Endologix, Inc.
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, 2006
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
incorporation or organization)
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(IRS Employer
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 Noþ
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 Noþ
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 Noo
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, or a non-accelerated filer.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o Noþ
As of June 30, 2006, the aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $150,802,000 (based upon the closing price for shares of the
Registrants Common Stock as reported by the NASDAQ Global Market for June 30, 2006, the last
trading date of the Registrants second fiscal quarter).
On February 16, 2007, approximately 43,207,360 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 22, 2007.
ENDOLOGIX, INC.
ANNUAL REPORT ON
Form 10-K
For the Fiscal Year Ended December 31, 2006
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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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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research and development of our products; |
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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.
1
PART I
Item 1. Business
Introduction
We develop, manufacture, sell and market minimally invasive therapies for the treatment of
cardiovascular disease. Our products are catheter-based alternative treatments for 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 the
13th leading cause of death in the United States today.
The Powerlink® System is a catheter and endoluminal graft, or ELG, system. The
self-expanding cobalt chromium alloy stent cage is 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 deployed into its proper position, the blood flow is shunted away from the
weakened or aneurysmal section of the aorta, reducing pressure and the potential for the aorta to
rupture. Our clinical trials demonstrate that implantation of our products will reduce the
mortality and morbidity rates associated with conventional AAA surgery, as well as provide a
clinical alternative to many patients that could not undergo conventional surgery.
Prior to developing the Powerlink System, we developed various catheter-based systems to treat
cardiovascular disease. We licensed our proprietary Focus balloon technology to Guidant Corporation
for use in Guidants coronary stent delivery systems. Sales of our Powerlink System in the United
States and in Europe are the primary sources of our reported revenues.
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 held Endologix, Inc., and changed our name to Endologix, Inc.
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 vessel wall, causing the
vessel wall 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, to 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 major surgery 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 surgical repair. The high morbidity and mortality rates of
surgery are well documented, yet 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 expandable wire cages or scaffolds 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 10%. In addition, complication rates vary
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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 10 to 15 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 lengths 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 1.5 million people have an AAA, and yet there are
only about 200,000 new diagnoses each year. Although AAA is one of the most 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%.
Patients diagnosed with an AAA larger than five centimeters can be classified into one of
three categories: those patients opting for elective surgery, patients who refuse surgery due to
the clinical risks of an open procedure, and those who are considered at high risk for an open
procedure. These high-risk patients and those refusing surgery will populate the initial patient
pool for less invasive techniques. We believe that ELGs could be applied to as many as 60%-70% of
the approximately 40,000 surgeries performed in the United States each year.
We estimate that this year, of those patients diagnosed with AAA, approximately 30,000 undergo
conventional open surgery, 30,000 will be treated with a commercially available ELG, and the
remainder will remain under watchful waiting.
AAAs generally are 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 2006,
the age 65 and over population in the United States numbered approximately 36.8 million, or 12.7%
of the total population, and is expected to be 39.7 million by 2010. 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
estimated to be equal in size to that in the United States.
Our Strategy
Our objective is to become a premier supplier of endovascular surgery products that repair
diseased or damaged vascular structures as an alternative to open surgery. As part of our core
strategy, we intend to:
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Demonstrate a Significant Technology Advantage. Our strategy has been to develop
technology that addresses the limitations of the early generation devices, and execute
clinical studies to substantiate the superiority of the technology. Being first to market
has not been an advantage in the AAA market thus far, as other devices approved for
marketing in the United States have undergone post-approval recalls and/or temporary sales
suspensions. |
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Execute a Global Marketing Strategy and Address Key Markets. We have obtained the right
to affix the CE Mark, and utilize distributors in markets outside the United States. We have
sought to limit our capital commitments by establishing sales through distributors due to
limitations on the size of the market, average sales price and device reimbursement in
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Continue to Develop Core Competencies and Develop Synergistic Collaborations. We believe
we have demonstrated core competencies in developing catheter-based solutions that address a
large unmet clinical need that we identified after close consultation with key physicians.
Our focus at this time is the aortic aneurysm. In the future, we may develop additional
devices to expand the application of our core competencies. |
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Our Products
Powerlink System
Our Powerlink System 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 by a small incision through the femoral artery. Once deployed into its proper
position, the blood flow is shunted away from the weakened, or aneurysmal, 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 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 guidewire 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 components 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 devices currently available commercially.
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 aortic cuffs, 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
26 millimeters in diameter. The infrarenal device is made of a cobalt chromium alloy cage covered
by thin-walled ePTFE for placement below the renal arteries. The self-expanding cage 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 making it easier for hospital purchasing patterns. 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. In
2006, we accelerated the launch with the addition of twenty-one sales representatives, three
regional managers and one national manager.
Powerlink Suprarenal Bifurcated System. The Powerlink Suprarenal Bifurcated System is similar
to the infrarenal device, except that the wire stent in the suprarenal device is extended above the
graft material to allow the physician to anchor the top of the device above the renal arteries
without obstructing them. The suprarenal device is available in multiple diameters and lengths and
can treat patients that have an aortic neck up to 32 millimeters in diameter. The suprarenal model
has a segment of uncovered stent at the proximal end that permits the operator to place the device
more proximally, over the opening of the renal arteries in patients with short or angulated aortic
necks. The uncovered stent permits continuous blood flow to the renal arteries, thereby mitigating
the risk of kidney complications. We obtained the CE Mark for this product in Europe in August
1999, and are currently enrolling patients in an arm of a Phase II pivotal trial in the United
States.
Powerlink Aortic Cuffs and Limb Extensions. The Powerlink Aortic Cuffs and Limb Extensions
permit the physician to treat a greater number of patients. Aortic cuffs are available in 25, 28
and 34 millimeters in diameter and multiple lengths. They also are available in the infrarenal or
suprarenal configurations. Limb extensions are 20 millimeters and 16 millimeters in diameter with
various lengths, allowing the physician to customize the technology to a given individual. We have
obtained the CE Mark for these products in Europe in October 1999 (Limb Extensions), December 1999
(25/28 Cuffs) and May 2002 (34 Cuff). We obtained United States FDA marketing approval in October
2004 for the 25 and 28 millimeter infrarenal cuffs, and the 20 and 16 millimeter limb extensions.
Clinical Trials
Powerlink Systems
As of February 14, 2007, 146 of the 193 patients required have been enrolled for the second
arm of United States Pivotal Phase II clinical trial for the suprarenal Powerlink System.
As of February 14, 2007, 50 of the 60 patients have been enrolled in a United States Pivotal
Phase II clinical trial utilizing a 34 mm proximal cuff in conjunction with a commercial bifurcated
Powerlink to treat patients with large aortic necks. Currently only one commercial device is
capable of treating aortic necks larger than 28 mm. We believe that approximately 10-15% of all
potential patients are refused minimally invasive treatment due to anatomic considerations.
Japanese Clinical Trial on the PowerWeb System.
The PowerWeb System is the predecessor to the Powerlink System. The two designs utilize the same
stent cage configuration but use different methods to link the wire forms. In November 2001, we
completed the first AAA clinical trial in Japan, including the required 6 month follow up. Six
centers used the PowerWeb System for elective endovascular aneurysm repair in 79 patients.
The patients age range was 40 to 89 years, with a mean age range of 70 to 79 years. The
effectiveness of the PowerWeb System was measured based on whether there was a persistent endoleak,
device migration, device damage, or change in aneurysm sac shape over a 6 month follow period.
Only 2.9% of all patients and 1.7% of patients implanted with bifurcated devices experienced these
problems. Safety of the PowerWeb System was based on adverse events, which occurred in 22 patients
after treatment, of which five were device related. The total safety
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evaluation ratings demonstrated that 68 patients (98.5%) were treated safely. Trial results showed
a combined rating of effectiveness and safety for 66 patients (95.6%) and the clinicians
recommended approval of the PowerWeb System as a low invasive medical device for aneurysms.
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 forty-four sales representatives, eight regional managers, and one national manager
as of December 31, 2006. The primary customer and decision maker for these devices in the United
States is the vascular surgeon. The market is fairly concentrated with estimates of 1,000 to 1,500
potential general and vascular surgeons, and a limited number of interventional cardiologists and
radiologists, in approximately 1,000 hospitals.
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 LeMaitre Vascular as well as
other exclusive independent distributors, supported by a direct regional manager based in Europe.
We will participate in and share the costs of attending key cardiovascular conferences in Europe.
We expect to continue to interface with key opinion leaders in Europe
Japan. In 2005, per request of the Japanese Ministry of Health, we submitted data on the FDA
approved Powerlink System. This permits us to submit Powerlink data for Shonin approval without
the need for additional clinical trials, and upon approval will permit the Company to have a single
technology platform for Europe, the United States, and Japan. We estimate that it will receive
Shonin approval in the second quarter of 2007.
Rest of World, excluding Japan. We have obtained marketing approval in a number of countries,
including China, Australia, Argentina, and South Africa and have initial clinical experience in
each of these locales.
Legacy Products
In June 1998, we entered into a technology license agreement with Guidant, an international
interventional cardiology products company, granting a 10 year license to manufacture and
distribute stent delivery products using our Focus technology. The original territory for the
license was the United States and Canada, but has expanded with the expiration of distribution
relations in other countries. If for any calendar year, after timely written notice by us to
Guidant of a shortfall in royalty payments below the annual minimum royalty required, they elect
not to pay us at least the minimum royalty, we can cancel the agreement. Also, as Guidant has paid
to date the aggregate payment amount required under the contract, they can at any time, with or
without cause, terminate the agreement upon thirty days notice. We are entitled to receive
royalties on Guidants sales. In the year ended December 31, 2006, we recorded $250,000 in
royalties. We anticipate that royalties from Guidant will remain at approximately this level
through the remaining term of the agreement, which expires in 2008.
Manufacturing
We manufacture our products at our facilities in Irvine, California. During 2005, we relocated
both our manufacturing and headquarters functions to a 30,200 square foot leased facility.
Our current manufacturing process is labor intensive and involves shaping and forming a cobalt
chromium wire cage, sewing graft material together to form the outside skin of the device and
suturing the graft material on to the cage. While we plan to make process improvements to reduce
the labor component of the production, the majority of the direct cost comes from the ePTFE graft
material, which has pricing set by our agreement with Bard Peripheral Vascular Systems described
below.
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In February 1999, we entered into a supply agreement with Bard Peripheral Vascular Systems, a
subsidiary of C.R. Bard, Inc for the supply of ePTFE. The supply agreement expires in December 2007, at
which time it automatically renews on a year-by-year basis, for additional one-year periods, unless
either party gives the other party notice of its intention not to renew within 30 days from the
expiration date of the applicable renewal period. Under the terms of a second amendment to the
supply agreement dated September 8, 2006, the minimum purchase requirements under the supply
agreement were reduced and we must purchase a specified annual dollar value of the component, as
opposed to a quantity of units, for the remaining term of the 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 twelve 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 38 issued United
States patents, one issued European patent, and one 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 technology license to Guidant is supported by seven United
States patents and one Japanese patent. These patents begin expiring in 2014 and the last patent
expires in 2016.
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 require our employees, consultants and advisors to
execute confidentiality agreements in connection with their employment, consulting or advisory
relationships. We also require employees, consultants and advisors who may work on our products to
agree to disclose and assign to us all inventions conceived during the work day, using our property
or which relate to our business.
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, ease of use, reliability and durability; |
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ability to receive regulatory approval; |
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distribution capability; |
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time necessary to develop products successfully; and |
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price. |
We expect that significant competition in the endovascular grafting market will develop over
time. Three manufacturers, Medtronic, W.L. Gore, and Cook have obtained FDA marketing approval for
their ELGs. However, we believe that our technology offers significant clinical advantages over
currently available technologies. The cardiovascular device industry is marked by rapid
technological improvements and, as a result, physicians are quick to seize upon 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 one-piece bifurcated, fully supported ELG, and we believe that the
Powerlink System will offer improved deliverability, dependability, and durability.
