e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|
|
|
þ |
|
Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 |
for the quarterly period ended September 30, 2007.
|
|
|
o |
|
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
for the transition period from ___________ to ___________
Commission file number 000-28440
ENDOLOGIX, INC.
(Exact name of Registrant as specified in its charter)
|
|
|
Delaware
(State or other jurisdiction of
incorporation or organization)
|
|
68-0328265
(I.R.S. Employer
Identification Number) |
11 Studebaker, Irvine, California 92618
(Address of principal executive offices)
(949) 595-7200
Registrants telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
On October 23, 2007, there were 42,884,231 shares of the registrants only class of common stock
outstanding.
ENDOLOGIX, INC.
Form 10-Q
September 30, 2007
TABLE OF CONTENTS
2
ENDOLOGIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
9,031 |
|
|
$ |
6,271 |
|
Restricted cash equivalents |
|
|
500 |
|
|
|
500 |
|
Marketable securities available-for-sale, including unrealized gains of $36 and $3 |
|
|
335 |
|
|
|
12,217 |
|
Accounts receivable, net of allowance for doubtful accounts of $27 and $38 |
|
|
4,002 |
|
|
|
2,763 |
|
Other receivables |
|
|
669 |
|
|
|
198 |
|
Inventories |
|
|
9,217 |
|
|
|
9,356 |
|
Other current assets |
|
|
835 |
|
|
|
637 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
24,589 |
|
|
|
31,942 |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
4,008 |
|
|
|
4,516 |
|
Marketable securities available-for-sale |
|
|
|
|
|
|
1,200 |
|
Goodwill |
|
|
4,631 |
|
|
|
4,631 |
|
Intangibles, net |
|
|
9,265 |
|
|
|
10,319 |
|
Other assets |
|
|
78 |
|
|
|
78 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
42,571 |
|
|
$ |
52,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
4,006 |
|
|
$ |
5,009 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
4,006 |
|
|
|
5,009 |
|
Long term liabilities |
|
|
1,124 |
|
|
|
1,172 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
5,130 |
|
|
|
6,181 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 13) |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.001 par value; 5,000,000 shares authorized, no
shares issued and outstanding |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 60,000,000 shares authorized, 43,378,000 and
43,144,000 shares issued, respectively, and 42,883,000 and 42,649,000 shares
outstanding, respectively |
|
|
43 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
166,123 |
|
|
|
163,698 |
|
Accumulated deficit |
|
|
(128,210 |
) |
|
|
(116,663 |
) |
Treasury stock, at cost, 495,000 shares |
|
|
(661 |
) |
|
|
(661 |
) |
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
|
146 |
|
|
|
88 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
37,441 |
|
|
|
46,505 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
42,571 |
|
|
$ |
52,686 |
|
|
|
|
|
|
|
|
See accompanying notes
3
ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
6,592 |
|
|
$ |
3,748 |
|
|
$ |
19,100 |
|
|
$ |
9,869 |
|
License |
|
|
560 |
|
|
|
53 |
|
|
|
678 |
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
7,152 |
|
|
|
3,801 |
|
|
|
19,778 |
|
|
|
10,029 |
|
Cost of product revenue |
|
|
2,432 |
|
|
|
1,532 |
|
|
|
7,649 |
|
|
|
4,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
4,720 |
|
|
|
2,269 |
|
|
|
12,129 |
|
|
|
5,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research, development and clinical |
|
|
1,606 |
|
|
|
1,628 |
|
|
|
4,665 |
|
|
|
5,145 |
|
Marketing and sales |
|
|
4,788 |
|
|
|
4,023 |
|
|
|
14,666 |
|
|
|
9,773 |
|
General and administrative |
|
|
1,635 |
|
|
|
1,167 |
|
|
|
4,702 |
|
|
|
4,093 |
|
Termination of supply agreement |
|
|
550 |
|
|
|
|
|
|
|
550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
8,579 |
|
|
|
6,818 |
|
|
|
24,583 |
|
|
|
19,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(3,859 |
) |
|
|
(4,549 |
) |
|
|
(12,454 |
) |
|
|
(13,431 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
152 |
|
|
|
352 |
|
|
|
558 |
|
|
|
719 |
|
Other income |
|
|
313 |
|
|
|
5 |
|
|
|
349 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
465 |
|
|
|
357 |
|
|
|
907 |
|
|
|
739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,394 |
) |
|
$ |
(4,192 |
) |
|
$ |
(11,547 |
) |
|
$ |
(12,692 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.08 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and
diluted net loss per share |
|
|
42,870 |
|
|
|
42,626 |
|
|
|
42,767 |
|
|
|
39,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
4
ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(11,547 |
) |
|
$ |
(12,692 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,624 |
|
|
|
1,708 |
|
Stock-based compensation |
|
|
1,857 |
|
|
|
1,076 |
|
Realized gain on investments |
|
|
(314 |
) |
|
|
|
|
Change in: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,239 |
) |
|
|
(1,381 |
) |
Inventories |
|
|
442 |
|
|
|
153 |
|
Other receivables and other assets |
|
|
(645 |
) |
|
|
(27 |
) |
Accounts payable, accrued expenses and long term liabilities |
|
|
(1,051 |
) |
|
|
(1,434 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(10,873 |
) |
|
|
(12,597 |
) |
|
|
|
|
|
|
|
Cash flows provided by investing activities: |
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities |
|
|
(1,850 |
) |
|
|
(11,159 |
) |
Sales of available-for-sale securities |
|
|
15,255 |
|
|
|
10,441 |
|
Cash paid for property and equipment |
|
|
(344 |
) |
|
|
(809 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
13,061 |
|
|
|
(1,527 |
) |
|
|
|
|
|
|
|
Cash flows provided by financing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale of common stock, net of expenses |
|
|
|
|
|
|
18,753 |
|
Proceeds from sale of common stock under employee stock purchase plan |
|
|
327 |
|
|
|
319 |
|
Proceeds from exercise of common stock options |
|
|
220 |
|
|
|
934 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
547 |
|
|
|
20,006 |
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
25 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
2,760 |
|
|
|
5,885 |
|
Cash and cash equivalents, beginning of period |
|
|
6,271 |
|
|
|
8,191 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
9,031 |
|
|
$ |
14,076 |
|
|
|
|
|
|
|
|
See accompanying notes
5
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair statement of the results of the periods presented have
been included. Operating results for the unaudited nine month period ended September 30, 2007 are
not necessarily indicative of results that may be expected for the year ending December 31, 2007 or
any other period. For further information, including information on significant accounting policies
and use of estimates, refer to the consolidated financial statements and footnotes thereto included
in the Companys Annual Report on Form 10-K for the year ended December 31, 2006.
