e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
or
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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)
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Delaware
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68-0328265 |
(State or other jurisdiction of
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(IRS Employer |
incorporation or organization)
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Identification No.) |
11 Studebaker, Irvine, California 92618
(Address of principal executive offices, including zip code)
Registrants telephone number, including area code: (949) 595-7200
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
Common Stock, $0.001 par value
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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 o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act.
Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants 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 o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of June 30, 2008, the aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $72,068,232 (based upon the closing price for shares of the
Registrants Common Stock as reported by the NASDAQ Global Market for June 30, 2008, the last
trading date of the Registrants most recently completed second fiscal quarter).
On February 10, 2009, approximately 43,870,449 shares of the Registrants 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
Registrants Proxy Statement for its Annual Meeting of Stockholders to be held on May 21, 2009.
ENDOLOGIX, INC.
ANNUAL REPORT ON
Form 10-K
For the Fiscal Year Ended December 31, 2008
TABLE OF CONTENTS
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, and Section 21E of the Securities Exchange
Act of 1934, as amended. You can identify forward-looking statements generally by the use of
forward-looking terminology such as believes, expects, may, will, intends, plans,
should, could, seeks, pro forma, anticipates, estimates, continues, or other
variations thereof, including their use in the negative, or by discussions of strategies,
opportunities, plans or intentions. In addition, any statements that refer to projections of our
future financial performance, trends in our businesses, or other characterizations of future events
or circumstances are forward-looking statements. We have based these forward-looking statements
largely on our current expectations based on information currently available to us and projections
about future events and trends affecting the financial condition of our business. These
forward-looking statements are subject to a number of risks, uncertainties, and assumptions
including, among other things:
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market acceptance of our Powerlink® System; |
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the level and availability of third party payor reimbursement for our products; |
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our ability to effectively manage our anticipated growth; |
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our ability to protect our intellectual property rights and proprietary technology; |
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our ability to effectively develop new or complementary technologies; |
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development and management of our business and anticipated trends of our business; |
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our ability to attract, retain and motivate qualified personnel; |
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our ability to attract and retain customers; |
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the market opportunity for our products and technology; |
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the nature of regulatory requirements that apply to us, our suppliers and competitors
and our ability to obtain and maintain any required regulatory approvals; |
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our future capital expenditures and needs; |
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our ability to effectively compete; |
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general economic and business conditions; and |
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other risks set forth under Risk Factors in Item 1A of this Annual Report on Form
10-K. |
The forward-looking statements involve known and unknown risks, uncertainties and other
factors that may cause actual results to differ in significant ways from any future results
expressed or implied by the forward-looking statements. Unless otherwise required by law, we
undertake no obligation to publicly update or revise any forward-looking statements, either as a
result of new information, future events or otherwise after the date of this Annual Report on Form
10-K.
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PART I
Item 1. Business
Introduction
We develop, manufacture, market and sell innovative treatments for aortic disorders. Our
principle product, the Powerlink® System is a minimally invasive device for the treatment of
abdominal aortic aneurysm, 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 AAAs is approximately 75%,
making it a leading cause of death in the United States today.
The Powerlink System is a catheter and endoluminal stent graft, or ELG, system. The device
consists of a self-expanding cobalt chromium alloy stent cage covered by ePTFE, a common surgical
graft material. The Powerlink ELG is implanted in the abdominal aorta, which is accessed through
the femoral artery. Once the Powerlink ELG is deployed into its proper position, blood flow is
shunted away from the weakened or aneurismal section of the aorta, reducing pressure and the
potential for the aorta to rupture. Our clinical trials demonstrated that implantation of our
products reduces the mortality and morbidity rates associated with conventional AAA surgery, as
well as provides a clinical alternative for many patients who could not undergo conventional
surgery. Sale of our Powerlink System in the United States, Europe, Japan, and Latin America is the
primary source of our reported revenues.
Industry Background
Atherosclerosis is the thickening and hardening of arteries. Some hardening of arteries occurs
naturally as people grow older. Atherosclerosis involves deposits of fatty substances, cholesterol,
cellular waste products, calcium and other substances on the inner lining of an artery.
Atherosclerosis is a slow, complex disease that starts in childhood and often progresses with age.
Atherosclerosis also can reduce the integrity and strength of the blood vessel wall, causing
the vessel to expand or balloon out, which is known as an aneurysm. Aneurysms are commonly
diagnosed in the aorta, which is the bodys largest artery. The highest incidence of aortic
aneurysms occurs in the segment below the opening of the arteries that feed the kidneys, the renal
arteries, and the area where the aorta divides into the two iliac arteries that travel down the
legs. Once diagnosed, patients with AAA require either a combination of medical therapy and
non-invasive monitoring, or they must undergo a procedure to repair the aneurysm.
For years, physicians have been interested in less invasive methods to treat AAA disease as an
alternative to the current standard of open surgical repair. The high morbidity and mortality rates
of this surgery are well documented, and medical pharmacological management for this condition
carries the catastrophic risk of aneurysm rupture. Physicians and commercial interests alike began
investigating catheter-based alternatives to repair an aneurysm from within, utilizing surgical
grafts in combination with stents to exclude blood flow and pressure from the weakened segment of
the aorta.
We believe the appeal of the Powerlink System for patients, physicians, and health-care payors
is compelling. The conventional treatment is a highly invasive, open surgical procedure requiring a
large incision in the patients abdomen, withdrawal of the patients intestines to provide access
to the aneurysm, and the cross clamping of the aorta to stop blood flow. This procedure typically
lasts two to four hours and is performed under general anesthesia. This surgery has an operative mortality rate estimated to range from 4% to 8%. In addition,
complication rates vary depending upon patient risk classification, ranging from 15% for low-risk
patients to 40% for high-risk patients. The typical recovery period for conventional AAA surgery includes a hospital stay of 8 or more days
and post-hospital convalescence of 8 to 12 weeks. Our minimally invasive treatment of AAA requires
only a small incision in the femoral artery of the leg, minimizing both hospital length of stay and
the amount of time required for convalescence. Many patients can be treated utilizing only a local
or regional anesthesia.
Market Opportunity
In the United States alone, an estimated two million people have an AAA. Although AAA is one
of the most
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serious cardiovascular diseases, many AAAs are never detected. Approximately 75% of AAA
patients do not have symptoms at the time of their initial diagnosis, and AAAs generally are
discovered inadvertently during procedures to diagnose unrelated medical conditions. Once an AAA
develops, it continues to enlarge and if left untreated, becomes increasingly susceptible to
rupture. The overall patient mortality rate for ruptured aneurysms is approximately 75%.
In 2009, we estimate that approximately 200,000 people will be diagnosed with AAA in the U.S.
Approximately 60,000 will undergo aneurysm repair. Of the approximately 60,000 patients undergoing
aneurysm repair, we expect that 35,000 will be treated with an ELG and the remaining 25,000 will be
treated with open surgery. Over the next several years, we forecast the ELG market to increase by
at least 8% per year, and we expect that 75% of AAA procedures will be performed using ELGs by
2013.
An article published in the New England Journal of Medicine on January 31, 2008 addressed the
comparison between open surgical repair and the endovascular treatment of AAA. This was a
significant paper in that researchers reviewed more than 45,000 Medicare records and came to three
conclusions:
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First, these findings support clinical study data showing that endovascular repair
significantly reduces morbidity and mortality versus open surgical repair. Importantly,
these findings are based on a patient population that typically has a significantly higher
co-morbidity rate compared with those patients treated by open surgery. |
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Second, patients treated by endovascular repair were discharged to their homes in
significantly greater numbers than those treated by surgery. This advantage has substantial
clinical and economic benefits for patients and payors alike. |
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Finally, the study points to the fact that open surgical repair entails risk of
re-hospitalization due to problems associated with surgical incision. Patients had to be
re-admitted over time for surgical complications associated with the laparotomy, such as
adhesions and bowel resections, at a much higher rate than those undergoing endovascular
repair. |
AAAs are generally more prevalent in people over the age of 65 and are more common in men than
in women. In addition to the current pool of potential patients, we expect that the number of
persons seeking treatment for their condition will increase based on demographic factors. In 2008,
the age 65 and over population in the United States numbered approximately 38 million, or 12% of
the total population, and is expected to be 71 million by 2030. It is growing at a higher rate than
the overall United States population.
We believe that the market opportunity outside of the United States for these technologies is
approximately 60% of the size of the United States market.
Our Strategy
Our objective is to become a leader in the development and commercialization of innovative and
cost effective products for the treatment of aortic disorders. Key elements of our strategy to
accomplish this objective are as follows:
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Focus exclusively on the aorta and become the industry expert in the treatment of aortic
disorders; |
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Provide differentiated, less invasive devices for the treatment of aortic disorders with
exceptional clinical results; |
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Develop and introduce innovative new products for the treatment of aortic disorders on a
regular basis; and |
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Provide excellent clinical and technical support to physicians worldwide by building an
experienced, knowledgeable and well-funded sales and marketing organization. |
Our Products
Powerlink System
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Our principal product is the Powerlink System for the treatment of AAA. The device consists of
a self-expanding cobalt chromium alloy stent cage covered with ePTFE, a common surgical graft
material. The Powerlink ELG is implanted in the abdominal aorta, gaining access through a small
incision into the femoral artery. Once the Powerlink ELG is deployed into its proper position,
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 the Powerlink System is a superior design that overcomes the inherent limitations
of early generation AAA devices and offers the following advantages:
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One-Piece, Bifurcated ELG. This eliminates many of the problems associated with early
generation multi-piece systems. Our products eliminate much of the guide wire manipulation
required during the procedure to assemble the component parts of a modular system, thereby
simplifying the procedure. In addition, in the follow-up period, there can be no limb
component separation with a one-piece system. We believe this should result in continued
long-term exclusion of the aneurysm, and improved clinical results. |
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Fully Supported. The main body and limbs of the Powerlink System are fully supported by
a cobalt chromium alloy cage. The cobalt chromium alloy cage greatly reduces or eliminates
the risk of kinking of the stent graft in even tortuous anatomies, eliminating the need for
additional procedures or costly peripheral stents. Kinking may result in reduced blood flow
and limb thrombosis. |
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Unique, Minimally Invasive Delivery Mechanism. The Powerlink System requires only a
small surgical incision in one leg. The other leg needs only placement of a non-surgical
introducer sheath, three millimeters in diameter. Other ELGs typically need surgical
exposure of the femoral artery in both legs to introduce the multiple components. Our
unique delivery mechanism and downsizing of the catheter permits our technology to be used
in patients having small or very tortuous access vessels. |
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Self-Expanding. The stent is formed from cobalt chromium alloy in a proprietary
configuration that is protected by our patent portfolio. This proprietary design expands to
the proper size of the target aorta and eliminates the need for hooks or barbs for
attachment. Based on our results to date, the Powerlink System has an excellent record of
successful deployments. |
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Single Wire and Long Main Body Design. The long main body of the stent cage is made of
a continuous piece of wire shaped into its appropriate configuration. Migration of
individual stent graft sections is eliminated. In addition, the long main body places the
Powerlink System near or at the aortic bifurcation, which minimizes the risk of device
migration during the follow-up period. |
Limitations of Earlier Technology
Our technology is dramatically different than other currently available AAA devices. Despite
enthusiasm by physicians and patients alike for minimally invasive technology, we believe early
generation devices have achieved a limited market penetration due to design limitations and related
complications. The published clinical literature details many of the deficiencies of these
approaches. In our opinion, early generation devices were limited because assembly was required by
the surgeon. Multi-piece, or modular, systems require assembly by the mating of multiple components
to form a bifurcated stent graft within the aneurysm sac. These systems can be more difficult to
implant and lead to longer operative times. In addition, there are a number of reports of component
detachment during the follow-up period. Component detachment can lead to a leak and a
re-pressurization of the sac. We believe this increases the risk of AAA rupture, often requiring a
highly invasive, open surgical procedure to repair the detachment.
Powerlink System Products
Variations in patient anatomies require an adaptive technology. We designed our Powerlink
System, with multiple proximal extensions, limb extensions, bifurcated main body lengths and
diameters to simplify procedures, improve clinical results, and drive product adoption by offering
physicians a full line of products that are adaptable for treatment of the majority of patients
with AAA disease.
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Powerlink Infrarenal Bifurcated Systems. The Powerlink Infrarenal Bifurcated System is
available in multiple diameters and lengths and can treat patients that have an aortic neck up to
32 millimeters in diameter. The infrarenal device is made of a cobalt chromium alloy stent covered
by high density ePTFE for placement below the renal arteries. The self-expanding stent permits the
graft to be used in a wide range of neck diameters, which allows us to treat a wide variety of
anatomies with a standard device. We obtained the CE Mark for this product in Europe in August
1999, and obtained United States Food and Drug Administration, or FDA, pre-marketing approval in
October 2004. We commenced commercial sales in the United States in December 2004 and executed a
focused United States launch throughout 2005.
Powerlink Aortic Cuffs and Limb Extensions. The Powerlink Proximal Extensions and Limb
Extensions permit the physician to treat a greater number of patients. Proximal Extensions are
available in 25, 28 and 34 millimeters in diameter and multiple lengths. They also are available in
both infrarenal and suprarenal configurations. Limb extensions are available in 16, 20, and 25
millimeters in diameter with various lengths, allowing the physician to customize the technology to
treat a wide range of patient anatomies. We have obtained the CE Mark for these products in Europe
in October 1999 (16/20 mm Limb Extensions), December 1999 (25/28 mm Proximal Extensions), May 2002
(34 mm Proximal Extensions) and November 2008 (25 mm Limb Extensions). We obtained United States
FDA marketing approval in October 2004 (25 and 28 mm proximal infrarenal extensions and the 16 and
20 mm limb extensions), March 2008 (25 mm limb extensions), and October 2008 (34 mm proximal
infrarenal and suprarenal extensions and 25 and 28 mm proximal suprarenal extensions). Our large
diameter 34mm Proximal Extensions are marketed under the trademark Powerlink XL.
IntuiTrak. In October 2008, we received FDA approval for a new system to deliver and deploy
the Powerlink stent graft. The new system, called IntuiTrak, was designed to further simplify the
implant procedure and provide a delivery profile advantage over many competitive devices. It is
expected to be available for full market introduction in the second quarter of 2009.
Clinical Trials
Powerlink Systems
We continue to conduct clinical trials for other products related to the Powerlink System. As
of December 31, 2008, all the required 63 patients have been enrolled in a clinical trial for a
34mm infrarenal bifurcated device designed to treat patients with large aortic necks.
Marketing and Sales
Powerlink System
United States. We began a focused launch of the Powerlink System in the United States with six
sales representatives and two clinical specialists in late 2004. We have expanded our domestic
sales force to 52 defined sales territories. As of December 31, 2008, 46 of these territories were
filled. The primary customer and decision maker for these devices in the United States is the
vascular surgeon. Through our direct sales force, we provide clinical support and service to many
of the approximately 1,600 hospitals in the United States who perform endovascular aneurysm repair.
Europe. The market for ELGs in Europe is influenced by vascular surgeons, interventional
radiologists and, to a lesser extent, interventional cardiologists who perform catheter directed
treatment of AAA. The European market is less concentrated than the domestic market. We have
obtained the right to affix the CE Mark to our family of Powerlink products. Europe represents a
smaller market opportunity due to capitated hospital budgets and a selling price that is typically
less than in the United States. We currently sell our devices through exclusive independent
distributors.
Japan. The Powerlink System received Shonin approval, which is equivalent to FDA approval of a
PMA application in the United States, in February 2008. We commenced commercial sales to Japan in
February 2008 through Cosmotec our exclusive distributor in that country.
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Rest of World. We have obtained regulatory approval and have active distribution partners in a
number of countries, including Argentina, Brazil, Chile, Colombia, Mexico, South Africa, and
Turkey. In addition, we have obtained regulatory approval but have not initiated the distribution
process in several other countries, including Australia, Canada, and the European countries of
Norway, Poland, Portugal, and Spain. We may or may not pursue these markets depending on the
availability of a suitable distribution partner. We are pursuing regulatory approval in China and
we intend to select a distribution partner in that market during 2009.
Manufacturing
We manufacture our products at our sole location in Irvine, California, a 30,200 square foot
leased facility.
Our current manufacturing process is labor intensive and involves shaping and forming a cobalt
chromium stent, producing ePTFE graft material to form the outside skin of the device, suturing the
graft material on to the stent, and loading the device into a delivery catheter.
In April 2007, we received FDA approval for in-house manufactured ePTFE graft material.
Beginning in 2008, we were producing all of our requirements for this material at a cost which is
significantly lower than our previous acquisition cost under a third party supply agreement.
Patents and Proprietary Information
We have an aggressive program to develop intellectual property in the United States, Europe
and Asia.
We are building a portfolio of apparatus and method patents covering various aspects of our current
and future technology. In the AAA area, we have 17 United States patents issued, covering 361
claims, and 22 pending United States patent applications. Our current AAA related patents begin
expiring in 2017 and the last patent expires in 2019. We intend to continue to file for patent
protection to strengthen our intellectual property position as we continue to develop our
technology.
In addition to our AAA intellectual property, we own or have the rights to 35 issued United
States patents, one issued European patent, and one issued Japanese patent relating to
intravascular radiation, stents, and various catheter technologies. The non-AAA patents begin
expiring in 2012 and the last patent expires in 2018.
Our policy is to protect our proprietary position by, among other methods, filing United
States 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 efforts to require our employees, directors, consultants and advisors, other
advisors and other individuals and entities 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 some other parties, the agreements provide
that all inventions conceived by the individual will be our exclusive property.
Competition
Any product we develop that gains regulatory clearance or approval will have to compete for
market acceptance and market share. We believe that the primary competitive factors in the market
for AAA devices are:
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clinical effectiveness; |
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product safety, reliability and durability; |
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ease of use; |
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distribution capability; and |
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price. |
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We expect that significant competition in the endovascular graft market will develop over
time. Three manufacturers, Medtronic Inc., W.L. Gore Inc., and Cook Medical Products, Inc. have
obtained FDA marketing approval for their endovascular stent grafts. However, we believe that our
technology offers clinical advantages over these other currently available technologies. The
cardiovascular device industry is marked by rapid technological improvements and, as a result,
physicians are open to improved designs. Significant market share and revenue can be captured by
designs demonstrating superior clinical outcomes. We believe deliverability of the device,
dependability of the clinical results and the durability of the product design are the most
important product characteristics. The Powerlink System is the only available AAA device that
provides anatomical fixation and gives physicians the choice of either Infrarenal or suprarenal
proximal extensions.
The following chart details the stent graft characteristics of the minimally-invasive AAA stent
grafts being sold in the United States.
FDA Approved
Stent Graft Characteristics
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Fixation |
Endologix/ Powerlink
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Single piece
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Radial force and anatomical fixation |
Medtronic/ Talent
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Modular
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Radial force and suprarenal stent |
Cook/ Zenith
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Modular
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Radial force, suprarenal stent and barbs |
WL Gore/ Excluder
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Modular
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Radial force and barbs |
In addition to the competitors mentioned above, Terumo-Vascutek, Aptus Medical, Nellix, Cordis
and Lombard Medical are believed to have active development programs.