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Companies that are first to market in the United States with a new technique must underwrite
the significant and expensive challenge of physician training and proctoring. In addition, the first
generation companies have borne these costs as well as costs of addressing reimbursement issues. We
believe that our Powerlink System represents next generation technology that is poised to take
advantage of a well-prepared market.
We believe that earlier generation technology devices experienced material failures and
complications due to their reliance on multi-piece designs that did not include a stent cage to
support the entire graft, or designs with hooks or barbs to hold their devices in place (See the
section above entitled Limitations of Earlier Technology for a discussion of these factors). Our
Powerlink System is a single- piece, fully supported design that uses radial force and column
strength to maintain fixation. We believe that our grafts may offer a competitive advantage. The
following chart that details the stent graft characteristics of the minimally-invasive AAA stent
grafts being sold in Europe and/or the United States.
Stent Graft Characteristics
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Single |
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Fully |
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Manufacturer/Product Name |
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Piece? |
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Supported? |
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Fixation |
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FDA Status |
Endologix/ Powerlink |
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Yes |
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Yes |
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Radial Force & |
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Approved |
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Anatomical fixation |
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Medtronic/ AneuRx |
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No |
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Yes |
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Radial Force |
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Approved |
Cook/ Zenith |
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No |
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Yes |
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Radial Force & Barbs |
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Approved |
WL Gore/ Excluder |
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No |
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Yes |
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Radial Force & Barbs |
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Approved |
In addition to the competitors mentioned above, Terumo-Vascutek and Lombard Medical are
believed to have 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 and marketing. 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 manufacturing, marketing and sales
resources.
Any product we develop that gains regulatory clearance or approval will have to compete for
market acceptance and market share. An important factor in such competition may be the timing of
market introduction of competitive products. Accordingly, we expect the relative speed with which
we can develop products, gain regulatory approval and reimbursement acceptance and supply
commercial quantities of the product to the market to be an important competitive factor. In
addition, we believe that the primary competitive factors for products addressing AAA include
deliverability, safety, efficacy, ease of use, reliability, service and price. We also believe that
physician relationships, especially relationships with leaders in the interventional cardiology
community are important competitive factors.
Third-Party Reimbursement
In the United States, medical institutions are the primary purchasers of our products. Medical
institutions 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 procedure
we develop will be available to hospitals and other users of our
products, or that future reimbursement policies of payors will not hamper our ability to sell
new products on a profitable basis.
8
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 reimbursement, the majority of patients using the Powerlink
System device will be classified under DRG 110, Major Cardiovascular Procedures with Complication/
Co morbidity. In the latest data published by CMS, the national average reimbursement for DRG 110,
which includes hospital costs, exceeded $23,000. 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 systems. 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 system
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. Although not as prevalent as in the United
States, managed care is gaining prevalence in certain European countries.
Upon obtaining the Shonin in Japan, equivalent to FDA approval of a PMA application in the
United States, we believe that the level of reimbursement in Japan will approximate that of the
United States.
We believe that reimbursement in the future will be subject to increased restrictions such as
those described above, both in the United States and in other countries. The general escalation in
medical costs has led to and probably will continue to create increased pressures on health care
providers to reduce the cost of products and services, including any products we develop. If third
party reimbursements are inadequate to provide us with a profit on any products we develop, our
efforts to develop and market products in the future may fail.
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 sales and
marketing 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 (QSR) regulations. These regulations
require that we manufacture our products and maintain related documentation in a prescribed manner
with respect to manufacturing, testing and control activities. We have undergone and expect to
continue to undergo regular QSR inspections in connection with the manufacture of our products at
our facilities. 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
9
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.
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. 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, 2006, we had 164 employees, including 68 in manufacturing, 13 in research
and development, 8 in clinical affairs, 61 in sales, marketing and customer service and 14 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 $6.8 million in 2006, $5.8 million in 2005, and $6.2 million in 2004, 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 aneurysms. To achieve the dynamics
required to rapidly implement these projects, our research and development is structured into three
main development areas: New Product Development, Current Product Enhancements and Process
Improvements. The objective is to bring a specific focus to each critical
area of development and to facilitate multiple projects on parallel paths.
10
Availability of Reports
We make available free of charge on our web site at www.endologix.com our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to such
reports, as soon as reasonably practicable after such reports are electronically filed with, or
furnished to, the Securities and Exchange Commission. We will also provide electronic or paper
copies of such reports free of charge, upon request made to our Corporate Secretary.
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 the
actual results and conditions to differ materially from those projected in the forward-looking
statements.
Our success depends on the safety and efficacy of the Powerlink System in general use.
While we have demonstrated the safety and efficacy of the Powerlink System in our clinical
studies with our clinical investigators, market acceptance will depend on similar results with the
Powerlink System in general use. Any significant difficulties or adverse events encountered in
general use will impair the success of the Powerlink System and our business.
Our success depends on the growth in the number of AAA patients treated with endovascular
devices.
Of the estimated 1.5 million people with AAA in the United States, only about 200,000 new
diagnoses are made each year, and of that amount only about 30,000 are treated with an endovascular
device. Our success with our Powerlink System will depend on increasing percentage of patients with
AAA being diagnosed at earlier stages and an increasing percentage of those 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, at an earlier stage, will negatively impact sales of
the Powerlink System.
Our success depends on convincing a concentrated customer base of vascular surgeons and a
limited number of interventional radiologists and cardiologists to use our product over
alternative products and treatment modalities.
The physicians currently treating AAA have choices in treatment approach, one of which is
endovascular AAA stent graft placement. There are several competing endovascular stent grafts to
choose from and that number may increase. Increasing revenues from sales of Powerlink Systems will
depend on our marketing and sales team demonstrating that the Powerlink System is a superior
treatment alternative to watchful waiting, open surgery and competitive products. We believe that
this will require continued demonstration through clinical data and personal experience of the
efficacy of the Powerlink System.
While we have committed, and intend to continue to commit substantial resources to our
marketing efforts, our competitors have superior resources to market and promote their endovascular
stent graft products. The most prominent devices that pose a competitive challenge to us include:
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Medtronics AneuRx, W.L. Gores Excluder, and Cooks Zenith AAA system, which are
available both in the United States and Europe; |
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other AAA graft Systems by Medtronic, Lombard Medical and Terumo, which currently have
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other technologies in various phases of development, including pharmaceutical
solutions.
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Any of these treatments could prove to be more effective or may achieve greater market
acceptance than the Powerlink System. Even if these treatments are not as effective as the Powerlink System, many
of the companies pursuing these treatments and technologies have:
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significantly greater financial, management and other resources; |
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more extensive research and development capability; |
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established market positions; and, |
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larger sales and marketing organizations. |
In addition, we believe that many of the purchasers and potential purchasers of our
competitors products prefer to purchase medical devices from a single source. Accordingly, our
competitors may have an advantage over us because of their size and range of product offerings. Any
failure of our Powerlink System to achieve clinical and commercial acceptance over our competitors
products will harm our business.
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 our 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 our products, which license may not be available on reasonable terms, or
at all; |
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redesign our products, processes or services; and, |
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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 or
license our technology 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.
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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 commercial launch of a single technology, the
Powerlink System, because of limited resources. If we are unable to successfully commercialize the
existing Powerlink System and reach positive cash flow from operations, we will be constrained in
our ability to fund development and commercialization improvements and other product lines.
We expect to incur losses for the foreseeable future and may never achieve profitability.
Our operations to date have consumed a substantial amount of cash. From our formation in 1992
to December 31, 2006, we have incurred an accumulated deficit of approximately $116.7 million,
including a net loss of $17.5 million for the year ended December 31, 2006. We only began
generating significant revenues from product sales in 2005, and it is possible that we may never
achieve profitability. Our ability to achieve positive cash flow from operations will be impacted
by a number of factors, including market acceptance of the Powerlink System, our ability to develop
additional products, competing technologies and regulatory developments. If we are unable to
achieve profitability, our business will be negatively impacted.
Our future operating results are difficult to predict and may vary significantly from quarter
to quarter, which may negatively impact our stock price in the future.
We have only commercially distributed the Powerlink System in the United States since late
2004 and therefore, we are unable to predict future revenues derived from sales of the Powerlink
System. As a result, our quarterly revenues and results of operations may fluctuate in the future
due to:
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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 of, and expense in obtaining, future regulatory approvals; |
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fluctuations in our expenses associated with expanding our operations; |
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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; |
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variations in foreign exchange rates; and, |
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changes in third-party payors reimbursement policies. |
In addition, we believe that sales of our products may be lower in the fourth fiscal quarter
as many patients choose to delay elective procedures during the holiday season. Therefore, we
believe that period to period comparison of our operating results may not necessarily be reliable
indicators of our future performance. 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 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.
We may not receive approval to market the Powerlink System in Japan.
We estimate that the Powerlink System will receive Shonin approval, equivalent to the United
States Food and Drug Administration approval, in the second quarter of 2007. This will allow us to
have a single technology platform for Europe, the United States, and Japan. However, the Ministry
of Health may not grant Shonin approval by such time, or at all, either of which may negatively
impact our future results of operations.
If we fail to increase our direct sales force in a timely manner, our business could suffer.
We have a limited domestic direct sales force and we utilize a distribution network 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 significantly expand the number of our direct sales
personnel. The establishment and development of a more extensive sales force will be expensive and
time consuming. In addition, there is significant competition for sales personnel experienced in
relevant medical device sales. If we are unable to attract, motivate and retain qualified sales
personnel and thereby increase our sales force, we may not be able to 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. If our distributors fail to
market and sell our products effectively, our operating results and business may suffer
substantially, or we may have to make significant additional expenditures or concessions to market
our products.
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
14
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 controls 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 rely on a single vendor to supply our graft material for the Powerlink System, and any
disruption in our supply could delay or prevent us from producing the product for sale.
Currently, we rely on Bard Peripheral Vascular Systems, a subsidiary of C.R. Bard, Inc., to
supply us with graft material, which is a primary component for the Powerlink System. Our reliance
on a sole source supplier exposes our operations to disruptions in supply caused by:
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failure of our supplier to comply with regulatory requirements; |
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any strike or work stoppage; |
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disruptions in shipping; |
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a natural disaster caused by fire, floods or earthquakes; |
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a supply shortage experienced by our sole source supplier; and, |
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the fiscal health and manufacturing strength of our sole source supplier. |
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 supply from
our sole source graft supplier may cause us to halt or experience a disruption in manufacturing the
Powerlink System. Because we do not have alternative suppliers, our sales and profitability 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. |
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.
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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 primarily on a consignment basis to 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 and third party inventory auditors 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 sales of our products, our ability to obtain and maintain
regulatory approval for our products and may divert managements attention from other matters.
We may need to raise additional funds in the future to fund our operations.
Although
we believe that our existing cash resources will be sufficient to meet our anticipated cash
needs for operations and planned capital requirements through at least December 31, 2007, we may
require additional capital to fund on-going operations. 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 time and costs involved in obtaining additional regulatory approvals; |
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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. 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 adequate funds are not
available, we might have to delay, scale back or eliminate one or more of our development programs,
which could significantly impair our ability to operate our business.
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
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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. 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; |
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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. |
Some provisions of our charter documents 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. These provisions may delay, deter or prevent a change in control of us, adversely
affecting the market price of our common stock.
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 for the foreseeable future.
Item 3. Legal Proceedings
A state court productions liability action was served on the Company on October 7, 2003, in
the Circuit Court of Cook County, Illinois. Plaintiff seeks damages for pain and suffering,
disability and disfigurement, loss of enjoyment of life and loss of capacity to earn a living.
