Endologix
ENDOLOGIX INC /DE/ (Form: 10-Q, Received: 11/01/2007 16:23:55)
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
     
þ   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended September 30, 2007.
     
o   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from ___________ to ___________
Commission file number 000-28440
ENDOLOGIX, INC.
(Exact name of Registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  68-0328265
(I.R.S. Employer
Identification Number)
11 Studebaker, Irvine, California 92618
(Address of principal executive offices)
(949) 595-7200
Registrant’s telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  þ  No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer  o                     Accelerated filer  þ                     Non-accelerated filer  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  þ
On October 23, 2007, there were 42,884,231 shares of the registrant’s only class of common stock outstanding.
 
 

 


 

ENDOLOGIX, INC.
Form 10-Q
September 30, 2007
TABLE OF CONTENTS
     
    Page
Part I. Financial Information
   
Item 1. Condensed Consolidated Financial Statements (Unaudited)
   
  3
  4
  5
  6
  14
  20
  20
  21
  21
  22
  23
  EXHIBIT 31.1
  EXHIBIT 31.2
  EXHIBIT 32.1
  EXHIBIT 32.2

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ENDOLOGIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
(Unaudited)
                 
    September 30,     December 31,  
    2007     2006  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 9,031     $ 6,271  
Restricted cash equivalents
    500       500  
Marketable securities available-for-sale, including unrealized gains of $36 and $3
    335       12,217  
Accounts receivable, net of allowance for doubtful accounts of $27 and $38
    4,002       2,763  
Other receivables
    669       198  
Inventories
    9,217       9,356  
Other current assets
    835       637  
 
           
Total current assets
    24,589       31,942  
 
           
Property and equipment, net
    4,008       4,516  
Marketable securities available-for-sale
          1,200  
Goodwill
    4,631       4,631  
Intangibles, net
    9,265       10,319  
Other assets
    78       78  
 
           
Total assets
  $ 42,571     $ 52,686  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 4,006     $ 5,009  
 
           
Total current liabilities
    4,006       5,009  
Long term liabilities
    1,124       1,172  
 
           
Total liabilities
    5,130       6,181  
 
           
Commitments and contingencies (Note 13)
               
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; 60,000,000 shares authorized, 43,378,000 and 43,144,000 shares issued, respectively, and 42,883,000 and 42,649,000 shares outstanding, respectively
    43       43  
 
               
Additional paid-in capital
    166,123       163,698  
Accumulated deficit
    (128,210 )     (116,663 )
Treasury stock, at cost, 495,000 shares
    (661 )     (661 )
 
               
Accumulated other comprehensive income
    146       88  
 
           
Total stockholders’ equity
    37,441       46,505  
 
           
Total liabilities and stockholders’ equity
  $ 42,571     $ 52,686  
 
           
See accompanying notes

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ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2007     2006     2007     2006  
Revenue:
                               
Product
  $ 6,592     $ 3,748     $ 19,100     $ 9,869  
License
    560       53       678       160  
 
                       
Total revenue
    7,152       3,801       19,778       10,029  
Cost of product revenue
    2,432       1,532       7,649       4,449  
 
                       
Gross profit
    4,720       2,269       12,129       5,580  
 
                       
Operating expenses:
                               
Research, development and clinical
    1,606       1,628       4,665       5,145  
Marketing and sales
    4,788       4,023       14,666       9,773  
General and administrative
    1,635       1,167       4,702       4,093  
Termination of supply agreement
    550             550        
 
                       
Total operating expenses
    8,579       6,818       24,583       19,011  
 
                       
Loss from operations
    (3,859 )     (4,549 )     (12,454 )     (13,431 )
 
                       
Other income:
                               
Interest income
    152       352       558       719  
Other income
    313       5       349       20  
 
                       
Total other income
    465       357       907       739  
 
                       
Net loss
  $ (3,394 )   $ (4,192 )   $ (11,547 )   $ (12,692 )
 
                       
Basic and diluted net loss per share
  $ (0.08 )   $ (0.10 )   $ (0.27 )   $ (0.32 )
 
                       
Shares used in computing basic and diluted net loss per share
    42,870       42,626       42,767       39,124  
 
                       
See accompanying notes

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ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
                 
    Nine Months Ended  
    September 30,  
    2007     2006  
Cash flows from operating activities:
               
Net loss
  $ (11,547 )   $ (12,692 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    1,624       1,708  
Stock-based compensation
    1,857       1,076  
Realized gain on investments
    (314 )      
Change in:
               
Accounts receivable
    (1,239 )     (1,381 )
Inventories
    442       153  
Other receivables and other assets
    (645 )     (27 )
Accounts payable, accrued expenses and long term liabilities
    (1,051 )     (1,434 )
 
           
Net cash used in operating activities
    (10,873 )     (12,597 )
 
           
Cash flows provided by investing activities:
               
Purchases of available-for-sale securities
    (1,850 )     (11,159 )
Sales of available-for-sale securities
    15,255       10,441  
Cash paid for property and equipment
    (344 )     (809 )
 
           
Net cash provided by (used in) investing activities
    13,061       (1,527 )
 
           
Cash flows provided by financing activities:
               
Proceeds from sale of common stock, net of expenses
          18,753  
Proceeds from sale of common stock under employee stock purchase plan
    327       319  
Proceeds from exercise of common stock options
    220       934  
 
           
Net cash provided by financing activities
    547       20,006  
 
           
Effect of exchange rate changes on cash and cash equivalents
    25       3  
 
           
Net increase in cash and cash equivalents
    2,760       5,885  
Cash and cash equivalents, beginning of period
    6,271       8,191  
 