Most of our competitors have substantially greater capital resources than we do and also have
greater resources and expertise in the areas of research and development, obtaining regulatory
approvals, manufacturing, marketing, and sales. We cannot assure you that competitors and potential
competitors will not succeed in developing, marketing and distributing technologies and products
that are more effective than those we will develop and market or that would render our technology
and products obsolete or noncompetitive. We may be unable to compete effectively against such
competitors and other potential competitors based upon their product development, regulatory,
manufacturing, marketing and sales resources.
Third-Party Reimbursement
In the United States, hospitals are the primary purchasers of our products. Hospitals then
bill various third-party payors, such as Medicare, Medicaid, and other government programs and
private insurance plans, for the healthcare services and products provided to patients. Government
agencies, private insurers and other payors determine whether to provide coverage for a particular
procedure and reimburse hospitals for medical treatment at a fixed rate based on the
diagnosis-related group established by the United States Centers for Medicare and Medicaid
Services, or CMS. The fixed rate of reimbursement is based on the procedure performed, and is
unrelated to the specific devices used in that procedure.
Reimbursement of interventional procedures utilizing our products currently is covered under a
diagnosis-related group. Some payors may deny reimbursement if they determine that the device used
in a treatment was unnecessary, inappropriate or not cost-effective, experimental or used for a
non-approved indication. Therefore, we cannot assure you that reimbursement for any new product we
develop will be available to hospitals and other users, or that future reimbursement policies of
payors will not hamper our ability to sell current or new products on a profitable basis.
In October 2000, the CMS issued a guideline regarding the proper coding of our procedures for
billing purposes. CMS instructed that code 39.71, for endovascular graft repair of aneurysm, be
utilized. For purposes of hospital
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reimbursement, the majority of patients using the Powerlink System device will be classified
under DRG 237, Major Cardiovascular Procedures with Complication/ Co morbidity. In the latest data
published by CMS, the national average reimbursement for DRG 237, which includes hospital costs,
exceeded $24,000. In Europe, reimbursement for the procedure, including the device, typically comes
from the hospitals general fund and is usually from about half to three-quarters of the
reimbursement available in the United States.
Outside the United States, market acceptance of products depends partly upon the availability
of reimbursement within the prevailing healthcare payment system. Reimbursement systems vary
significantly by country, and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Reimbursement is obtained from a variety of sources,
including government sponsored healthcare and private health insurance plans.
Some countries have centrally organized healthcare systems, but in most cases there is a
degree of regional autonomy either in deciding whether to pay for a particular procedure or in
setting the reimbursement level. The manner in which new devices enter the healthcare market
depends on the system. There may be a national appraisal process leading to a new procedure or
product coding, or it may be a local decision made by the relevant hospital department. The latter
is particularly the case where a global payment is made that does not detail specific technologies
used in the treatment of a patient. Most foreign countries also have private insurance plans that
may reimburse patients for alternative therapies.
Following receipt of Shonin approval for the Powerlink System in Japan in February 2008, we
believe that the level of reimbursement in Japan approximates that of the United States. However,
we receive a negotiated sales price from our distributor, not the full selling price to the user.
Government Regulation
The manufacturing and marketing of our products are subject to extensive and rigorous
government regulation in the United States and in other countries. Prior to commercialization, new
products must meet rigorous governmental agency requirements for pre-clinical and clinical testing
and patient follow-up. Federal regulations control the ongoing safety, efficacy, manufacture,
storage, labeling, record-keeping, and marketing of all medical devices. We cannot sell or market
our products without United States or foreign government regulatory approvals.
Devices such as our Powerlink System are subject to the rigorous PMA review process with the
FDA to assure safety and effectiveness. The PMA must be approved by the FDA prior to marketing and
sale of the device in the United States. The PMA process is complex, expensive and time-consuming
and requires the submission of extensive clinical data. The Powerlink System was approved through
this PMA process in October 2004.
FDA regulations require us to register as a medical device manufacturer with the FDA.
Additionally, the California Department of Health Services, or CDHS, requires us to register as a
medical device manufacturer within the state. Because of this, the FDA and the CDHS inspect us on a
routine basis for compliance with Quality System Records, or QSR regulations. These regulations
require that we manufacture our products and maintain related documentation in a proscribed manner
with respect to manufacturing, testing and control activities. We have undergone and expect to
continue to undergo regular QSR inspections in connection with the manufacture of our products at
our facility. Further, the FDA requires us to comply with various FDA regulations regarding
labeling. The Medical Device Reporting laws and regulations require us to provide information to
the FDA on deaths or serious injuries alleged to have been associated with the use of our devices,
as well as product malfunctions that likely would cause or contribute to death or serious injury if
the malfunction were to recur. In addition, the FDA prohibits an approved device from being
marketed for unapproved applications.
Failure to comply with applicable regulatory requirements can, among other consequences,
result in fines, injunctions, civil penalties, suspensions or loss of regulatory approvals, product
recalls, seizure of products, operating restrictions and criminal prosecution. In addition,
government regulations may be established in the future that could prevent or delay regulatory
clearance or approval of our products.
We are subject to other federal, state and local laws, regulations and recommendations
relating to safe working conditions, laboratory and manufacturing practices. We cannot accurately
predict the extent of government regulation that might result from any future legislation or administrative action.
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Our international sales are subject to regulatory requirements in the countries in which our
products are sold. The regulatory review process varies from country to country and may in some
cases require the submission of clinical data. We most likely would rely on distributors in such
foreign countries to obtain the requisite regulatory approvals. We cannot assure you, however, that
we would obtain such approvals on a timely basis or at all. In addition, the FDA must approve the
export to certain countries of devices that require a PMA but are not yet approved domestically.
In Europe, we need to comply with the requirements of the Medical Devices Directive, or MDD,
and affix the CE Mark on our products to attest to such compliance. To achieve compliance, our
products must meet the Essential Requirements of the MDD relating to safety and performance and
we must successfully undergo verification of our regulatory compliance, or conformity assessment,
by a Notified Body selected by us. The level of scrutiny of such assessment depends on the
regulatory class of the product.
In December 1998, we received ISO 9001:1994/ EN46001:1996 certification from our Notified Body
with respect to the manufacturing of all of our products in our facilities. In September 2002, we
received ISO 9001:1994/ EN46001:1996 and ISO 13485:1996 certification. In December 2005, we
received ISO13485:2003 certification. We are subject to continued surveillance by our Notified Body
and will be required to report any serious adverse incidents to the appropriate authorities. We
also must comply with additional requirements of individual nations.
Product Liability
The manufacture and marketing of medical devices carries the risk of financial exposure to
product liability claims. Our products are used in situations in which there is a high risk of
serious injury or death. Such risks will exist even with respect to those products that have
received, or in the future may receive, regulatory approval for commercial sale. We are currently
covered under a product liability insurance policy with coverage limits of $10.0 million per
occurrence and $10.0 million per year in the aggregate subject to usual self insured retention
amounts. We cannot assure you that our product liability insurance is adequate or that such
insurance coverage will remain available at acceptable costs. We also cannot assure you that we
will not incur significant product liability claims in the future.
Employees
As of December 31, 2008, we had 190 employees, including 98 in manufacturing, seven in
research and development, six in regulatory and clinical affairs, 64 in sales, marketing and
customer service and 15 in administration. We believe that the success of our business will depend,
in part, on our ability to attract and retain qualified personnel. Our employees are not subject to
a collective bargaining agreement, and we believe we have good relations with our employees.
Research and Development
We spent $6.1 million in 2008, $6.4 million in 2007, and $6.8 million in 2006, on research and
development, including clinical studies. Our focus is to continually develop innovative and cost
effective medical device technology for the treatment of aortic disorders. We believe that our
ability to develop new technologies is a key to our future growth and success. Our research and
development activities focus on technology to support our existing Powerlink System, product line
extensions for the Powerlink System, and new technologies to address AAA and other aortic
disorders. Historically, we have focused on these first two areas of research and development.
However, we believe that we will need to continue to devote more resources to new technologies for
AA and aortic disorders to continue to grow our business. These research and development activities
will likely require significant cash resources.
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, we merged with privately held
Radiance Medical Systems, Inc. and changed our name to Radiance Medical Systems, Inc. and in May
2002, we merged with privately
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held Endologix, Inc., and changed our name to Endologix, Inc. Our principal executive office
is located at 11 Studebaker, Irvine, California and our telephone number is (949) 595-7200. Our
website is located at www.endologix.com. The information on, or that can be accessed through, our
website is not incorporated by reference into this report and should not be considered to be a part
of this report.
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to these reports available on our website, at www.endologix.com, free of
charge as soon as practicable after filing with the U.S. Securities and Exchange Commission, or
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
SECs public reference room located at 100 F St., NE, Washington, D.C., 20549. Information
regarding operation of the SECs public reference room can be obtained by calling the SEC at
1-800-SEC-0330.
Item 1A. Risk Factors
The following risks could affect our business, financial results and results of operations.
These risk factors should be considered in connection with evaluating the forward-looking
statements contained in this Annual Report on Form 10-K because these factors could cause actual
results and conditions to differ materially from those projected in the forward-looking statements.
Substantially all of our revenue is generated from a single product, the Powerlink System, and
any declines in the sale of this product will negatively impact our business.
We have focused heavily on the development and commercialization of a single technology, the
Powerlink System, because of limited resources. If we are unable to continue to achieve market
acceptance of the Powerlink System and do not achieve positive cash flow from operations, we will
be constrained in our ability to fund development and commercialization of improvements and other
product lines.
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
the Powerlink System Our existing resources may not allow us to conduct all of the research and
development activities that we believe would be beneficial for our future growth. As a result, we
may need to seek funds in the future to finance these activities. If we are unable to raise funds
on favorable terms, or at all, we may not be able to increase our research and development
activities and the growth of our business may be negatively impacted.
Our success depends on the growth in the number of AAA patients treated with endovascular
devices.
Of the estimated 2.0 million people with AAA in the United States, about 200,000 new diagnoses
are made each year. About 35,000 are treated with an endovascular device. Our success with our
Powerlink
System will depend on an increasing percentage of patients with AAA being diagnosed, and an
increasing percentage of those diagnosed receiving endovascular, as opposed to open surgical
procedures. Initiatives to increase screening for AAA are underway but are out of our control and
such general screening programs may never gain wide acceptance. The failure to diagnose more
patients with AAA, could negatively impact sales of the Powerlink System.
Our success depends on convincing physicians to use the Powerlink System in more endovascular
AAA procedures.
We believe that physicians may have chosen to use our Powerlink System for AAA procedures that
involved abnormal vasculatures, such as those with difficult neck anatomies, while using
competitive products for more normal vasculatures. We believe physicians did not choose the
Powerlink System for these more common endovascular AAA procedures primarily as result of the
perception of the ease of use of competitive products versus the Powerlink System. However, with
the introduction of our IntuiTrak delivery system, we believe that physicians
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will be more willing to use the Powerlink System in a wider variety of endovascular AAA
procedures. However, if we are unable to convince physicians of the ease of use of the Powerlink
System compared to competitive products, we may not be able to achieve our anticipated growth and
our business could be negatively impacted.
Our international operations subject us to certain operating risks, which could adversely impact
our net sales, results of operations and financial condition.
Sales of our products outside the United States represented 15% of our revenue in 2008.
Through December 31, 2008, we have sold our products through distributors in the following
countries outside of the United States: Argentina, Brazil, Chile, Colombia, Germany, Greece,
Ireland, Italy, Japan, Mexico, South Africa, and Turkey. The sale and shipment of our products
across international borders, as well as the purchase of components and products from international
sources, subject us to extensive U.S. and foreign governmental trade, import and export, and custom
regulations and laws. Compliance with these regulations is costly and exposes us to penalties for
non-compliance. Other laws and regulations that can significantly impact us include various
anti-bribery laws, including the U.S. Foreign Corrupt Practices Act and anti-boycott laws. Any
failure to comply with applicable legal and regulatory obligations could impact us in a variety of
ways that include, but are not limited to, significant criminal, civil and administrative
penalties, including imprisonment of individuals, fines and penalties, denial of export privileges,
seizure of shipments, restrictions on certain business activities, and exclusion or debarment from
government contracting. Also, the failure to comply with applicable legal and regulatory
obligations could result in the disruption of our shipping and sales activities.
In addition, many of the countries in which we sell our products are, to some degree, subject
to political, economic or social instability. Our international operations expose us and our
distributors to risks inherent in operating in foreign jurisdictions. These risks include:
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the imposition of additional U.S. and foreign governmental controls or regulations; |
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the imposition of costly and lengthy new export licensing requirements; |
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the imposition of U.S. or international sanctions against a country, company, person or
entity with whom we do business that would restrict or prohibit continued business with the
sanctioned country, company, person or entity; |
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economic instability; |
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a shortage of high-quality sales people and distributors; |
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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; |
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changes in duties and tariffs, license obligations and other non-tariff barriers to
trade; |
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the imposition of new trade restrictions; |
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the imposition of restrictions on the activities of foreign agents, representatives and
distributors; |
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scrutiny of foreign tax authorities which could result in significant fines, penalties
and additional taxes being imposed on us; |
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pricing pressure that we may experience internationally; |
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laws and business practices favoring local companies; |
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longer payment cycles; |
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difficulties in maintaining consistency with our internal guidelines; |
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difficulties in enforcing agreements and collecting receivables through certain foreign
legal systems; and |
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difficulties in enforcing or defending intellectual property rights. |
Any of these factors may adversely impact our operations. Our international sales are
predominately in Europe. In Europe, healthcare regulation and reimbursement for medical devices
vary significantly from country to country. This changing environment could adversely affect our
ability to sell our products in some European countries, which could negatively affect our results
of operations.
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 hurt our business substantially. 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:
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stop selling, making or using products that use the disputed intellectual property; |
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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; |
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redesign our products, processes or services; or |
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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.
If third-party payors do not provide reimbursement for the use of the Powerlink System, our
revenues may be negatively impacted.
Our success in marketing the Powerlink System 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 product. 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 made available for the Powerlink System, or any other
product that we may develop, in either the United States or internationally, the demand for our
products will be adversely affected.
Current challenges in the commercial and credit environment may adversely affect our business
and financial condition.
The global financial markets have recently experienced unprecedented levels of volatility. Our
ability to generate cash flows from operations or 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 in the solvency of our customers, deterioration in our key financial
ratios, maintenance of compliance with financial covenants in existing credit
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agreements, or credit ratings, or other significantly unfavorable changes in conditions. While
these conditions and the current economic downturn have not meaningfully impaired our ability to
access credit markets or meaningfully adversely affected 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 and services, and the
amount spent on healthcare generally. This could result in a decrease in the demand for our
products and services, longer sales cycles, slower adoption of new technologies and increased price
competition.
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 in the future due to, among
others, the following reasons:
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physician acceptance of the Powerlink System; |
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the conduct and results of clinical trials; |
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the timing and expense of obtaining future regulatory approvals; |
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fluctuations in our expenses associated with expanding our operations; |
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the introduction of new products by our competitors; |
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changes in our pricing policies or in the pricing policies of our competitors or
suppliers; and |
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changes in third-party payors reimbursement policies. |
Because of these and possibly other factors, it is likely that in some future period our
operating results will not meet investor expectations or those of public market analysts.
Any unanticipated change in revenues or operating results is likely to cause our stock price
to fluctuate since such changes reflect new information available to investors and analysts. New
information may cause investors and analysts to revalue our stock, which could cause a decline in
the trading price of our stock.
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 and enhancements to the Powerlink System. However, we
may not be able to successfully develop and obtain regulatory clearance or approval for product
enhancements, or new products or our future 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:
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properly identify and anticipate vascular surgeons and patient needs; |
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develop and introduce new products or product enhancements in a timely manner; |
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avoid infringing upon the intellectual property rights of third parties; |
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demonstrate, if required, the safety and efficacy of new products with data from
preclinical studies and clinical trials; |
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obtain the necessary regulatory clearances or approvals for new products or product
enhancements; |
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be fully FDA-compliant with marketing of new devices or modified products; |
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provide adequate training to potential users of our products; |
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receive adequate coverage and reimbursement for procedures performed with our products;
and |
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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.
If clinical trials of our current or future product candidates 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 several clinical trials and will likely need to conduct additional
clinical trials in the future in support of new product approvals. Clinical testing is expensive,
typically takes many years and has 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:
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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; |
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patients or investigators do not comply with study protocols; |
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patients do not return for post-treatment follow-up at the expected rate; |
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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; |
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sites participating in an ongoing clinical study may withdraw, requiring us to engage
new sites; |
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difficulties or delays associated with bringing additional clinical sites on-line; |
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third-party clinical investigators decline to participate in our clinical studies, do
not perform the clinical studies on the anticipated schedule or consistent with the
investigator agreement, clinical study protocol, good clinical practices, and other FDA and
Institutional Review Board requirements; |
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third-party organizations do not perform data collection and analysis in a timely or
accurate manner; |
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regulatory inspections of our clinical studies require us to undertake corrective
action or suspend or terminate our clinical studies; |
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changes in U.S. federal, state, or foreign governmental statutes, regulations or
policies; |
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interim results are inconclusive or unfavorable as to immediate and long-term safety or
efficacy; or |
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the study design is inadequate to demonstrate safety and efficacy. |
Clinical failure can occur at any stage of the testing. Our clinical trials may produce
negative or inconclusive
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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.
Our business is subject to extensive governmental regulation that could make it more expensive
and time consuming for us to introduce new or improved products.
Our products must comply with regulatory requirements imposed by the FDA and similar agencies
in foreign countries. These requirements involve lengthy and detailed laboratory and clinical
testing procedures, sampling activities, an extensive FDA 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:
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FDA approval process; |
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California Department of Health Services requirements; |
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ISO 9001:1994 and ENISO 13485:2003; and |
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European Union CE Mark requirements. |
Government regulation may impede our ability to conduct continuing clinical trials of
Powerlink System enhancements and to manufacture the Powerlink System and other prospective
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 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 use, misuse or off-label use of our products may harm our image in the marketplace or result
in injuries that lead to product liability suits, which could be costly to our business or
result in FDA sanctions if we are deemed to have engaged in such promotion.
Our currently marketed products have been cleared by the FDA for specific treatments. We
cannot, however, prevent a physician from using our products outside of those indications cleared
for use, known as off-label use. There may be increased risk of injury if physicians attempt to use
our products off-label. We train our sales force not to promote our products for off-label uses.
Furthermore, the use of our products for indications other than those indications for which our
products have been cleared by the FDA may not effectively treat such conditions, which could harm
our reputation in the marketplace among physicians and patients. Physicians may also misuse our
products or use improper techniques if they are not adequately trained, potentially leading to
injury and an increased risk of product liability. If our products are misused or used with
improper technique, we may become subject to costly litigation by our customers or their patients.
Product liability claims could divert managements attention from our core business, be expensive
to defend and result in sizable damage awards against us that may not be
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covered by insurance. If we are deemed by FDA to have engaged in the promotion of any 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 to decline.
If we fail to develop and maintain our direct sales force, our business could suffer.
We have a nationally staffed direct sales force and we 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 business
relationships. 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 maintain 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 on medical device distributors and strategic relationships for the marketing and
selling of our Powerlink System internationally. We depend on these distributors efforts to market
our product, yet we are unable to control their efforts completely. In addition, we are unable to
ensure that our distributors are complying all applicable laws regarding the sales of our products.