Plaintiff claims these injuries arose on or about October 1, 2001, following an abdominal aortic
aneurysm repair with a graft designed, manufactured and distributed by the
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Company.
On February 28, 2007, the Company and plaintiff
agreed to a settlement of the matter which will be satisfied
through its insurance policies, and there will be no impact to our financial statements.
We are a party to ordinary disputes arising in the normal course of business, including a
product liability claim arising from the use of our product in a clinical trial. Management is of
the opinion that the outcome of these matters will not have a material adverse effect on our
consolidated financial position, results of operations, or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
None.
18
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.
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
Year Ended December 31, 2005 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
7.24 |
|
|
$ |
5.49 |
|
Second Quarter |
|
|
6.01 |
|
|
|
4.00 |
|
Third Quarter |
|
|
5.86 |
|
|
|
4.17 |
|
Fourth Quarter |
|
|
7.10 |
|
|
|
4.44 |
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
7.35 |
|
|
$ |
4.32 |
|
Second Quarter |
|
|
4.88 |
|
|
|
3.17 |
|
Third Quarter |
|
|
4.24 |
|
|
|
3.24 |
|
Fourth Quarter |
|
|
4.33 |
|
|
|
3.22 |
|
On February 20, 2007, the closing sale price of our common stock on the NASDAQ Global
Market was $4.32 per share and there were 253 record holders of our common stock.
19
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, prohibits 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, 2006, 2005, and 2004 are included elsewhere in this Annual Report on Form
10-K. The information set forth below should be read in conjunction with the Managements
Discussion and Analysis of financial Condition and Results of Operations and consolidated financial
statements and notes thereto included herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(In thousands, except per share data) |
|
Consolidated Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
14,422 |
|
|
$ |
6,889 |
|
|
$ |
3,019 |
|
|
$ |
1,395 |
|
|
$ |
834 |
|
License |
|
|
250 |
|
|
|
250 |
|
|
|
1,213 |
|
|
|
2,595 |
|
|
|
6,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
14,672 |
|
|
|
7,139 |
|
|
|
4,232 |
|
|
|
3,990 |
|
|
|
7,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales |
|
|
6,330 |
|
|
|
3,859 |
|
|
|
1,851 |
|
|
|
625 |
|
|
|
460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
6,330 |
|
|
|
3,859 |
|
|
|
1,851 |
|
|
|
625 |
|
|
|
460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
8,342 |
|
|
|
3,280 |
|
|
|
2,381 |
|
|
|
3,365 |
|
|
|
6,939 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
6,765 |
|
|
|
5,817 |
|
|
|
6,159 |
|
|
|
6,711 |
|
|
|
6,155 |
|
Marketing and sales |
|
|
14,579 |
|
|
|
8,794 |
|
|
|
2,718 |
|
|
|
787 |
|
|
|
982 |
|
General and administrative |
|
|
5,585 |
|
|
|
4,801 |
|
|
|
3,548 |
|
|
|
2,075 |
|
|
|
2,324 |
|
Charge for acquired in-process
research and development (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,501 |
|
Restructuring charges (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168 |
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16 |
) |
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
26,929 |
|
|
|
19,412 |
|
|
|
12,425 |
|
|
|
9,557 |
|
|
|
14,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(18,587 |
) |
|
|
(16,132 |
) |
|
|
(10,044 |
) |
|
|
(6,192 |
) |
|
|
(7,164 |
) |
Total other income |
|
|
1,044 |
|
|
|
614 |
|
|
|
361 |
|
|
|
277 |
|
|
|
597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(17,543 |
) |
|
$ |
(15,518 |
) |
|
$ |
(9,683 |
) |
|
$ |
(5,915 |
) |
|
$ |
(6,567 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.44 |
) |
|
$ |
(0.46 |
) |
|
$ |
(0.31 |
) |
|
$ |
(0.23 |
) |
|
$ |
(0.33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted
net loss per share |
|
|
40,010 |
|
|
|
33,951 |
|
|
|
31,149 |
|
|
|
25,845 |
|
|
|
19,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(In thousands) |
|
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, restricted cash and cash equivalents |
|
$ |
6,771 |
|
|
$ |
8,691 |
|
|
$ |
4,831 |
|
|
$ |
4,402 |
|
|
$ |
2,606 |
|
Marketable securities available-for-sale |
|
|
13,417 |
|
|
|
8,959 |
|
|
|
17,085 |
|
|
|
8,377 |
|
|
|
7,104 |
|
Working capital |
|
|
26,933 |
|
|
|
22,520 |
|
|
|
23,477 |
|
|
|
15,020 |
|
|
|
9,411 |
|
Total assets |
|
|
52,686 |
|
|
|
47,944 |
|
|
|
44,512 |
|
|
|
35,343 |
|
|
|
33,907 |
|
Accumulated deficit |
|
|
(116,663 |
) |
|
|
(99,120 |
) |
|
|
(83,602 |
) |
|
|
(73,919 |
) |
|
|
(68,004 |
) |
Total stockholders equity |
|
|
46,505 |
|
|
|
42,207 |
|
|
|
41,551 |
|
|
|
33,875 |
|
|
|
31,476 |
|
|
|
|
(1) |
|
The charge for acquired in-process research and development for the year ended December 31,
2002 relates to our merger with the former Endologix, Inc. This charge represents the portion
of the purchase price allocated to the acquired research and development projects, which, at
the date of the acquisition, were in process, had not reached technological feasibility and
had no alternative future use. |
|
(2) |
|
During 2002, we reassessed our restructuring accrual for non-cancelable lease commitments in
light of diminished opportunity for sublease arrangements prior to the lease term expirations
in October 2003, and recorded $168,000 restructuring charge. |
20
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.
Overview
Our Business
We are engaged in the development, manufacture, marketing and sale of minimally invasive
therapies for the treatment of vascular disease. Our primary focus is the marketing and sale of the
Powerlink System, a catheter-based alternative treatment to surgery for abdominal aortic aneurysms,
or AAA. AAA is a weakening of the wall of the aorta, the largest artery of the body. Once AAA
develops, it continues to enlarge and if left untreated becomes increasingly susceptible to
rupture. The overall patient mortality rate for ruptured abdominal aortic aneurysms is
approximately 75%, making it the 13th 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. Prior
to that we developed, manufactured and marketed other catheter and stent products for treatment of
cardiovascular disease.
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 Corporation rights to manufacture and distribute products using our
Focus technology for the delivery of stents in exchange for milestone and royalty payments.
Our license revenue has significantly decreased in 2006 and 2005, reaching the contractual
minimum level of $250,000. We anticipate that license revenue will remain at this minimum level
through 2008, the remaining term of the license agreement, and that the sales of our Powerlink
System will be our only material source of revenue.
For the years ended December 31, 2006 and 2005, we incurred net losses of $17.5 million and
$15.5 million, respectively. As of December 31, 2006, we had an accumulated deficit of
approximately $116.7 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 new credit facility, will be
sufficient to fund ongoing operations through at least December 31, 2007. 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, 2007.
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.
Critical 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
21
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.
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:
|
|
|
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. |
We earn 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.
We do not offer rights of return or price protection 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 a 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.
22
Income Taxes
We reduce our deferred tax assets to zero due to uncertainties concerning the future
realization of the related tax benefits, primarily due to our history of losses. In the event we
were to determine that we would be able to realize some or all of the tax benefit of the deferred
tax assets, the valuation allowance would be reduced, resulting in increased income in the period
such determination was made.
Stock-based compensation
Effective at the beginning of our fiscal year 2006, we adopted Statement of
Financial Accounting Standards (SFAS) No. 123R, Share-Based Payments (SFAS 123R). This statement
requires us to recognize the cost of employee and director services received in exchange for the
stock options it has 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 have
elected to adopt SFAS 123R on a modified prospective basis; accordingly, the financial statements
for the periods prior to January 1, 2006 do not include stock based compensation under the fair
value method. We use the Black-Scholes option pricing model to value its 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 an options expected life. The
financial statements include amounts that are based on our best estimates and judgments.
Results of Operations
Comparison of Years Ended December 31, 2006 and 2005
Product Sales. Sales increased 109% to $14.4 million in 2006 from $6.9 million in 2005
primarily due to our investment in our domestic field sales personnel, and increased market
acceptance of the Powerlink System. United States sales increased from $4.8 million to $12.4
million, and sales to distributors outside the United States did not change from $2.0 million in
2006 and 2005. Sales to Edwards LifeSciences AG decreased to $1.2 million in 2006 from $1.5 million
in 2005. Our distribution agreement with Edwards LifeSciences AG was not renewed beyond the
original expiration of December 31, 2006 and was replaced with a three-year distribution agreement
with LeMaitre Vascular. This agreement named LeMaitre Vascular as the exclusive distributor of the
Endologix Powerlink® System in ten European countries, including Austria, Belgium, the Czech
Republic, France, Germany, Luxembourg, the Netherlands, Sweden, Switzerland, and the United
Kingdom. There were no distributors in 2006 that accounted for more than 10% of product sales, and
no distributors other than Edwards LifeSciences AG that accounted for more than 10% of product
sales in 2005.
License Revenue. License revenue remained unchanged at $250,000 in 2006 and 2005, which
represents the contractual minimum annual amount from Guidant. We believe license revenue will
remain unchanged in 2007.
Cost of Product Revenue. The cost of product revenue increased 64% to $6.3 million from $3.9
million in 2005. This increase is attributable to the higher unit volume of product sales in 2006
compared to 2005.
Gross Profit. Gross profit increased 154% to $8.3 million in 2006 from $3.3 million in 2005.
The increase in gross profit resulted from higher product sales in 2006 as compared to 2005.
Gross profit on product sales increased 167% to $8.1 million from $3.0 million in 2005 because
product sales volume more than doubled in 2006 from 2005. Gross profit, as a percentage of product
sales increased to 56% in 2006 from 44% in 2005. This increase in gross profit margin was due to an
increase in product sales in the United States. Direct product sales in the United States have a
higher gross profit margin compared to international product sales, which are sold through
distributors. Additionally, the percentage in 2005 was impacted by a product recall and a facility
relocation which resulted in period charges to cost of sales in the fourth quarter of approximately
$1.0 million. A charge of $326,000 related to the final phase of the product recall was incurred
in the second quarter of 2006.
We believe that gross profit dollars will increase in future years due to higher commercial
sales of the Powerlink System in the United States. We also expect that gross profit as a
percentage of product revenues to remain relatively unchanged in 2007 as the increase in product
sales in the United States will be offset by the effect of the
significantly higher prices we are now paying for the raw graft material which we purchase
from Bard Peripheral Vascular Systems, a subsidiary of C.R. Bard, Inc.
23
Research, Development and Clinical. Research, development and clinical expenses increased by
16% to $6.8 million from $5.8 million in 2005. The increase primarily resulted from continued
product research and development of our Powerlink System product and
complementary technologies,
and continued enrollment in the suprarenal arm of the pivotal United States clinical trials. A
$347,000 charge for stock compensation expense pursuant to the adoption of SFAS 123R at January 1, 2006, also contributed to
the increase. We expect that research, development, and clinical expense will range between $6.5 to
$7.0 million in 2007, to support new product and process development projects.
Marketing and Sales. Marketing and sales expenses increased by 66% to $14.6 million from $8.8
million in 2005. This increase was due to staffing increases in sales and marketing support
functions in support of the expanded commercial launch of the infrarenal Powerlink System in the
United States market. In addition, the increase was partially due to a $448,000 charge for stock
compensation expense pursuant to the adoption of SFAS 123R at January 1, 2006. We expect that
sales and marketing expense will continue to increase in 2007, but at
a lessor rate than in 2006.