For the nine months ended September 30, 2007, the Company incurred a net loss of $11,547. As
of September 30, 2007, the Company had an accumulated deficit of $128,210. Historically, the
Company has relied on the sale and issuance of equity securities to provide a significant portion
of funding for its operations. In June 2006, the Company sold shares of its common stock that
resulted in gross proceeds to the Company of $20,000.
At September 30, 2007, the Company had cash, cash equivalents, restricted cash equivalents and
marketable securities available for sale of $9,866. The Company believes that its current cash
balance, in combination with cash receipts generated from sales of the Powerlink® System and
borrowings available under its credit facility, will be sufficient to fund ongoing operations
through at least September 30, 2008. However, if the Company does not realize its expected revenue
and gross margin levels, or if the Company is unable to manage its operating expenses in line with
its revenues, it may require additional financing to fund its operations.
In the event that the Company requires additional funding, it would attempt to raise the
required capital through either debt or equity arrangements. The Company cannot provide any
assurance that the required capital would be available on acceptable terms, if at all, or that any
financing activity would not be dilutive to its current stockholders. If the Company were not able
to raise additional funds, it would be required to significantly curtail its operations which would
have an adverse effect on its financial position, results of operations and cash flows. The
financial statements do not include any adjustments that might result from the outcome of these
uncertainties.
2. Stock-Based Compensation
Effective January 1, 2006, the Company adopted Financial Accounting Standards Board Statement
No. 123(R) Share Based Payment, or FAS 123R. Share-based compensation expense recognized in the Companys consolidated
statements of operations after December 31, 2005 includes (i) compensation expense for share-based
payment awards granted prior to, but not vested as of December 31, 2005, based on the grant-date
fair value estimated in accordance with the pro forma provisions of FAS 123 and (ii) compensation
expense for the share-based payment awards granted subsequent to December 31, 2005, based on the
grant-date fair value estimated in accordance with the provisions of FAS 123R. As share-based
compensation expense recognized in the consolidated statement of operations is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures. FAS 123R requires the estimation of forfeitures when
recognizing compensation expense and that this estimate of forfeitures be adjusted over the
requisite service period should actual forfeitures differ from such estimates. Changes in estimated
forfeitures are recognized through a cumulative catch-up adjustment, which is recorded in the
period of change and which impacts the amount of unamortized compensation expense to be recognized
in future periods.
6
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
The Company elected to adopt FAS 123R using the modified prospective application approach
which requires the Company to value unvested stock options granted prior to its adoption of FAS
123R under the fair value method and expense these amounts in the statement of operations over the
stock options remaining vesting period. Prior periods are not required to be restated.
The Company uses the Black-Scholes option pricing model which requires extensive use of
financial estimates and accounting judgment, including estimates of the expected period of time
employees will retain their vested stock options before exercising them, the expected volatility of
the Companys common stock over the expected term, and the number of shares that are expected to be
forfeited before they are vested. Application of alternative assumptions could produce
significantly different estimates of the fair value of the stock-based compensation and as a
result, significantly different results recognized in the consolidated statements of operations.
The weighted average of the assumptions that were used to estimate the fair value of stock
options granted using the Black-Scholes valuation method are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
Expected Life (in years) (1) |
|
|
5.5 |
|
|
|
5.5 |
|
Expected Volatility (2) |
|
|
72.0 |
% |
|
|
76.1 |
% |
Risk Free Interest Rate (3) |
|
|
4.7 |
% |
|
|
5.0 |
% |
Dividend Yield (4) |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
1) |
|
Estimated based on historical experience. |
|
2) |
|
Volatility based on historical experience over a period equivalent to the expected life in
years. |
|
3) |
|
Based on the US Treasury constant maturity interest rate with a term consistent with the
expected life of the options granted. |
|
4) |
|
The Company does not pay dividends on its common stock and the Company currently does not
have any plans to pay or declare any cash dividends. |
Pursuant to the Companys 1996 Stock Option/Issuance Plan (the 1996 Plan) and the Companys 2006
Stock Incentive Plan (the 2006 Plan), either incentive stock option or non-qualified stock option
awards may be granted and under the 1997 Supplemental Stock Option Plan (the 1997 Plan and
together with the 1996 Plan and 2006 Plan, the Plans), non-qualified stock option awards may
be granted. Under the Plans, options are generally granted at a price equal to the fair market
value of the 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 September 30, 2007,
there were approximately 780 shares of common stock available for future stock option grants.
7
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
The following table summarizes option activity for all Plans during the first nine months of 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
|
|
|
|
Exercise |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
|
Price per |
|
Contractual |
|
Intrinsic |
|
|
|
Shares |
|
Share |
|
Life (Years) |
|
Value |
|
|
|
|
Outstanding at December 31, 2006 |
|
|
|
3,397 |
|
|
$ |
4.38 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
1,290 |
|
|
|
4.24 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
(121 |
) |
|
|
1.91 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
(477 |
) |
|
|
4.31 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
(38 |
) |
|
|
3.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007 |
|
|
|
4,051 |
|
|
$ |
4.42 |
|
|
|
7.67 |
|
|
$ |
1,696 |
|
|
|
|
|
Exercisable at September 30, 2007 |
|
|
|
1,991 |
|
|
$ |
4.57 |
|
|
|
6.20 |
|
|
$ |
938 |
|
|
|
|
|
Vested or expected to vest |
|
|
|
3,635 |
|
|
$ |
4.44 |
|
|
|
7.48 |
|
|
$ |
1,551 |
|
|
|
|
|
The weighted average fair value per option granted during the three months ended September 30, 2007
and 2006 was $2.55 and $2.54, respectively. During the nine months ended September 30, 2007 and
2006, the weighted average fair value was $2.71 and $2.53, respectively. These amounts were
estimated using the Black-Scholes option pricing model with the assumptions listed above. The
aggregate intrinsic value of stock options exercised, represented in the table above, was $197 for
the three months ended September 30, 2007 and $292 for the nine months ended September 30, 2007.