If our distributors fail to market and sell our products effectively and in compliance with
applicable laws, our operating results and business may suffer substantially, or we may have to
make significant additional expenditures or concessions to market our products.
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 ability to generate revenue will be reduced or eliminated.
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 are publicly traded or are divisions of publicly-traded companies,
and these companies enjoy several competitive advantages, including:
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greater financial and human resources for product development, sales and marketing and
patent litigation; |
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significantly greater name recognition; |
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established relationships with physicians, customers and third-party payors; |
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additional lines of products, and the ability to offer rebates or bundle products to
offer greater discounts or incentives to gain a competitive advantage; |
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established sales and marketing, and distribution networks; and |
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greater experience in conducting research and development, manufacturing, clinical
trials, preparing regulatory submissions and obtaining regulatory clearance or approval for
products and marketing approved products. |
Our competitors may develop and patent processes or products earlier than us, obtain
regulatory clearance or approvals for competing products more rapidly than us, and develop more
effective or less expensive products or technologies that render our technology or products
obsolete or non-competitive. We also compete with our competitors in recruiting and retaining
qualified scientific, sales, and management personnel, establishing clinical trial sites and
patient enrollment in clinical trials, as well as in acquiring technologies and technology licenses
complementary to our products or advantageous to our business. If our competitors are more
successful than us in these matters, our business may be harmed.
Our dependence upon key personnel to operate our business puts us at risk of a loss of expertise
if key personnel were to leave us.
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We depend upon the experience and expertise of our executive management team. The competition
for executives, as well as for skilled product development and technical personnel, in the medical
device industry is intense and we may not be able to retain or recruit the personnel we need. If we
are not able to attract and retain existing and additional highly qualified management, sales,
regulatory, clinical and technical personnel, we may not be able to successfully execute our
business strategy.
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 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. We may in the future experience
difficulties in increasing production, including problems with production yields and quality
control and assurance, 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.
We are required to maintain compliance with financial and other restrictive covenants in our
credit facility which can restrict our ability to operate our business, and if we fail to comply
with those covenants, our outstanding indebtedness may be accelerated or the terms of the credit
facility may become more onerous.
Our existing credit facility with Silicon Valley Bank contain negative covenants on the
operation of our business and financial covenants, including requiring us to maintain a tangible
net worth of $13.0 million. As of December 31, 2008, our tangible net worth was $13.7 million. If
we are not able to maintain compliance with our financial covenants, certain terms of our credit
facility and term loan will change including an increase in the interest rate and a limitation on
the amounts available for borrowing under the credit facility based on eligible accounts
receivable. Further, if we do not maintain a tangible net worth of at least $12.0 million through
June 29, 2009 and $12.5 million thereafter, we will be in default under the credit facility. In
addition, the credit facility contains restrictions on certain business activities, including:
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incurring additional debt; |
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paying dividends or make other distributions or payments on capital stock; |
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merging or consolidating or otherwise combining with another company. |
These covenants could adversely affect our ability to finance our future operations or capital
needs and pursue available business opportunities, including acquisitions. A breach of any of these
covenants could result in a default allowing the lender to accelerate the repayment of the
indebtedness under the credit facility.
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We have a history of operating losses and may be required to obtain additional funds.
We had $7.6 million in cash and cash equivalents at December 31, 2008. In addition, we had
$3.0 million available to borrow under our revolving credit facility. We have had a history of
operating losses, and although we expect to achieve positive cash flow from operations in the
second quarter of 2009, we may not be able to do so. Our cash requirements in the future may be
significantly different from our current estimates and depend on many factors, including:
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the results of our commercialization efforts for the Powerlink System; |
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the need for additional capital to fund future development programs; |
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the costs involved in obtaining and enforcing patents or any litigation by third
parties regarding intellectual property; |
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the establishment of high volume manufacturing and increased sales and marketing
capabilities; and |
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|
our success in entering into collaborative relationships with other parties. |
To finance these activities, we may seek funds through borrowings or through additional rounds
of financing, including private or public equity or debt offerings and collaborative arrangements
with corporate partners. We may be unable to raise funds on favorable terms, or at all. During the
recent economic crisis, it has been difficult for many companies, particularly small cap medical
device companies, to obtain financing in the public markets or to obtain debt financing on
commercially reasonable terms, if at all. In addition, the sale of additional equity or convertible
debt securities could result in additional dilution to our stockholders. If we borrow additional
funds or issue debt securities, these securities could have rights superior to holders of our
common stock, and could contain covenants that will restrict our operations. We might have to
obtain funds through arrangements with collaborative partners or others that may require us to
relinquish rights to our technologies, product candidates or products that we otherwise would not
relinquish. If we do not obtain additional resources, our ability to capitalize on business
opportunities will be limited, and the growth of our business will be harmed.
We rely solely on an in-house process to manufacture our graft material for the Powerlink
System, and any disruption in our ability to produce this material could delay or prevent us
from producing the product for sale.
Currently, we rely solely on an in-house manufacturing process to produce graft material,
which is a primary component for the Powerlink System. Our reliance on a sole source exposes our
operations to disruptions in supply caused by:
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failure to comply with regulatory requirements; |
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|
fire, flood or earthquake, or other natural disaster; and |
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a supply interruption in the underlying raw material for the process. |
Although we retain a significant stock of the graft material, the occurrence of any of the
above disruptions in supply or other unforeseen events that could cause a disruption in our process
to manufacture graft material may cause us to halt or experience a disruption in manufacturing the
Powerlink System. Because we do not have alternative suppliers, our sales and operating results
would be harmed in the event of a disruption.
If we are unable to protect our intellectual property, our business may be negatively affected.
The market for medical devices is subject to frequent litigation regarding patent and other
intellectual property rights. It is possible that our patents or licenses may not withstand
challenges made by others or protect our rights adequately.
Our success depends in large part on our ability to secure effective patent protection for our
products and processes in the United States and internationally. We have filed and intend to
continue to file patent applications for various aspects of our technology. However, we face the
risks that:
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we may fail to secure necessary patents prior to or after obtaining regulatory
clearances, thereby permitting competitors to market competing products; and |
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our already-granted patents may be re-examined, re-issued or invalidated. |
18
We also own trade secrets and confidential information that we try to protect by entering into
confidentiality agreements with other parties. However, the confidentiality agreements may not be
honored or, if breached, we may not have sufficient remedies to protect our confidential
information. Further, our competitors may independently learn our trade secrets or develop similar
or superior technologies. To the extent that our consultants, key employees or others apply
technological information to our projects that they develop independently or others develop,
disputes may arise regarding the ownership of proprietary rights to such information, and such
disputes may not be resolved in our favor. If we are unable to protect our intellectual property
adequately, our business and commercial prospects likely will suffer.
If we are unable to effectively manage our inventory held on consignment by our intended
customers, we will not achieve our expected results.
Our Powerlink System is sold on a consignment basis to certain hospitals which purchase our
product as they use it. In these consignment locations, we do not have physical possession of our
products. We therefore must rely on information from our customers as well as periodic inspections
by our sales personnel to determine when our products have been used. Our efforts to strengthen our
monitoring and management of consigned inventory may not be adequate to meaningfully reduce the
risk of inventory loss. If we are not able to effectively manage appropriate consigned inventory
levels, we may suffer inventory losses which will reduce our operating results.
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 the reputation and sale of our products, our ability to obtain and maintain
regulatory approval for our products and may divert managements attention from other matters.
Our operations are currently conducted at a single location that may be at risk from earthquakes
or other natural disasters.
We currently conduct all of our manufacturing, development and management activities at a
single location in Irvine, California, near known earthquake fault zones. We have taken precautions
to safeguard our facilities, including insurance, health and safety protocols, and off-site storage
of computer data. However, any future natural disaster, such as an earthquake, could cause
substantial delays in our operations, damage or destroy our equipment or inventory, and cause us to
incur additional expenses. A disaster could seriously harm our business and results of operations.
The insurance coverage we maintain may not be adequate to cover our losses in any particular case.
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, as they have during the past year. In
particular, the market price of securities of small medical device companies, like ours, has been
very unpredictable and may vary in response to:
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announcements by us or our competitors concerning technological innovations; |
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introductions of new products; |
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FDA and foreign regulatory actions; |
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developments or disputes relating to patents or proprietary rights; |
19
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failure of our results of operations to meet the expectations of stock market analysts
and investors; |
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changes in stock market analyst recommendations regarding our common stock; |
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|
changes in healthcare policy in the United States or other countries; and |
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general stock market conditions and other factors unrelated to our operating
performance. |
Trading in our stock over the last twelve months has been limited, so investors may not be able
to sell as much stock as they want at prevailing prices.
The average daily trading volume in our common stock for the year ended December 31, 2008 was
approximately 85,000 shares. If limited trading in our stock continues, it may be difficult for
investors to sell their shares in the public market at any given time at prevailing prices.
Moreover, the market price for shares of our common stock may be made more volatile because of the
relatively low volume of trading in our common stock. When trading volume is low, significant price
movement can be caused by the trading in 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 your ability to receive a premium price
for your shares.
Provisions of our amended and restated certificate of incorporation could make it more difficult
for a third party to acquire control of our business, even if such change in control would be
beneficial to our stockholders. Our amended and restated certificate of incorporation allows our
board of directors to issue up to five million shares of preferred stock and to fix the rights and
preferences of such shares without stockholder approval. Any such issuance could make it more
difficult for a third party to acquire our business and may adversely affect the rights of our
stockholders. In addition, our board of directors is divided into three classes for staggered terms
of three years. We are also subject to anti-takeover provisions under Delaware law, each of which
could delay or prevent a change of control. Together these provisions may delay, deter or prevent a
change in control of us, adversely affecting the market price of our common stock.
We do not anticipate declaring any cash dividends on our common stock.
We have never declared or paid cash dividends on our common stock and do not plan to pay any
cash dividends in the near future. Our current policy is to retain all funds and any earnings for
use in the operation and expansion of our business. The payment of cash dividends by us is
restricted by our revolving credit facility, which contains restrictions prohibiting us from paying
any cash dividends without the lenders prior approval. If we do not pay dividends, our stock may
be less valuable to you because a return on your investment will only occur if our stock price
appreciates.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Currently, we lease a facility aggregating approximately 30,200 square feet in Irvine,
California under a lease agreement that expires in April 2010 and may be renewed for two additional
five-year periods, at our option.
We believe that our current facilities will be adequate and suitable for our operations through the
initial lease term.
Item 3. Legal Proceedings
On December 1, 2008, we entered into a settlement with Cook Medical Incorporated for claims
arising out of our employment of certain former employees of Cook. Although we are not currently a
party to any claims, we may become party to ordinary disputes arising in the normal course of
business.
Item 4. Submission of Matters to a Vote of Security Holders
None.
20
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock trades on the NASDAQ Global Market under the symbol ELGX. The following
table sets forth the high and low sale prices for our common stock as reported on the NASDAQ Global
Market for the periods indicated.
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High |
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Low |
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Year Ended December 31, 2007
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|
|
|
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First Quarter |
|
$ |
4.75 |
|
|
$ |
3.15 |
|
Second Quarter |
|
|
4.69 |
|
|
|
3.82 |
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Third Quarter |
|
|
4.54 |
|
|
|
3.13 |
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Fourth Quarter |
|
|
4.19 |
|
|
|
2.56 |
|
Year Ended December 31, 2008 |
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|
|
|
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First Quarter |
|
$ |
3.31 |
|
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$ |
2.20 |
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Second Quarter |
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|
3.16 |
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|
|
2.25 |
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Third Quarter |
|
|
2.95 |
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|
|
1.82 |
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Fourth Quarter |
|
|
2.35 |
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|
|
.85 |
|
On February 10, 2009, the closing sale price of our common stock on the NASDAQ Global Market
was $1.69 per share and there were 220 record holders of our common stock.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Endologix, Inc., The NASDAQ Composite
Index
And The NASDAQ Medical Equipment Index
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* |
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$100 invested on 12/31/03 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. |
21
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 Silicon Valley Bank, which
was entered into on February 21, 2007 and amended on July 22, 2008, prohibit us from paying cash
dividends without their consent.
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, 2008, 2007, and 2006 are included elsewhere in this Annual Report on Form
10-K. The information set forth below should be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of Operations and consolidated financial statements
and notes thereto included herein.
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|
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|
|
|
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Year Ended December 31, |
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2008 |
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2007 |
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2006 |
|
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2005 |
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2004 |
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(In thousands, except per share data) |
|
Consolidated Statement of Operations Data: |
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|
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Revenue: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
37,631 |
|
|
$ |
27,017 |
|
|
$ |
14,422 |
|
|
$ |
6,889 |
|
|
$ |
3,019 |
|
License |
|
|
33 |
|
|
|
754 |
|
|
|
250 |
|
|
|
250 |
|
|
|
1,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
37,664 |
|
|
|
27,771 |
|
|
|
14,672 |
|
|
|
7,139 |
|
|
|
4,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Cost of product sales |
|
|
10,380 |
|
|
|
10,539 |
|
|
|
6,330 |
|
|
|
3,859 |
|
|
|
1,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
10,380 |
|
|
|
10,539 |
|
|
|
6,330 |
|
|
|
3,859 |
|
|
|
1,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
27,284 |
|
|
|
17,232 |
|
|
|
8,342 |
|
|
|
3,280 |
|
|
|
2,381 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
6,060 |
|
|
|
6,372 |
|
|
|
6,765 |
|
|
|
5,817 |
|
|
|
6,159 |
|
Marketing and sales |
|
|
23,794 |
|
|
|
20,142 |
|
|
|
14,579 |
|
|
|
8,794 |
|
|
|
2,718 |
|
General and administrative |
|
|
9,477 |
|
|
|
6,380 |
|
|
|
5,585 |
|
|
|
4,801 |
|
|
|
3,548 |
|
Termination of supply agreement |
|
|
|
|
|
|
550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
39,331 |
|
|
|
33,444 |
|
|
|
26,929 |
|
|
|
19,412 |
|
|
|
12,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(12,047 |
) |
|
|
(16,212 |
) |
|
|
(18,587 |
) |
|
|
(16,132 |
) |
|
|
(10,044 |
) |
Total other income |
|
|
55 |
|
|
|
1,137 |
|
|
|
1,044 |
|
|
|
614 |
|
|
|
361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(11,992 |
) |
|
$ |
(15,075 |
) |
|
$ |
(17,543 |
) |
|
$ |
(15,518 |
) |
|
$ |
(9,683 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.28 |
) |
|
$ |
(0.35 |
) |
|
$ |
(0.44 |
) |
|
$ |
(0.46 |
) |
|
$ |
(0.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and
diluted net loss per share |
|
|
43,045 |
|
|
|
42,796 |
|
|
|
40,010 |
|
|
|
33,951 |
|
|
|
31,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
|
(In thousands) |
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, restricted cash and cash equivalents |
|
$ |
8,111 |
|
|
$ |
9,228 |
|
|
$ |
6,771 |
|
|
$ |
8,691 |
|
|
$ |
4,831 |
|
Marketable securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
13,417 |
|
|
|
8,959 |
|
|
|
17,085 |
|
Working capital |
|
|
15,876 |
|
|
|
18,365 |
|
|
|
26,933 |
|
|
|
22,520 |
|
|
|
23,477 |
|
Total assets |
|
|
37,263 |
|
|
|
40,043 |
|
|
|
52,686 |
|
|
|
47,944 |
|
|
|
44,512 |
|
Accumulated deficit |
|
|
(143,730 |
) |
|
|
(131,738 |
) |
|
|
(116,663 |
) |
|
|
(99,120 |
) |
|
|
(83,602 |
) |
Total stockholders equity |
|
|
25,817 |
|
|
|
34,675 |
|
|
|
46,505 |
|
|
|
42,207 |
|
|
|
41,551 |
|
Item 7. Managements 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.
22
Overview
Our Business
We are engaged in the development, manufacturing, marketing and sale of minimally invasive
treatments for aortic disorders. Our primary focus is the marketing and sale of the Powerlink
System, a catheter-based alternative treatment to surgery for 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 abdominal aortic aneurysms is approximately 75%, making it a leading cause of death in the
United States.
Prior to the acquisition of former Endologix and the restructuring that occurred during the
third and fourth quarters of 2001, we were researching, developing and marketing a radiation
therapy catheter for the treatment of blockages in arteries after angioplasty, or restenosis.
Between 1999 and 2003, our source of revenues shifted gradually from direct sales of previous
catheter and stent products to royalties from licenses of our stent delivery technology. In June
1998, we licensed to Guidant rights to manufacture and distribute products using our Focus
technology for the delivery of stents in exchange for milestone and royalty payments. In April
2006, Abbott acquired Guidants vascular business, including all rights and obligations under the
license.
Our license revenue decreased in 2008 from 2007. In 2007, under our licensing agreement with
BioLucent, Inc., we received $504,000 in royalties and fees, including a one-time payment of
$500,000 in exchange for a fully paid-up license to certain of our patents. License revenue from
Abbott remained at the contractual minimum level of $250,000 for 2007 and the minimum payment
requirement under the agreement expired at December 31, 2007. In 2008, we received de minimus
royalties under this agreement prior to its expiration in June 2008. Sales of our Powerlink System
are now our only material source of revenue.
For the years ended December 31, 2008 and 2007, we incurred net losses of $12.0 million and
$15.1 million, respectively. As of December 31, 2008, we had an accumulated deficit of
approximately $143.7 million.
We believe that our current cash balance, in combination with cash receipts generated from
sales of the Powerlink System and borrowings available under our credit facility, will be
sufficient to fund ongoing operations through at least December 31, 2009. If we do not realize
expected revenue and gross margin levels, or if we are unable to manage our operating expenses in
line with our revenues, or if we cannot maintain our days sales outstanding accounts receivable
ratio, we may not be able to fund our operations through December 31, 2009.
In the event that we require additional funding to continue our operations, we will 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 are not able to raise
additional funds, we may be required to significantly curtail our operations and this would have an
adverse effect on our financial position, results of operations and cash flows.
Summary of Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those related to
collectibility of customer accounts, whether the cost of inventories can be recovered, the value
assigned to and estimated useful life of intangible assets, the realization of tax assets and
estimates of tax liabilities, contingent liabilities and the potential outcome of litigation. We
base our estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities. Actual results may differ from these estimates
under different assumptions or conditions.
23
The following critical accounting policies and estimates were used in the preparation of the
consolidated financial statements:
Revenue Recognition and Accounts Receivable
We comply with the revenue recognition guidelines in SEC Staff Accounting Bulletin No. 104,
Revenue Recognition. We recognize revenue when all of the following criteria are met:
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Persuasive evidence of an arrangement exists; |
|
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|
|
The sales price is fixed or determinable; |
|
|
|
|
Collection of the relevant receivable is probable at the time of sale; and |
|
|
|
|
Products have been shipped or used and the customer has taken ownership and assumed
risk of loss. |
In the past, we have earned royalty revenue, which was included in license revenue in the
consolidated statement of operations, as a result of the sale of product rights and technologies to
third parties. Royalties were recognized upon the sale of products subject to the royalty by the
third party.
We do not offer rights of return and we have no post delivery obligations other than our
specified warranty.
We maintain allowances for doubtful accounts for estimated losses resulting from the inability
of our customers to make required payments. These estimates are based on our review of the aging of
customer balances, correspondence with the customer, and the customers payment history. If
additional information becomes available to us indicating the financial condition of the customer
is deteriorating, additional allowances may be required.