General and Administrative. General and administrative expenses increased by 16% to $5.6
million from $4.8 million in 2005. The increase was due to stock compensation expense totaling
$767,000, pursuant to the adoption of SFAS 123R at January 1,
2006. We expect only a modest growth in expenses in 2007.
Other Income (Expense). Other income increased 70% to $1.0 million from $614,000 in 2005,
driven by higher interest income. The increase in interest income was accounted for by a higher
average invested cash balance in 2006, which resulted from a registered direct public offering of
our common stock that resulted in net proceeds of $18.8 million in June 2006.
Comparison of Years Ended December 31, 2005 and 2004
Product Sales. Sales increased 128% to $6.9 million in 2005 from $3.0 million in 2004
primarily due to a full year of product sales after receipt of FDA approval in October 2004. United
States sales increased from $400,000 to $4.8 million, and sales to distributors outside the United
States decreased from $2.6 million to $2.0 million. Sales to Edwards LifeSciences AG commenced in
the second quarter of 2004, and were $1.5 million in 2005 and $1.6 million in 2004. There were no
other distributors in 2005 that accounted for more than 10% of product sales. In 2004, other than
Edwards LifeSciences AG, only Bolton Medical Italia S.p.A. accounted for more than 10% of product
sales. Sales to this distributor in 2004 were $474,000.
License Revenue. License revenue decreased 79% to $250,000 in 2005 from $1.2 million in 2004.
Royalties on licensed product sales by Guidant decreased to $250,000 from $952,000 in 2004.
Starting in September 2002, we believe that Guidant replaced certain licensed products with
unlicensed products in the United States. Also, we believe the introduction of drug coated stents
in early 2003 has had a material negative effect on Guidants sale of the licensed product. As a
result, the royalties from Guidant reached the contractual minimum annual amount of $250,000 in
2005. Royalty revenue from Escalon Medical Corporation was at the minimum $261,000 in 2004. Our
agreement with Escalon expired in October 2004.
Cost of Product Revenue. The cost of product revenue increased 109% to $3.9 million from $1.9
million in 2004. This increase is attributable to the higher unit volume of product sales in 2005
compared to 2004.
Gross Profit. Gross profit increased 38% to $3.3 million in 2005 from $2.4 million in 2004.
The increase in gross profit resulted from higher product sales in 2005 as compared to 2004, offset
by the decrease in royalties received from Guidant and Escalon, which did not have an associated
cost of revenue.
Gross profit on product sales increased 159% to $3.0 million from $1.2 million in 2004 because
product sales volume more than doubled in 2005 from 2004. Gross profit, as a percentage of product
sales increased to 44.0% in 2005 from 38.7% in 2004. This increase in gross profit margin was due
to an increase in product sales in the United States. Direct product sales in the United States
have a higher gross profit margin compared to international product sales, which are sold through
distributors. This impact was offset by a product recall and a facility relocation which resulted
in period charges to cost of sales in the fourth quarter of 2005 of approximately $1.0 million.
24
Research, Development and Clinical. Research, development and clinical expenses decreased by
6% to $5.8 million from $6.2 million in 2004.
Marketing and Sales. Marketing and sales expenses increased by 224% to $8.8 million from $2.7
million in 2004. This increase was due to staffing increases in sales, marketing support, and
customer service functions in support of the commercial launch of the infrarenal Powerlink System
in the United States market.
General and Administrative. General and administrative expenses increased 35% to $4.8 million
from $3.5 million in 2004. The increase in expenses in 2005 was due primarily to expenses related
to our review of internal controls over financial reporting as required by Section 404 of the
Sarbanes-Oxley Act, as well as expenses associated with building the infrastructure in our finance
and information technology departments.
Other Income (Expense). Other income increased 70% to $614,000 from $361,000 in 2004, driven
by higher interest income. The increase in interest income was accounted for by a higher average
invested cash balance in 2005, which resulted from a private placement of our common stock which
yielded aggregate net proceeds of $15.5 million in July 2005, and a higher rate of return on our
investments.
Liquidity and Capital Resources
For the years ended December 31, 2006 and 2005, we incurred net losses of $17.5 million and
$15.5 million, respectively. As of December 31, 2006, we had an accumulated deficit of
approximately $116.7 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 a private placement of our
common stock, which resulted in net proceeds of $18.8 million, leaving $30 million available
under the shelf registration. Additionally, in July 2003, March 2004 and July 2005, we completed
three private placements of our common stock, resulting in aggregate net proceeds of $39.2 million.
In February 2007, we entered into a revolving credit facility, whereby 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 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 will become due and payable on February 21, 2009.
At December 31, 2006, we had cash, cash equivalents, restricted cash and marketable securities
available for sale of $20.2 million. We believe that current cash and cash equivalents and
marketable securities, together with cash receipts generated from sales of the Powerlink System and
available borrowings under our credit facility, will be sufficient to meet anticipated cash needs
for operating and capital expenditures through at least December 31, 2007. We expect to continue to
incur substantial costs and cash outlays in 2007 to support Powerlink System research and
development, and United States marketing of the Powerlink System. However, if we fail to
effectively penetrate the AAA market, or if we fail to reduce certain discretionary expenditures,
if necessary, we may need to seek additional sources of financing. We may not be able to obtain
such financing on acceptable terms or at all, which would adversely affect the operations of our
business.
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; |
25
|
|
|
our requirements for additional office space; and |
|
|
|
|
the success of our research and development programs for future products and processes. |
In July 2002, the board of directors authorized a program for repurchases of our outstanding
common stock of up to $1.5 million under certain parameters. As of December 31, 2006, we had
repurchased an aggregate of 495,000 shares for $661,000, with the last such purchase in the quarter
ended September 30, 2003. At this time, we do not anticipate further share repurchases.
Accounts Receivable. Trade accounts receivable, net, increased 121% to $2.8 million at
December 31, 2006 from $1.2 million at December 31, 2005. The increase was due to the increase in
sales in 2006.
Inventories. Inventories increased 27% to $9.4 million at December 31, 2006 from $7.4 million
at December 31, 2005. The increase was primarily a result of higher sales in 2006, and higher
expected sales in 2007.
Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses increased 11% to
$5.0 million at December 31, 2006 from $4.5 million at December 31, 2005. The increase is
attributable primarily to an increase in the amount owed to Bard Peripheral Vascular Systems for a
key component of the Powerlink System.
Cash Used in Operations. Cash used in operations increased 2% to $16.6 million for the year
ended December 31, 2006 from $16.2 million for the year ended December 31, 2005.
Cash Provided by (used in) Investing Activities. Cash used in investing activities was $5.4
million for the year ended December 31, 2006 as compared to cash provided by investing activities
of $3.5 million for the year ended December 31, 2005. This change was primarily due to an increase
in purchases of available-for-sale securities and a decrease in maturities of available-for-sale
securities in 2006 as compared to 2005, offset by a decrease in capital expenditures for property
and equipment.
Cash Provided by Financing Activities. Cash provided by financing activities increased 24% to
$20.0 million for the year ended December 31, 2006 from $16.1 million for the year ended December
31, 2005. This increase was primarily a result of an increase in proceeds from the sale of common
stock
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements.
Commitments
In February 1999, the former Endologix entered into a supply agreement with Bard Peripheral
Vascular Systems, a subsidiary of C.R. Bard, Inc for the supply of ePTFE. The supply agreement has
an initial term through December 2007, at which time it automatically renews on a year-by-year
basis, for additional one-year periods, unless either party gives the other party notice of its
intention not to renew within 30 days from the expiration date of the applicable renewal period.
Under the terms of a second amendment to the supply agreement dated September 8, 2006, the minimum
purchase requirements were reduced and we must purchase a specified annual dollar value of the
component, as opposed to a quantity of units, for the remaining term of the agreement.
During 2006, we purchased $2.5 million of such materials, which fulfilled the 2006 purchase
commitment.
As of December 31, 2006, expected future cash payments related to contractual obligations and
commercial commitments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Thereafter |
|
|
|
(In thousands) |
|
Contractual Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
$ |
1,117 |
|
|
$ |
340 |
|
|
$ |
344 |
|
|
$ |
346 |
|
|
$ |
87 |
|
|
$ |
|
|
Purchase obligation |
|
|
2,875 |
|
|
|
2,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,992 |
|
|
$ |
3,215 |
|
|
$ |
344 |
|
|
$ |
346 |
|
|
$ |
87 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, or SFAS
159, The Fair Value Option for Financial Assets and Financial Liabilities Including an
amendment of FASB Statement No. 115. SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. Unrealized gains and losses on items for which
the fair value option has been elected will be recognized in earnings at each subsequent reporting
date. SFAS No. 159 is effective for our fiscal year beginning January 1, 2008. We are currently
evaluating the impact that the adoption of SFAS No. 159 will have on our consolidated financial
statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, or
SFAS 157, Fair Value Measurements, which defines fair value, establishes guidelines for measuring
fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any
new fair value measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November
15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial
statements, including for interim periods, for that fiscal year. We are currently evaluating the
impact of SFAS 157 on our consolidated financial statements.
In July 2006, the Financial Accounting Standards Board issued Interpretation Number 48, or FIN
48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in
tax positions. This Interpretation requires that we recognize in our financial statements the
impact of a tax position, if that position is more likely than not of being sustained on audit,
based on the technical merits of the position. The provisions of FIN 48 are effective as of the
beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of
adopting FIN 48 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 investment profile. 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
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,
2006, our investment portfolio included only high-grade corporate bonds and commercial paper and
government bonds all with remaining maturities of less than two years and denominated in U.S.
dollars.
The table below provides information about our available-for-sale investment portfolio,
including funds designated as restricted cash. For investment securities, the table presents
principal cash flows and related weighted average fixed interest rates by expected maturity dates.
Principal amounts by expected maturity in the subsequent twelve-month periods ending December
31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at |
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
2006 |
|
2007 |
|
2008 |
|
Total |
|
|
(in thousands except per share amounts) |
Cash, cash equivalents and restricted cash equivalents |
|
$ |
6,771 |
|
|
$ |
6,791 |
|
|
|
|
|
|
$ |
6,791 |
|
Weighted average interest rate |
|
|
|
|
|
|
0.91 |
% |
|
|
|
|
|
|
0.91 |
% |
Investments |
|
$ |
13,417 |
|
|
$ |
12,342 |
|
|
$ |
1,200 |
|
|
$ |
13,542 |
|
Weighted average interest rate |
|
|
|
|
|
|
0.14 |
% |
|
|
5.36 |
% |
|
|
0.60 |
% |
Total portfolio |
|
$ |
20,188 |
|
|
$ |
19,133 |
|
|
$ |
1,200 |
|
|
$ |
20,333 |
|
Weighted average interest rate |
|
|
|
|
|
|
0.41 |
% |
|
|
5.36 |
% |
|
|
0.70 |
% |
27
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, 2006, 2005, and 2004,
we recorded $25,000, ($7,000), and $29,000, respectively, of foreign currency transaction gains
(losses). Accordingly, we do not have a significant currency exposure at December 31, 2006.