           
Cash and cash equivalents, end of period
  $ 9,031     $ 14,076  
 
           
See accompanying notes

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Unaudited)
1. Basis of Presentation
     The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the results of the periods presented have been included. Operating results for the unaudited nine month period ended September 30, 2007 are not necessarily indicative of results that may be expected for the year ending December 31, 2007 or any other period. For further information, including information on significant accounting policies and use of estimates, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
     For the nine months ended September 30, 2007, the Company incurred a net loss of $11,547. As of September 30, 2007, the Company had an accumulated deficit of $128,210. Historically, the Company has relied on the sale and issuance of equity securities to provide a significant portion of funding for its operations. In June 2006, the Company sold shares of its common stock that resulted in gross proceeds to the Company of $20,000.
     At September 30, 2007, the Company had cash, cash equivalents, restricted cash equivalents and marketable securities available for sale of $9,866. The Company believes that its current cash balance, in combination with cash receipts generated from sales of the Powerlink® System and borrowings available under its credit facility, will be sufficient to fund ongoing operations through at least September 30, 2008. However, if the Company does not realize its expected revenue and gross margin levels, or if the Company is unable to manage its operating expenses in line with its revenues, it may require additional financing to fund its operations.
     In the event that the Company requires additional funding, it would attempt to raise the required capital through either debt or equity arrangements. The Company cannot provide any assurance that the required capital would be available on acceptable terms, if at all, or that any financing activity would not be dilutive to its current stockholders. If the Company were not able to raise additional funds, it would be required to significantly curtail its operations which would have an adverse effect on its financial position, results of operations and cash flows. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
2. Stock-Based Compensation
     Effective January 1, 2006, the Company adopted Financial Accounting Standards Board Statement No. 123(R) “Share Based Payment,” or FAS 123R. Share-based compensation expense recognized in the Company’s consolidated statements of operations after December 31, 2005 includes (i) compensation expense for share-based payment awards granted prior to, but not vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the pro forma provisions of FAS 123 and (ii) compensation expense for the share-based payment awards granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of FAS 123R. As share-based compensation expense recognized in the consolidated statement of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. FAS 123R requires the estimation of forfeitures when recognizing compensation expense and that this estimate of forfeitures be adjusted over the requisite service period should actual forfeitures differ from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment, which is recorded in the period of change and which impacts the amount of unamortized compensation expense to be recognized in future periods.

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
     The Company elected to adopt FAS 123R using the modified prospective application approach which requires the Company to value unvested stock options granted prior to its adoption of FAS 123R under the fair value method and expense these amounts in the statement of operations over the stock option’s remaining vesting period. Prior periods are not required to be restated.
     The Company uses the Black-Scholes option pricing model which requires extensive use of financial estimates and accounting judgment, including estimates of the expected period of time employees will retain their vested stock options before exercising them, the expected volatility of the Company’s common stock over the expected term, and the number of shares that are expected to be forfeited before they are vested. Application of alternative assumptions could produce significantly different estimates of the fair value of the stock-based compensation and as a result, significantly different results recognized in the consolidated statements of operations.
     The weighted average of the assumptions that were used to estimate the fair value of stock options granted using the Black-Scholes valuation method are as follows:
                 
    Nine Months Ended   Nine Months Ended
    September 30,   September 30,
    2007   2006
Expected Life (in years) (1)
    5.5       5.5  
Expected Volatility (2)
    72.0 %     76.1 %
Risk Free Interest Rate (3)
    4.7 %     5.0 %
Dividend Yield (4)
    0.0 %     0.0 %
 
1)   Estimated based on historical experience.
 
2)   Volatility based on historical experience over a period equivalent to the expected life in years.
 
3)   Based on the US Treasury constant maturity interest rate with a term consistent with the expected life of the options granted.
 
4)   The Company does not pay dividends on its common stock and the Company currently does not have any plans to pay or declare any cash dividends.
Pursuant to the Company’s 1996 Stock Option/Issuance Plan (the “1996 Plan”) and the Company’s 2006 Stock Incentive Plan (the “2006 Plan”), either incentive stock option or non-qualified stock option awards may be granted and under the 1997 Supplemental Stock Option Plan (the “1997 Plan” and together with the “1996 Plan” and “2006 Plan”, the “Plans”), non-qualified stock option awards may be granted. Under the Plans, options are generally granted at a price equal to the fair market value of the Company’s common stock on the date of grant and are exercisable over a maximum term of ten years from the date of grant and generally vest over a four-year period. At September 30, 2007, there were approximately 780 shares of common stock available for future stock option grants.

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
The following table summarizes option activity for all Plans during the first nine months of 2007:
                                   
              Weighted   Weighted    
              Average   Average    
              Exercise   Remaining   Aggregate
              Price per   Contractual   Intrinsic
      Shares   Share   Life (Years)   Value
       
Outstanding at December 31, 2006
      3,397     $ 4.38                  
Granted
      1,290       4.24                  
Exercised
      (121 )     1.91                  
Forfeited
      (477 )     4.31                  
Expired
      (38 )     3.88                  
       