The stock options granted during the third quarter of 2007 were outstanding for only a portion of
the period, and as such, the compensation expense recognized was only for the period that the
options were outstanding. As of September 30, 2007 there was $4,666 of total unrecognized
compensation cost related to approximately 2,040 non-vested outstanding stock options, with a per
share weighted average fair value of $2.29. The unrecognized expense is anticipated to be
recognized over a weighted average period of 17 months.
Expense recorded pursuant to FAS 123R during the three and nine month periods ended September 30,
2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
General and Administrative |
|
$ |
300 |
|
|
$ |
123 |
|
|
$ |
729 |
|
|
$ |
485 |
|
Marketing and Sales |
|
|
227 |
|
|
|
124 |
|
|
|
602 |
|
|
|
304 |
|
Research, Development, and Clinical |
|
|
108 |
|
|
|
92 |
|
|
|
304 |
|
|
|
255 |
|
Cost of Sales |
|
|
17 |
|
|
|
4 |
|
|
|
154 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
652 |
|
|
$ |
343 |
|
|
$ |
1,789 |
|
|
$ |
1,079 |
|
In addition, the Company had $153 of stock based compensation capitalized into inventory as of
September 30, 2007, and $130 of stock based compensation capitalized into inventory as of December
31, 2006.
The Company accounts for non-employee stock-based awards, in which goods or services are the
consideration received for the stock options issued, in accordance with the provisions of SFAS No.
123R and EITF 96-18 Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. Compensation expense for
non-employee stock-based awards is recognized in accordance with FASB Interpretation 28,
Accounting for Stock Appreciation Rights and Other Variable Stock Options or Award Plans, an
Interpretation of APB Opinions No. 15 and 25, or FIN 28. The Company records compensation expense
based on the then-current fair values of the stock options at each financial reporting date.
Compensation recorded during the service period is adjusted in subsequent periods for changes
in the stock options fair value until the options vest.
8
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
Under the 2004 Performance Compensation Plan (the Performance Plan), Performance Units are
granted at a discount to the fair market value (as defined in the Performance Plan) of the
Companys common stock on the grant date (Base Value). The Performance Units vest over
three-years; one-third vests at the end of the first year, and the remainder vests ratably on a
quarterly basis. The difference between the twenty-day average closing market price of the
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 (as defined in the Performance Plan), or
(c) upon exercise of the Performance Unit, which cannot occur until eighteen months from the grant
date. There were no Performance Units granted during the three and nine month periods ended
September 30, 2007 and 2006, respectively. The total accrued compensation expense as of September
30, 2007 was $168, at which time there were an aggregate of 154 Performance Units outstanding. The
total accrued compensation expense as of December 31, 2006, was $160 and there were 243 total
Performance Units outstanding. The Company recorded a reduction of expense totaling $103 and an
expense totaling $117 for the three and nine months ended September 30, 2007 and an expense
of $98 and a reduction in expense of $467 for the three and nine months ended September 30,
2006, in accordance with FIN 28. During the three and nine months ended September 30, 2007, 64 and
87 Performance Units were exercised resulting in a payout of $71 and $109, respectively. The
expense was included in marketing and sales expense in the consolidated statements of operations.
The Company records changes in the estimated compensation expense over the vesting period of the
Performance Units, and once fully vested, records the difference between the twenty-day average
closing market price of the Companys common stock and the Base Value as compensation expense each
period until exercised.
3. Net Loss Per Share
Net loss per common share is computed using the weighted average number of common shares
outstanding during the periods presented. Certain options with an exercise price below the average
market price for the three and nine month periods ended September 30, 2007 and the three and nine
month periods ended September 30, 2006 have been excluded from the calculation of diluted earnings
per share, as they are anti-dilutive.
If
anti-dilutive stock options were included for the three months ended September 30, 2007 and 2006, the number
of shares used to compute diluted net loss per share would have been increased by approximately
3,222 and 2,350 shares, respectively. Of these amounts, 3,068 shares and 2,140 shares had an exercise price
above the average closing price for the three months ended September 30, 2007 and 2006, respectively.
If anti-dilutive stock options
were included for the nine months ended September 30, 2007 and 2006, the number of shares used to
compute diluted net loss per share would have been increased by approximately 2,418 and 1,982 shares,
respectively. Of these amounts, 2,154 shares and 1,662 shares had an exercise price above the average
closing price for the nine months ended September 30, 2007 and 2006, respectively.
4. Restricted Cash Equivalents
The Company has a $475 line of credit with a bank in conjunction with a corporate credit card
agreement. At September 30, 2007, the Company had pledged all of its cash equivalents held at the
bank as collateral on the line of credit. Per the agreement, the Company must maintain a balance of
at least $500 in cash and cash equivalents with the bank.
5. Marketable Securities Available-For-Sale
The Company accounts for its investments pursuant to SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities.
The Company has classified its entire investment portfolio as available-for-sale.
Available-for-sale securities are stated at fair value with unrealized gains and losses recorded in
accumulated other comprehensive income. The cost of securities sold is based on the specific identification method. During the three and nine
month periods ended
9
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
September 30, 2007, the Company had realized gains of $313. During the three
and nine months ended September 30, 2006, the Company had no realized gains or losses.