Item 8. Financial Statements and Supplementary 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) |
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
2,675 |
|
|
$ |
3,446 |
|
|
$ |
3,748 |
|
|
$ |
4,553 |
|
Total revenues |
|
|
2,733 |
|
|
|
3,495 |
|
|
|
3,801 |
|
|
|
4,643 |
|
Gross profit(1) |
|
|
1,614 |
|
|
|
1,697 |
|
|
|
2,269 |
|
|
|
2,762 |
|
Net loss |
|
|
(4,112 |
) |
|
|
(4,388 |
) |
|
|
(4,192 |
) |
|
|
(4,851 |
) |
Basic and diluted net loss per share |
|
|
(0.11 |
) |
|
|
(0.11 |
) |
|
|
(0.10 |
) |
|
|
(0.11 |
) |
2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
$ |
1,354 |
|
|
$ |
1,495 |
|
|
$ |
2,135 |
|
|
$ |
1,905 |
|
Total revenues |
|
|
1,414 |
|
|
|
1,562 |
|
|
|
2,201 |
|
|
|
1,962 |
|
Gross profit(2) |
|
|
771 |
|
|
|
978 |
|
|
|
1,335 |
|
|
|
196 |
|
Net loss |
|
|
(3,296 |
) |
|
|
(2,903 |
) |
|
|
(3,667 |
) |
|
|
(5,651 |
) |
Basic and diluted net loss per share |
|
|
(0.10 |
) |
|
|
(0.09 |
) |
|
|
(0.10 |
) |
|
|
(0.16 |
) |
|
|
|
(1) |
|
During the second quarter of 2006, we incurred approximately $326,000 due to the product
recall. |
|
(2) |
|
During the fourth quarter of 2005, we incurred approximately $1.0 million due to the product
recall and facility relocation. |
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. 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.
28
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.
Our management assessed the effectiveness of our internal control over financial reporting as
of December 31, 2006. 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, 2006, our internal control over
financial reporting was effective based on those criteria.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited our
assessment of the effectiveness of our internal control over financial reporting as of December 31,
2006, as stated in their report which appears 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 Securities Exchange Act of 1934, as amended.
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.
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, 2006 and delivered to stockholders in connection with
our Annual Meeting of Stockholders to be held on May 22, 2007.
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, 2006 and delivered to stockholders in connection with
our Annual Meeting of Stockholders to be held on May 22, 2007.
29
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, 2006 and delivered to stockholders in
connection with our Annual Meeting of Stockholders to be held on May 22, 2007.
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, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
|
|
|
|
to be Issued upon |
|
Weighted Average |
|
Number of Securities |
|
|
Exercise of |
|
Exercise Price of |
|
Remaining Available for |
|
|
Outstanding Options |
|
Outstanding Options |
|
Future Issuance |
Plan Category |
|
(a) |
|
(b) |
|
(c) |
Equity compensation plans
approved by security holders: |
|
|
|
|
|
|
|
|
|
|
|
|
2006 Stock Incentive Plan |
|
|
1,073,800 |
|
|
$ |
3.55 |
|
|
|
1,738,783 |
|
1996 Stock Option/ Stock Issuance Plan |
|
|
2,261,129 |
|
|
$ |
4.77 |
|
|
|
|
|
Employee Stock Purchase Plan |
|
|
|
|
|
|
|
|
|
|
308,734 |
|
Equity compensation plans not
approved by security holders: 1997
Supplemental Stock Option Plan |
|
|
62,000 |
|
|
$ |
4.61 |
|
|
|
1,500 |
|
Total |
|
|
3,396,929 |
|
|
$ |
4.38 |
|
|
|
2,049,017 |
|
1997 Supplemental Stock Option Plan.
This stock option plan is used to provide compensation to non-employees, typically as part of
a consulting services arrangement. The plan authorizes 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(R) and related interpretations (See Note 1 and 12 to 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, 2006 and delivered to stockholders in connection with
our Annual Meeting of Stockholders to be held on May 22, 2007.
Item 14. Principal Accountant 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, 2006 and delivered to stockholders in connection with
our Annual Meeting of Stockholders to be held on May 22, 2007.
30
PART IV
Item 15. Exhibits and 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, 2006 and 2005 |
|
|
Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004 |
|
|
Consolidated Statements of Stockholders Equity for the years ended December 31, 2006, 2005
and 2004 |
|
|
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 |
|
|
Notes to Consolidated Financial Statements for the years ended December 31, 2006, 2005
and 2004 |
|
|
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.
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). |
31
|
|
|
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. |
|
|
|
10.8(1) |
|
Supply Agreement dated as of February 12, 1999, and as amended
August 4, 1999, November 16, 1999, March 10, 2000, and January 31,
2001 by and between Endologix and Impra, Inc. (Incorporated by
reference to Exhibit 10.40 to Endologix Quarterly Report on Form
10-Q, filed with the SEC on August 14, 2002). |
|
|
|
10.8.1(1) |
|
Amendment to Supply Agreement dated January 17, 2002 by and between
Endologix and Impra, Inc, (Incorporated by reference to Exhibit
10.40.1 to Endologix Quarterly Report on Form 10-Q, filed with the
SEC on August 14, 2002). |
|
|
|
10.8.2 |
|
Second Amendment to Supply Agreement dated September 8, 2006
between Endologix and Bard Peripheral Vascular, Inc. (Incorporated
by reference to Exhibit 10.6.2 to Endologix Quarterly Report on
Form 10-Q, filed with the SEC on November 9, 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). |
|
|
|
10.10(2) |
|
Form of Employment Agreement with certain officers of Endologix
(Incorporated by reference to Exhibit 10.42 to Endologix Annual
Report on Form 10-K, filed with the SEC on March 27, 2003). |
|
|
|
10.10.1 |
|
Schedule of officers of Endologix party to the Employment Agreement. |
|
|
|
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 |
|
Stock Purchase Agreement, dated July 5, 2005, by and between
Endologix and the investors named therein (Incorporated by
reference to Exhibit 10.48 to Endologix Current Report on Form 8-K,
filed with the SEC on July 8, 2005). |
|
|
|
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. |
32
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/ PAUL MCCORMICK
|
|
|
|
Paul McCormick |
|
|
|
Chief Executive Officer and
Director
(Principal Executive Officer) |
|
|
Date:
March 12, 2007
POWER OF ATTORNEY
We, the undersigned directors and officers of Endologix, Inc., do hereby constitute and
appoint Paul McCormick and Robert J. Krist, and each of them, as our true and lawful
attorney-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/ PAUL MCCORMICK
(Paul McCormick)
|
|
Chief Executive Officer and Director
(Principal Executive Officer)
|
|
March 12, 2007 |
|
|
|
|
|
/s/ ROBERT J. KRIST
(Robert J. Krist)
|
|
Chief Financial Officer, and Secretary
(Principal Financial and
Accounting Officer)
|
|
March 12, 2007 |
|
|
|
|
|
/s/ FRANKLIN D. BROWN
(Franklin D. Brown)
|
|
Chairman and Director
|
|
March 12, 2007 |
|
|
|
|
|
/s/ RONALD H. COELYN
(Ronald H. Coelyn)
|
|
Director
|
|
March 12, 2007 |
|
|
|
|
|
/s/ RODERICK DE GREEF
(Roderick de Greef)
|
|
Director
|
|
March 12, 2007 |
|
|
|
|
|
/s/ EDWARD DIETHRICH, M.D.
(Edward Diethrich, M.D.)
|
|
Director
|
|
March 12, 2007 |
|
|
|
|
|
/s/ JEFFREY F. ODONNELL
(Jeffrey F. ODonnell)
|
|
Director
|
|
March 12, 2007 |
|
|
|
|
|
/s/ GREGORY D. WALLER
(Gregory D. Waller)
|
|
Director
|
|
March 12, 2007 |
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Endologix, Inc.:
We have completed integrated audits of Endologix, Inc.s consolidated financial statements and of
its internal control over financial reporting as of December 31, 2006, in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on
our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index appearing under
Item15(a)(1) present fairly, in all material respects, the financial position of Endologix, Inc.
and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2006 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2)
presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in
which it accounts for share-based compensation in 2006.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in Managements Report on Internal
Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective
internal control over financial reporting as of December 31, 2006 based on criteria established
in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control Integrated Framework issued by the COSO. The Companys
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements assessment and on the effectiveness of the
Companys internal control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal control over financial
reporting includes obtaining an understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating the design and operating effectiveness
of internal control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinions.
F-1
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 8, 2007
F-2
ENDOLOGIX, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands, except |
|
|
|
share and per |
|
|
|
share amounts) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
6,271 |
|
|
$ |
8,191 |
|
Restricted cash equivalents |
|
|
500 |
|
|
|
500 |
|
Marketable
securities available-for-sale, including unrealized gains
(losses) of $3 and $(20) |
|
|
12,217 |
|
|
|
8,959 |
|
Accounts receivable, net of allowance for doubtful accounts of $38 and $26 |
|
|
2,763 |
|
|
|
1,248 |
|
Other receivables |
|
|
198 |
|
|
|
175 |
|
Inventories |
|
|
9,356 |
|
|
|
7,372 |
|
Other current assets |
|
|
637 |
|
|
|
576 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
31,942 |
|
|
|
27,021 |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
4,516 |
|
|
|
4,490 |
|
Marketable securities available-for-sale, including unrealized gains of $0 |
|
|
1,200 |
|
|
|
|
|
Goodwill |
|
|
4,631 |
|
|
|
4,631 |
|
Intangibles, net |
|
|
10,319 |
|
|
|
11,724 |
|
Other assets |
|
|
78 |
|
|
|
78 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
52,686 |
|
|
$ |
47,944 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
5,009 |
|
|
$ |
4,501 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
5,009 |
|
|
|
4,501 |
|
Long-term liabilities |
|
|
1,172 |
|
|
|
1,236 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
6,181 |
|
|
|
5,737 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 11 and 15)
|
|
|
|
|
|
|
|
|
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, 43,144,000
and 36,679,000 shares issued, and 42,649,000 and 36,184,000 outstanding |
|
|
43 |
|
|
|
37 |
|
Additional paid-in capital |
|
|
163,698 |
|
|
|
141,903 |
|
Accumulated deficit |
|
|
(116,663 |
) |
|
|
(99,120 |
) |
Treasury stock, at cost, 495,000 shares |
|
|
(661 |
) |
|
|
(661 |
) |
Accumulated other comprehensive income |
|
|
88 |
|
|
|
48 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
46,505 |
|
|
|
42,207 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
52,686 |
|
|
$ |
47,944 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-3
ENDOLOGIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands, |
|
|
|
except per share amounts) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
14,422 |
|
|
$ |
6,889 |
|
|
$ |
3,019 |
|
License |
|
|
250 |
|
|
|
250 |
|
|
|
1,213 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
14,672 |
|
|
|
7,139 |
|
|
|
4,232 |
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales |
|
|
6,330 |
|
|
|
3,859 |
|
|
|
1,851 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
8,342 |
|
|
|
3,280 |
|
|
|
2,381 |
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
6,765 |
|
|
|
5,817 |
|
|
|
6,159 |
|
Marketing and sales |
|
|
14,579 |
|
|
|
8,794 |
|
|
|
2,718 |
|
General and administrative |
|
|
5,585 |
|
|
|
4,801 |
|
|
|
3,548 |
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
26,929 |
|
|
|
19,412 |
|
|
|
12,425 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(18,587 |
) |
|
|
(16,132 |
) |
|
|
(10,044 |
) |
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,019 |
|
|
|
623 |
|
|
|
339 |
|
Other income (expense), net |
|
|
25 |
|
|
|
(9 |
) |
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
1,044 |
|
|
|
614 |
|
|
|
361 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(17,543 |
) |
|
$ |
(15,518 |
) |
|
$ |
(9,683 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.44 |
) |
|
$ |
(0.46 |
) |
|
$ |
(0.31 |
) |
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share |
|
|
40,010 |
|
|
|
33,951 |
|
|
|
31,149 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-4
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, 2003 |
|
|
28,576,000 |
|
|
$ |
28 |
|
|
$ |
108,279 |
|
|
$ |
(73,919 |
) |
|
|
(495,000 |
) |
|
$ |
(661 |
) |
|
$ |
148 |
|
|
$ |
33,875 |
|
|
$ |
(5,933 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common
stock options |
|
|
551,000 |
|
|
|
1 |
|
|
|
1,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,751 |
|
|
|
|
|
Employee stock
purchase plan |
|
|
35,000 |
|
|
|
|
|
|
|
148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148 |
|
|
|
|
|
Sale of common stock |
|
|
3,200,000 |
|
|
|
3 |
|
|
|
15,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,360 |
|
|
|
|
|
Amortization of
deferred
compensation |
|
|
|
|
|
|
|
|
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170 |
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,683 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,683 |
) |
|
|
(9,683 |
) |
Unrealized holding
loss arising
during the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39 |
) |
|
|
(39 |
) |
|
|
(39 |
) |
Unrealized exchange
rate loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31 |
) |
|
|
(31 |
) |
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2004 |
|
|
32,362,000 |
|
|
$ |
32 |
|
|
$ |
125,704 |
|
