Summary of ENDOLOGIX INC /DE/

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to the historical financial information included herein, this Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are based on management's beliefs, as well as on assumptions made by and information currently available to management. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q, including without limitation, statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and statements located elsewhere herein regarding our financial position and business strategy, may constitute forward-looking statements. You generally can identify forward-looking statements by the use of forward-looking terminology such as "believes," "may," "will," "expects," "intends," "estimates," "anticipates," "plans," "seeks," or "continues," or the negative thereof or variations thereon or similar terminology although not all forward-looking statements contain these words. Such forward-looking statements involve known and unknown risks, including, but not limited to, market acceptance of our sole technology, the Powerlink® System products, 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, 2008, including but not limited to those factors discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations," Risk Factors," "Consolidated Financial Statements" and "Notes to Consolidated Financial Statements." 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 expressly disclaim any intent or obligation to update information contained in any forward-looking statement after the date hereof to conform such information to actual results or to changes in our opinions or expectations. Overview
Organizational History
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. Our Business
We are engaged in the development, manufacture, sale and marketing of minimally invasive therapies for the treatment of aortic disorders. 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 a leading cause of death in the United States today.
The Powerlink System is a catheter and endoluminal stent graft, or ELG, system. The device consists of a self-expanding cobalt chromium alloy stent cage covered by ePTFE, a common surgical graft material. The Powerlink ELG is implanted in the abdominal aorta, which is accessed through the femoral artery. Once the Powerlink ELG is deployed into its proper position, blood flow is shunted away from the weakened or "aneurismal" section of the aorta, reducing pressure and the potential for the aorta to rupture. Our clinical trials demonstrated that implantation of our products reduces the mortality and morbidity rates associated with conventional AAA surgery, as well as provides a clinical alternative for many patients who could not undergo conventional surgery. Sale of our Powerlink System in the United States, Europe, Japan, and Latin America is the primary source of our reported revenues.
In February 2008, Cosmotec Co., Ltd., or Cosmotec, our distributor in Japan, obtained Shonin approval to market the Powerlink System from the Japanese Ministry of Health. Shonin is equivalent to FDA approval of a premarket approval, or PMA, application in the United States. We commenced commercial sales to Japan in February 2008 through Cosmotec.

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We continue to conduct clinical trials for other products related to the Powerlink System. All the required 63 patients have been enrolled in a clinical trial for a 34mm infrarenal bifurcated device designed to treat patients with large aortic necks.
Results of Operations
Comparison of the Three Months Ended March 31, 2009 and 2008 Product Revenue. Product revenue increased 42% to $11.8 million in the three months ended March 31, 2009 from $8.3 million in the three months ended March 31, 2008. Domestic sales increased 49% to $10.2 million in the three months ended March 31, 2009 from $6.8 million in the three months ended March 31, 2008. The increase in domestic sales was primarily due to increased productivity of our sales representatives, as well as the introduction of two new products in 2008. In addition, we began marketing our new system to deliver and deploy the Powerlink system in the first quarter of 2009. The new delivery system, called IntuiTrak, was designed to further simplify the implant procedure, and contributed to the increase in domestic revenue.
International sales increased 13% to $1.7 million in the three months ended March 31, 2009 from $1.5 million for the comparable period in the prior year. This increase was driven primarily by higher sales to Cosmotec in Japan due to greater market acceptance.
We expect that product revenue will continue to grow, both sequentially and compared to prior year periods. We anticipate that product revenue will be between $47.0 to $50.0 million for the year ended December 31, 2009.
Cost of Product Revenue. The cost of product revenue increased 15% to $2.9 million in the three months ended March 31, 2009 from $2.5 million in the three months ended March 31, 2008, due to an increase in the volume of Powerlink System sales. As a percentage of product revenue, cost of product revenue decreased to 25% in the first quarter of 2009 as compared to 30% in the same period of 2008. The percentage decline in the cost of product revenue was due to the full substitution of in-house produced ePTFE graft material for higher-cost purchased graft material, in the products sold during the 2009 period.
We believe that gross profit will increase in 2009 due to the expected higher commercial sales of the Powerlink System both in and outside of the United States. We also expect gross margin as a percentage of product revenues to increase modestly due to expected higher average selling prices for the IntuiTrak delivery system and due to efficiencies from higher manufacturing volumes required to support sales growth.
Research, Development and Clinical. Research, development and clinical expense was relatively unchanged at $1.4 million in the three months ended March 31, 2009 as compared to $1.5 million for the three months ended March 31, 2008.
We expect that research, development, and clinical expense will increase sequentially over the remaining quarters of 2009 as we pursue opportunities to develop additional new products for the treatment of aortic disorders.
Marketing and Sales. Marketing and sales expense increased 14% to $6.6 million in the three months ended March 31, 2009 from $5.8 million in the three months ended March 31, 2008. The increase in the first quarter of 2009 resulted primarily from:
• marketing costs related to the launch of the IntuiTrak delivery system,