Outstanding at September 30, 2007
      4,051     $ 4.42       7.67     $ 1,696  
       
Exercisable at September 30, 2007
      1,991     $ 4.57       6.20     $ 938  
       
Vested or expected to vest
      3,635     $ 4.44       7.48     $ 1,551  
       
The weighted average fair value per option granted during the three months ended September 30, 2007 and 2006 was $2.55 and $2.54, respectively. During the nine months ended September 30, 2007 and 2006, the weighted average fair value was $2.71 and $2.53, respectively. These amounts were estimated using the Black-Scholes option pricing model with the assumptions listed above. The aggregate intrinsic value of stock options exercised, represented in the table above, was $197 for the three months ended September 30, 2007 and $292 for the nine months ended September 30, 2007. The stock options granted during the third quarter of 2007 were outstanding for only a portion of the period, and as such, the compensation expense recognized was only for the period that the options were outstanding. As of September 30, 2007 there was $4,666 of total unrecognized compensation cost related to approximately 2,040 non-vested outstanding stock options, with a per share weighted average fair value of $2.29. The unrecognized expense is anticipated to be recognized over a weighted average period of 17 months.
Expense recorded pursuant to FAS 123R during the three and nine month periods ended September 30, 2007 and 2006 was as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2007     2006     2007     2006  
General and Administrative
  $ 300     $ 123     $ 729     $ 485  
Marketing and Sales
    227       124       602       304  
Research, Development, and Clinical
    108       92       304       255  
Cost of Sales
    17       4       154       35  
 
                       
Total
  $ 652     $ 343     $ 1,789     $ 1,079  
In addition, the Company had $153 of stock based compensation capitalized into inventory as of September 30, 2007, and $130 of stock based compensation capitalized into inventory as of December 31, 2006.
     The Company accounts for non-employee stock-based awards, in which goods or services are the consideration received for the stock options issued, in accordance with the provisions of SFAS No. 123R and EITF 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” Compensation expense for non-employee stock-based awards is recognized in accordance with FASB Interpretation 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Options or Award Plans, an Interpretation of APB Opinions No. 15 and 25,” or FIN 28. The Company records compensation expense based on the then-current fair values of the stock options at each financial reporting date. Compensation recorded during the service period is adjusted in subsequent periods for changes in the stock options’ fair value until the options vest.

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
     Under the 2004 Performance Compensation Plan (the “Performance Plan”), Performance Units are granted at a discount to the fair market value (as defined in the Performance Plan) of the Company’s common stock on the grant date (“Base Value”). The Performance Units vest over three-years; one-third vests at the end of the first year, and the remainder vests ratably on a quarterly basis. The difference between the twenty-day average closing market price of the Company’s common stock and the Base Value of the vested Performance Unit will be payable in cash at the first to occur of (a) a change of control (as defined in the Performance Plan), (b) the termination of employment for any reason other than Cause (as defined in the Performance Plan), or (c) upon exercise of the Performance Unit, which cannot occur until eighteen months from the grant date. There were no Performance Units granted during the three and nine month periods ended September 30, 2007 and 2006, respectively. The total accrued compensation expense as of September 30, 2007 was $168, at which time there were an aggregate of 154 Performance Units outstanding. The total accrued compensation expense as of December 31, 2006, was $160 and there were 243 total Performance Units outstanding. The Company recorded a reduction of expense totaling $103 and an expense totaling $117 for the three and nine months ended September 30, 2007 and an expense of $98 and a reduction in expense of $467 for the three and nine months ended September 30, 2006, in accordance with FIN 28. During the three and nine months ended September 30, 2007, 64 and 87 Performance Units were exercised resulting in a payout of $71 and $109, respectively. The expense was included in marketing and sales expense in the consolidated statements of operations. The Company records changes in the estimated compensation expense over the vesting period of the Performance Units, and once fully vested, records the difference between the twenty-day average closing market price of the Company’s common stock and the Base Value as compensation expense each period until exercised.
3. Net Loss Per Share
     Net loss per common share is computed using the weighted average number of common shares outstanding during the periods presented. Certain options with an exercise price below the average market price for the three and nine month periods ended September 30, 2007 and the three and nine month periods ended September 30, 2006 have been excluded from the calculation of diluted earnings per share, as they are anti-dilutive.
     If anti-dilutive stock options were included for the three months ended September 30, 2007 and 2006, the number of shares used to compute diluted net loss per share would have been increased by approximately 3,222 and 2,350 shares, respectively. Of these amounts, 3,068 shares and 2,140 shares had an exercise price above the average closing price for the three months ended September 30, 2007 and 2006, respectively.
     If anti-dilutive stock options were included for the nine months ended September 30, 2007 and 2006, the number of shares used to compute diluted net loss per share would have been increased by approximately 2,418 and 1,982 shares, respectively. Of these amounts, 2,154 shares and 1,662 shares had an exercise price above the average closing price for the nine months ended September 30, 2007 and 2006, respectively.
4. Restricted Cash Equivalents
     The Company has a $475 line of credit with a bank in conjunction with a corporate credit card agreement. At September 30, 2007, the Company had pledged all of its cash equivalents held at the bank as collateral on the line of credit. Per the agreement, the Company must maintain a balance of at least $500 in cash and cash equivalents with the bank.
5. Marketable Securities Available-For-Sale
     The Company accounts for its investments pursuant to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”
     The Company has classified its entire investment portfolio as available-for-sale. Available-for-sale securities are stated at fair value with unrealized gains and losses recorded in accumulated other comprehensive income. The cost of securities sold is based on the specific identification method. During the three and nine month periods ended

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
September 30, 2007, the Company had realized gains of $313. During the three and nine months ended September 30, 2006, the Company had no realized gains or losses.
     The Company’s investments in debt securities are diversified among high credit quality securities in accordance with the Company’s investment policy. In addition, at September 30, 2007, the Company held 5 shares of Hologic, Inc. common stock with a market value of $326. The Company subsequently liquidated this investment on October 17, 2007.
      Two major financial institutions manage the Company’s investment portfolio. Marketable securities are classified as current or non-current depending on the security’s maturity date. If the maturity date is less than one year from the balance sheet date, the security is classified as current. As of September 30, 2007, $9 and $0 of the Company’s debt securities had original contractual maturities more than 90 days and less than one year, and had original contractual maturities between one to two years, respectively. As of December 31, 2006, $11,917 and $1,500 of the Company’s debt securities had original contractual maturities more than 90 days and less than one year, and between one to two years, respectively.
                                                 