|
$ |
(83,602 |
) |
|
|
(495,000 |
) |
|
$ |
(661 |
) |
|
$ |
78 |
|
|
$ |
41,551 |
|
|
$ |
(9,753 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common
stock options |
|
|
133,000 |
|
|
|
1 |
|
|
|
493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
494 |
|
|
|
|
|
Employee stock
purchase plan |
|
|
34,000 |
|
|
|
|
|
|
|
165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165 |
|
|
|
|
|
Sale of common stock |
|
|
4,150,000 |
|
|
|
4 |
|
|
|
15,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,454 |
|
|
|
|
|
Amortization of
deferred
compensation |
|
|
|
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91 |
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,518 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,518 |
) |
|
|
(15,518 |
) |
Unrealized holding
gain arising
during the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
20 |
|
|
|
20 |
|
Unrealized exchange
rate loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50 |
) |
|
|
(50 |
) |
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-5
ENDOLOGIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(17,543 |
) |
|
$ |
(15,518 |
) |
|
$ |
(9,683 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,303 |
|
|
|
1,736 |
|
|
|
1,484 |
|
Stock-based compensation and deferred compensation |
|
|
1,665 |
|
|
|
91 |
|
|
|
170 |
|
Gain on disposal of assets |
|
|
|
|
|
|
(7 |
) |
|
|
|
|
Changes: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,515 |
) |
|
|
(901 |
) |
|
|
(108 |
) |
Inventories |
|
|
(1,854 |
) |
|
|
(3,388 |
) |
|
|
(1,204 |
) |
Other receivables and other assets |
|
|
(84 |
) |
|
|
16 |
|
|
|
423 |
|
Accounts payable, accrued expenses and
long term liabilities |
|
|
444 |
|
|
|
1,747 |
|
|
|
1,493 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(16,584 |
) |
|
|
(16,224 |
) |
|
|
(7,425 |
) |
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities |
|
|
(18,823 |
) |
|
|
(10,733 |
) |
|
|
(28,112 |
) |
Maturities of available-for-sale securities |
|
|
14,388 |
|
|
|
18,878 |
|
|
|
19,358 |
|
Increase in restricted cash equivalents |
|
|
|
|
|
|
(500 |
) |
|
|
|
|
Capital expenditures for property and equipment |
|
|
(924 |
) |
|
|
(4,132 |
) |
|
|
(627 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(5,359 |
) |
|
|
3,513 |
|
|
|
(9,381 |
) |
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock, net of expenses |
|
|
18,753 |
|
|
|
15,454 |
|
|
|
15,360 |
|
Proceeds from sale of common stock under employee stock purchase
plan |
|
|
319 |
|
|
|
165 |
|
|
|
148 |
|
Proceeds from exercise of stock options |
|
|
934 |
|
|
|
494 |
|
|
|
1,751 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
20,006 |
|
|
|
16,113 |
|
|
|
17,259 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
17 |
|
|
|
(42 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(1,920 |
) |
|
|
3,360 |
|
|
|
429 |
|
Cash and cash equivalents, beginning of year |
|
|
8,191 |
|
|
|
4,831 |
|
|
|
4,402 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
6,271 |
|
|
$ |
8,191 |
|
|
$ |
4,831 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-6
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share 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.
Prior to the merger in May 2002 the Company was developing proprietary devices to deliver
radiation to prevent the recurrence of blockages in arteries following balloon angioplasty,
vascular stenting, arterial bypass surgery and other interventional treatments of blockages in
coronary and peripheral arteries. The Company also manufactured, licensed and sold angioplasty
catheters and stent products primarily through medical device distributors.
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, 2006, 2005, and 2004, the Company has incurred
net losses of $17,540, $15,520, and $9,680, respectively. As of December 31, 2006, the Company had
an accumulated deficit of approximately $116,660. The Company believes that the current cash and
marketable securities balance, in combination with cash receipts generated from sales of the
Powerlink System and borrowings available under the new credit facility, will be sufficient to fund
ongoing operations through at least December 31, 2007. 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 it cannot maintain its days sales outstanding accounts
receivable ratio, it may not be able to fund its operations through December 31, 2007.
In the event that the Company requires additional funding to continue operations, 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.
Critical 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
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
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 maturities of three months or less from the date of purchase.
Marketable Securities Available-For-Sale
The Company accounts for its investments pursuant to Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities.
The Company has classified its entire investment portfolio as available-for-sale.
Available-for-sale securities are stated at fair value with unrealized gains and losses included in
accumulated other comprehensive income, net of realized gains and losses. Management evaluates the
classification of its securities based on the Companys short-term cash needs. The amortized cost
of debt securities is adjusted for amortization of premiums and accretions of discounts to
maturity. Such amortization is included in interest income. The Company did not have any realized
gains for the years ended December 31, 2006, 2005, and 2004. The cost of securities sold is based
on the specific identification method.
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. During the year ended December 31, 2006 and
December 31, 2005, the Company recorded $326 and $780, respectively, to cost of goods sold for the
write-off of inventory primarily due to a limited product recall.
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. 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, 2006
and will continue to test for impairment annually as of June 30. No impairment was indicated. In
2005, the Company increased the balance in Goodwill by $1,029 as a result of recording a deferred
tax liability on the indefinite-lived intangible assets acquired in the 2002 acquisition of former
Endologix that previously had not been recorded.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
The developed technology is being amortized over its estimated useful life of 10 years. During
the years ended December 31, 2006, 2005 and 2004, the Company recorded $1,405, $1,405 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.
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.
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.
In June 1998, the Company signed a technology license agreement with Guidant Corporation
(Guidant), an international interventional cardiology products company, granting Guidant the
right to manufacture and distribute products using the Companys Focus technology for stent
deployment. During 2006, 2005 and 2004, the Company recognized royalty revenue from Guidant of
$250, $250, and $952, respectively, which represented 2%, 4%, and 22% of total revenues,
respectively (Note 2). In 2005, revenues from Edwards Lifesciences AG was $1,498, which represented
21% of total revenues. No other single customer accounted for more than 10% of the Companys
revenues in 2005 or 2004. There was no single customer that
accounted for more than 10% of the Companys revenues in 2006.
As of December 31, 2006 and December 31, 2005, 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, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
United States |
|
$ |
12,366 |
|
|
$ |
4,844 |
|
|
$ |
431 |
|
Netherlands |
|
|
1,183 |
|
|
|
1,498 |
|
|
|
1,577 |
|
Other European countries |
|
|
617 |
|
|
|
409 |
|
|
|
920 |
|
Latin America |
|
|
164 |
|
|
|
72 |
|
|
|
83 |
|
Other |
|
|
92 |
|
|
|
66 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,422 |
|
|
$ |
6,889 |
|
|
$ |
3,019 |
|
|
|
|
|
|
|
|
|
|
|
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
Sales to commercial hospital accounts represented 97%, 95% and 8% of United States product
sales in 2006, 2005 and 2004, 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 |
|
|
|
|
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
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.
Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based
Payments (SFAS 123R), on January 1, 2006. This statement requires the Company to recognize the
cost of employee and director services received in exchange for the stock options it has awarded.
Under SFAS 123R the Company is required to recognize compensation expense over an awards vesting
period based on the awards fair value at the date of grant. The Company has elected to adopt SFAS
123R on a modified prospective basis; accordingly, the financial statements for the periods prior
to January 1, 2006 do not include stock based compensation under the fair value method. The Company
uses the Black-Scholes option pricing model to value its stock option grants.
Prior to January 1, 2006, the Company applied APB Opinion No. 25, Accounting for Stock Issued
to Employees for measurement and recognition of stock based transactions with its employees and
directors. If the Company had recognized compensation expense for its stock based transactions
based on the fair value method prescribed by SFAS 123, net loss and net loss per share for the
years ended December 31, 2005 and 2004 would have been as follows:
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
Net loss, as reported |
|
$ |
(15,518 |
) |
|
$ |
(9,683 |
) |
Add: Stock-based employee compensation expense
included in reported net loss |
|
|
60 |
|
|
|
|
|
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards |
|
|
(2,314 |
) |
|
|
(892 |
) |
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(17,772 |
) |
|
$ |
(10,575 |
) |
|
|
|
|
|
|
|
Basic and diluted net loss per share, as reported |
|
$ |
(0.46 |
) |
|
$ |
(0.31 |
) |
Basic and diluted net loss per share, pro forma |
|
$ |
(0.52 |
) |
|
$ |
(0.34 |
) |
|
|
|
|
|
|
|
|
|
Expected Life (in years) |
|
|
4.8 |
|
|
|
5.0 |
|
Expected Volatility |
|
|
78.01 |
% |
|
|
77.25 |
% |
Risk Free Interest Rate |
|
|
3.9 |
% |
|
|
2.9 |
% |
Dividend Yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
The Company accounts for non-employee stock-based awards, in which goods or services are the
consideration received for the stock options issued, in accordance with the provisions of SFAS No.
123 and related interpretations. Compensation expense for non-employee stock-based awards is
recognized in accordance with FASB Interpretation 28, Accounting for Stock Appreciation Rights and
Other Variable Stock Options or Award Plans, an Interpretation of APB Opinions No. 15 and 25 (FIN
28). Under SFAS No. 123R and FIN 28, the Company records compensation expense based on the
then-current fair values of the stock options at each financial reporting date. Compensation
recorded during the service period is adjusted in subsequent periods for changes in the stock
options fair value.
In the past, the Company granted Performance Units under its 2004 Performance Compensation
Plan (the Performance Plan). Under the Performance Plan, these units are granted at a discount to
the fair market value (as defined in the Performance Plan) of the Companys common stock on the
grant date (Base Value). The Performance Units vest over three years. The difference between the
twenty-day average closing market price of the Companys common stock and the Base Value of the
vested Performance Unit will be payable in cash at the first to occur of (a) a change of control
(as defined in the Performance Plan), (b) the termination of employment for any reason other than
Cause, or (c) upon exercise of the Performance Unit, which cannot occur until eighteen months from
the grant date.
In 2006 and 2005, the Company granted a total of 0 and 180,000 Performance Units,
respectively. The weighted average Base Value for the 2005 grants was $3.33. The Company recorded
a reduction in compensation expense of $562 in 2006 and $579 in compensation expense during 2005
based on vested service in accordance with FIN 28, which has been included in marketing and sales
expense in the consolidated statements of operations. The Company will record changes in the
estimated compensation expense until the Performance Units are paid in cash.
Income Taxes
The Company follows SFAS No. 109, Accounting for Income Taxes, which requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in different periods for financial statement purposes versus tax
return purposes. Under this method, deferred income taxes are recognized for the tax consequences
in future years of differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory rates applicable to the
periods in which the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets when it is more likely than not that a
portion of such assets will not be recoverable.
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, 2006, 2005 and 2004, 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 they were
included, the number of shares used to compute net loss per share would have been increased by
approximately 314,000 shares, 551,000 shares, and 655,000 shares for the years ended December 31,
2006, 2005 and 2004, respectively. However, options to
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
purchase approximately 1,712,000, 772,000, and 153,000 shares at a weighted average exercise
price of $5.47, $6.04, and $6.58 that were outstanding during 2006, 2005, and 2004 respectively,
would have still been excluded from the computation of diluted loss per share because the options
exercise price was greater than the average market price of the common shares.