The Companys investments in debt securities are diversified among high credit quality
securities in accordance with the Companys investment policy. In addition, at September 30, 2007,
the Company held 5 shares of Hologic, Inc. common stock with a market value of $326. The
Company subsequently liquidated this investment on October 17, 2007.
Two major financial institutions manage
the 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 September 30, 2007, $9 and $0 of
the Companys debt securities had original contractual maturities more than 90 days and less than
one year, and had original contractual maturities between one to two years, respectively. As of
December 31, 2006, $11,917 and $1,500 of the Companys debt securities had original contractual
maturities more than 90 days and less than one year, and between one to two years, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Holding |
|
|
Fair |
|
|
|
|
|
|
Holding |
|
|
Fair |
|
|
|
Cost |
|
|
Gain |
|
|
Value |
|
|
Cost |
|
|
Gain |
|
|
Value |
|
Corporate debt securities |
|
$ |
9 |
|
|
$ |
0 |
|
|
$ |
9 |
|
|
$ |
13,414 |
|
|
$ |
3 |
|
|
$ |
13,417 |
|
Marketable equity securities |
|
$ |
290 |
|
|
$ |
36 |
|
|
$ |
326 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
299 |
|
|
$ |
36 |
|
|
$ |
335 |
|
|
$ |
13,414 |
|
|
$ |
3 |
|
|
$ |
13,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Inventories
Inventories are stated at the lower of cost, determined on a first in, first out basis, or
market value. Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Raw materials |
|
$ |
3,083 |
|
|
$ |
2,325 |
|
Work-in-process |
|
|
2,138 |
|
|
|
2,426 |
|
Finished goods |
|
|
3,996 |
|
|
|
4,605 |
|
|
|
|
|
|
|
|
|
|
$ |
9,217 |
|
|
$ |
9,356 |
|
|
|
|
|
|
|
|
Inventory reserves, were $302 and $79 as of September 30, 2007 and December 31, 2006, respectively.
7. Line of Credit
On February 21, 2007, the Company entered into a revolving credit facility, whereby it may
borrow up to $5.0 million. All outstanding amounts under the credit facility bear interest at a
variable rate equal to the 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 Companys business and financial covenants relating
to ratios of current assets to current liabilities and tangible net worth during any calendar
quarter and is collateralized by the 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.
As of September 30, 2007, the Company had no outstanding borrowings under the credit facility
and is in compliance with all covenants.
10
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
8. License Revenue
In June 1998, the Company licensed to Guidant Corporation, an international interventional
cardiology products company, the right to manufacture and distribute stent delivery products using
the Companys Focus technology. In April 2006, Abbott Laboratories acquired Guidants vascular
business. This acquisition included all rights and obligations under licenses. The Company receives royalty
payments based upon the sale of products using the Focus technology. The agreement includes minimum
annual royalties of $250 and expires in 2008. During the three months ended September 30, 2007 and
2006, the Company recorded $60 and $53, respectively, in license revenue due on product sales by
Abbott Laboratories. During the nine months ended September 30, 2007 and 2006, the
Company recorded $178 and $160, respectively, in license revenue due on product sales by Abbott Laboratories. At September 30, 2007 and December 31, 2006, $130 and $117, respectively, due
under this agreement are included in other receivables on the condensed consolidated balance sheet.
In September 2006, the Company licensed to BioLucent, Inc., a privately held medical device
company, rights under certain patents held by the Company. In September 2007, Hologic, Inc.
purchased BioLucent, Inc. Pursuant to this acquisition, the Company had the option to continue the
royalty arrangement or to receive a one-time cash payment in exchange for a fully-paid up license. The Company elected to receive
the one-time payment of $500, which has been recorded as license revenue in the three and nine month periods ended September 30,
2007 in the accompanying unaudited condensed consolidated financial statements. At September 30, 2007, the $500 due
under this agreement was included in other receivables on the condensed consolidated balance sheet
and the payment was subsequently received in October 2007.
9. Product Revenue by Geographic Region
The Company had product sales, based on the locations of the customer, by region as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
United States |
|
$ |
5,827 |
|
|
$ |
3,376 |
|
|
$ |
16,307 |
|
|
$ |
8,269 |
|
Netherlands |
|
|
|
|
|
|
258 |
|
|
|
|
|
|
|
1,136 |
|
Germany |
|
|
302 |
|
|
|
|
|
|
|
1,431 |
|
|
|
|
|
Other European countries |
|
|
182 |
|
|
|
56 |
|
|
|
743 |
|
|
|
269 |
|
Latin America |
|
|
204 |
|
|
|
48 |
|
|
|
507 |
|
|
|
115 |
|
Other |
|
|
77 |
|
|
|
10 |
|
|
|
112 |
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,592 |
|
|
$ |
3,748 |
|
|
$ |
19,100 |
|
|
$ |
9,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales to Germany are to LeMaitre Vascular, Inc. which sells into selected European
markets. Prior to the January 1, 2007 appointment of this distributor in Germany, the Company had a distribution
agreement with Edwards LifeSciences AG, located in the Netherlands, to sell the Companys products
in selected European markets.
10. Concentrations of Credit Risk and Significant Customers
During the three and nine months ended September 30, 2007, no single customer accounted for
more than 10% of total revenues. During the nine months ended September 30, 2006, revenue from
Edwards Lifesciences AG was $1,136, which represented 11% of total revenues. No other single
customer in the three and nine month period ended September 30, 2006 accounted for more than 10% of
total revenues.
As of September 30, 2007 and December 31, 2006, no single customer accounted for more than 10%
of the Companys accounts receivable balance.