    September 30, 2007     December 31, 2006  
            Gross                     Gross        
            Unrealized                     Unrealized        
            Holding     Fair             Holding     Fair  
    Cost     Gain     Value     Cost     Gain     Value  
Corporate debt securities
  $ 9     $ 0     $ 9     $ 13,414     $ 3     $ 13,417  
Marketable equity securities
  $ 290     $ 36     $ 326     $ 0     $ 0     $ 0  
 
                                   
 
  $ 299     $ 36     $ 335     $ 13,414     $ 3     $ 13,417  
 
                                   
6. Inventories
     Inventories are stated at the lower of cost, determined on a first in, first out basis, or market value. Inventories consist of the following:
                 
    September 30,     December 31,  
    2007     2006  
Raw materials
  $ 3,083     $ 2,325  
Work-in-process
    2,138       2,426  
Finished goods
    3,996       4,605  
 
           
 
  $ 9,217     $ 9,356  
 
           
Inventory reserves, were $302 and $79 as of September 30, 2007 and December 31, 2006, respectively.
7. Line of Credit
     On February 21, 2007, the Company entered into a revolving credit facility, whereby it may borrow up to $5.0 million. All outstanding amounts under the credit facility bear interest at a variable rate equal to the lender’s prime rate plus 0.5%, which is payable on a monthly basis. The unused portion is subject to an unused revolving line facility fee, payable quarterly, in arrears, on a calendar year basis, in an amount equal to one quarter of one percent per annum of the average unused portion of the revolving line, as determined by the bank. The credit facility also contains customary covenants regarding operations of the Company’s business and financial covenants relating to ratios of current assets to current liabilities and tangible net worth during any calendar quarter and is collateralized by the Company’s assets with the exception of its intellectual property. All amounts owing under the credit facility will become due and payable on February 21, 2009.
     As of September 30, 2007, the Company had no outstanding borrowings under the credit facility and is in compliance with all covenants.

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
8. License Revenue
     In June 1998, the Company licensed to Guidant Corporation, an international interventional cardiology products company, the right to manufacture and distribute stent delivery products using the Company’s Focus technology. In April 2006, Abbott Laboratories acquired Guidant’s vascular business. This acquisition included all rights and obligations under licenses. The Company receives royalty payments based upon the sale of products using the Focus technology. The agreement includes minimum annual royalties of $250 and expires in 2008. During the three months ended September 30, 2007 and 2006, the Company recorded $60 and $53, respectively, in license revenue due on product sales by Abbott Laboratories. During the nine months ended September 30, 2007 and 2006, the Company recorded $178 and $160, respectively, in license revenue due on product sales by Abbott Laboratories. At September 30, 2007 and December 31, 2006, $130 and $117, respectively, due under this agreement are included in other receivables on the condensed consolidated balance sheet.
     In September 2006, the Company licensed to BioLucent, Inc., a privately held medical device company, rights under certain patents held by the Company. In September 2007, Hologic, Inc. purchased BioLucent, Inc. Pursuant to this acquisition, the Company had the option to continue the royalty arrangement or to receive a one-time cash payment in exchange for a fully-paid up license. The Company elected to receive the one-time payment of $500, which has been recorded as license revenue in the three and nine month periods ended September 30, 2007 in the accompanying unaudited condensed consolidated financial statements. At September 30, 2007, the $500 due under this agreement was included in other receivables on the condensed consolidated balance sheet and the payment was subsequently received in October 2007.
9. Product Revenue by Geographic Region
     The Company had product sales, based on the locations of the customer, by region as follows:
                                 
    Three Months     Nine Months  
    Ended September 30,     Ended September 30,  
    2007     2006     2007     2006  
United States
  $ 5,827     $ 3,376     $ 16,307     $ 8,269  
Netherlands
          258             1,136  
Germany
    302             1,431        
Other European countries
    182       56       743       269  
Latin America
    204       48       507       115  
Other
    77       10       112       80  
 
                       
 
  $ 6,592     $ 3,748     $ 19,100     $ 9,869  
 
                       
     Product sales to Germany are to LeMaitre Vascular, Inc. which sells into selected European markets. Prior to the January 1, 2007 appointment of this distributor in Germany, the Company had a distribution agreement with Edwards LifeSciences AG, located in the Netherlands, to sell the Company’s products in selected European markets.
10. Concentrations of Credit Risk and Significant Customers
     During the three and nine months ended September 30, 2007, no single customer accounted for more than 10% of total revenues. During the nine months ended September 30, 2006, revenue from Edwards Lifesciences AG was $1,136, which represented 11% of total revenues. No other single customer in the three and nine month period ended September 30, 2006 accounted for more than 10% of total revenues.
     As of September 30, 2007 and December 31, 2006, no single customer accounted for more than 10% of the Company’s accounts receivable balance.
11. Comprehensive Loss
The Company’s comprehensive loss included the following:

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
                                 
    Three Months     Nine Months  
    Ended September 30,     Ended September 30,  
    2007     2006     2007     2006  
Net loss
  $ (3,394 )   $ (4,192 )   $ (11,547 )   $ (12,692 )
Unrealized holding gain arising during the period, net
    36       9       33       23  
Foreign currency translation adjustment
    7       (9 )     25       3  
 
                       
Comprehensive loss
  $ (3,351 )   $ (4,192 )   $ (11,489 )   $ (12,666 )
 
                       
12. Intangible Assets and Goodwill
     The following table details the intangible assets, estimated lives, related accumulated amortization and goodwill:
                 
    September 30,     December 31,  
    2007     2006  
Developed technology (10 year life)
  $ 14,050     $ 14,050  
Accumulated amortization
    (7,493 )     (6,439 )
 