Inventories
We write down our inventory for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the estimated realizable value based upon assumptions
about future demand, as driven by economic and market conditions, and the products shelf life. If
actual demand, or economic or market conditions are less favorable than those projected by
management, additional inventory write-downs may be required.
Goodwill, Intangible Assets and Long-Lived Assets
We record an impairment charge, or expense, for long-lived assets whenever events or changes
in circumstances indicate that the value recorded for the asset may not be recoverable. Future
changes in operations could cause us to write down the asset value and record an expense to better
reflect our current estimate of its value. Goodwill and indefinite-lived intangible assets are
tested for impairment annually, or more frequently if events or changes in circumstances indicate
that the goodwill or indefinite-lived intangible assets are impaired. Factors that may impact
whether there is potential goodwill impairment include a significant decrease in our stock price
and our evaluation of a control premium that may be used when estimating our total fair value. Our
stock price may decline, or other factors may arise, which could result in goodwill impairment in
future periods. Factors that may impact whether there is a potential impairment to our
indefinite-lived intangible assets include legal and regulatory considerations.
Income Taxes
We record the estimated future tax effects of temporary differences between the tax basis of
assets and liabilities and amounts reported in the financial statements, as well as operating
losses and tax credit carry forwards. We have recorded a full valuation allowance to reduce our
deferred tax assets to zero, because we believe that, based upon a number of factors, it is more
likely than not that the deferred tax assets will not be realized. If we were to determine that we
would be able to realize our deferred tax assets in the future, an adjustment to the valuation
allowance on our deferred tax assets would increase net income in the period such determination was
made.
24
In July 2006, the Financial Accounting Standards Board issued FIN 48. FIN 48 prescribes a
comprehensive model for how companies should recognize, measure, present, and disclose, in their
financial statements, uncertain tax positions taken or expected to be taken on a tax return. Under
FIN 48, tax positions must initially be recognized in the financial statements when it is more
likely than not the position will be sustained upon examination by the tax authorities. Such tax
positions must initially and subsequently be measured as the largest amount of tax benefit that is
greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming
full knowledge of the position and relevant facts.
Stock-based compensation
Effective at the beginning of our fiscal year 2006, we adopted Statement of Financial
Accounting Standards, or SFAS No. 123R, Share-Based Payments, or SFAS 123R. This statement
requires us to recognize the cost of employee and director services received in exchange for stock
options awarded. Under SFAS 123R, we are required to recognize compensation expense over an awards
vesting period based on the awards fair value at the date of grant. We use the Black-Scholes
option pricing model to value stock option grants. The fair value for awards that are expected to
vest is then amortized on a straight-line basis over the requisite service period of the award,
which is generally the option vesting term. The amount of expense attributed is net of an estimated
forfeiture rate, which is updated as appropriate. This option pricing model requires the input of
highly subjective assumptions, including the expected volatility of our common stock, pre-vesting
forfeiture rate and the options expected life. The financial statements include such amounts based
on our best estimates and judgments.
Results of Operations
Comparison of Years Ended December 31, 2008 and 2007
Product Sales. Sales increased 39% to $37.6 million in 2008 from $27.0 million in 2007
primarily due to the increased productivity of our domestic field sales personnel, and the
introduction of our suprarenal proximal extensions and Powerlink XL products. Domestic sales
increased from $23.0 million to $31.9 million, and sales to distributors outside the United States
increased from $4.0 million in 2007 to $5.7 million in 2008. This increase was primarily due to
sales to our distributor Cosmotec in Japan, as well as an increase in sales to distributors in
Latin America.
We expect that product sales will increase in 2009 by an estimated 17% to 22% from 2008 to $44
million to $46 million in 2009. In the U.S. market the increase is expected due to increased
productivity from our sales representatives and the introduction of two new products in the second
and third quarters of 2009, and the full year effect of two new products launched in the fourth
quarter of 2008. Outside the U.S., we expect growth in each of our major markets of Europe, Japan,
and Latin America.
License Revenue. License revenue decreased 96% to $33,000 in 2008 from $754,000 in 2007.
License revenue from Abbott remained at the contractual minimum level of $250,000 for 2007, and
expectedly declined sharply in 2008 as the minimum royalty provision of the agreement expired at
December 31, 2007. The license expired and was fully paid up in June 2008. Additionally in 2007,
due to our licensing agreement with BioLucent, we received $504,000 in royalties and fees,
including a one-time payment of $500,000 in exchange for a fully paid up license to certain of our
patents in a certain field of use. Beginning January 1, 2008, sales of our Powerlink System were
our only material source of revenue.
Cost of Product Revenue. The cost of product revenue, which includes labor, overhead,
materials and parts, rent, depreciation, small tools and supplies, samples for destructive testing,
and utilities, among other items, decreased 2% to $10.4 million from $10.5 million in 2007. This
decrease is directly attributable to the substitution of lower-cost in-house produced graft
material in a majority of the products sold in 2008.
Gross Profit. Gross profit increased 58% to $27.3 million in 2008 from $17.2 million in 2007.
The increase in gross profit resulted from higher product sales in 2008 as compared to 2007 and a
reduction in the per unit cost of product due to substitution of lower-cost in-house produced graft
material in a majority of the products sold in 2008. Gross profit as a percentage of revenue
increased to 72% in 2008 from 62% in 2007 for these reasons.
25
We believe that gross profit dollars will increase marginally in 2009 due to higher commercial
sales of the Powerlink System both in and outside of the United States. We also expect that gross
profit as a percentage of product revenues will increase due to efficiencies from higher
manufacturing volumes required to support sales growth.
Research, Development and Clinical. Research, development and clinical expenses decreased by
5% to $6.1 million from $6.4 million in 2007. The decrease primarily resulted from lower costs
associated with clinical trials in the 2008 period. We recorded $236,000 in 2008 and $417,000 in
2007, of stock compensation expense.
Research, development, and clinical expense has decreased in two consecutive years for the
reasons noted in this discussion. We expect that these expenses will now increase in 2009 and
future years as we pursue opportunities to develop additional new products for the treatment of
aortic disorders.
Marketing and Sales. Marketing and sales expenses increased by 18% to $23.8 million from $20.1
million in 2007. This increase was due to higher sales commission payouts on the 39% growth in
domestic sales revenue, severance payments, and the implementation of an in-depth sales training
program. We recorded $1.0 million in 2008 and $878,000 in 2007, respectively, of stock compensation
expense.
We expect that marketing and sales expense will increase in 2009 for three reasons:
|
|
|
the marketing related costs to launch two significant new products in 2009 the
IntuiTrak delivery system for Powerlink in the second quarter and the IntuiTrak Express
delivery system for Powerlink XL in the third quarter; |
|
|
|
|
expenses related to more intensive training of sales representatives; and
|
|
|
|
|
higher commission expense on the expected increase in sales. |
General and Administrative. General and administrative expenses increased by 49% to $9.5
million from $6.4 million in 2007. The increase was due primarily to increases in patent and legal
fees, settlement of the legal dispute with Cook Medical Products, Inc., our chief executive officer
succession process, and our analysis and response to the unsolicited acquisition proposal from
Elliott Associates. In addition, stock based compensation expense totaled $1.4 million in 2008 as
compared to $894,000 in 2007. We expect general and administrative expense to decline by
approximately $1.0 million in 2009 relative to 2008.
Termination of Supply Agreement. Termination of supply agreement expense was $550,000 in 2007.
The expense was due to the third amendment to our supply agreement for ePTFE graft material with
Bard Peripheral, dated September 21, 2007, which reduced the minimum purchase requirement for the
2007 year from $2.9 million to $2.2 million, and wherein 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 Peripheral.
Other Income. Other income decreased 95% to $55,000 from $1.1 million in 2007. The decrease in
other income was primarily the result of a realized gain of $412,000 on our investment in BioLucent
in 2007, lower interest income, and higher interest expense in 2008 due to drawing down on the
term loan and revolving line of credit with Silicon Valley Bank in September 2008.
Comparison of Years Ended December 31, 2007 and 2006
Product Sales. Sales increased 87% to $27.0 million in 2007 from $14.4 million in 2006
primarily due to the expansion and increased productivity of our domestic field sales personnel,
and increased market acceptance of the Powerlink System. Domestic sales increased from $12.4
million to $23.0 million, and sales to distributors outside the United States doubled from $2.0
million in 2006 to $4.0 million in 2007. Our distribution agreement with Edwards Lifesciences AG,
or Edwards Lifesciences, was not renewed beyond the original expiration of December 31, 2006. Sales
to Edwards Lifesciences in 2006 were $1.2 million. We replaced the Edwards Lifesciences
distribution agreement with a three-year distribution agreement with LeMaitre Vascular. This
agreement named LeMaitre Vascular as the exclusive distributor of the Powerlink System in ten
European countries, including Austria, Belgium, the Czech Republic, France, Germany, Luxembourg,
the Netherlands, Sweden, Switzerland, and the United Kingdom. Sales to LeMaitre in 2007 were $2.1
million.
26
License Revenue. License revenue increased 202% to $754,000 in 2007 from $250,000 in 2006, due
to our licensing agreement with BioLucent. Under that agreement, we received $504,000 in royalties
and fees, including a one-time payment of $500,000 in exchange for a fully paid up license to
certain of our patents in a certain field of use. License revenue from Abbott and Guidant remained
at the contractual minimum level of $250,000 for 2007, equal to 2006.
Cost of Product Revenue. The cost of product revenue increased 66% to $10.5 million from $6.3
million in 2006. This increase is directly attributable to the higher unit volume of product sales
in 2007 compared to 2006.
Gross Profit. Gross profit increased 107% to $17.2 million in 2007 from $8.3 million in 2006.
The increase in gross profit resulted from higher product sales in 2007 as compared to 2006,
license revenue from BioLucent, and a reduction in the per unit cost of product due to substitution
of lower-cost in-house produced graft material in a portion of the products sold in 2007. Gross
profit as a percentage of revenue increased to 62% in 2007 from 57% in 2006 for these reasons.
Also, the percentage in 2006 was impacted by a second quarter charge of $326,000, related to the
final phase of an earlier limited, voluntary product recall.
Research, Development and Clinical. Research, development and clinical expenses decreased by
6% to $6.4 million from $6.8 million in 2006. The decrease primarily resulted from lower costs
associated with clinical trials in the 2007 period. We incurred a charge of $417,000 in 2007 and
$347,000 in 2006, for stock compensation expense pursuant to the adoption of SFAS 123R at January
1, 2006.
Marketing and Sales. Marketing and sales expenses increased by 38% to $20.1 million from $14.6
million in 2006. This increase was due to staffing increases in sales and marketing functions in
support of the commercial sales of the infrarenal Powerlink System in the United States market. We
incurred a charge of $878,000 in 2007 and $448,000 in 2006, respectively, for stock compensation
expense pursuant to the adoption of SFAS 123R at January 1, 2006.
General and Administrative. General and administrative expenses increased by 14% to $6.4
million from $5.6 million in 2006. The increase was due primarily to increases in patent and legal
fees and insurance expenses. In addition, stock based compensation expense totaling $894,000 in
2007 as compared to $767,000 in 2006, pursuant to the adoption of SFAS 123R at January 1, 2006.
Termination of Supply Agreement. Termination of supply agreement expense was $550,000 in 2007.
The expense was due to the third amendment to our supply agreement for ePTFE graft material with
Bard Peripheral, dated September 21, 2007, which reduced the minimum purchase requirement for the
2007 year from $2.9 million to $2.2 million, and wherein 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 Peripheral.
Other Income. Other income increased 9% to $1.1 million from $1.0 million in 2006. The
increase in other income was a result of a realized gain of $412,000 on our investment in
BioLucent, offset by less interest income due to a lower invested cash balance. In 2006, we had a
higher cash balance due to a registered direct public offering of our common stock that resulted in
net proceeds of $18.8 million in June 2006.
Liquidity and Capital Resources
For the years ended December 31, 2008 and 2007, we incurred net losses of $12.0 million and
$15.1 million, respectively. As of December 31, 2008, we had an accumulated deficit of
approximately $143.7 million. Historically, we have relied on the sale and issuance of equity
securities to provide a significant portion of funding for our operations. In April 2006, we filed
a shelf registration statement with the SEC that would permit us to sell from time to time, up to a
total of $50.0 million of common stock. In June 2006, we completed an offering of our common stock,
which resulted in net proceeds of $18.8 million, leaving $30.2 million available under the shelf
registration.
In February 2007, we entered into a revolving credit facility with Silicon Valley Bank, under
which we may borrow up to $5 million. All outstanding amounts under the credit facility bear
interest at a variable rate equal to the lenders prime rate plus 0.5%, which is payable on a
monthly basis. The unused portion is subject to an unused
27
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 our 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 all of our
assets with the exception of our intellectual property. All amounts owing under the credit facility
were to become due and payable on February 21, 2009. In September 2008, we drew down $2.0 million.
As of December 31, 2008, we had $2.0 million in outstanding borrowings under this credit facility
and were in compliance with all of our covenants under the credit facility.
In July 2008, we entered into an amendment to the credit facility which added a term loan
whereby we may borrow up to $3.0 million and which extended the repayment date for borrowings under
the revolving line of credit to July, 2010. In September 2008, we drew down the $3.0 million term
loan, all of which was outstanding at December 31, 2008. The term loan requires interest only
payments at a variable rate equal to the lenders prime rate plus 1.0%, which is payable on a
monthly basis through March 31, 2009. The term loan principal is due in 36 monthly installments
beginning in April 2009.
Our existing credit facilities with Silicon Valley Bank contain negative covenants on the
operation of our business and financial covenants, including requiring us to maintain a tangible
net worth of $13.0 million. As of December 31, 2008, our tangible net worth was $13.7 million. If
we are not able to maintain compliance with our financial covenants, certain terms of our credit
facility and term loan will change including an increase in the interest rate and a limitation on
the amounts available for borrowing under the credit facility based on eligible accounts
receivable. Further, if we do not maintain a tangible net worth of at least $12.0 million through
June 29, 2009 and $12.5 million thereafter, we will be in default under the credit facility which
could allow the lender to accelerate the repayment of the indebtedness under the credit facility.
At December 31, 2008, we had cash and cash equivalents of $7.6 million. We expect that our
continued growth, strong gross margins and expense controls will enable us to achieve positive cash
flow from operations in the second quarter of 2009, consequently, we believe that our current cash
balance, in combination with cash receipts generated from sales of the Powerlink System and
borrowings available under our credit facility, will be sufficient to meet anticipated cash needs
for operating and capital expenditures through at least December 31, 2009. If we do not realize
expected revenue and gross profit margin levels, or if we are unable to manage our operating
expenses in line with our revenues, or if we cannot maintain our days sales outstanding accounts
receivable ratio, we may not achieve positive cash flow from operations in the second quarter of
2009, nor be able to fund our operations through December 31, 2009.
We believe that the future growth of our business will depend upon our ability to successfully
develop new technologies and bring these technologies to market, as well as increased market
acceptance of the Powerlink System. If we pursue additional research and development opportunities
or fail to increase our penetration of the AAA market, or if we fail to reduce certain
discretionary expenditures, as necessary, we may need to seek additional sources of financing. In
the event that we require additional funding to continue our operations, we will attempt to raise
the required capital through either debt or equity arrangements.
The timing and amount of our future capital expenditure requirements will depend on many
factors, including:
|
|
|
the rate of market acceptance of the Powerlink System; |
|
|
|
|
our requirements for additional manufacturing capacity; |
|
|
|
|
our requirements for additional IT infrastructure and systems; |
|
|
|
|
our requirements for additional facility space; and |
|
|
|
|
the need for additional capital to fund future development programs. |
Accounts Receivable. Trade accounts receivable, net, increased 41% to $6.4 million at December
31, 2008 from $4.5 million at December 31, 2007. The increase was due to the 39% increase in
product sales in 2008.
28
Inventories. Inventories decreased 12% to $7.1 million at December 31, 2008 from $8.1 million
at December 31, 2007. The decrease was primarily the result of a lower cost basis of the ePTFE
graft material.
Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses increased 27% to
$5.4 million at December 31, 2008 from $4.3 million at December 31, 2007. The increase is primarily
attributable to legal fees and litigation matters as well as a change in the commission plan for
our sales force.
Cash Used in Operations. Cash used in operations decreased 49% to $6.0 million for the year
ended December 31, 2008 from $11.7 million for the year ended December 31, 2007. The change was
primarily attributed to the improved gross margin, increased production efficiencies, and higher
sales volume.
Cash Provided by (used in) Investing Activities. Cash used in investing activities was
$447,000 for the year ended December 31, 2008 as compared to cash provided by investing activities
of $13.4 million for the year ended December 31, 2007. This change was primarily due to decreased
investment in marketable securities in 2008 as compared to 2007.
Cash Provided by Financing Activities. Cash provided by financing activities was $5.5 million
for the year ended December 31, 2008 from $724,000 for the year ended December 31, 2007, namely as
a result of drawing upon our available credit facility and term loan which provided $5.0 million in
cash.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements.
Commitments
As of December 31, 2008, expected future cash payments related to contractual obligations were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
|
(In thousands) |
Contractual Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under term loan and credit facilities |
|
$ |
5,000 |
|
|
$ |
750 |
|
|
$ |
3,000 |
|
|
$ |
1,000 |
|
|
$ |
250 |
|
Operating lease obligations |
|
|
433 |
|
|
|
346 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
Interest
expense on borrowings |
|
|
374 |
|
|
|
228 |
|
|
|
105 |
|
|
|
39 |
|
|
|
2 |
|
Other obligations |
|
|
300 |
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,107 |
|
|
$ |
1,624 |
|
|
$ |
3,192 |
|
|
$ |
1,039 |
|
|
$ |
252 |
|
Recent Accounting Pronouncements
Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements. In February
2008, the FASB issued FASB Staff Position No. FAS 157-2, or FSP FAS 157-2, Effective Date of FASB
Statement No. 157, which provides a one year deferral of the effective date of SFAS 157 for
non-financial assets and non-financial liabilities, except those that are recognized or disclosed
in the financial statements at fair value at least annually. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements and does not require any new fair
value measurements. The standard describes a fair value hierarchy based on three levels of inputs,
the first two of which are considered observable and the last unobservable, that may be used to
measure fair value. As of December 31, 2008, the adoption of SFAS 157 had no impact on our
consolidated financial statements. We are currently evaluating the impact of adopting the
provisions of FSP FAS 157-2.
As of January 1, 2008, we adopted 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 allows for voluntary measurement of
financial assets and liabilities as well as certain other items at fair value. Unrealized gains and
losses on financial instruments for which the fair value option has been elected are reported in
earnings. As of December 31, 2008, the adoption of SFAS 159 had no impact our consolidated
financial statements.