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.
Product Warranty
Within six months of shipment, 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 returns
as a result of its product warranty policy.
Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, or SFAS
159, The Fair Value Option for Financial Assets and Financial Liabilities Including an
amendment of FASB Statement No. 115. SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. Unrealized gains and losses on items for which
the fair value option has been elected will be recognized in earnings at each subsequent reporting
date. SFAS No. 159 is effective for the Companys fiscal year beginning January 1, 2008. The
Company is currently evaluating the impact that the adoption of SFAS No. 159 will have on its
consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, or
SFAS 157, Fair Value Measurements, which defines fair value, establishes guidelines for measuring
fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any
new fair value measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November
15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial
statements, including for interim periods, for that fiscal year. The Company is currently
evaluating the impact of SFAS 157 on its consolidated financial statements.
In July 2006, the Financial Accounting Standards Board issued Interpretation Number 48, or FIN
48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in
tax positions. This Interpretation requires that the Company recognize in its financial statements
the impact of a tax position, if that position is more likely than not of being sustained on audit,
based on the technical merits of the position. The provisions of FIN 48 are effective as of the
beginning of the Companys 2007 fiscal year, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. The Company is currently
evaluating the impact of adopting FIN 48 on its 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
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
technology to Guidant, and royalty payments based upon the sale of products using the Focus
technology. For the years ended December 31, 2006, 2005 and 2004, the Company recorded $250, $250,
and $952, respectively, in royalties under the agreement. At December 31, 2006 and 2005, $117 and
$59, respectively, due under this agreement are included in other receivables on the consolidated
balance sheet.
3. Restricted Cash Equivalents
The Company has a $500 line of credit with a bank in conjunction with a corporate credit card
agreement. At December 31, 2006, the Company had pledged all of its cash equivalents held at the
bank as collateral on the line of credit. Per the agreement, the Company must maintain a balance of
at least $500 in cash and cash equivalents with the bank.
4. Marketable Securities Available-for-Sale
The Companys investments in debt securities are diversified among high credit quality
securities in accordance with the Companys investment policy. A major financial institution
manages the Companys investment portfolio. Marketable Securities are classified as current or
non-current depending on the securitys maturity date. If the maturity date is less than one year
from the balance sheet date, the security is classified as current. As of December 31, 2006,
$11,917 and $1,500 of the Companys debt securities had original contractual maturities of more
than 90 days and less than one year and original contractual maturities between one to two years,
respectively. As of December 31, 2005, $3,490 and $5,469 of the Companys debt securities had
original contractual maturities more than 90 days and less than one year and original contractual
maturities between one to two years, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
December 31, 2005 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Holding |
|
|
Fair |
|
|
|
|
|
|
Holding |
|
|
Fair |
|
|
|
Cost |
|
|
Gain |
|
|
Value |
|
|
Cost |
|
|
Loss |
|
|
Value |
|
U.S. Treasury and
other agencies debt
securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,573 |
|
|
$ |
(14 |
) |
|
$ |
5,559 |
|
Corporate debt securities |
|
|
13,414 |
|
|
|
3 |
|
|
|
13,417 |
|
|
|
3,406 |
|
|
|
(6 |
) |
|
|
3,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,414 |
|
|
$ |
3 |
|
|
$ |
13,417 |
|
|
$ |
8,979 |
|
|
$ |
(20 |
) |
|
$ |
8,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Receivables
Receivables consist of the following at December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Trade |
|
$ |
2,763 |
|
|
$ |
1,248 |
|
|
|
|
|
|
|
|
License |
|
|
117 |
|
|
|
59 |
|
Interest |
|
|
14 |
|
|
|
66 |
|
Other |
|
|
67 |
|
|
|
50 |
|
|
|
|
|
|
|
|
Total other receivables |
|
$ |
198 |
|
|
$ |
175 |
|
|
|
|
|
|
|
|
6. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Raw materials |
|
$ |
2,325 |
|
|
$ |
3,885 |
|
Work in process |
|
|
2,426 |
|
|
|
1,361 |
|
Finished goods |
|
|
4,605 |
|
|
|
2,126 |
|
|
|
|
|
|
|
|
|
|
$ |
9,356 |
|
|
$ |
7,372 |
|
|
|
|
|
|
|
|
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
7. Property and Equipment
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Construction in progress |
|
$ |
2,527 |
|
|
$ |
2,006 |
|
Leasehold improvements |
|
|
1,982 |
|
|
|
1,990 |
|
Furniture and equipment |
|
|
1,490 |
|
|
|
1,026 |
|
|
|
|
|
|
|
|
|
|
|
5,999 |
|
|
|
5,022 |
|
Less accumulated depreciation and amortization |
|
|
(1,483 |
) |
|
|
(532 |
) |
|
|
|
|
|
|
|
|
|
$ |
4,516 |
|
|
$ |
4,490 |
|
|
|
|
|
|
|
|
8. Intangibles
Intangibles consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Developed technology |
|
$ |
14,050 |
|
|
$ |
14,050 |
|
Accumulated amortization |
|
|
(6,439 |
) |
|
|
(5,034 |
) |
|
|
|
|
|
|
|
|
|
|
7,611 |
|
|
|
9,016 |
|
Trademarks and trade names |
|
|
2,708 |
|
|
|
2,708 |
|
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
10,319 |
|
|
$ |
11,724 |
|
|
|
|
|
|
|
|
9. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Accounts payable |
|
$ |
3,066 |
|
|
$ |
2,035 |
|
Accrued payroll and related expenses |
|
|
1,526 |
|
|
|
1,249 |
|
Accrued clinical expenses |
|
|
178 |
|
|
|
172 |
|
Accrued compensation |
|
|
160 |
|
|
|
923 |
|
Other accrued expenses |
|
|
79 |
|
|
|
122 |
|
|
|
|
|
|
|
|
|
|
$ |
5,009 |
|
|
$ |
4,501 |
|
|
|
|
|
|
|
|
10. Long Term Liabilities
Long term liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Deferred tax |
|
$ |
1,029 |
|
|
$ |
1,029 |
|
Deferred rent |
|
|
143 |
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
$ |
1,172 |
|
|
$ |
1,236 |
|
|
|
|
|
|
|
|
11. Commitments and Contingencies
Sole-Source, Related-Party Supplier Agreement
In February 1999, the former Endologix entered into a supply agreement with Bard Peripheral
Vascular Systems, a subsidiary of C.R. Bard, Inc for the supply of ePTFE. The supply agreement has
an initial term through December 2007, at which time it automatically renews on a year-by-year
basis, for additional one-year periods, unless either party gives the other party notice of its
intention not to renew within 30 days from the expiration date of the applicable renewal period.
Under the terms of a second amendment to the supply agreement dated September 8, 2006, the minimum
purchase requirements were reduced and the Company must purchase a specified annual dollar value of
the component, as opposed to a quantity of units, for the remaining term of the agreement.
During 2006, the Company purchased approximately $2,500 of such materials, which fulfilled its
2006 purchase commitments.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
As of December 31, 2006, estimated future purchase commitments for such material were as
follows:
|
|
|
|
|
Year Ending December 31, 2007 |
|
|
2,875 |
|
|
|
|
|
|
|
$ |
2,875 |
|
|
|
|
|
The Company is economically dependent on this vendor, which is the sole source for this key
component.
Operating Leases
The Company leases its administrative, research and manufacturing facilities 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 prescribed 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, 2006:
|
|
|
|
|
Year Ending December 31, |
|
|
|
|
2007 |
|
|
340 |
|
2008 |
|
|
344 |
|
2009 |
|
|
346 |
|
2010 |
|
|
87 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
$ |
1,117 |
|
|
|
|
|
Rental expense charged to operations for all operating leases during the years ended December
31, 2006, 2005 and 2004, was approximately $336, $472, and $399, respectively.
Employment Agreements and Retention Plan
The Company has entered into employment agreements with its officers and one manager (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,
or 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 or by the key employee for good reason, and generally be
equal to twelve months of salary upon a change in control or corporate transaction.
12. 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 2003, the Company announced the completion of its private placement of 4,000,000
shares of its common stock at a purchase price of $2.25 per share. The Company received aggregate
gross proceeds of $9,000 for the newly issued shares of common stock. The proceeds of the private
placement, net of issuance costs, amounted to $8,357.
In March 2004, the Company completed a private placement of 3,200,000 shares of its common
stock at a purchase price of $5.10 per share resulting in proceeds, net of issuance costs of
$15,360.
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.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
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 Option Plan
Pursuant to the Companys 1996 Stock Option/Issuance Plan (the 1996 Plan) and the Companys
2006 Stock Incentive Plan (the 2006 Plan), either incentive stock options or non-qualified
options awards may be granted and under the 1997 Supplemental Stock Option Plan (the 1997 Plan
and together with the 1996 Plan and 2006 Plan, the Plans), non-qualified option 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. At December 31, 2006 and 2005, there were approximately
1,740,000 and 1,004,000 shares of common stock available for future stock option grants. The
activity under the plans is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
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 |
|
|
2,678,201 |
|
|
$ |
4.53 |
|
|
|
1,793,363 |
|
|
$ |
3.85 |
|
|
|
1,793,363 |
|
|
$ |
3.85 |
|
Granted |
|
|
1,309,300 |
|
|
|
3.77 |
|
|
|
1,201,800 |
|
|
|
5.50 |
|
|
|
310,000 |
|
|
|
5.55 |
|
Exercised |
|
|
316,404 |
|
|
|
2.95 |
|
|
|
133,148 |
|
|
|
3.71 |
|
|
|
550,626 |
|
|
|
3.18 |
|
Forfeited |
|
|
274,168 |
|
|
|
4.62 |
|
|
|
183,814 |
|
|
|
4.86 |
|
|
|
104,312 |
|
|
|
5.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding End of Year |
|
|
3,396,929 |
|
|
$ |
4.38 |
|
|
|
2,678,201 |
|
|
$ |
4.53 |
|
|
|
1,793,363 |
|
|
$ |
3.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable End of Year |
|
|
1,579,764 |
|
|
$ |
4.53 |
|
|
|
1,302,155 |
|
|
$ |
3.94 |
|
|
|
1,047,427 |
|
|
$ |
3.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Fair Value of
Options Granted During Year |
|
|
|
|
|
$ |
2.55 |
|
|
|
|
|
|
$ |
5.50 |
|
|
|
|
|
|
$ |
3.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value for options outstanding was approximately $530, $6,358 and $5,362 as
of December 31, 2006, 2005, and 2004, respectively. The total intrinsic value for options
exercisable was approximately $461, $3,873, and $3,464 as December 31, 2006, 2005, and 2004,
respectively. The total intrinsic value of options exercised was approximately $1,347, $358, and
$1,395 in 2006, 2005, and 2004, respectively.