11. Comprehensive Loss
The Companys comprehensive loss included the following:
11
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net loss |
|
$ |
(3,394 |
) |
|
$ |
(4,192 |
) |
|
$ |
(11,547 |
) |
|
$ |
(12,692 |
) |
Unrealized holding gain arising during the period, net |
|
|
36 |
|
|
|
9 |
|
|
|
33 |
|
|
|
23 |
|
Foreign currency translation adjustment |
|
|
7 |
|
|
|
(9 |
) |
|
|
25 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(3,351 |
) |
|
$ |
(4,192 |
) |
|
$ |
(11,489 |
) |
|
$ |
(12,666 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
12. Intangible Assets and Goodwill
The following table details the intangible assets, estimated lives, related accumulated
amortization and goodwill:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Developed technology (10 year life) |
|
$ |
14,050 |
|
|
$ |
14,050 |
|
Accumulated amortization |
|
|
(7,493 |
) |
|
|
(6,439 |
) |
|
|
|
|
|
|
|
Net developed technologyy |
|
|
6,557 |
|
|
|
7,611 |
|
Trademarks and trade names (Indefinite life) |
|
|
2,708 |
|
|
|
2,708 |
|
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
9,265 |
|
|
$ |
10,319 |
|
|
|
|
|
|
|
|
Goodwill, (Indefinite life) |
|
$ |
4,631 |
|
|
$ |
4,631 |
|
|
|
|
|
|
|
|
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and other
intangible assets with indeterminate lives are no longer subject to amortization but are tested for
impairment annually or whenever events or changes in circumstances indicate that the asset might be
impaired. The Company most recently performed its annual impairment analysis as of June 30, 2007
and will continue to test for impairment annually as of June 30 each year. No impairment was
indicated in the last analysis. Intangible assets with finite lives continue to be subject to
amortization, and any impairment is determined in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.
The Company recognized amortization expense on intangible assets of $350 and $351 during the
three months ended September 30, 2007 and 2006, respectively. The Company recognized amortization
expense on intangible assets of $1,054 and $1,054 during the nine months ended September 30, 2007
and 2006, respectively. Estimated amortization expense for the remainder of 2007 and the five
succeeding fiscal years is as follows:
|
|
|
|
|
2007 |
|
$ |
351 |
|
2008 |
|
$ |
1,405 |
|
2009 |
|
$ |
1,405 |
|
2010 |
|
$ |
1,405 |
|
2011 |
|
$ |
1,405 |
|
2012 |
|
$ |
586 |
|
13. Commitments and Contingencies
Supplier Agreement
In February 1999, the former Endologix entered into a supply agreement with Bard Peripheral
Vascular, Inc., a subsidiary of C.R. Bard, Inc., for the supply of ePTFE. The supply agreement has
an initial term through December 2007, at which time it automatically renews on a year-by-year
basis for additional one-year periods, unless either party gives the other party notice of its
intention not to renew within 30 days from the expiration date of the applicable renewal period.
Under the terms of a third amendment to the supply agreement dated September 21, 2007, the minimum
purchase requirement for the 2007 year was reduced from $2,875 to $2,200, the Company agreed to pay
$550 in consideration for the reduction, and both parties agreed to terminate the agreement on
December 31, 2007. The $550 paid to reduce the 2007 commitment was recorded as an operating
expense in the quarter ended September 30, 2007. During the three and nine months ended September
30, 2007, the Company purchased $317 and $1,928 toward the minimum, and issued purchase orders
totaling $272 during the third quarter to complete the revised commitment.
12
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
Legal Matters
On July 6, 2007, Harrison Lazarus, M.D. filed a lawsuit against the Company in the United
States District Court for the Central District of Utah, alleging the Companys products are
infringing a patent owned by him. Dr. Lazarus is seeking an injunction against further alleged
infringement of the patent at issue and unspecified damages. The Company believes that his claims
are without merit. The Company has filed a counter claim against Dr. Lazarus, and intends to
vigorously defend its intellectual property rights.
The Company is a party to ordinary disputes arising in the normal course of business.
Management is of the opinion that the outcome of any such matters will not have a material adverse
effect on the Companys consolidated financial position, results of operations or cash flow.
14. Recent Accounting Pronouncements
As of January 1, 2007, the Company has adopted Financial Accounting Standards Board
Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes, which clarifies the
accounting for uncertainty in tax positions. FIN 48 requires that the Company recognize in its
financial statements the impact of a tax position, if that position is more likely than not of
being sustained on audit, based on the technical merits of the position. The provisions of FIN 48
were effective as of the beginning of the Companys 2007 fiscal year, with no cumulative effect of
the change in accounting principle recorded as an adjustment to opening retained earnings. As of
September 30, 2007, there are no uncertain tax positions to report.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, or SFAS
159, The Fair Value Option for Financial Assets and Financial Liabilities Including an
amendment of FASB Statement No. 115. SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. Unrealized gains and losses on items for which
the fair value option has been elected will be recognized in earnings at each subsequent reporting
date. SFAS No. 159 is effective for the 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.
13
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to the historical financial information included herein, this Quarterly Report on Form
10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934 that are based on managements
beliefs, as well as on assumptions made by and information currently available to management. All
statements other than statements of historical fact included in this Quarterly Report on Form 10-Q,
including without limitation, statements under Managements Discussion and Analysis of Financial
Condition and Results of Operations and statements located elsewhere herein regarding our
financial position and business strategy, may constitute forward-looking statements. You generally
can identify forward-looking statements by the use of forward-looking terminology such as
believes, may, will, expects, intends, estimates, anticipates, plans, seeks, or
continues, or the negative thereof or variations thereon or similar terminology. Such
forward-looking statements involve known and unknown risks, including, but not limited to, market
acceptance of our sole technology, the Powerlink® System, economic and market conditions, the
regulatory environment in which we operate, the availability of third party payor medical
reimbursements, competitive activities or other business conditions. Our actual results,
performance or achievements may differ materially from any future results, performance or
achievements expressed or implied from such forward-looking statements. Important factors that
could cause actual results to differ materially from our expectations are disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2006, including but not limited to those
factors discussed in Item 1A. Risk Factors. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly qualified in their
entirety by these cautionary statements. We do not undertake any obligation to update information
contained in any forward-looking statement.