29
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), or
SFAS 141(R), Business Combinations (revised 2007). SFAS 141(R) is a revision to previously
existing guidance on accounting for business combinations. The statement retains the fundamental
concept of the purchase method of accounting, and introduces new requirements for the recognition
and measurement of assets acquired, liabilities assumed and noncontrolling interests. The statement
is effective for fiscal years beginning after December 15, 2008. As of December 31, 2008, the
adoption of SFAS 141(R) had no impact on our consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, or SFAS
160, Noncontrolling Interests in Consolidated Financial Statements. The Statement requires that
noncontrolling interests be reported as stockholders equity. The Statement also establishes a
single method of accounting for changes in a parents ownership interest in a subsidiary as long as
that ownership change does not result in deconsolidation. SFAS 160 is required to be applied
prospectively in 2009, except for the presentation and disclosure requirements which are to be
applied retrospectively. The statement is effective for fiscal years beginning after December 15,
2008. The adoption of SFAS 160 is not expected to have a material impact on our consolidated
financial statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 161,
or SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133. This new standard requires enhanced disclosures for derivative instruments,
including those used in hedging activities. It is effective for fiscal years and interim periods
beginning after November 15, 2008. The adoption of SFAS 161 is not expected to have a material
impact on our consolidated financial statements.
In April 2008, the FASB issued Staff Position No. FAS 142-3, or FSP FAS 142-3, Determination
of the Useful Life of Intangible Assets, which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP FAS
142-3 allows an entity to use its own historical experience in renewing or extending similar
arrangements, adjusted for specified entity-specific factors, in developing assumptions about
renewal or extension used to determine the useful life of a recognized intangible asset and will be
effective for fiscal years and interim periods beginning after December 15, 2008. Additional
disclosures are required to enable financial statement users to assess the extent to which the
expected future cash flows associated with the asset are affected by the entitys intent and/or
ability to renew or extend the arrangement. The guidance for determining the useful life of a
recognized intangible asset is to be applied prospectively to intangible assets acquired after the
effective date. The disclosure requirements are to be applied prospectively to all intangible
assets recognized as of, and subsequent to, the effective date. We have not yet evaluated the
potential impact of adopting FSP FAS 142-3 on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We do not believe that we currently have material exposure to interest rate, foreign currency
exchange rate or other relevant market risks.
Interest Rate and Market Risk. Our exposure to market risk for changes in interest rates
relates primarily to our revolving credit facility and our term loan with Silicon Valley Bank.
Under our revolving credit facility, all outstanding amounts bear interest at a variable rate equal
to the lenders prime rate plus 0.5%. As of December 31, 2008, we had $2.0 million outstanding
under our revolving credit facility. The interest rate under this facility was 4.5% at December
31, 2008. Under our term loan, interest only payments are due monthly at a variable rate equal to
the lenders prime rate plus 1.0% through March 31, 2009, and the principle is due in 36 monthly
installments beginning in April 2009. As of December 31, 2008, we had $3.0 million outstanding
under our term loan. The interest rate under this loan was 5.0% at December 31, 2008. Under both
the term loan and the credit facility, interest is payable on a monthly basis which may expose us
to market risk due to changes in interest rates. We estimate that a 10% change in interest rate on
our revolving credit facility would not have a material effect on our net loss for the year ended
December 31, 2008.
We do not use derivative financial instruments in our investment portfolio. We place our
investments with high credit quality issuers and, by policy, limit the amount of credit exposure to
any one issuer. 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
30
reinvestment risk. We attempt to mitigate default risk by investing in only the safest and
highest credit quality securities and by constantly positioning our portfolio to respond
appropriately to a significant reduction in a credit rating of any investment issuer or guarantor.
At December 31, 2008, our investment portfolio included only money market instruments.
Foreign Currency Transaction Risk. We do not currently have material foreign currency exposure
as the majority of our assets are denominated in U.S. currency and our foreign-currency based
transaction exchange risk is not material. For the years ended December 31, 2008, 2007, and 2006,
we recorded $194,000, $51,000, and $25,000, respectively, of foreign currency transaction gains
(losses).
Item 8. Financial Statements and Selected Quarterly Financial Data
The financial statements required by this Item 8 are set forth at the pages indicated at Item
15(a)(1).
Summarized Quarterly Data
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
|
(in thousands, except per share amounts) |
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
8,317 |
|
|
$ |
9,261 |
|
|
$ |
9,374 |
|
|
$ |
10,679 |
|
Total revenues |
|
|
8,329 |
|
|
|
9,273 |
|
|
|
9,383 |
|
|
|
10,679 |
|
Gross profit |
|
|
5,798 |
|
|
|
6,719 |
|
|
|
6,923 |
|
|
|
7,844 |
|
Net loss |
|
|
(3,692 |
) |
|
|
(3,762 |
) |
|
|
(2,962 |
) |
|
|
(1,576 |
) |
Basic and diluted net loss per share |
|
|
(0.09 |
) |
|
|
(0.09 |
) |
|
|
(0.07 |
) |
|
|
(0.04 |
) |
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
6,250 |
|
|
$ |
6,258 |
|
|
$ |
6,592 |
|
|
$ |
7,917 |
|
Total revenues |
|
|
6,308 |
|
|
|
6,318 |
|
|
|
7,152 |
|
|
|
7,993 |
|
Gross profit |
|
|
3,729 |
|
|
|
3,680 |
|
|
|
4,720 |
|
|
|
5,103 |
|
Net loss |
|
|
(4,440 |
) |
|
|
(3,713 |
) |
|
|
(3,394 |
) |
|
|
(3,528 |
) |
Basic and diluted net loss per share |
|
|
(0.10 |
) |
|
|
(0.09 |
) |
|
|
(0.08 |
) |
|
|
(0.08 |
) |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act
of 1934, as amended, or the Exchange Act. Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of the financial
reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. This process includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of our assets; (ii) 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 are being made
only in accordance with authorizations of our management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of the internal control over financial
reporting to future periods are subject to risk that the internal control may become inadequate
because of changes in conditions, or that the degree of compliance with policies or procedures may
deteriorate.
31
Our management assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based
on our assessment, we have concluded that, as of December 31, 2008, our internal control over
financial reporting was effective based on those criteria.
The effectiveness of our internal control over financial reporting as of December 31, 2008 has
been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report, which is included herein.
Disclosure 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 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.
Changes in internal control over financial reporting
There has been no change in our internal control over financial reporting during the fourth
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. Other Information
None.
32
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required hereunder is incorporated herein by reference to our Proxy Statement
to be filed within 120 days of December 31, 2008 and delivered to stockholders in connection with
our Annual Meeting of Stockholders to be held on May 21, 2009.
Item 11. Executive Compensation
The information required hereunder is incorporated herein by reference to our Proxy Statement
to be filed within 120 days of December 31, 2008 and delivered to stockholders in connection with
our Annual Meeting of Stockholders to be held on May 21, 2009.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain information required hereunder is incorporated herein by reference to our Proxy
Statement to be filed within 120 days of December 31, 2008 and delivered to stockholders in
connection with our Annual Meeting of Stockholders to be held on May 21, 2009.
Equity Compensation Plan Information
The following table sets forth information regarding outstanding options and rights and shares
reserved for future issuance under our existing equity compensation plans as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
|
|
|
|
|
|
|
|
Remaining Available for |
|
|
|
|
|
|
|
|
|
|
Future Issuance Under |
|
|
Number of Securities |
|
|
|
|
|
Equity Compensation |
|
|
to be Issued upon |
|
Weighted Average |
|
Plans (Excluding |
|
|
Exercise of |
|
Exercise Price of |
|
Securities Reflected |
|
|
Outstanding Options |
|
Outstanding Options |
|
in Column A) |
Plan Category |
|
(a) |
|
(b) |
|
(c) |
Equity compensation plans approved by
security holders: |
|
|
|
|
|
|
|
|
|
|
|
|
2006 Stock Incentive Plan |
|
|
4,137,992 |
|
|
$ |
2.78 |
|
|
|
1,676,502 |
|
1996 Stock Option/ Stock Issuance Plan |
|
|
1,352,769 |
|
|
$ |
5.06 |
|
|
|
|
|
Employee Stock Purchase Plan |
|
|
|
|
|
|
|
|
|
|
20,662 |
|
Equity compensation plans not
approved by security holders: |
|
|
|
|
|
|
|
|
|
|
|
|
1997 Supplemental Stock Option Plan |
|
|
19,500 |
|
|
$ |
3.92 |
|
|
|
|
|
Total |
|
|
5,510,261 |
|
|
$ |
3.34 |
|
|
|
1,697,164 |
|
1997 Supplemental Stock Option Plan
This stock option plan was used to provide compensation to non-employees, typically as part of
a consulting services arrangement. The plan authorized the issuance of non-qualified stock options
only. We account 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.
123 and related interpretations. (See Note 1 and 11to the consolidated financial statements for
additional information on recognition of expense associated with non-employee option grants under
the 1997 Supplemental Stock Option Plan).
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required hereunder is incorporated herein by reference to our Proxy Statement
to be filed within 120 days of December 31, 2008 and delivered to stockholders in connection with
our Annual Meeting of Stockholders to be held on May 21, 2009.
Item 14. Principal Accounting Fees and Services
The information required hereunder is incorporated herein by reference to our Proxy Statement
to be filed within 120 days of December 31, 2008 and delivered to stockholders in connection with
our Annual Meeting of Stockholders to be held on May 21, 2009.
33
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as a part of this Annual Report on Form 10-K:
|
1. Financial Statements. |
|
Report of Independent Registered Public Accounting Firm |
|
Consolidated Balance Sheets December 31, 2008 and 2007 |
|
Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006 |
|
Consolidated Statements of Stockholders Equity for the years ended December 31, 2008, 2007 and 2006 |
|
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006 |
|
Notes to Consolidated Financial Statements for the years ended December 31, 2008, 2007 and 2006 |
|
2. Financial Statement Schedule. |
|
Schedule II Valuation and Qualifying Accounts |
Schedules not listed above have been omitted because they are not applicable or are not
required to be set forth herein as such information is included in the Consolidated Financial
Statements or the notes thereto.
3. Exhibits.
The following exhibits are filed as part of this Annual Report on Form 10-K:
|
|
|
Exhibit |
|
|
Number |
|
Description |
3.1
|
|
Amended and Restated Certificate of Incorporation
(Incorporated by reference to Exhibit 4.1 to Endologix
Registration Statement on Form S-8, filed with the SEC on
August 7, 2006). |
|
|
|
3.2
|
|
Amended and Restated Bylaws (Incorporated by reference to
Exhibit 3.2 to Endologix Annual Report on Form 10-K filed with
the SEC on March 29, 2001). |
|
|
|
4.1
|
|
Specimen Certificate of Common Stock (Incorporated by
reference to Exhibit 4.1 to Amendment No. 2 to Endologix
Registration Statement on Form S-1, No. 333-04560, filed with
the SEC on June 10, 1996). |
|
|
|
10.1(2)
|
|
Employee Stock Purchase Plan and forms of agreement thereunder
(Incorporated by reference to Exhibit 4.1 to Endologix
Registration Statement on Form S-8, No. 333-114465, filed with
the SEC on April 14, 2004). |
|
|
|
10.2(2)
|
|
1997 Supplemental Stock Option Plan (Incorporated by reference
to Exhibit 99.1 to Endologix Registration Statement on Form
S-8, No. 333-42161, filed with the SEC on December 12, 1997). |
|
|
|
10.4(2)
|
|
1996 Stock Option/Stock Issuance Plan (Incorporated by
reference to Exhibit 4.1 to Endologix Registration Statement
on Form S-8, No. 333-122491, filed with the SEC on February 2,
2005). |
|
|
|
10.5(2)
|
|
1997 Stock Option Plan assumed by Endologix pursuant to its
acquisition of Radiance Medical Systems, Inc. on January 14,
1999 (Incorporated by reference to Exhibit 99.2 to Endologix
Registration Statement on Form S-8, No. 333-72531, filed with
the SEC on February 17, 1999). |
|
|
|
10.6(2)
|
|
2006 Stock Incentive Plan (Incorporated by reference to
Exhibit 10.1 to Endologix Current Report on Form 8-K, filed
with the SEC on May 26, 2006). |
34
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.6.1(2)
|
|
Stock Option Agreement under 2006 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.1 to Endologix
Quarterly Report on Form 10-Q, filed with the SEC on November
9, 2006). |
|
|
|
10.6.2(1)
|
|
Restricted Stock Award Agreement under 2006 Stock Incentive
Plan (Incorporated by reference to Exhibit 10.2 to Endologix
Quarterly Report on Form 10-Q, filed with the SEC on November
9, 2006). |
|
|
|
10.7(2)
|
|
2006 Employee Stock Purchase Plan (Incorporated by reference
to Exhibit 10.2 to Endologix Current Report on Form 8-K, filed
with the SEC on May 26, 2006). |
|
|
|
10.9
|
|
Form of Indemnification Agreement entered into with Endologix
officers and directors (Incorporated by reference to Exhibit
10.41 to Endologix Quarterly Report on Form 10-Q, filed with
the SEC on November 13, 2002). |
|
|
|
10.11
|
|
Standard Industrial/Commercial Single-Tenant Lease Net,
dated November 2, 2004, by and between Endologix and Del
Monico Investments, Inc. (Incorporated by reference to Exhibit
10.46 to Endologix Current Report on Form 8-K, filed with the
SEC on November 24, 2004). |
|
|
|
10.12
|
|
Loan and Security Agreement, dated as of February 21, 2007, by
and between Endologix and Silicon Valley Bank (Incorporated by
reference to Exhibit 10.13 to Endologix Quarterly Report on
Form 10-Q, filed with the SEC on May 9, 2007). |
|
|
|
10.12.1
|
|
First Amendment to Loan and Security Agreement, dated as of
July 22, 2008, by and between Endologix and Silicon Valley
Bank (Incorporated by reference to Exhibit 10.1 to Endologix
Current Report on Form 8-K, filed with the SEC on July 28,
2008). |
|
|
|
10.13(2)
|
|
Offer Letter, dated April 28, 2008, between Endologix and John
McDermott (Incorporated by reference to Exhibit 10.1 to
Endologix Current Report on Form 8-K, filed with the SEC on
May 16, 2008). |
|
|
|
10.14(2)
|
|
Severance Agreement and General Release, effective May 12,
2008, between Endologix and Paul McCormick (Incorporated by
reference to Exhibit 10.2 to Endologix Current Report on Form
8-K, filed with the SEC on May 16, 2008). |
|
|
|
10.15(2)
|
|
Employment Agreement, dated as of December 29, 2008, between
Endologix and John McDermott (Incorporated by reference to
Exhibit 10.1 to Endologix Current Report on Form 8-K, filed
with the SEC on January 2, 2009). |
|
|
|
10.16(2)
|
|
Employment Agreement, dated as of December 29, 2008, between
Endologix and Robert J. Krist (Incorporated by reference to
Exhibit 10.2 to Endologix Current Report on Form 8-K, filed
with the SEC on January 2, 2009). |
|
|
|
10.17(2)
|
|
Employment Agreement, dated as of December 29, 2008, between
Endologix and Stefan G. Schreck, Ph.D. (Incorporated by
reference to Exhibit 10.3 to Endologix Current Report on Form
8-K, filed with the SEC on January 2, 2009). |
|
|
|
10.18(2)
|
|
Employment Agreement, dated as of December 29, 2008, between
Endologix and Janet Fauls (Incorporated by reference to
Exhibit 10.4 to Endologix Current Report on Form 8-K, filed
with the SEC on January 2, 2009). |
|
|
|
14
|
|
Code of Ethics for Chief Executive Officer and Principal
Financial Officers (Incorporated by reference to Exhibit 14 to
Endologix Annual Report on Form 10-K filed with the SEC on
March 26, 2004). |
|
|
|
21.1
|
|
List of Subsidiaries. |
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
24.1
|
|
Power of Attorney (included on signature page hereto). |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities |
35
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
Exchange Act of 1934. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to Rule
13a-14(b)/15d-14(b) under the Securities Exchange Act of 1934
and 18 U.S.C. Section 1350. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to Rule
13a-14(b)/15d-14(b) under the Securities Exchange Act of 1934
and 18 U.S.C. Section 1350. |
|
|
|
(1) |
|
Portions of this exhibit are omitted and were filed separately with the Securities and
Exchange Commission pursuant to Endologix application requesting confidential treatment under
Rule 24b-2 of the Securities Exchange Act of 1934. |
|
(2) |
|
These exhibits are identified as management contracts or compensatory plans or arrangements
of Endologix pursuant to Item 15(a)(3) of Form 10-K. |
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
ENDOLOGIX, INC.
|
|
|
By: |
/s/ JOHN MCDERMOTT
|
|
|
|
John McDermott |
|
|
|
Chief Executive Officer and Director
(Principal Executive Officer) |
|
|
Date: March 9, 2009
POWER OF ATTORNEY
We, the undersigned directors and officers of Endologix, Inc., do hereby constitute and
appoint John McDermott and Robert J. Krist, and each of them, as our true and lawful
attorneys-in-fact and agents with power of substitution, to do any and all acts and things in our
name and behalf in our capacities as directors and officers and to execute any and all instruments
for us and in our names in the capacities indicated below, which said attorney-in-fact and agent
may deem necessary or advisable to enable said corporation to comply with the Securities Exchange
Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with this Annual Report on Form 10-K, including specifically but without
limitation, power and authority to sign for us or any of us in our names in the capacities
indicated below, any and all amendments (including post-effective amendments) hereto; and we do
hereby ratify and confirm all that said attorney-in-fact and agent, shall do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ JOHN MCDERMOTT
(John McDermott)
|
|
Chief Executive Officer and Director
(Principal Executive Officer)
|
|
March 9, 2009 |
|
|
|
|
|
/s/ ROBERT J. KRIST
(Robert J. Krist)
|
|
Chief Financial Officer, and Secretary
(Principal Financial and Accounting Officer)
|
|
March 9, 2009 |
|
|
|
|
|
/s/ FRANKLIN D. BROWN
(Franklin D. Brown)
|
|
Chairman and Director
|
|
March 9, 2009 |
|
|
|
|
|
/s/ RODERICK DE GREEF
(Roderick de Greef)
|
|
Director
|
|
March 9, 2009 |
|
|
|
|
|
/s/ EDWARD DIETHRICH, M.D.
(Edward Diethrich, M.D.)
|
|
Director
|
|
March 9, 2009 |
|
|
|
|
|
/s/ PAUL MCCORMICK
(Paul McCormick)
|
|
Director
|
|
March 9, 2009 |
|
|
|
|
|
/s/ JEFFREY F. ODONNELL
(Jeffrey F. ODonnell)
|
|
Director
|
|
March 9, 2009 |
|
|
|
|
|
/s/ GREGORY D. WALLER
(Gregory D. Waller)
|
|
Director
|
|
March 9, 2009 |
37
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Endologix, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, stockholders equity and cash flows present fairly, in all material
respects, the financial position of Endologix, Inc. and its subsidiaries (the Company) at
December 31, 2008 and 2007, and the results of their operations
and their cash flows for each of the
three years in the period ended December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion, the financial
statement schedule appearing under item 15(a)(2) on page F-22, presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is responsible for these
financial statements and financial statement schedule, for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in Managements Report on Internal Control over Financial Reporting
appearing under item 9A. Our responsibility is to express opinions on these financial statements,
on the financial statement schedule, and on the Companys internal control over financial reporting
based on our integrated audits. We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over
financial reporting 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 audits also
included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinion.