           
Net developed technologyy
    6,557       7,611  
Trademarks and trade names (Indefinite life)
    2,708       2,708  
 
           
Intangible assets, net
  $ 9,265     $ 10,319  
 
           
Goodwill, (Indefinite life)
  $ 4,631     $ 4,631  
 
           
     In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and other intangible assets with indeterminate lives are no longer subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. The Company most recently performed its annual impairment analysis as of June 30, 2007 and will continue to test for impairment annually as of June 30 each year. No impairment was indicated in the last analysis. Intangible assets with finite lives continue to be subject to amortization, and any impairment is determined in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
     The Company recognized amortization expense on intangible assets of $350 and $351 during the three months ended September 30, 2007 and 2006, respectively. The Company recognized amortization expense on intangible assets of $1,054 and $1,054 during the nine months ended September 30, 2007 and 2006, respectively. Estimated amortization expense for the remainder of 2007 and the five succeeding fiscal years is as follows:
         
2007
  $ 351  
2008
  $ 1,405  
2009
  $ 1,405  
2010
  $ 1,405  
2011
  $ 1,405  
2012
  $ 586  
13. Commitments and Contingencies
Supplier Agreement
     In February 1999, the former Endologix entered into a supply agreement with Bard Peripheral Vascular, Inc., a subsidiary of C.R. Bard, Inc., for the supply of ePTFE. The supply agreement has an initial term through December 2007, at which time it automatically renews on a year-by-year basis for additional one-year periods, unless either party gives the other party notice of its intention not to renew within 30 days from the expiration date of the applicable renewal period. Under the terms of a third amendment to the supply agreement dated September 21, 2007, the minimum purchase requirement for the 2007 year was reduced from $2,875 to $2,200, the Company agreed to pay $550 in consideration for the reduction, and both parties agreed to terminate the agreement on December 31, 2007. The $550 paid to reduce the 2007 commitment was recorded as an operating expense in the quarter ended September 30, 2007. During the three and nine months ended September 30, 2007, the Company purchased $317 and $1,928 toward the minimum, and issued purchase orders totaling $272 during the third quarter to complete the revised commitment.