As
of December 31, 2006, there was $3,965 of total unrecognized compensation cost related to
unvested options granted. This unrecognized compensation cost is expected to be recognized over a
weighted average period of 2.6 years.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
The following table summarizes information regarding stock options outstanding at December 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Options Exercisable |
|
|
|
|
|
|
|
Average |
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Options |
|
|
Contractual |
|
|
Exercise |
|
|
Options |
|
|
Exercise |
|
Range of Exercise Prices |
|
Outstanding |
|
|
Life (Years) |
|
|
Price |
|
|
Exercisable |
|
|
Price |
|
$0.77 3.00 |
|
|
244,408 |
|
|
|
3.9 |
|
|
$ |
1.61 |
|
|
|
242,950 |
|
|
$ |
1.60 |
|
3.25 3.40 |
|
|
636,800 |
|
|
|
9.4 |
|
|
|
3.40 |
|
|
|
1,000 |
|
|
|
3.25 |
|
3.43 3.90 |
|
|
392,500 |
|
|
|
7.8 |
|
|
|
3.62 |
|
|
|
120,521 |
|
|
|
3.61 |
|
3.92 4.48 |
|
|
526,000 |
|
|
|
8.1 |
|
|
|
3.98 |
|
|
|
226,063 |
|
|
|
3.94 |
|
4.51 5.00 |
|
|
520,629 |
|
|
|
5.7 |
|
|
|
4.74 |
|
|
|
394,483 |
|
|
|
4.76 |
|
5.06 5.81 |
|
|
739,888 |
|
|
|
8.1 |
|
|
|
5.62 |
|
|
|
338,251 |
|
|
|
5.61 |
|
6.00 8.75 |
|
|
336,704 |
|
|
|
7.4 |
|
|
|
6.47 |
|
|
|
256,496 |
|
|
|
6.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.77 8.75 |
|
|
3,396,929 |
|
|
|
7.6 |
|
|
$ |
4.38 |
|
|
|
1,579,764 |
|
|
$ |
4.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during 2006, 2005 and 2004 where
the exercise price on the date of grant was equal to the stock price on that date, was $2.55,
$5.50, and $3.51, respectively.
Stock Based Compensation
As disclosed in Note 1 of Notes to Consolidated Financial Statements, effective January 1,
2006, the Company adopted Financial Accounting Standards Board Statement No. 123(R) Share Based
Payment, or FAS 123R. FAS 123R establishes the accounting required for share based compensation,
and requires companies to measure and recognize compensation expense for all share-based payments
at the grant date based on the fair value of the award. This compensation expense shall be
included in the statement of operations over the requisite service period. The provisions of FAS
123R apply to new stock options and stock options outstanding, but not yet vested on the effective
date. For all unvested options outstanding as of January 1, 2006, compensation expense previously
measured under Statement of Financial Accounting Standards No. 123, or FAS 123, Accounting for
Stock-Based Compensation, but unrecognized, will be recognized using the straight-line method over
the remaining vesting period. For share-based payments granted subsequent to January 1, 2006,
compensation expense, based on the fair value on the date of grant, as defined by FAS 123R, will be
recognized using the straight-line method from the date of grant over the service period of the
employee receiving the award.
FAS 123R requires the estimation of forfeitures when recognizing compensation expense and that
this estimate of forfeitures be adjusted over the requisite service period should actual
forfeitures differ from such estimates. Changes in estimated forfeitures are recognized through a
cumulative catch-up adjustment, which is recorded in the period of change and which impacts the
amount of unamortized compensation expense to be recognized in future periods. Share-based
compensation expense recognized in the Companys consolidated statements of operations in 2006
includes (i) compensation expense for share-based payment awards granted prior to, but not vested
as of December 31, 2005, based on the grant-date fair value estimated in accordance with the pro
forma provisions of FAS 123 and (ii) compensation expense for the share-based payment awards
granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance
with the provisions of FAS 123R. As share-based compensation expense recognized in the
consolidated statement of operations for the fiscal year 2006 is based on awards ultimately
expected to vest, it has been reduced for estimated forfeitures. In the Companys pro forma
information required by FAS 123 for the periods prior to fiscal year 2006, the Company accounted
for forfeitures as they occurred.
The Company elected to adopt FAS 123R using the modified prospective application approach
which requires the Company to value unvested stock options granted prior to its adoption of FAS
123R under the fair value method and expense these amount in the statement of operations over the
stock options remaining vesting period. Prior periods are not required to be restated. Prior to
the effective date of FAS 123R the Company applied the disclosure-only provisions of FAS 123. In
accordance with the provisions of FAS 123, the Company applied Accounting Principles Board Opinion
No. 25, or APB 25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock option plans. Under the provisions of APB 25, the Company recognized
compensation expense only to the extent that the exercise price of the Companys employee stock
options was less than the market price of the underlying stock at date of grant.
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.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
The weighted average of the assumptions used to estimate the fair value of stock options
granted using the Black-Scholes valuation method were as follows:
|
|
|
|
|
Expected Life (in years) (1) |
|
|
5.5 |
|
Expected Volatility (2) |
|
|
75.8 |
% |
Risk Free Interest Rate (3) |
|
|
4.9 |
% |
Dividend Yield (4) |
|
|
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. |
Expense recorded pursuant to FAS 123R during was as follows:
|
|
|
|
|
|
|
2006 |
|
General and Administrative |
|
$ |
767 |
|
Marketing and Sales |
|
|
448 |
|
Research, Development, and Clinical |
|
|
347 |
|
Cost of Sales |
|
|
72 |
|
|
|
|
|
Total Stock Based Compensation |
|
$ |
1,634 |
|
|
|
|
|
In addition, the Company has $130 of stock based compensation capitalized in inventory as of
December 31, 2006.
Expense related to non-employee stock options is being amortized over the vesting, which is
generally four years. During the years ended December 31, 2006, 2005, and 2004, $(6), $31, and
$170, 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, 2006, 2005 and 2004, the
Company granted 20,000, -0-, and -0- options, respectively, to non-employees. As of December 31, 2006,
2005 and 2004, a total of 220,100, 236,100, and 252,400 non-employee stock options, respectively,
were outstanding. As of December 31, 2006, 2005, and 2004, a total of 207,000, 232,100, and
234,400, non-employee stock options, respectively, were fully vested.
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 for
issuance under the Purchase Plan. During 2006, 2005, and 2004, a total of approximately 77,000,
34,000, and 35,000 shares of common stock, respectively, were purchased at an average price of
$4.11, $3.58, and $0.77, respectively.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
13. Income Taxes
Significant components of the Companys deferred tax assets and (liabilities) are as follows at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Net operating loss carryforwards |
|
$ |
32,783 |
|
|
$ |
27,513 |
|
Accrued expenses |
|
|
140 |
|
|
|
|
|
Tax credits |
|
|
5,734 |
|
|
|
5,666 |
|
License fees |
|
|
73 |
|
|
|
84 |
|
Inventory |
|
|
30 |
|
|
|
161 |
|
Capitalized research and development |
|
|
613 |
|
|
|
751 |
|
Developed technology |
|
|
(2,903 |
) |
|
|
(4,448 |
) |
Trademarks and tradenames |
|
|
(1,029 |
) |
|
|
(1,029 |
) |
Deferred compensation |
|
|
441 |
|
|
|
588 |
|
Other |
|
|
164 |
|
|
|
109 |
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
36,046 |
|
|
|
29,395 |
|
Valuation allowance |
|
|
(37,075 |
) |
|
|
(30,424 |
) |
|
|
|
|
|
|
|
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 and, accordingly, a
valuation allowance for the entire deferred tax asset amount has been recorded.
The valuation allowance increased by $6,651, $3,815, and $5,099 in 2006, 2005 and 2004,
respectively.
The Companys effective tax rate differs from the statutory rate of 35% due primarily to
research and development and other tax credits offset by federal and state losses that were
recorded without tax benefit.
At December 31, 2006, the Company has net operating loss carryforwards for federal and state
income tax purposes of approximately $90,609 and $47,907, respectively, which begin to expire in
2010 and 2007, respectively. In addition, the Company has research and development and other tax
credits for federal and state income tax purposes of approximately $3,006, and $2,618,
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 2007.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, the utilization of net
operating losses (NOL) and other tax attributes may be subject to substantial limitations if
certain ownership changes occur during a three-year testing period (as defined). As of December 31,
2006 management has not determined if ownership changes have occurred which would limit the
Companys utilization of its NOL or credit carryovers.
The results of operations for the years ended December 31, 2006, 2005 and 2004 include the net
losses of the Companys wholly-owned German subsidiary of $17, $24, and $56, respectively.
14. 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 2006, 2005, or 2004.
15. Legal Matters
A state court productions liability action was served on the Company on October 7, 2003, in
the Circuit Court of Cook County, Illinois. Plaintiff seeks damages for pain and suffering,
disability and disfigurement, loss of enjoyment of life and loss of capacity to earn a living.
Plaintiff claims these injuries arose on or about October 1, 2001, following an abdominal aortic
aneurysm repair with a graft designed, manufactured and distributed
by the Company. On February 28, 2007, the Company and plaintiff agreed to a
settlement of the matter which will be satisfied through the
Companys insurance policies, and there
will be no impact to the Companys financial statements.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share amounts)
The Company is a party to ordinary disputes arising in the normal course of business.
Management is of the opinion that the outcome of these matters will not have a material adverse
effect on the Companys consolidated financial position, results of operations or cash flow.
16. Subsequent Event
On February 21, 2007, the Company entered into a revolving credit facility, whereby it may
borrow up to $5.0 million. All outstanding amounts under the credit facility bear interest at a
variable rate equal to the 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 also contains
customary covenants regarding operations of the 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 the Companys assets with the exception of its intellectual property. All
amounts owing under the credit facility will become due and payable on February 21, 2009.
F-20
(b) Financial Statement Schedule
ENDOLOGIX, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 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 |
|
Year ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
31 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(5 |
) |
|
$ |
26 |
|
Reserve for excess and obsolete
inventories |
|
$ |
65 |
|
|
$ |
780 |
|
|
$ |
|
|
|
$ |
(419 |
) |
|
$ |
426 |
|
Income tax valuation allowance |
|
$ |
26,609 |
|
|
$ |
3,815 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
30,424 |
|
Year ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
16 |
|
|
$ |
25 |
|
|
$ |
|
|
|
$ |
(10 |
) |
|
$ |
31 |
|
Reserve for excess and obsolete
inventories |
|
$ |
82 |
|
|
$ |
244 |
|
|
$ |
|
|
|
$ |
(261 |
) |
|
$ |
65 |
|
Income tax valuation allowance |
|
$ |
21,510 |
|
|
$ |
5,099 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
26,609 |
|
|
|
|
(a) |
|
Deductions represent the actual write-off of accounts receivable balances or the disposal of
inventory. |
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. |
|
|
|
10.8(1)
|
|
Supply Agreement dated as of February 12, 1999, and as amended
August 4, 1999, November 16, 1999, March 10, 2000, and January 31,
2001 by and between Endologix and Impra, Inc. (Incorporated by
reference to Exhibit 10.40 to Endologix Quarterly Report on Form
10-Q, filed with the SEC on August 14, 2002). |
|
|
|
10.8.1(1)
|
|
Amendment to Supply Agreement dated January 17, 2002 by and between
Endologix and Impra, Inc, (Incorporated by reference to Exhibit
10.40.1 to Endologix Quarterly Report on Form 10-Q, filed with the
SEC on August 14, 2002). |
|
|
|
10.8.2
|
|
Second Amendment to Supply Agreement dated September 8, 2006
between Endologix and Bard Peripheral Vascular, Inc. (Incorporated
by reference to Exhibit 10.6.2 to Endologix Quarterly Report on
Form 10-Q, filed with the SEC on November 9, 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). |
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.10(2)
|
|
Form of Employment Agreement with certain officers of Endologix
(Incorporated by reference to Exhibit 10.42 to Endologix Annual
Report on Form 10-K, filed with the SEC on March 27, 2003). |
|
|
|
10.10.1
|
|
Schedule of officers of Endologix party to the Employment Agreement. |
|
|
|
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
|
|
Stock Purchase Agreement, dated July 5, 2005, by and between
Endologix and the investors named therein (Incorporated by
reference to Exhibit 10.48 to Endologix Current Report on Form 8-K,
filed with the SEC on July 8, 2005). |
|
|
|
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). |
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31.1
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Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934. |
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31.2
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Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934. |
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32.1
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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. |
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32.2
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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. |
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(1) |
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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. |
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(2) |
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These exhibits are identified as management contracts or compensatory plans or arrangements
of Endologix pursuant to Item 15(a)(3) of Form 10-K. |