A companys 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
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) 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 (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys 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.
|
|
|
|
|
|
|
|
/s/ PricewaterhouseCoopers LLP
|
|
|
PricewaterhouseCoopers LLP |
|
|
Orange County, California
March 9, 2009 |
|
|
F-1
ENDOLOGIX, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands, except |
|
|
|
share and per |
|
|
|
share amounts) |
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
7,611 |
|
|
$ |
8,728 |
|
Restricted cash equivalents |
|
|
500 |
|
|
|
500 |
|
Accounts receivable, net of allowance for doubtful accounts of $72 and $100 |
|
|
6,371 |
|
|
|
4,527 |
|
Other receivables |
|
|
3 |
|
|
|
234 |
|
Inventories |
|
|
7,099 |
|
|
|
8,054 |
|
Other current assets |
|
|
443 |
|
|
|
581 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
22,027 |
|
|
|
22,624 |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
2,993 |
|
|
|
3,771 |
|
Goodwill |
|
|
4,631 |
|
|
|
4,631 |
|
Intangibles, net |
|
|
7,508 |
|
|
|
8,913 |
|
Other assets |
|
|
104 |
|
|
|
104 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
37,263 |
|
|
$ |
40,043 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
5,401 |
|
|
$ |
4,259 |
|
Current portion of long term debt |
|
|
750 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
6,151 |
|
|
|
4,259 |
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
Long term debt |
|
|
4,250 |
|
|
|
|
|
Other long-term liabilities |
|
|
1,045 |
|
|
|
1,109 |
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
5,295 |
|
|
|
1,109 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
11,446 |
|
|
|
5,368 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 9) |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
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, 44,365,000
and 43,453,000 shares issued, and 43,870,000 and 42,958,000 outstanding |
|
|
44 |
|
|
|
43 |
|
Additional paid-in capital |
|
|
170,239 |
|
|
|
166,912 |
|
Accumulated deficit |
|
|
(143,730 |
) |
|
|
(131,738 |
) |
Treasury stock, at cost, 495,000 shares |
|
|
(661 |
) |
|
|
(661 |
) |
Accumulated other comprehensive income(loss) |
|
|
(75 |
) |
|
|
119 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
25,817 |
|
|
|
34,675 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
37,263 |
|
|
$ |
40,043 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-2
ENDOLOGIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands, except per share amounts) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
37,631 |
|
|
$ |
27,017 |
|
|
$ |
14,422 |
|
License |
|
|
33 |
|
|
|
754 |
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
37,664 |
|
|
|
27,771 |
|
|
|
14,672 |
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue |
|
|
10,380 |
|
|
|
10,539 |
|
|
|
6,330 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
27,284 |
|
|
|
17,232 |
|
|
|
8,342 |
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
6,060 |
|
|
|
6,372 |
|
|
|
6,765 |
|
Marketing and sales |
|
|
23,794 |
|
|
|
20,142 |
|
|
|
14,579 |
|
General and administrative |
|
|
9,477 |
|
|
|
6,380 |
|
|
|
5,585 |
|
Termination of supply agreement |
|
|
|
|
|
|
550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
39,331 |
|
|
|
33,444 |
|
|
|
26,929 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(12,047 |
) |
|
|
(16,212 |
) |
|
|
(18,587 |
) |
|
|
|
|
|
|
|
|
|
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
170 |
|
|
|
664 |
|
|
|
1,019 |
|
Interest expense |
|
|
(106 |
) |
|
|
|
|
|
|
|
|
Other income, net |
|
|
(9 |
) |
|
|
473 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
55 |
|
|
|
1,137 |
|
|
|
1,044 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(11,992 |
) |
|
$ |
(15,075 |
) |
|
$ |
(17,543 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.28 |
) |
|
$ |
(0.35 |
) |
|
$ |
(0.44 |
) |
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share |
|
|
43,045 |
|
|
|
42,796 |
|
|
|
40,010 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-3
ENDOLOGIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Accumulated |
|
|
Treasury |
|
|
Comprehensive |
|
|
Stockholders |
|
|
Comprehensive |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Equity |
|
|
Loss |
|
|
|
(In thousands, except share amounts) |
|
Balance at December 31, 2005 |
|
|
36,679,000 |
|
|
$ |
37 |
|
|
$ |
141,903 |
|
|
$ |
(99,120 |
) |
|
|
(495,000 |
) |
|
$ |
(661 |
) |
|
$ |
48 |
|
|
$ |
42,207 |
|
|
$ |
(15,548 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock options |
|
|
317,000 |
|
|
|
|
|
|
|
934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
934 |
|
|
|
|
|
Employee stock purchase plan |
|
|
77,000 |
|
|
|
|
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319 |
|
|
|
|
|
Sale of common stock |
|
|
6,061,000 |
|
|
|
6 |
|
|
|
18,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,753 |
|
|
|
|
|
Amortization of stock
compensation expense |
|
|
10,000 |
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
|
|
Grant of stock options |
|
|
|
|
|
|
|
|
|
|
1,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,764 |
|
|
|
|
|
Amortization expense of
non-employee stock options |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,543 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,543 |
) |
|
|
(17,543 |
) |
Unrealized holding gain arising
during the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
23 |
|
|
|
23 |
|
Unrealized exchange rate gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
17 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
43,144,000 |
|
|
$ |
43 |
|
|
$ |
163,698 |
|
|
$ |
(116,663 |
) |
|
|
(495,000 |
) |
|
$ |
(661 |
) |
|
$ |
88 |
|
|
$ |
46,505 |
|
|
$ |
(17,503 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock options |
|
|
123,000 |
|
|
|
|
|
|
|
228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228 |
|
|
|
|
|
Employee stock purchase plan |
|
|
180,000 |
|
|
|
|
|
|
|
491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
491 |
|
|
|
|
|
Amortization of stock
compensation expense |
|
|
|
|
|
|
|
|
|
|
2,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,430 |
|
|
|
|
|
Grant of stock awards |
|
|
6,000 |
|
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
|
|
Amortization expense of
non-employee stock options |
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,075 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,075 |
) |
|
|
(15,075 |
) |
Unrealized holding loss arising
during the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
Unrealized exchange rate gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
34 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
43,453,000 |
|
|
$ |
43 |
|
|
$ |
166,912 |
|
|
$ |
(131,738 |
) |
|
|
(495,000 |
) |
|
$ |
(661 |
) |
|
$ |
119 |
|
|
$ |
34,675 |
|
|
$ |
(15,044 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock options |
|
|
30,000 |
|
|
|
|
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29 |
|
|
|
|
|
Employee stock purchase plan |
|
|
357,000 |
|
|
|
|
|
|
|
480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
480 |
|
|
|
|
|
Amortization of stock
compensation expense |
|
|
|
|
|
|
|
|
|
|
2,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,381 |
|
|
|
|
|
Grant of restricted stock |
|
|
525,000 |
|
|
|
1 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
Amortization expense of
restricted stock |
|
|
|
|
|
|
|
|
|
|
432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
432 |
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,992 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,992 |
) |
|
|
(11,992 |
) |
Unrealized exchange rate loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(194 |
) |
|
|
(194 |
) |
|
|
(194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
44,365,000 |
|
|
$ |
44 |
|
|
$ |
170,239 |
|
|
$ |
(143,730 |
) |
|
|
(495,000 |
) |
|
$ |
(661 |
) |
|
$ |
(75 |
) |
|
$ |
25,817 |
|
|
$ |
(12,186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-4
ENDOLOGIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(11,992 |
) |
|
$ |
(15,075 |
) |
|
$ |
(17,543 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,483 |
|
|
|
2,322 |
|
|
|
2,303 |
|
Stock-based compensation and deferred compensation |
|
|
2,900 |
|
|
|
2,444 |
|
|
|
1,665 |
|
Realized gain (loss) on investments |
|
|
|
|
|
|
(412 |
) |
|
|
|
|
Loss on disposal of assets |
|
|
23 |
|
|
|
|
|
|
|
|
|
Changes: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,844 |
) |
|
|
(1,764 |
) |
|
|
(1,515 |
) |
Inventories |
|
|
980 |
|
|
|
1,614 |
|
|
|
(1,854 |
) |
Other receivables and other assets |
|
|
369 |
|
|
|
(6 |
) |
|
|
(84 |
) |
Accounts payable, accrued expenses and long term liabilities |
|
|
1,078 |
|
|
|
(813 |
) |
|
|
444 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(6,003 |
) |
|
|
(11,690 |
) |
|
|
(16,584 |
) |
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities |
|
|
|
|
|
|
(1,850 |
) |
|
|
(18,823 |
) |
Maturities of available-for-sale securities |
|
|
|
|
|
|
15,650 |
|
|
|
14,388 |
|
Capital expenditures for property and equipment |
|
|
(447 |
) |
|
|
(437 |
) |
|
|
(924 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(447 |
) |
|
|
13,363 |
|
|
|
(5,359 |
) |
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock, net of expenses |
|
|
|
|
|
|
|
|
|
|
18,753 |
|
Proceeds from sale of common stock under employee stock
purchase plan |
|
|
497 |
|
|
|
496 |
|
|
|
319 |
|
Proceeds from exercise of stock options |
|
|
30 |
|
|
|
228 |
|
|
|
934 |
|
Borrowings under term loan and line of credit (facilities) |
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
5,527 |
|
|
|
724 |
|
|
|
20,006 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(194 |
) |
|
|
60 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(1,117 |
) |
|
|
2,457 |
|
|
|
(1,920 |
) |
Cash and cash equivalents, beginning of year |
|
|
8,728 |
|
|
|
6,271 |
|
|
|
8,191 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
7,611 |
|
|
$ |
8,728 |
|
|
$ |
6,271 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
|
$ |
106 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-5
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share or performance unit and per share amounts)
1. Business, Basis of Presentation and Summary of Critical Accounting Policies
Business and Basis of Presentation
Endologix, Inc. (the Company) was incorporated in California in March 1992 and
reincorporated in Delaware in June 1993. In January 1999, the Company merged with privately held
Radiance Medical Systems, Inc. (former Radiance), and changed its name to Radiance Medical
Systems, Inc. In May 2002, the Company merged with privately held Endologix, Inc., and changed its
name to Endologix, Inc.
Since the merger in May 2002, the Company has been engaged in the development, manufacture,
sales and marketing of minimally invasive therapies for the treatment of vascular disease. The
Companys primary focus is the development of the Powerlink System, a catheter-based alternative
treatment for abdominal aortic aneurysms, or AAA. AAA is a weakening of the wall of the aorta, the
largest artery of the body.
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. Intercompany transactions have been eliminated in consolidation. The Company operates
in a single business segment.
Liquidity and Capital Resources
The accompanying financial statements have been prepared assuming the Company will continue as
a going concern. For the years ended December 31, 2008, 2007, and 2006, the Company incurred net
losses of $11,992, $15,075, and $17,543, respectively. As of December 31, 2008, the Company had an
accumulated deficit of $143,730. The Company believes that its continued growth, gross margins,
expense controls, and its current cash and cash equivalents 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 December 31, 2009. If the
Company does not realize the expected revenue and gross margin levels, or if the Company is unable
to manage its operating expenses in line with its revenues, or if the Company is not able to
maintain compliance with its financial covenants under the credit facility, or if it cannot
maintain its days sales outstanding accounts receivable ratio, it may not be able to fund its
operations through December 31, 2009.
In the event that the Company requires additional funding to continue operations or to fund
future development programs, it will 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 is not able to raise additional funds, it may be required
to significantly curtail its operations and this 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.
Summary of Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, the Company evaluates its estimates, including those related to
collectibility of customer accounts, whether the cost of inventories can be recovered, the value
assigned to and estimated useful life of intangible assets, the realization of tax assets and
estimates of tax liabilities, contingent liabilities and the potential outcome of litigation. The
Company bases its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities. Actual results may differ from these
estimates under different assumptions or conditions.
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, demand deposits and money market funds with
original
F-6
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share or performance unit and per share amounts)
maturities of three months or less from the date of purchase.
Accounts Receivables
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is the Companys best estimate of the amount of probable credit
losses in existing accounts receivable. The Company determines the allowance based on historical
write-off experience. The Company reviews the allowance for doubtful accounts monthly. Past due
balances over 90 days and over a specified amount are reviewed individually for collectibility.
Account balances are charged off against the allowance when the Company believes it is probable the
receivable will not be recovered.
Inventories
The Company values inventory at the lower of the actual cost to purchase or manufacture the
inventory or the market value for such inventory. Cost is determined on the first-in, first-out
method. The Company regularly reviews inventory quantities in process and on hand and records a
provision for obsolete inventory based on actual loss experience and a forecast of product demand
compared to the remaining shelf life.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over the
estimated useful lives of the assets, with the exception of the Companys in-house ePTFE
manufacturing equipment, which is depreciated by a per unit produced basis and approximates a six
year useful life. Leasehold improvements are amortized over the term of the lease or the estimated
useful life of the asset, whichever is shorter. Maintenance and repairs are expensed as incurred
while renewals or betterments are capitalized. Upon sale or disposition of property and equipment,
any gain or loss is included in the statement of operations. The estimated useful lives for
furniture and equipment range from three to seven years and the estimated useful life for leasehold
improvements is five years.
Intangible Assets
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and other
intangible assets with indefinite lives are not subject to amortization but are tested for
impairment annually or whenever events or changes in circumstances indicate that the asset might be
impaired. The Company most recently performed its annual impairment analysis as of June 30, 2008
and will continue to test for impairment annually as of June 30. No impairment was indicated.
The developed technology is being amortized over its estimated useful life of 10 years. During
the years ended December 31, 2008, 2007 and 2006, the Company recorded $1,405, $1,406 and $1,405 in
amortization expense for the developed technology and expects to record $1,405 each year
thereafter, until the asset is fully amortized in 2012.
Long-Lived Assets
In accordance with SFAS No. 144, long-lived assets and intangible assets with determinate
lives are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company evaluates potential impairment by
comparing the carrying amount of the asset with the estimated undiscounted future cash flows
associated with the use of the asset and its eventual disposition. Should the review indicate that
the asset is not recoverable, the Companys carrying value of the asset would be reduced to its
estimated fair value, which is measured by future discounted cash flows.
Fair Value of Financial Instruments
The carrying amount of all financial instruments approximates fair value because of the short
maturities of the instruments.
F-7
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share or performance unit and per share amounts)
Concentrations of Credit Risk and Significant Customers
The Company maintains its cash and cash equivalents in deposit accounts and in money market
securities administered by a major financial institution.
The Company sells its products primarily to hospitals and distributors worldwide. The Company
performs credit evaluations of its customers financial condition and generally does not require
collateral from customers. Management believes that an adequate allowance for doubtful accounts has
been provided.
No single customer accounted for more than 10% of the Companys total revenue in 2008, 2007,
and 2006.
As of December 31, 2008 and December 31, 2007, no single customer accounted for more than 10%
of the Companys accounts receivable balance.
Product Sales by Geographic Region
The Company had product sales by region as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
United States |
|
$ |
31,936 |
|
|
$ |
23,049 |
|
|
$ |
12,366 |
|
Germany |
|
|
2,228 |
|
|
|
2,050 |
|
|
|
|
|
Japan |
|
|
1,370 |
|
|
|
68 |
|
|
|
|
|
Latin America |
|
|
1,171 |
|
|
|
699 |
|
|
|
164 |
|
Netherlands |
|
|
|
|
|
|
|
|
|
|
1,183 |
|
Other |
|
|
926 |
|
|
|
1,151 |
|
|
|
709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,631 |
|
|
$ |
27,017 |
|
|
$ |
14,422 |
|
|
|
|
|
|
|
|
|
|
|
Product sales to Germany are to LeMaitre Vascular, Inc. which sells into selected European
markets.
Sales to commercial hospital accounts represented 97%, 98% and 97% of United States product
sales in 2008, 2007 and 2006, respectively. The remaining United States product sales were sales to
hospitals conducting clinical trials for the Powerlink System.
Revenue Recognition
The Company complies with the revenue recognition guidelines in SEC Staff Accounting Bulletin
No. 104, Revenue Recognition. The Company recognizes revenue when all of the following criteria
are met:
|
|
|
Persuasive evidence of an arrangement exists; |
|
|
|
|
The sales price is fixed or determinable; |
|
|
|
|
Collection of the relevant receivable is probable at the time of sale; and |
|
|
|
|
Products have been shipped or used and the customer has taken ownership and assumed
risk of loss. |
The Company earns royalty revenue, which is included in license revenue in the consolidated
statement of operations, as a result of the sale of product rights and technologies to third
parties. Royalties are recognized upon the sale of products subject to the royalty, by the third
party.
The Company does not offer rights of return or price protection and has no post delivery
obligations other than its specified warranty.
Shipping Costs
F-8
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share or performance unit and per share amounts)
Shipping costs billed to customers are included in revenue with the related costs in costs of
goods sold.
Foreign Currency
The assets and liabilities of foreign subsidiaries are translated at the rates of exchange at
the balance sheet date. The income and expense items of these subsidiaries are translated at
average monthly rates of exchange. The resulting translation gains and losses are included as a
component of accumulated other comprehensive income on the consolidated balance sheet. Gains and
losses resulting from foreign currency transactions, which are denominated in a currency other than
the respective entitys functional currency are included in the consolidated statement of
operations.
Income Taxes
The Company records the estimated future tax effects of temporary differences between the tax
basis of assets and liabilities and amounts reported in the financial statements, as well as
operating losses and tax credit carry forwards. It has recorded a full valuation allowance to
reduce its deferred tax assets to zero, because the Company believes that, based upon a number of
factors, it is more likely than not that the deferred tax assets will not be realized. If the
Company were to determine that it would be able to realize their deferred tax assets in the future,
an adjustment to the valuation allowance on its deferred tax assets would increase net income in
the period such determination was made.
In July 2006, the Financial Accounting Standards Board issued FIN 48. FIN 48 prescribes a
comprehensive model for how companies should recognize, measure, present, and disclose, in their
financial statements, uncertain tax positions taken or expected to be taken on a tax return. Under
FIN 48, tax positions must initially be recognized in the financial statements when it is more
likely than not the position will be sustained upon examination by the tax authorities. Such tax
positions must initially and subsequently be measured as the largest amount of tax benefit that is
greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming
full knowledge of the position and relevant facts.
Net Loss Per Share
Net loss per common share is computed using the weighted average number of common shares
outstanding during the periods presented. Because of the net losses during the years ended December
31, 2008, 2007, and 2006, options to purchase the common stock of the Company were excluded from
the computation of net loss per share because the effect would have been antidilutive.
If anti-dilutive stock options were included, the number of shares used to compute net loss
per share would have been increased by approximately 4,802,000 shares, 2,874,000 shares, and
2,026,000 shares for the years ended December 31, 2008, 2007 and 2006, respectively. Of these
amounts, 4,746,000, 2,678,000, and 1,712,000 shares had an exercise price above the average closing
price for the years ended December 31, 2008, 2007, and 2006, respectively.
Research and Development Costs
Research and development costs are expensed as incurred.
Comprehensive Income (Loss)
The Company accounts for elements of comprehensive income (loss) pursuant to SFAS No. 130,
Reporting Comprehensive Income. Comprehensive income (loss) includes unrealized holding gains and
losses and other items that have been previously excluded from net income (loss) and reflected
instead in stockholders equity. Comprehensive income (loss) includes net loss, the effect of
foreign currency translation adjustments, and unrealized holding gains (losses) on marketable
securities classified as available-for-sale.
