensive income

510


2,272

Total stockholders’ equity

$
103,307


$
124,150

Total liabilities and stockholders’ equity

$
335,817


$
248,209

See accompanying notes to these consolidated financial statements.

45



ENDOLOGIX, INC.
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share amounts)


Year Ended December 31,
 
2015

2014

2013
Revenue
$
153,612


$
147,588


$
132,257

Cost of goods sold
51,821


41,801


32,750

Gross profit
101,791


105,787


99,507

Operating expenses:





Research and development
26,421


21,616


16,199

Clinical and regulatory affairs
15,418


13,243


8,679

Marketing and sales
78,213


73,411


63,588

General and administrative
29,581


26,663


21,409

Contract termination and business acquisition expenses
5,071





Total operating expenses
154,704


134,933


109,875

Loss from operations
(52,913
)

(29,146
)

(10,368
)
Other income (expense):





Interest income
175


245


50

Interest expense
(7,476
)

(5,709
)

(321
)
Other income (expense), net
553


(5,798
)

3,061

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

7,928


(8,500
)
Total other income (expense)
(6,848
)

(3,334
)

(5,710
)
Net loss before income tax benefit
(59,761
)

(32,480
)

(16,078
)
Income tax benefit
9,337


62


10

Net loss
$
(50,424
)

$
(32,418
)

$
(16,068
)
Other comprehensive income (loss) foreign currency translation
(1,762
)

3,369


(845
)
Comprehensive loss
$
(52,186
)

$
(29,049
)

$
(16,913
)









Basic and diluted net loss per share
$
(0.75
)

$
(0.50
)

$
(0.26
)
Shares used in computing basic and diluted loss per share
67,671


65,225


62,607

See accompanying notes to these consolidated financial statements.

46



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

Additional
Paid-In
Capital

Accumulated
Deficit

Treasury
Stock

Accumulated Other Comprehensive Income (Loss)

Total Stockholders’
Equity
 
Issued Shares

$0.001 Par Value





Balance at December 31, 2012
63,069


$
63


$
295,338


$
(200,014
)

$
(661
)

$
(252
)

$
94,474

Exercise of common stock options
974


1


4,874








4,875

Employee stock purchase plan
216




2,444








2,444