Overview
Organizational History
We were formed in 1992 as Cardiovascular Dynamics, Inc., and our common stock began trading
publicly in 1996. The current Endologix, Inc. resulted from the May 2002 acquisition of all of the
capital stock of a private company, Endologix, Inc., which we refer to herein as the former
Endologix, and the subsequent change of our company name from Radiance Medical Systems, Inc. to
Endologix, Inc.
Our Business
We are engaged in the development, manufacture, sale and marketing of minimally invasive
therapies for the treatment of vascular disease. Our primary focus is the development of the
Powerlink® System, a catheter-based alternative treatment to surgery for abdominal aortic
aneurysms, or AAA. AAA is a weakening of the wall of the aorta, the largest artery of the body.
Once AAA develops, it continues to enlarge and if left untreated becomes increasingly susceptible
to rupture. The overall patient mortality rate for ruptured AAA is approximately 75%, making it the
14th leading cause of death for persons 55 years of age and older in the United States.
The Powerlink System is a catheter and endoluminal stent graft, or ELG, system. The
self-expanding cobalt chromium alloy cage is covered by ePTFE, a commonly-used surgical graft
material. The Powerlink ELG is implanted in the abdominal aorta by gaining access through the
femoral artery. Once deployed into its proper position, the blood flow is shunted away from the
weakened or aneurismal section of the aorta, reducing pressure and the potential for the aorta to
rupture. We believe that our products reduce the mortality and morbidity rates associated with
conventional AAA surgery, as well as provide a clinical alternative to many patients that could not
undergo conventional surgery. We are currently selling the Powerlink System in the United States
and Europe, and in other selected markets.
14
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued).
In 2005, per the request of the Japanese Ministry of Health, we submitted data on the United
States Food and Drug Administration, or FDA, approved Powerlink System. This permits us to submit
Powerlink System data for Shonin approval without the need for additional clinical trials, and upon
approval will permit us to have a single technology platform for Europe, the United States, and
Japan.
We also continue to conduct clinical trials for the suprarenal Powerlink System and for other
products related to the Powerlink System. As of October 15, 2007, 151 of the required 193 patients
have been enrolled for the second arm of a United States Pivotal Phase II clinical trial for the
suprarenal Powerlink System. As of July 31, 2007, all of the required 60 patients have been
enrolled in a United States Pivotal Phase II clinical trial utilizing a 34 mm proximal cuff in
conjunction with a commercial bifurcated Powerlink ELG to treat patients with large aortic necks.
As of October 15, 2007, 10 of the required 63 patients have been enrolled in a clinical trial for a
34mm infrarenal bifurcated device, also designed to treat patients with large aortic necks.
Currently, only one commercial device is capable of treating aortic necks larger than 26 mm. We
believe that approximately 10% to 15% of all potential AAA patients are refused minimally invasive
treatment due to these anatomic considerations.
We have experienced an operating loss for each of the last five years and expect to continue
to incur operating losses for at least the next twelve months. Our business is subject to a number
of challenges inherent in a company with a single technology such as the difficulty in predicting
physician acceptance of our product and the difficulty of planning for the growth of our operations
relative to the market demand for our product. Consequently, our results of operations have varied
significantly from quarter to quarter, and we expect that our results of operations will continue
to vary significantly in the future.
Results of Operations
Comparison of the Three Months Ended September 30, 2007 and 2006
Product Revenue. Product revenue increased 76% to $6.6 million in the three months ended
September 30, 2007 from $3.7 million in the three months ended September 30, 2006. Domestic sales
increased 73% to $5.8 million in the three months ended September 30, 2007 from $3.4 million in the
three months ended September 30, 2006. The increase in domestic sales was due to our investment in
additional field sales personnel, and increased market acceptance of the Powerlink System.
International sales increased 106% to $765,000 in the three months ended September 30, 2007
from $372,000 for the comparable period in the prior year. This increase was driven by higher sales
to our distributors in Europe and Latin America.
We expect that product revenue will continue to grow, both sequentially and compared to prior
year periods. We anticipate that product revenue will be in the range of $27 to $29 million for the
year ended December 31, 2007.
License Revenue. License revenue increased 957% to $560,000 in the three months ended
September 30, 2007 from $53,000 for the comparable period in the prior year. This increase is due
to the one-time lump-sum amount of $500,000 from Cianna, Inc., a successor corporation to BioLucent, Inc. in exchange for a
fully paid up license.
Cost of Product Revenue. The cost of product revenue increased 59% to $2.4 million in the
three months ended September 30, 2007 from $1.5 million in the three months ended September 30,
2006. Cost of product revenue increased due to the increase in volume of Powerlink System sales. As
a percentage of product revenue, cost of product revenue decreased to 37% in the third quarter of
2007 as compared to 41% in the same period of 2006. Cost of product revenue as a percentage of
product revenue decreased due to substitution of in-house produced ePTFE graft material for higher
cost purchased graft material in a portion of the products sold during the period.
We expect to see our gross profit percentage continue to improve by approximately 10
percentage points as this substitution effect becomes complete in 2008.
15
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued).
Research, Development and Clinical. Research, development and clinical expense remained
unchanged at $1.6 million in the three months ended September 30, 2007 as compared to $1.6 million
for the three months ended September 30, 2006. We expect that research, development, and clinical expense will remain in the
range of $1.5 million to $1.8 million per quarter through mid-2008.
Marketing and Sales. Marketing and sales expense increased 19% to $4.8 million in the three
months ended September 30, 2007 from $4.0 million in the three months ended September 30, 2006. The
increase in the third quarter of 2007 resulted primarily from an increase of the domestic sales
force resulting in a 73% increase in domestic sales between those periods. We anticipate that
marketing and sales expense will increase at a decreasing rate over the remainder of the year due
to increased production of our tenured sales representatives within their territories.
General and Administrative. General and administrative expense increased 40% to $1.6 million
in the three months ended September 30, 2007 from $1.2 million in the three months ended September
30, 2006. The increase was primarily due to higher FAS123(R) expenses and insurance premium
increases. We expect general and administration expense to remain in the $1.6 to $1.8 million
range per quarter through mid-2008.