F-9
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share or performance unit and per share amounts)
Product Warranty
Within six months of shipment, certain customers may request replacement of products they
receive that do not meet the manufacturers product specifications. No other warranties are offered
and the Company disclaims responsibility for any consequential or incidental damages associated
with the use of the products. Historically, the Company has not experienced a significant amount of costs as a result of its product warranty
policy.
Recent Accounting Pronouncements
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, or FSP FAS 157-2, Effective Date
of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS 157
for non-financial assets and non-financial liabilities, except those that are recognized or
disclosed in the financial statements at fair value at least annually. SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements and does not require any
new fair value measurements. The standard describes a fair value hierarchy based on three levels of
inputs, the first two of which are considered observable and the last unobservable, that may be
used to measure fair value. As of December 31, 2008, the adoption of SFAS 157 had no impact on the
Companys consolidated financial statements. We are currently evaluating the impact of adopting the
provisions of FSP FAS 157-2.
As of January 1, 2008, the Company has adopted 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 allows for
voluntary measurement of financial assets and liabilities as well as certain other items at fair
value. Unrealized gains and losses on financial instruments for which the fair value option has
been elected are reported in earnings. As of December 31, 2008, the adoption of SFAS 159 had no
impact on the Companys consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), or
SFAS 141(R), Business Combinations (revised 2007). SFAS 141(R) is a revision to previously
existing guidance on accounting for business combinations. The statement retains the fundamental
concept of the purchase method of accounting, and introduces new requirements for the recognition
and measurement of assets acquired, liabilities assumed and noncontrolling interests. The statement
is effective for fiscal years beginning after December 15, 2008. As of December 31, 2008, the
adoption of SFAS 141(R) had no impact on the Companys consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, or SFAS
160, Noncontrolling Interests in Consolidated Financial Statements. The Statement requires that
noncontrolling interests be reported as stockholders equity. The Statement also establishes a
single method of accounting for changes in a parents ownership interest in a subsidiary as long as
that ownership change does not result in deconsolidation. SFAS 160 is required to be applied
prospectively in 2009, except for the presentation and disclosure requirements which are to be
applied retrospectively. The statement is effective for fiscal years beginning after December 15,
2008. The adoption of SFAS 160 is not expected to have a material impact on the Companys
consolidated financial statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 161,
or SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133. This new standard requires enhanced disclosures for derivative instruments,
including those used in hedging activities. It is effective for fiscal years and interim periods
beginning after November 15, 2008. The adoption of SFAS 161 is not expected to have a material
impact on the Companys consolidated financial statements.
In April 2008, the FASB issued Staff Position No. FAS 142-3, or FSP FAS 142-3, Determination
of the Useful Life of Intangible Assets, which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP FAS
142-3 allows an entity to use its own historical experience in
F-10
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share or performance unit and per share amounts)
renewing or extending similar arrangements, adjusted for specified entity-specific factors, in developing assumptions about
renewal or extension used to determine the useful life of a recognized intangible asset and will be
effective for fiscal years and interim periods beginning after December 15, 2008. Additional
disclosures are required to enable financial statement users to assess the extent to which the
expected future cash flows associated with the asset are affected by the entitys intent and/or
ability to renew or extend the arrangement. The guidance for determining the useful life of a
recognized intangible asset is to be applied prospectively to intangible assets acquired after the
effective date. The disclosure requirements are to be applied prospectively to all intangible
assets recognized as of, and subsequent to, the effective date. The Company has not yet evaluated the
potential impact of adopting FSP FAS 142-3 on the Companys consolidated financial statements.
2. License Agreements
In June 1998, the Company signed a technology license agreement with Guidant granting Guidant
the right to manufacture and distribute stent delivery products using the Companys Focus
technology. Under the agreement, the Company was entitled to receive certain milestone payments
based upon the transfer of the technology to Guidant, and royalty payments based upon the sale of
products using the Focus technology. In April 2006, Abbott acquired Guidants vascular business,
including all rights and obligations under the license. For the years ended December 31, 2008, 2007
and 2006, the Company recorded $33, $250, and $250, respectively, in royalties under the agreement.
At December 31, 2008 and 2007, $0 and $182, respectively, due under this agreement are included in
other receivables on the consolidated balance sheet. This royalty agreement expired in June of
2008, at which time Abbott acquired a fully paid up license for the underlying technology.
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. For the year ended December 31, 2007,
the Company recorded $504 in royalties under the agreement and all payments were received.
3. Restricted Cash Equivalents
The Company has a $475 line of credit with Wells Fargo Bank in conjunction with a corporate
credit card agreement. At December 31, 2008, 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 restricted balance of $500 in cash and cash equivalents with the bank.
4. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Raw materials |
|
$ |
2,467 |
|
|
$ |
2,785 |
|
Work in process |
|
|
2,058 |
|
|
|
2,295 |
|
Finished goods |
|
|
3,342 |
|
|
|
3,634 |
|
|
|
|
|
|
|
|
|
|
|
7,867 |
|
|
|
8,714 |
|
Less reserve for excess and obsolescence |
|
|
(768 |
) |
|
|
(660 |
) |
|
|
|
|
|
|
|
|
|
$ |
7,099 |
|
|
$ |
8,054 |
|
|
|
|
|
|
|
|
F-11
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share or performance unit and per share amounts)
5. Property and Equipment
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Construction in progress |
|
$ |
|
|
|
$ |
17 |
|
Leasehold improvements |
|
|
2,032 |
|
|
|
2,032 |
|
Furniture and equipment |
|
|
4,818 |
|
|
|
4,387 |
|
|
|
|
|
|
|
|
|
|
|
6,850 |
|
|
|
6,436 |
|
Less accumulated depreciation and amortization |
|
|
(3,857 |
) |
|
|
(2,665 |
) |
|
|
|
|
|
|
|
|
|
$ |
2,993 |
|
|
$ |
3,771 |
|
|
|
|
|
|
|
|
6. Intangibles
Intangibles consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Developed technology |
|
$ |
14,050 |
|
|
$ |
14,050 |
|
Accumulated amortization |
|
|
(9,250 |
) |
|
|
(7,845 |
) |
|
|
|
|
|
|
|
|
|
|
4,800 |
|
|
|
6,205 |
|
Trademarks and trade names |
|
|
2,708 |
|
|
|
2,708 |
|
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
7,508 |
|
|
$ |
8,913 |
|
|
|
|
|
|
|
|
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Accounts payable |
|
$ |
1,822 |
|
|
$ |
1,395 |
|
Accrued payroll and related expenses |
|
|
2,629 |
|
|
|
2,071 |
|
Current portion of long term debt |
|
|
750 |
|
|
|
|
|
Customer deposits |
|
|
684 |
|
|
|
418 |
|
Accrued clinical expenses |
|
|
194 |
|
|
|
250 |
|
Other accrued expenses |
|
|
72 |
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
$ |
6,151 |
|
|
$ |
4,259 |
|
|
|
|
|
|
|
|
8. Long Term Liabilities
Long term liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Term loan |
|
$ |
3,000 |
|
|
$ |
|
|
Line of credit facility |
|
|
2,000 |
|
|
|
|
|
Deferred tax |
|
|
1,029 |
|
|
|
1,029 |
|
Deferred rent |
|
|
16 |
|
|
|
80 |
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
6,045 |
|
|
|
1,109 |
|
Current portion of long-term debt |
|
|
(750 |
) |
|
|
|
|
|
|
|
|
|
|
|
Long-term portion |
|
$ |
5,295 |
|
|
$ |
1,109 |
|
|
|
|
|
|
|
|
Future fixed payments by year under the term loan and revolving line of credit facility were
as follows as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
Term loan |
|
$ |
750 |
|
|
$ |
1,000 |
|
|
$ |
1,000 |
|
|
$ |
250 |
|
Line of credit facility |
|
|
|
|
|
|
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
750 |
|
|
$ |
3,000 |
|
|
$ |
1,000 |
|
|
$ |
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 21, 2007, the Company entered into a revolving credit facility with Silicon Valley
Bank, under
F-12
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share or performance unit and per share amounts)
which it may borrow up to $5 million. All outstanding amounts under the credit facility
bear interest at a variable rate equal to the lenders 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 is collateralized by all of its assets with the exception of the Companys
intellectual property. All amounts owing under the credit facility were to become due and payable
on February 21, 2009. In September, 2008, the Company drew down $2.0 million. As of December 31,
2008, the Company had $2.0 million in outstanding borrowings under this credit facility.
In July 2008, the Company entered into an amendment to the credit facility which added a term
loan whereby the Company may borrow up to $3.0 million and which extended the repayment date for
borrowings under the revolving line of credit to July, 2010. In September 2008, the Company drew
$3.0 million on the term loan, all of which was outstanding at December 31, 2008. The term loan requires interest only payments at
a variable rate equal to the lenders prime rate plus 1.0%, which is payable on a monthly basis
through March 31, 2009. The term loan principal is due in 36 monthly installments beginning in
April 2009.
The Companys existing credit facilities with Silicon Valley Bank contain negative covenants
on the operation of its business and financial covenants, including requiring them to maintain a
tangible net worth of $13.0 million. As of December 31, 2008, the Companys tangible net worth was
$13.7 million. If the Company is not able to maintain compliance with its financial covenants,
certain terms of its credit facility and term loan will change including an increase in the
interest rate and a limitation on the amounts available for borrowing under the credit facility
based on eligible accounts receivable. Further, if the Company does not maintain a tangible net
worth of at least $12.0 million through June 29, 2009 and $12.5 million thereafter, it will be in
default under the credit facility which could allow the lender to accelerate the repayment of the
indebtedness under the credit facility.
As of December 31, 2008, the Company was in compliance with all covenants.
9. Commitments and Contingencies
Sole-Source, Related-Party Supplier Agreement
In February 1999, the Company 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 would renew on a year-by-year basis,
unless either party were to give 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 2007, the Company purchased approximately $2,200 of such materials, which fulfilled its
2007 purchase commitments.
As of December 31, 2008, the Company did not have any future commitments under supply
agreements.
Operating Leases
The Company leases its administrative, research and manufacturing facility and certain
equipment under long-term, non-cancelable lease agreements that have been accounted for as
operating leases. Certain of these leases include renewal options and require the Company to pay
operating costs, including property taxes, insurance and maintenance as proscribed by the
agreements.
Future minimum payments by year under non-cancelable operating leases with initial terms in
excess of one year were as follows as of December 31, 2008:
F-13
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share or performance unit and per share amounts)
|
|
|
|
|
Year Ending December 31, |
|
|
|
|
2009 |
|
|
346 |
|
2010 |
|
|
87 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
$ |
433 |
|
|
|
|
|
Rental expense charged to operations for all operating leases during the years ended December
31, 2008, 2007 and 2006, was $312, $329, and $336, respectively.
Employment Agreements and Retention Plan
The Company has entered into employment agreements with its officers and key employees under
which payment and benefits would become payable in the event of termination by the Company for any
reason other than cause; or upon a change in control or corporate transaction, by the key employee
for good reason, as such terms are defined in the agreement. If due, the payment will generally be
equal to six months of the key employees then current salary for termination by the Company
without cause, and generally be equal to twelve months of salary if by the key employee for good
reason upon a change in control or corporate transaction.
10. Stockholders Equity
Authorized Shares of Common Stock
In October 2003, shareholders approved an increase in the number of authorized shares of
common stock from 30,000,000 to 50,000,000. In May 2006, shareholders approved an amendment, which
increased the number of authorized shares of common stock from 50,000,000 to 60,000,000.
Sale of Common Stock
In July 2005, the Company completed a private placement of 4,150,000 shares of its common
stock at a purchase price of $4.00 per share, which resulted in net proceeds of approximately
$15,450 after deducting the offering expenses.
In June 2006, the Company completed a registered direct public offering of 6,061,000 shares of
its common stock at a purchase price of $3.30 per share, which resulted in net proceeds of
approximately $18,750 after deducting the offering expenses.
Treasury Stock
In July 2002, the board of directors authorized a program for repurchases of the Companys
outstanding common stock of up to $1,500 under certain parameters. During the year ended December
31, 2003, the Company utilized $456 to repurchase 268,000 shares of its common stock at a weighted
average share price of $1.71 per share. During the year ended December 31, 2002, the Company
utilized $205 to repurchase 227,000 shares of its common stock at a weighted average share price of
$.90 per share.
Stock Options
Pursuant to the Companys 1996 Stock Option/Issuance Plan (the 1996 Plan), the 1997 Supplemental
Stock Option Plan (the 1997 Plan), and the Companys 2006 Stock Incentive Plan (the 2006 Plan
and together with the 1996 Plan and 1997 Plan, the Plans), either incentive stock options,
non-qualified options, restricted stock, or awards may be granted. Under the Plans, options are granted at a price not less than 100% for
incentive stock options and 85% for non-qualified stock options of the value of the Companys 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.
F-14
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share or performance unit and per share amounts)
At December 31, 2008 and 2007, there were approximately 1,676,000 and 607,000 shares of common
stock available for future stock grants. The stock option activity under the plans is summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Number of |
|
|
Weighted Average |
|
|
Number of |
|
|
Weighted Average |
|
|
Number of |
|
|
Weighted Average |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Shares |
|
|
Exercise Price |
|
|
Shares |
|
|
Exercise Price |
|
Outstanding Beginning of Year |
|
|
4,124,739 |
|
|
$ |
4.34 |
|
|
|
3,396,929 |
|
|
$ |
4.38 |
|
|
|
2,678,201 |
|
|
$ |
4.53 |
|
Granted |
|
|
2,025,000 |
|
|
|
2.57 |
|
|
|
1,556,500 |
|
|
|
4.08 |
|
|
|
1,309,300 |
|
|
|
3.77 |
|
Exercised |
|
|
30,000 |
|
|
|
2.82 |
|
|
|
122,868 |
|
|
|
2.38 |
|
|
|
316,404 |
|
|
|
2.95 |
|
Forfeited |
|
|
891,978 |
|
|
|
4.00 |
|
|
|
647,822 |
|
|
|
4.34 |
|
|
|
274,168 |
|
|
|
4.62 |
|
Expired |
|
|
242,500 |
|
|
|
4.63 |
|
|
|
58,000 |
|
|
|
4.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding End of Year |
|
|
4,985,261 |
|
|
$ |
3.69 |
|
|
|
4,124,739 |
|
|
$ |
4.34 |
|
|
|
3,396,929 |
|
|
$ |
4.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable End of Year |
|
|
2,266,879 |
|
|
$ |
4.52 |
|
|
|
2,059,617 |
|
|
$ |
4.56 |
|
|
|
1,579,764 |
|
|
$ |
4.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Fair Value of
Options Granted During Year |
|
|
|
|
|
$ |
2.57 |
|
|
|
|
|
|
$ |
2.59 |
|
|
|
|
|
|
$ |
2.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the Plans, the total intrinsic value for shares outstanding was approximately $11, $126
and $530 as of December 31, 2008, 2007, and 2006, respectively. The total intrinsic value for
shares exercisable was approximately $5, $126, and $461 as December 31, 2008, 2007, and 2006,
respectively. The total intrinsic value of options exercised was approximately $56, $126, and
$1,347 in 2008, 2007, and 2006, respectively.
As of December 31, 2008, there was $3,414 of total unrecognized compensation cost related to
unvested stock options granted. This unrecognized compensation cost is expected to be recognized
over a weighted average period of 2.5 years.
The following table summarizes information regarding stock grants outstanding at December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Exercisable |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
Granted |
|
|
Remaining |
|
|
Average |
|
|
Granted |
|
|
Average |
|
|
|
Shares |
|
|
Contractual |
|
|
Exercise |
|
|
Shares |
|
|
Exercise |
|
Range of Exercise Prices |
|
Outstanding |
|
|
Life (Years) |
|
|
Price |
|
|
Exercisable |
|
|
Price |
|
$0.77 2.16 |
|
|
332,678 |
|
|
|
8.8 |
|
|
$ |
1.84 |
|
|
|
47,678 |
|
|
$ |
1.36 |
|
2.21 2.55 |
|
|
639,000 |
|
|
|
9.4 |
|
|
|
2.54 |
|
|
|
|
|
|
|
|
|
2.56 2.69 |
|
|
635,000 |
|
|
|
9.1 |
|
|
|
2.66 |
|
|
|
15,000 |
|
|
|
2.69 |
|
2.73 3.35 |
|
|
500,000 |
|
|
|
7.8 |
|
|
|
2.91 |
|
|
|
82,085 |
|
|
|
2.96 |
|
3.40 3.57 |
|
|
556,338 |
|
|
|
7.5 |
|
|
|
3.43 |
|
|
|
381,979 |
|
|
|
3.42 |
|
3.60 4.20 |
|
|
511,895 |
|
|
|
6.2 |
|
|
|
3.85 |
|
|
|
359,021 |
|
|
|
3.85 |
|
4.26 4.32 |
|
|
698,550 |
|
|
|
8.1 |
|
|
|
4.31 |
|
|
|
372,042 |
|
|
|
4.31 |
|
4.44 5.50 |
|
|
437,000 |
|
|
|
5.5 |
|
|
|
4.74 |
|
|
|
366,896 |
|
|
|
4.75 |
|
5.55 8.75 |
|
|
674,800 |
|
|
|
5.9 |
|
|
|
6.01 |
|
|
|
642,178 |
|
|
|
6.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.77 8.75 |
|
|
4,985,261 |
|
|
|
7.6 |
|
|
$ |
3.69 |
|
|
|
2,266,879 |
|
|
$ |
4.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of stock granted during 2008, 2007 and 2006 where
the exercise price on the date of grant was equal to the stock price on that date, was $2.57,
$2.59, and $2.55, respectively.
Expense related to non-employee stock options is being amortized over the vesting period, which is
generally four years. During the years ended December 31, 2008, 2007, and 2006, $(8), $42, and
$(6), respectively, was recorded as compensation expense for the change in the fair value of unvested non-employee
option grants. During the years ended December 31, 2008, 2007 and 2006, the Company granted -0-,
10,000, and 20,000 options, respectively, to non-employees. As of December 31, 2008, 2007 and 2006,
a total of 95,000, 187,000, and 220,100 non-employee stock options, respectively, were outstanding.
As of December 31, 2008, 2007, and 2006, a total of 76,667, 168,667, and 207,000 non-employee stock
options, respectively, were fully vested.
F-15
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share or performance unit and per share amounts)
Restricted Stock
The following table summarizes activity and related information for our restricted stock
awards under the Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number of |
|
|
Grant-Date Fair |
|
|
|
Shares |
|
|
Value |
|
Nonvested as of December 31, 2007 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
525,000 |
|
|
|
2.65 |
|
Vested |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested as of December 31, 2008 |
|
|
525,000 |
|
|
$ |
2.65 |
|
|
|
|
|
|
|
|
During the year ended December 31, 2008, we granted 525,000 shares of restricted stock. We
did not grant restricted stock during the years ended December 31, 2007 and 2006. Restricted stock
is granted subject to restrictions as to sale or other disposition of shares and to restrictions
that require continuous employment with the Company. The restrictions generally expire and the
stock becomes fully vested, two years from the date of grant. The grant-date fair value of shares
granted during the year ended December 31, 2008, was $1,389. The weighted-average grant-date fair
value per share for restricted stock granted was based upon the closing market price of the
Companys common stock on the grant dates of the awards and was $2.65 per share for the year ended
December 31, 2008. As of December 31, 2008, none of the shares vested. The Company recorded
stock-based compensation related to restricted stock of $432 for the year ended December 31, 2008.