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
Legal Matters
     On July 6, 2007, Harrison Lazarus, M.D. filed a lawsuit against the Company in the United States District Court for the Central District of Utah, alleging the Company’s products are infringing a patent owned by him. Dr. Lazarus is seeking an injunction against further alleged infringement of the patent at issue and unspecified damages. The Company believes that his claims are without merit. The Company has filed a counter claim against Dr. Lazarus, and intends to vigorously defend its intellectual property rights.
     The Company is a party to ordinary disputes arising in the normal course of business. Management is of the opinion that the outcome of any such matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flow.
14. Recent Accounting Pronouncements
     As of January 1, 2007, the Company has adopted Financial Accounting Standards Board Interpretation No. 48, or FIN 48, “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Company recognize in its financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 were effective as of the beginning of the Company’s 2007 fiscal year, with no cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. As of September 30, 2007, there are no uncertain tax positions to report.
     In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, or SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for the Company’s fiscal year beginning January 1, 2008. The Company is currently evaluating the impact that the adoption of SFAS No. 159 will have on its consolidated financial statements.
     In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, or SFAS 157, “Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. The Company is currently evaluating the impact of SFAS 157 on its consolidated financial statements.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to the historical financial information included herein, this Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are based on management’s beliefs, as well as on assumptions made by and information currently available to management. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q, including without limitation, statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and statements located elsewhere herein regarding our financial position and business strategy, may constitute forward-looking statements. You generally can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “may,” “will,” “expects,” “intends,” “estimates,” “anticipates,” “plans,” “seeks,” or “continues,” or the negative thereof or variations thereon or similar terminology. Such forward-looking statements involve known and unknown risks, including, but not limited to, market acceptance of our sole technology, the Powerlink ® System, economic and market conditions, the regulatory environment in which we operate, the availability of third party payor medical reimbursements, competitive activities or other business conditions. Our actual results, performance or achievements may differ materially from any future results, performance or achievements expressed or implied from such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006, including but not limited to those factors discussed in “Item 1A. Risk Factors.” All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We do not undertake any obligation to update information contained in any forward-looking statement.
Overview
Organizational History
     We were formed in 1992 as Cardiovascular Dynamics, Inc., and our common stock began trading publicly in 1996. The current Endologix, Inc. resulted from the May 2002 acquisition of all of the capital stock of a private company, Endologix, Inc., which we refer to herein as the former Endologix, and the subsequent change of our company name from Radiance Medical Systems, Inc. to Endologix, Inc.
Our Business
     We are engaged in the development, manufacture, sale and marketing of minimally invasive therapies for the treatment of vascular disease. Our primary focus is the development of the Powerlink ® System, a catheter-based alternative treatment to surgery for abdominal aortic aneurysms, or AAA. AAA is a weakening of the wall of the aorta, the largest artery of the body. Once AAA develops, it continues to enlarge and if left untreated becomes increasingly susceptible to rupture. The overall patient mortality rate for ruptured AAA is approximately 75%, making it the 14th leading cause of death for persons 55 years of age and older in the United States.
     The Powerlink System is a catheter and endoluminal stent graft, or ELG, system. The self-expanding cobalt chromium alloy cage is covered by ePTFE, a commonly-used surgical graft material. The Powerlink ELG is implanted in the abdominal aorta by gaining access through the femoral artery. Once deployed into its proper position, the blood flow is shunted away from the weakened or “aneurismal” section of the aorta, reducing pressure and the potential for the aorta to rupture. We believe that our products reduce the mortality and morbidity rates associated with conventional AAA surgery, as well as provide a clinical alternative to many patients that could not undergo conventional surgery. We are currently selling the Powerlink System in the United States and Europe, and in other selected markets.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued).
     In 2005, per the request of the Japanese Ministry of Health, we submitted data on the United States Food and Drug Administration, or FDA, approved Powerlink System. This permits us to submit Powerlink System data for Shonin approval without the need for additional clinical trials, and upon approval will permit us to have a single technology platform for Europe, the United States, and Japan.
     We also continue to conduct clinical trials for the suprarenal Powerlink System and for other products related to the Powerlink System. As of October 15, 2007, 151 of the required 193 patients have been enrolled for the second arm of a United States Pivotal Phase II clinical trial for the suprarenal Powerlink System. As of July 31, 2007, all of the required 60 patients have been enrolled in a United States Pivotal Phase II clinical trial utilizing a 34 mm proximal cuff in conjunction with a commercial bifurcated Powerlink ELG to treat patients with large aortic necks. As of October 15, 2007, 10 of the required 63 patients have been enrolled in a clinical trial for a 34mm infrarenal bifurcated device, also designed to treat patients with large aortic necks. Currently, only one commercial device is capable of treating aortic necks larger than 26 mm. We believe that approximately 10% to 15% of all potential AAA patients are refused minimally invasive treatment due to these anatomic considerations.
     We have experienced an operating loss for each of the last five years and expect to continue to incur operating losses for at least the next twelve months. Our business is subject to a number of challenges inherent in a company with a single technology such as the difficulty in predicting physician acceptance of our product and the difficulty of planning for the growth of our operations relative to the market demand for our product. Consequently, our results of operations have varied significantly from quarter to quarter, and we expect that our results of operations will continue to vary significantly in the future.
Results of Operations
Comparison of the Three Months Ended September 30, 2007 and 2006
      Product Revenue . Product revenue increased 76% to $6.6 million in the three months ended September 30, 2007 from $3.7 million in the three months ended September 30, 2006. Domestic sales increased 73% to $5.8 million in the three months ended September 30, 2007 from $3.4 million in the three months ended September 30, 2006. The increase in domestic sales was due to our investment in additional field sales personnel, and increased market acceptance of the Powerlink System.
     International sales increased 106% to $765,000 in the three months ended September 30, 2007 from $372,000 for the comparable period in the prior year. This increase was driven by higher sales to our distributors in Europe and Latin America.
     We expect that product revenue will continue to grow, both sequentially and compared to prior year periods. We anticipate that product revenue will be in the range of $27 to $29 million for the year ended December 31, 2007.
      License Revenue. License revenue increased 957% to $560,000 in the three months ended September 30, 2007 from $53,000 for the comparable period in the prior year. This increase is due to the one-time lump-sum amount of $500,000 from Cianna, Inc., a successor corporation to BioLucent, Inc. in exchange for a fully paid up license.
      Cost of Product Revenue . The cost of product revenue increased 59% to $2.4 million in the three months ended September 30, 2007 from $1.5 million in the three months ended September 30, 2006. Cost of product revenue increased due to the increase in volume of Powerlink System sales. As a percentage of product revenue, cost of product revenue decreased to 37% in the third quarter of 2007 as compared to 41% in the same period of 2006. Cost of product revenue as a percentage of product revenue decreased due to substitution of in-house produced ePTFE graft material for higher cost purchased graft material in a portion of the products sold during the period.