Termination of Supply Agreement. Termination of supply agreement expense was $550,000 in the
three months ended September 30, 2007. The addition of this expense category was due to the third
amendment of our supply agreement with Bard Peripheral Vascular, Inc., dated September 21, 2007, which reduced the minimum purchase
requirement for the 2007 year from $2.9 million to $2.2 million, and both parties
agreed to terminate the agreement on December 31, 2007. In consideration for the reduction in the
minimum purchase requirement for the 2007 year, we paid $550,000 to Bard. We do not anticipate
termination of supply agreement expense to recur in the future.
Other Income. Other income increased 30% to $465,000 in the three months
ended September 30, 2007, from $357,000 in the same period of 2006. Interest income declined due to
lower balances of invested cash, but was offset by a realized gain of $314,000 on our investment in
BioLucent, Inc.
Comparison of the Nine Months Ended September 30, 2007 and 2006
Product Revenue. Product revenue increased 94% to $19.1 million in the nine months ended
September 30, 2007 from $9.9 million in the nine months ended September 30, 2006. Domestic sales
increased 97% to $16.3 million in the nine months ended September 30, 2007 from $8.3 million in the
nine months ended September 30, 2006. The increase in domestic sales was due to our investment in
additional field sales personnel, and increased physician acceptance of the Powerlink System.
International sales increased 75% to $2.8 million in the nine months ended September 30, 2007
from $1.6 million for the comparable period in the prior year. This increase was driven by higher
sales to our distributors in Europe and Latin America.
License Revenue. License revenue increased 324% to $678,000 in the nine months ended
September 30, 2007 from $160,000 for the comparable period in the prior year. This increase is
primarily due to the receipt of the one-time lump-sum amount of $500,000 from Cianna, Inc. in
exchange for a fully paid up license.
Cost of Product Revenue. The cost of product revenue increased 72% to $7.6 million in the nine
months ended September 30, 2007 from $4.4 million in the nine months ended September 30, 2006. Cost
of product revenue increased due to the increase in volume of Powerlink System sales. As a percentage of product
revenue, cost of product revenue decreased to 40% in the nine months ended September 30, 2007 from
45% in the same period of 2006. The percentage decrease was due in part to the improvement in
geographic mix of product sales, the $326,000 charge for the reserve in 2006 to complete the final
phase of an earlier voluntary recall, and the partial substitution effect of the in-house ePTFE graft
material during the third quarter of 2007.
16
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued).
Research, Development and Clinical. Research, development and clinical expense decreased 9% to
$4.7 million in the nine months ended September 30, 2007 as compared to $5.1 million for the nine
months ended September 30, 2006. The decrease was due to a lower amount of outside services needed
to support new product and process development projects.
Marketing and Sales. Marketing and sales expense increased 50% to $14.7 million in the nine
months ended September 30, 2007 from $9.8 million in the nine months ended September 30, 2006. The
increase resulted primarily from the expansion of our sales force and sales support work force to
support the growing U.S. market penetration of the Powerlink System, somewhat offset by lower
European sales and marketing expenses.
General and Administrative. General and administrative expense increased 15% to $4.7 million
in the nine months ended September 30, 2007, from $4.1 million in the nine months ended September
30, 2006. The increase was primarily due to higher stock based compensation charges in the nine
months ended September 30, 2007 as compared to the same period in 2006, as well as an increase in
insurance premiums.
Termination of Supply Agreement. Termination of supply agreement expense was $550,000 in the
nine months ended September 30, 2007. The addition of this expense category was due to the third
amendment of our supply agreement with Bard Peripheral Vascular, Inc., dated September 21, 2007, which reduced the minimum purchase
requirement for the 2007 year from $2.9 million to $2.2 million, and both parties
agreed to terminate the agreement on December 31, 2007. In consideration for the reduction in
the minimum purchase requirement for the 2007 year, we paid $550,000 to Bard. We do not anticipate
termination of supply agreement expense to recur in the future.
Other Income. Other income increased 23% to $907,000 in the nine months ended September 30,
2007, from $739,000 in the same period of 2006. Interest income declined due to lower balances of
invested cash, but was offset by a realized gain of $314,000 on our investment in BioLucent, Inc.
Liquidity and Capital Resources
For the nine months ended September 30, 2007, we incurred a net loss of $11.5 million. As of
September 30, 2007, we had an accumulated deficit of $128.2 million. Historically, we have relied
on the sale and issuance of equity securities to provide a significant portion of funding for our
operations. Since July 2003, we have completed four financing transactions resulting in net
proceeds of approximately $58.0 million.
In February 2007, we entered into a revolving credit facility, whereby we may borrow up to
$5.0 million. All outstanding amounts under the credit facility bear interest at a variable rate
equal to the 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 lender. The credit facility also contains
customary covenants regarding the operation of our business and financial covenants relating to
ratios of current assets to current liabilities and tangible net worth during any calendar quarter.
As of September 30, 2007, we were in compliance with all of these covenants. The amounts
outstanding under the credit facility are collateralized by all of our assets with the exception of
our intellectual property. All amounts owing under the credit facility will become due and payable
on February 21, 2009. As of September 30, 2007, we did not have any outstanding borrowings under
this credit facility.
At September 30, 2007, we had cash, cash equivalents, restricted cash equivalents and
marketable securities available for sale of $9.9 million. We believe that current cash and cash
equivalents and marketable securities, together with cash receipts generated from sales of the
Powerlink System and available borrowings under our credit facility, will be sufficient to meet
anticipated cash needs for operating and capital expenditures through at least September 30, 2008. Nevertheless, we expect to continue to incur substantial costs and cash
outlays in 2007 and beyond to support Powerlink System research and development, and United States
marketing of the Powerlink System. If we fail to increase our penetration of the AAA market, or if
we fail to reduce certain discretionary expenditures,
17
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued).
as necessary, we may need to seek additional sources of financing.