As of December 31, 2008, the unrecorded stock-based compensation balance related to restricted
stock awards was $952, and will be recognized over an estimated weighted average amortization
period of 1.4 years.
Employee Stock Purchase Plan
Under the terms of the Companys 1996 Employee Stock Purchase Plan (the Purchase Plan),
eligible employees can purchase common stock through payroll deductions at a price equal to the
lower of 85% of the fair market value of the Companys common stock at the beginning or end of the
applicable offering period. In 2006, an additional 250,000 shares of common stock were approved and
in 2008, another 250,000 shares of common stock were approved for issuance under the Purchase Plan.
During the years ended December 31, 2008, 2007, and 2006, $169, $155, and $101, respectively, was
recorded as stock based compensation expense under the Purchase Plan. During 2008, 2007, and 2006,
a total of approximately 357,000, 180,000, and 77,000 shares of common stock, respectively, were
purchased at an average price of $1.39, $2.74, and $4.11, respectively.
Stock Based Compensation
Financial Accounting Standards Board Statement No. 123(R) Share Based Payment, or FAS 123R,
requires the use of a valuation model to calculate the fair value of stock-based compensation. 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
Companys 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 used to estimate the fair value of stock options granted
using the
Black-Scholes valuation method was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
Expected Life (in years) (1) |
|
|
5.5 |
|
|
|
5.5 |
|
|
|
5.5 |
|
Expected Volatility (2) |
|
|
56.1 |
% |
|
|
71.2 |
% |
|
|
75.8 |
% |
Risk Free Interest Rate (3) |
|
|
3.1 |
% |
|
|
4.5 |
% |
|
|
4.9 |
% |
Dividend Yield (4) |
|
|
0.0 |
% |
|
|
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. |
F-16
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share or performance unit and per share amounts)
Expense recorded pursuant to FAS 123R during was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
General and Administrative |
|
$ |
1,413 |
|
|
$ |
894 |
|
|
$ |
767 |
|
Marketing and Sales |
|
|
1,018 |
|
|
|
878 |
|
|
|
448 |
|
Research, Development, and Clinical |
|
|
236 |
|
|
|
417 |
|
|
|
347 |
|
Cost of Sales |
|
|
245 |
|
|
|
195 |
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
Total Stock Based Compensation |
|
$ |
2,912 |
|
|
$ |
2,384 |
|
|
$ |
1,634 |
|
|
|
|
|
|
|
|
|
|
|
In addition, the Company had $78, $177, and $130 of stock based compensation capitalized in
inventory as of December 31, 2008, 2007, and 2006, respectively.
11. Related Party Transactions
A director of Endologix is also a director of a hospital facility from whom the Company
contracts for physician training and clinical research services. Payments totaling $97, $42, and
$94 for the years ended December 31, 2008, 2007, and 2006, respectively, were made to this
hospital. In addition, this hospital purchased products from the Company totaling $816, $490, and
$460 for the years ended December 31, 2008, 2007, and 2006, respectively. All transactions were in
accordance with normal commercial terms and conditions.
12. Income Taxes
Income tax expense (benefit) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(30 |
) |
|
$ |
|
|
|
$ |
|
|
State |
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
Foreign |
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
|
|
|
|
|
|
State |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense (benefit) |
|
$ |
(28 |
) |
|
$ |
2 |
|
|
$ |
3 |
|
Income taxes for 2008, 2007 and 2006 differ from income taxes for those years computed by
applying the U.S. federal statutory rate of 34% to income/(loss) before taxes for those years as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Tax expense (benefit) at U.S. statutory rate |
|
$ |
(4,077 |
) |
|
$ |
(5,126 |
) |
|
$ |
(5,965 |
) |
State tax (benefit) net of federal benefit |
|
|
(372 |
) |
|
|
(493 |
) |
|
|
(662 |
) |
Meals & Entertainment (50% addback) |
|
|
128 |
|
|
|
114 |
|
|
|
76 |
|
Research & Development Credits |
|
|
(110 |
) |
|
|
(201 |
) |
|
|
(39 |
) |
Stock based compensation |
|
|
500 |
|
|
|
456 |
|
|
|
437 |
|
Net change in valuation allowance |
|
|
3,898 |
|
|
|
5,240 |
|
|
|
5,811 |
|
Other, net |
|
|
5 |
|
|
|
12 |
|
|
|
345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(28 |
) |
|
$ |
2 |
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
During 2008, the Housing Assistance Act of 2008 was enacted. This act contains a provision
that allows taxpayers to claim a partial refund of its research and development credit and
alternative minimum tax credit carryforwards (accelerated credits) in lieu of claiming certain
tax depreciation deductions. The Company has elected to claim the accelerated credit claim and as
of December 31, 2008 and estimates a total refundable credit of approximately $30.
F-17
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share or performance unit and per share amounts)
Significant components of the Companys deferred tax assets and (liabilities) are as follows
at December 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Net operating loss carryforwards |
|
$ |
40,173 |
|
|
$ |
36,257 |
|
Accrued expenses |
|
|
203 |
|
|
|
181 |
|
Tax credits |
|
|
6,341 |
|
|
|
6,232 |
|
License fees |
|
|
51 |
|
|
|
61 |
|
Inventory |
|
|
289 |
|
|
|
248 |
|
Capitalized research and development |
|
|
281 |
|
|
|
401 |
|
Developed technology |
|
|
(1,808 |
) |
|
|
(2,337 |
) |
Trademarks and tradenames |
|
|
(1,029 |
) |
|
|
(1,029 |
) |
Deferred compensation |
|
|
1,328 |
|
|
|
803 |
|
Other |
|
|
707 |
|
|
|
746 |
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
46,536 |
|
|
|
41,563 |
|
Valuation allowance |
|
|
(47,565 |
) |
|
|
(42,592 |
) |
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
(1,029 |
) |
|
$ |
(1,029 |
) |
|
|
|
|
|
|
|
Based upon the Companys history of continuing operating losses, realization of its deferred
tax assets does not meet the more likely than not criteria under SFAS No. 109. The Company
recorded a valuation allowance of $47.6 million. In determining the net asset subject to a
valuation allowance, the Company recorded a deferred tax liability related to its indefinite-lived
other intangible assets that is not expected to reverse in the foreseeable future resulting in a
net deferred tax liability of approximately $1.0 million after application of the valuation
allowance.
The
valuation allowance increased by $4,973, $5,517, and $6,651 in 2008, 2007 and 2006,
respectively.
At December 31, 2008, the Company has net operating loss carryforwards for federal and state
income tax purposes of approximately $107,541 and $62,231, respectively. The federal net operating
loss carryforward will begin expiring in 2015. The state net operating loss began expiring in 2007.
In addition, the Company has research and development and other tax credits for federal and state
income tax purposes of approximately $3,227, and $3,004, respectively, which begin to expire in
2018. The state research and development credits do not expire for California purposes. In
addition, the Company has approximately $110 of California Manufacturers Investment Credits, which
begin to expire in 2010.
As a result of certain realization requirements of SFAS 123(R), the table of deferred tax
assets and liabilities shown above does not include certain deferred tax assets at December 31,
2008 and 2007 that arose directly from (or the use of which was postponed by) tax deductions
related to equity compensation in excess of compensation recognized for financial reporting. Those
deferred tax assets include federal and state net operating losses. Equity will be increased by $58
if and when such deferred tax assets are ultimately realized. The Company uses SFAS 109 ordering
for purposes of determining when excess tax benefits have been realized.
Utilization of the NOL and R&D credit carryforwards may be subject to a substantial annual
limitation due to an ownership change (as defined) that may have occurred or that could occur in
the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the
Code), as well as similar state provisions. These ownership changes may limit the amount of NOL
and R&D credit carryforwards, and other tax attributes, that can be utilized annually to offset
future taxable income and tax, respectively. In general, an ownership change as
defined by Section 382 of the Code results from a transaction or series of transactions over a
three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of
a company by certain stockholders or public groups. Since the Companys formation, the Company has
raised capital through the issuance of capital stock on several occasions which, combined with the
purchasing stockholders subsequent disposition of those shares, may have resulted in such an
ownership change, or could result in an ownership change in the future upon subsequent disposition.
The Company has not completed a study to assess whether an ownership change has occurred or
whether there
F-18
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share or performance unit and per share amounts)
have been multiple ownership changes since the Companys formation due to the
complexity and cost associated with such a study. If the Company has experienced an ownership
change at any time since its formation, utilization of the NOL, R&D credit carryforwards, and other
tax attributes, would be subject to an annual limitation under Section 382 of the Code. In
general, the annual limitation, which is determined by first multiplying the value of the Companys
stock at the time of the ownership change by the applicable long-term, tax-exempt rate, could
further be subject to additional adjustments, as required. Any limitation may result in the
expiration of a portion of the NOL or R&D credit carryforwards before utilization. Further, until a
study is completed and any limitation is known, no amounts are being considered as an uncertain tax
position or disclosed as an unrecognized tax benefit under FIN 48. Due to the existence of the
valuation allowance, future changes in the Companys unrecognized tax benefits will not impact its
effective tax rate. Any carryforwards that will expire prior to utilization as a result of a
limitation under Section 382 will be removed from deferred tax assets with a corresponding
reduction of the valuation allowance.
The results of operations for the years ended December 31, 2008, 2007 and 2006 include the net
losses of the Companys wholly-owned German subsidiary of $11, $14, and $17, respectively.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, on January 1, 2007. The Company did not recognize any additional liability for
unrecognized tax benefit as a result of the implementation. As of December 31, 2008, the Company
did not increase or decrease its liability for unrecognized tax benefit related to tax positions in
the prior period nor did the Company increase its liability for any tax positions in the current
year. Furthermore, there were no adjustments to the liability or lapse of statute of limitation or
settlements with taxing authorities.
The Company expects resolution of unrecognized tax benefits, if created, would occur while the
full valuation allowance of deferred tax assets is maintained; therefore, the Company does not
expect to have any unrecognized tax benefits that, if recognized, would affect the effective tax
rate.
The Company will recognize interest and penalty related to unrecognized tax benefits and
penalties as income tax expense. As of December 31, 2008, the Company has not recognized
liabilities for penalty and interest as the Company does not have liability for unrecognized tax
benefits.
The Company is subject to taxation in the U.S. and various states. The Companys tax years for
2005, 2006, and 2007 are subject to examination by the taxing authorities. With few exceptions, the
Company is no longer subject to U.S. federal, state, local or foreign examinations by taxing
authorities for years before 2005.
13. Employee Benefit Plan
The Company provides a 401(k) Plan for all employees 21 years of age or older. Under the 401(k)
Plan, eligible employees voluntarily contribute to the Plan up to 100% of their salary through
payroll deductions. Employer
contributions may be made by the Company at its discretion based upon matching employee
contributions, within limits, and profit sharing provided for in the Plan. No employer contributions were made in
2008, 2007, or 2006.
14. Legal Matters
On December 1, 2008, the Company entered into a settlement with Cook Medical Incorporated for
claims arising out of our employment of certain former employees of Cook. Although the Company is
not currently a party to any claims, it may become party to ordinary disputes arising in the normal
course of business.
F-19
(b) Financial Statement Schedule
ENDOLOGIX, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A |
|
Column B |
|
Column C |
|
Column D |
|
Column E |
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
(Reductions) |
|
|
|
|
|
|
|
|
Balance at |
|
Charges to |
|
Charged |
|
|
|
|
|
Balance at |
|
|
Beginning of |
|
Costs and |
|
to Other |
|
|
|
|
|
End of |
Description |
|
Period |
|
Expenses |
|
Accounts |
|
Deductions(a) |
|
Period |
|
|
(In thousands) |
Year ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
100 |
|
|
$ |
89 |
|
|
$ |
|
|
|
$ |
(117 |
) |
|
$ |
72 |
|
Reserve for excess and obsolete inventories |
|
$ |
660 |
|
|
$ |
318 |
|
|
$ |
|
|
|
$ |
(210 |
) |
|
$ |
768 |
|
Income tax valuation allowance |
|
$ |
42,592 |
|
|
$ |
4,973 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
47,565 |
|
Year ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
38 |
|
|
$ |
81 |
|
|
$ |
|
|
|
$ |
(19 |
) |
|
$ |
100 |
|
Reserve for excess and obsolete inventories |
|
$ |
79 |
|
|
$ |
777 |
|
|
$ |
|
|
|
$ |
(196 |
) |
|
$ |
660 |
|
Income tax valuation allowance |
|
$ |
37,075 |
|
|
$ |
5,517 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
42,592 |
|
Year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
26 |
|
|
$ |
38 |
|
|
$ |
|
|
|
$ |
(26 |
) |
|
$ |
38 |
|
Reserve for excess and obsolete inventories |
|
$ |
426 |
|
|
$ |
488 |
|
|
$ |
|
|
|
$ |
(835 |
) |
|
$ |
79 |
|
Income tax valuation allowance |
|
$ |
30,424 |
|
|
$ |
6,651 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
37,075 |
|
|
|
|
(a) |
|
Deductions represent the actual write-off of accounts receivable balances or the disposal of
inventory. |
F-20
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
3.1
|
|
Amended and Restated Certificate of Incorporation (Incorporated by
reference to Exhibit 4.1 to Endologix Registration Statement on Form S-8,
filed with the SEC on August 7, 2006). |
|
|
|
3.2
|
|
Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to
Endologix Annual Report on Form 10-K filed with the SEC on March 29,
2001). |
|
|
|
4.1
|
|
Specimen Certificate of Common Stock (Incorporated by reference to Exhibit
4.1 to Amendment No. 2 to Endologix Registration Statement on Form S-1,
No. 333-04560, filed with the SEC on June 10, 1996). |
|
|
|
10.1(2)
|
|
Employee Stock Purchase Plan and forms of agreement thereunder
(Incorporated by reference to Exhibit 4.1 to Endologix Registration
Statement on Form S-8, No. 333-114465, filed with the SEC on April 14,
2004). |
|
|
|
10.2(2)
|
|
1997 Supplemental Stock Option Plan (Incorporated by reference to Exhibit
99.1 to Endologix Registration Statement on Form S-8, No. 333-42161, filed
with the SEC on December 12, 1997). |
|
|
|
10.3(1)
|
|
License Agreement by and between Endologix and Guidant dated June 19, 1998
(Incorporated by reference to Exhibit 10.24 to Endologix Quarterly Report
on Form 10-Q, filed with the SEC on August 11, 1998). |
|
|
|
10.4(2)
|
|
1996 Stock Option/Stock Issuance Plan (Incorporated by reference to
Exhibit 4.1 to Endologix Registration Statement on Form S-8, No.
333-122491, filed with the SEC on February 2, 2005). |
|
|
|
10.5(2)
|
|
1997 Stock Option Plan assumed by Endologix pursuant to its acquisition of
Radiance Medical Systems, Inc. on January 14, 1999 (Incorporated by
reference to Exhibit 99.2 to Endologix Registration Statement on Form S-8,
No. 333-72531, filed with the SEC on February 17, 1999). |
|
|
|
10.6(2)
|
|
2006 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 to
Endologix Current Report on Form 8-K, filed with the SEC on May 26, 2006). |
|
|
|
10.6.1(2)
|
|
Stock Option Agreement under 2006 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.1 to Endologix Quarterly Report on Form 10-Q,
filed with the SEC on November 9, 2006). |
|
|
|
10.6.2(1)
|
|
Restricted Stock Award Agreement under 2006 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.2 to Endologix Quarterly Report
on Form 10-Q, filed with the SEC on November 9, 2006). |
|
|
|
10.7(2)
|
|
2006 Employee Stock Purchase Plan (Incorporated by reference to Exhibit
10.2 to Endologix Current Report on Form 8-K, filed with the SEC on May
26, 2006. |
|
|
|
10.9
|
|
Form of Indemnification Agreement entered into with Endologix officers and
directors (Incorporated by reference to Exhibit 10.41 to Endologix
Quarterly Report on Form 10-Q, filed with the SEC on November 13, 2002). |
|
|
|
10.11
|
|
Standard Industrial/Commercial Single-Tenant Lease Net, dated November
2, 2004, by and between Endologix and Del Monico Investments, Inc.
(Incorporated by reference to Exhibit 10.46 to Endologix Current Report on
Form 8-K, filed with the SEC on November 24, 2004). |
|
|
|
10.12
|
|
Loan and Security Agreement, dated as of February 21, 2007, by and between
Endologix and Silicon Valley Bank (Incorporated by reference to Exhibit
10.13 to Endologix Quarterly Report on Form 10-Q, filed with the SEC on
May 9, 2007). |
|
|
|
10.12.1
|
|
First Amendment to Loan and Security Agreement, dated as of July 22, 2008,
by and between Endologix and Silicon Valley Bank (Incorporated by
reference to Exhibit 10.1 to Endologix Current Report on Form 8-K, filed
with the SEC on July 28, 2008). |
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.13(2)
|
|
Offer Letter, dated April 28, 2008, between Endologix and John McDermott
(Incorporated by reference to Exhibit 10.1 to Endologix Current Report on
Form 8-K, filed with the SEC on May 16, 2008). |
|
|
|
10.14(2)
|
|
Severance Agreement and General Release, effective May 12, 2008, between
Endologix and Paul McCormick (Incorporated by reference to Exhibit 10.2 to
Endologix Current Report on Form 8-K, filed with the SEC on May 16, 2008). |
|
|
|
10.15(2)
|
|
Employment Agreement, dated as of December 29, 2008, between Endologix and
John McDermott (Incorporated by reference to Exhibit 10.1 to Endologix
Current Report on Form 8-K, filed with the SEC on January 2, 2009). |
|
|
|
10.16(2)
|
|
Employment Agreement, dated as of December 29, 2008, between Endologix and
Robert J. Krist (Incorporated by reference to Exhibit 10.2 to Endologix
Current Report on Form 8-K, filed with the SEC on January 2, 2009). |
|
|
|
10.17(2)
|
|
Employment Agreement, dated as of December 29, 2008, between Endologix and
Stefan G. Schreck, Ph.D. (Incorporated by reference to Exhibit 10.3 to
Endologix Current Report on Form 8-K, filed with the SEC on January 2,
2009). |
|
|
|
10.18(2)
|
|
Employment Agreement, dated as of December 29, 2008, between Endologix and
Janet Fauls (Incorporated by reference to Exhibit 10.4 to Endologix
Current Report on Form 8-K, filed with the SEC on January 2, 2009). |
|
|
|
14
|
|
Code of Ethics for Chief Executive Officer and Principal Financial
Officers (Incorporated by reference to Exhibit 14 to Endologix Annual
Report on Form 10-K filed with the SEC on March 26, 2004). |
|
|
|
21.1
|
|
List of Subsidiaries. |
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
24.1
|
|
Power of Attorney (included on signature page hereto). |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to Rule
13a-14(b)/15d-14(b) under the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to Rule
13a-14(b)/15d-14(b) under the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350. |
|
|
|
(1) |
|
Portions of this exhibit are omitted and were filed separately with the Securities and
Exchange Commission pursuant to Endologix application requesting confidential treatment under
Rule 24b-2 of the Securities Exchange Act of 1934. |
|
(2) |
|
These exhibits are identified as management contracts or compensatory plans or arrangements
of Endologix pursuant to Item 15(a)(3) of Form 10-K. |