     We expect to see our gross profit percentage continue to improve by approximately 10 percentage points as this substitution effect becomes complete in 2008.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued).
      Research, Development and Clinical. Research, development and clinical expense remained unchanged at $1.6 million in the three months ended September 30, 2007 as compared to $1.6 million for the three months ended September 30, 2006. We expect that research, development, and clinical expense will remain in the range of $1.5 million to $1.8 million per quarter through mid-2008.
      Marketing and Sales . Marketing and sales expense increased 19% to $4.8 million in the three months ended September 30, 2007 from $4.0 million in the three months ended September 30, 2006. The increase in the third quarter of 2007 resulted primarily from an increase of the domestic sales force resulting in a 73% increase in domestic sales between those periods. We anticipate that marketing and sales expense will increase at a decreasing rate over the remainder of the year due to increased production of our tenured sales representatives within their territories.
      General and Administrative . General and administrative expense increased 40% to $1.6 million in the three months ended September 30, 2007 from $1.2 million in the three months ended September 30, 2006. The increase was primarily due to higher FAS123(R) expenses and insurance premium increases. We expect general and administration expense to remain in the $1.6 to $1.8 million range per quarter through mid-2008.
      Termination of Supply Agreement . Termination of supply agreement expense was $550,000 in the three months ended September 30, 2007. The addition of this expense category was due to the third amendment of our supply agreement with Bard Peripheral Vascular, Inc., dated September 21, 2007, which reduced the minimum purchase requirement for the 2007 year from $2.9 million to $2.2 million, and both parties agreed to terminate the agreement on December 31, 2007. In consideration for the reduction in the minimum purchase requirement for the 2007 year, we paid $550,000 to Bard. We do not anticipate termination of supply agreement expense to recur in the future.
      Other Income . Other income increased 30% to $465,000 in the three months ended September 30, 2007, from $357,000 in the same period of 2006. Interest income declined due to lower balances of invested cash, but was offset by a realized gain of $314,000 on our investment in BioLucent, Inc.
Comparison of the Nine Months Ended September 30, 2007 and 2006
      Product Revenue. Product revenue increased 94% to $19.1 million in the nine months ended September 30, 2007 from $9.9 million in the nine months ended September 30, 2006. Domestic sales increased 97% to $16.3 million in the nine months ended September 30, 2007 from $8.3 million in the nine months ended September 30, 2006. The increase in domestic sales was due to our investment in additional field sales personnel, and increased physician acceptance of the Powerlink System.
     International sales increased 75% to $2.8 million in the nine months ended September 30, 2007 from $1.6 million for the comparable period in the prior year. This increase was driven by higher sales to our distributors in Europe and Latin America.
      License Revenue. License revenue increased 324% to $678,000 in the nine months ended September 30, 2007 from $160,000 for the comparable period in the prior year. This increase is primarily due to the receipt of the one-time lump-sum amount of $500,000 from Cianna, Inc. in exchange for a fully paid up license.
      Cost of Product Revenue. The cost of product revenue increased 72% to $7.6 million in the nine months ended September 30, 2007 from $4.4 million in the nine months ended September 30, 2006. Cost of product revenue increased due to the increase in volume of Powerlink System sales. As a percentage of product revenue, cost of product revenue decreased to 40% in the nine months ended September 30, 2007 from 45% in the same period of 2006. The percentage decrease was due in part to the improvement in geographic mix of product sales, the $326,000 charge for the reserve in 2006 to complete the final phase of an earlier voluntary recall, and the partial substitution effect of the in-house ePTFE graft material during the third quarter of 2007.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued).
      Research, Development and Clinical. Research, development and clinical expense decreased 9% to $4.7 million in the nine months ended September 30, 2007 as compared to $5.1 million for the nine months ended September 30, 2006. The decrease was due to a lower amount of outside services needed to support new product and process development projects.
      Marketing and Sales. Marketing and sales expense increased 50% to $14.7 million in the nine months ended September 30, 2007 from $9.8 million in the nine months ended September 30, 2006. The increase resulted primarily from the expansion of our sales force and sales support work force to support the growing U.S. market penetration of the Powerlink System, somewhat offset by lower European sales and marketing expenses.
      General and Administrative. General and administrative expense increased 15% to $4.7 million in the nine months ended September 30, 2007, from $4.1 million in the nine months ended September 30, 2006. The increase was primarily due to higher stock based compensation charges in the nine months ended September 30, 2007 as compared to the same period in 2006, as well as an increase in insurance premiums.
      Termination of Supply Agreement . Termination of supply agreement expense was $550,000 in the nine months ended September 30, 2007. The addition of this expense category was due to the third amendment of our supply agreement with Bard Peripheral Vascular, Inc., dated September 21, 2007, which reduced the minimum purchase requirement for the 2007 year from $2.9 million to $2.2 million, and both parties agreed to terminate the agreement on December 31, 2007. In consideration for the reduction in the minimum purchase requirement for the 2007 year, we paid $550,000 to Bard. We do not anticipate termination of supply agreement expense to recur in the future.
      Other Income. Other income increased 23% to $907,000 in the nine months ended September 30, 2007, from $739,000 in the same period of 2006. Interest income declined due to lower balances of invested cash, but was offset by a realized gain of $314,000 on our investment in BioLucent, Inc.
Liquidity and Capital Resources
     For the nine months ended September 30, 2007, we incurred a net loss of $11.5 million. As of September 30, 2007, we had an accumulated deficit of $128.2 million. Historically, we have relied on the sale and issuance of equity securities to provide a significant portion of funding for our operations. Since July 2003, we have completed four financing transactions resulting in net proceeds of approximately $58.0 million.
     In February 2007, we entered into a revolving credit facility, whereby we may borrow up to $5.0 million. All outstanding amounts under the credit facility bear interest at a variable rate equal to the lender’s prime rate plus 0.5%, which is payable on a monthly basis. The unused portion is subject to an unused revolving line facility fee, payable quarterly, in arrears, on a calendar year basis, in an amount equal to one quarter of one percent per annum of the average unused portion of the revolving line, as determined by the lender. The credit facility also contains customary covenants regarding the operation of our business and financial covenants relating to ratios of current assets to current liabilities and tangible net worth during any calendar quarter. As of September 30, 2007, we were in compliance with all of these covenants. The amounts outstanding under the credit facility are collateralized by all of our assets with the exception of our intellectual property. All amounts owing under the credit facility will become due and payable on February 21, 2009. As of September 30, 2007, we did not have any outstanding borrowings under this credit facility.
     At September 30, 2007, we had cash, cash equivalents, restricted cash equivalents and marketable securities available for sale of $9.9 million. We believe that current cash and cash equivalents and marketable securities, together with cash receipts generated from sales of the Powerlink System and available borrowings under our credit facility, will be sufficient to meet anticipated cash needs for operating and capital expenditures through at least September 30, 2008. Nevertheless, we expect to continue to incur substantial costs and cash outlays in 2007 and beyond to support Powerlink System research and development, and United States marketing of the Powerlink System. If we fail to increase our penetration of the AAA market, or if we fail to reduce certain discretionary expenditures,