In the event that we require additional funding, we would attempt to raise the required
capital through either debt or equity arrangements. We cannot provide any assurance that the
required capital would be available on acceptable terms, if at all, or that any financing activity
would not be dilutive to our current stockholders. If we were not able to raise additional funds,
we would be required to significantly curtail our operations which would have an adverse effect on
our financial position, results of operations and cash flows.
Endologix licensed certain non-AAA technology to BioLucent Inc. in return for future royalties
based on sales incorporating that technology. The September 2007 acquisition of BioLucent by
Hologic Inc. triggered a change of control provision in that agreement which gave us the option to
continue the license and royalty agreement, or to receive a lump sum cash payment in return for a
fully paid license. We opted for the lump sum payment of $500,000, which was recorded as license
revenue in the third quarter, and the cash was subsequently received in October 2007. In connection with the acquisition by Hologic, Inc. of BioLucent, we recorded other income of $314,000. We
received approximately $290,000 in Hologic stock, which was liquidated in October 2007 for
proceeds of $361,000, as well as a cash payment of approximately $24,000 which was received in
October 2007.
18
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued).
We believe that our future cash and capital requirements may be difficult to predict and will
depend on many factors, including:
|
|
|
continued market acceptance of the Powerlink System; |
|
|
|
|
our ability to successfully expand our commercial marketing of the Powerlink System; |
|
|
|
|
the success of our research and development programs for future products; |
|
|
|
|
the clinical trial and regulatory approval processes for future products; |
|
|
|
|
the costs involved in intellectual property rights enforcement or litigation; |
|
|
|
|
the level of hospital reimbursement for ELG procedures and other competitive factors; |
|
|
|
|
viability of our sole manufacturing facility through unforeseen natural or other
disasters; |
|
|
|
|
our ability to produce and/or purchase an adequate supply of ePTFE, the key raw
material for our Powerlink System; |
|
|
|
|
the establishment of collaborative relationships with other parties. |
As of September 30, 2007, inventory remained relatively unchanged at $9.2 million as compared
to $9.4 million as of December 31, 2006. The decrease in finished goods to $4.0 million from $4.6
million and decrease in work in process to $2.1 million from $2.3 million was offset by the
increase in raw materials to $3.1 million from $2.3 million. In general, our raw material and
in-process inventories have an indefinite shelf life, and finished goods have a shelf life of up to
three years.
In February 1999, Endologix entered into a supply agreement with Bard Peripheral
Vascular, Inc., a subsidiary of C.R. Bard, Inc., for the supply of ePTFE. The supply agreement had
an initial term through December 2007, at which time it automatically renewed on a year-by-year
basis for additional one-year periods, unless either party provided the other party notice of its
intention not to renew within 30 days from the expiration date of the applicable renewal period.
Under the terms of a third amendment to the supply agreement entered into on September 21, 2007,
the minimum purchase requirement for the 2007 year was reduced from $2.9 million to $2.2 million,
we agreed to pay $550,000 in consideration for the reduction, and both parties agreed to terminate
the agreement on December 31, 2007. During the three and nine months ended September 30, 2007, we
had purchased $317,000 and $1.9 million toward the minimum, and we issued purchase orders totaling
$272,000 during the third quarter to complete the revised commitment. We are no longer
economically dependent on this vendor.
19
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our financial instruments include cash, short-term and long-term investment grade debt
securities. At September 30, 2007, the carrying values of our financial instruments approximated
their fair values based on current market prices and rates. It is our policy not to enter into
derivative financial instruments. We do not currently have material foreign currency exposure as
the majority of our assets are denominated in United States currency and our foreign-currency based
transactions are not material. Accordingly, we do not have a significant currency exposure at
September 30, 2007.
All outstanding amounts under our revolving credit facility bear interest at a variable rate
equal to the lenders prime rate plus 0.5%, which is payable on a monthly basis and which may
expose us to market risk due to changes in interest rates. As of September 30, 2007, we had no
outstanding amounts under our credit facility and therefore, were not subject to any risk from
changes in interest rates.
Item 4. CONTROLS AND PROCEDURES.
We carried out an evaluation, under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer, of the effectiveness
of our disclosure controls and procedures as of the end of the period covered by this report,
pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or
the Exchange Act. Based on that evaluation, our chief executive officer and chief financial officer
have concluded that our disclosure controls and procedures, as of the end of the period covered by
this report, were effective to ensure that information we are required to disclose in reports that
we file or submit under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and forms and to ensure that
information required to be disclosed by us in the reports that we file or submit under the Exchange
Act is accumulated and communicated to our management, including our chief executive officer and
chief financial officer, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
There has been no change in our internal control over financial reporting during the period
covered by this report that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
20
Part II.
OTHER INFORMATION
Item 6. EXHIBITS
The following exhibits are filed herewith:
|
|
|
Exhibit 31.1
|
|
Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
|
|
|
Exhibit 31.2
|
|
Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
|
|
|
Exhibit 32.1
|
|
Certification of Chief Executive Officer Pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934
and 18 U.S.C. Section 1350. |
|
|
|
Exhibit 32.2
|
|
Certification of Chief Financial Officer Pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934
and 18 U.S.C. Section 1350. |
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
ENDOLOGIX, INC.
|
|
Date: November 1, 2007 |
/s/ Paul McCormick
|
|
|
President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
|
Date: November 1, 2007 |
/s/ Robert J. Krist
|
|
|
Chief Financial Officer and Secretary |
|
|
(Principal Financial and Accounting Officer) |
|
22
EXHIBIT INDEX
The following exhibits are filed herewith:
|
|
|
Exhibit 31.1
|
|
Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
|
|
|
Exhibit 31.2
|
|
Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. |
|
|
|
Exhibit 32.1
|
|
Certification of Chief Executive Officer Pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934
and 18 U.S.C. Section 1350. |
|
|
|
Exhibit 32.2
|
|
Certification of Chief Financial Officer Pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934
and 18 U.S.C. Section 1350. |
23