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued).
as necessary, we may need to seek additional sources of financing.
     In the event that we require additional funding, we would attempt to raise the required capital through either debt or equity arrangements. We cannot provide any assurance that the required capital would be available on acceptable terms, if at all, or that any financing activity would not be dilutive to our current stockholders. If we were not able to raise additional funds, we would be required to significantly curtail our operations which would have an adverse effect on our financial position, results of operations and cash flows.
     Endologix licensed certain non-AAA technology to BioLucent Inc. in return for future royalties based on sales incorporating that technology. The September 2007 acquisition of BioLucent by Hologic Inc. triggered a change of control provision in that agreement which gave us the option to continue the license and royalty agreement, or to receive a lump sum cash payment in return for a fully paid license. We opted for the lump sum payment of $500,000, which was recorded as license revenue in the third quarter, and the cash was subsequently received in October 2007. In connection with the acquisition by Hologic, Inc. of BioLucent, we recorded other income of $314,000. We received approximately $290,000 in Hologic stock, which was liquidated in October 2007 for proceeds of $361,000, as well as a cash payment of approximately $24,000 which was received in October 2007.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued).
     We believe that our future cash and capital requirements may be difficult to predict and will depend on many factors, including:
    continued market acceptance of the Powerlink System;
 
    our ability to successfully expand our commercial marketing of the Powerlink System;
 
    the success of our research and development programs for future products;
 
    the clinical trial and regulatory approval processes for future products;
 
    the costs involved in intellectual property rights enforcement or litigation;
 
    the level of hospital reimbursement for ELG procedures and other competitive factors;
 
    viability of our sole manufacturing facility through unforeseen natural or other disasters;
 
    our ability to produce and/or purchase an adequate supply of ePTFE, the key raw material for our Powerlink System;
 
    the establishment of collaborative relationships with other parties.
     As of September 30, 2007, inventory remained relatively unchanged at $9.2 million as compared to $9.4 million as of December 31, 2006. The decrease in finished goods to $4.0 million from $4.6 million and decrease in work in process to $2.1 million from $2.3 million was offset by the increase in raw materials to $3.1 million from $2.3 million. In general, our raw material and in-process inventories have an indefinite shelf life, and finished goods have a shelf life of up to three years.
     In February 1999, Endologix entered into a supply agreement with Bard Peripheral Vascular, Inc., a subsidiary of C.R. Bard, Inc., for the supply of ePTFE. The supply agreement had an initial term through December 2007, at which time it automatically renewed on a year-by-year basis for additional one-year periods, unless either party provided the other party notice of its intention not to renew within 30 days from the expiration date of the applicable renewal period. Under the terms of a third amendment to the supply agreement entered into on September 21, 2007, the minimum purchase requirement for the 2007 year was reduced from $2.9 million to $2.2 million, we agreed to pay $550,000 in consideration for the reduction, and both parties agreed to terminate the agreement on December 31, 2007. During the three and nine months ended September 30, 2007, we had purchased $317,000 and $1.9 million toward the minimum, and we issued purchase orders totaling $272,000 during the third quarter to complete the revised commitment. We are no longer economically dependent on this vendor.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
     Our financial instruments include cash, short-term and long-term investment grade debt securities. At September 30, 2007, the carrying values of our financial instruments approximated their fair values based on current market prices and rates. It is our policy not to enter into derivative financial instruments. We do not currently have material foreign currency exposure as the majority of our assets are denominated in United States currency and our foreign-currency based transactions are not material. Accordingly, we do not have a significant currency exposure at September 30, 2007.
     All outstanding amounts under our revolving credit facility bear interest at a variable rate equal to the lender’s prime rate plus 0.5%, which is payable on a monthly basis and which may expose us to market risk due to changes in interest rates. As of September 30, 2007, we had no outstanding amounts under our credit facility and therefore, were not subject to any risk from changes in interest rates.
Item 4. CONTROLS AND PROCEDURES.
     We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
     There has been no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II.
OTHER INFORMATION
Item 6. EXHIBITS
The following exhibits are filed herewith:
     
Exhibit 31.1
  Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
   
Exhibit 31.2
  Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
   
Exhibit 32.1
  Certification of Chief Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
 
   
Exhibit 32.2
  Certification of Chief Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  ENDOLOGIX, INC.
 
 
Date: November 1, 2007  /s/ Paul McCormick    
  President and Chief Executive Officer   
  (Principal Executive Officer)   
 
     
Date: November 1, 2007  /s/ Robert J. Krist    
  Chief Financial Officer and Secretary   
  (Principal Financial and Accounting Officer)   

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EXHIBIT INDEX
The following exhibits are filed herewith:
     
Exhibit 31.1
  Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
   
Exhibit 31.2
  Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
   
Exhibit 32.1
  Certification of Chief Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
 
   
Exhibit 32.2
  Certification of Chief Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

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Exhibit 31.1
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
I, Paul McCormick, Chief Executive Officer of Endologix, Inc. (the “Company”), certify that:
1.   I have reviewed this quarterly report on Form 10-Q of the Company;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I, are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and we have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principals;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: November 1, 2007  By:   /s/ Paul McCormick    
    Paul McCormick   
    President and Chief Executive Officer   

 

 

         
Exhibit 31.2
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
I, Robert J. Krist, Chief Financial Officer of Endologix, Inc. (the “Company”), certify that:
1.   I have reviewed this quarterly report on Form 10-Q of the Company;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I, are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and we have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principals;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: November 1, 2007  By:   /s/ Robert J. Krist    
    Robert J. Krist   
    Chief Financial Officer   

 

 

         
Exhibit 32.1
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934
and 18 U.S.C. Section 1350
I, Paul McCormick, Chief Executive Officer of Endologix, Inc. (the “Company”), certify pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 that:
  (1)   The Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007 (the “Quarterly Report”) complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 780(d)); and
 
  (2)   The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
     
Date: November 1, 2007  By:   /s/ Paul McCormick    
    Paul McCormick   
    President and Chief Executive Officer   
 
This certification accompanies the Quarterly Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934.

 

 

Exhibit 32.2
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934
and 18 U.S.C. Section 1350
I, Robert J. Krist, Chief Financial Officer of Endologix, Inc. ( the “Company”), certify pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 that:
  (1)   The Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007 (the “Quarterly Report”) complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 780(d)); and
 
  (2)   The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
     
Date: November 1, 2007  By:   /s/ Robert J. Krist    
    Robert J. Krist   
    Chief Financial Officer   
 
This certification accompanies the Quarterly Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934.