• expenses related to more intensive training of sales representatives, and

• higher commission expense on the 49% increase in domestic sales between those periods.

We anticipate that marketing and sales expense will increase for the remaining quarters of the year due to the addition of four to six additional sales territories, the higher compensation associated with the anticipated sales growth, the addition of executive staff in the second quarter, and the increase in marketing related costs for the broader launch of the IntuiTrak Express delivery system for Powerlink XL in the third quarter of the 2009 fiscal year.

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General and Administrative. General and administrative expense decreased 9% to $2.1 million in the three months ended March 31, 2009 from $2.2 million in the three months ended March 31, 2008. The decrease is primarily due to the resolution of certain legal matters ongoing during the first quarter of 2008, offset by higher compensation expense paid in 2009.
We expect general and administrative expenses to be in the $1.9 million to $2.1 million range per quarter through the balance of 2009.
Other Income(Expense). Other income decreased 176% to ($61,000) in the three months ended March 31, 2009 from $80,000 in the same period of 2008. The decrease in other income was primarily the result of interest expense in 2009 due to drawing down on the term loan and revolving line of credit with Silicon Valley Bank in September 2008, the non-recurrence of income related to a credit card rebate program and the loss in the value of our investment in Cianna Medical.
Liquidity and Capital Resources
For the three months ended March 31, 2009, we incurred net losses of $1.2 million. As of March 31, 2009, we had an accumulated deficit of approximately $144.9 million. Historically, we have relied on the sale and issuance of equity securities to provide a significant portion of funding for our operations.
In February 2007, we entered into a revolving credit facility with Silicon Valley Bank whereby we may borrow up to $5.0 million under a revolving line of credit. All outstanding amounts under the revolving line of credit bear interest at a variable rate equal to the lender's prime rate plus 0.5%, which is payable on a monthly basis. The unused portion is subject to an unused revolving line facility fee, payable quarterly, in arrears, on a calendar year basis, in an amount equal to one quarter of one percent per annum of the average unused portion of the revolving line of credit, 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 revolving line of credit become due and payable in July 2010. In September 2008, we drew down $2.0 million. As of March 31, 2009, we had $2.0 million in outstanding borrowings under the revolving line of credit.
In July 2008, we entered into an amendment to the credit facility which added a term loan whereby we may borrow up to $3.0 million. In September 2008, we drew down the $3.0 million term loan, all of which was outstanding at March 31, 2009. The term loan requires interest only payments at a variable rate equal to the lender's prime rate plus 1.0%, which is payable on a monthly basis through March 31, 2009. The term loan principal is due in 36 monthly installments beginning in April 2009.
Our existing credit facility with Silicon Valley Bank contains negative covenants on the operation of our business and financial covenants, including requiring us to maintain a tangible net worth of $13.0 million. As of March 31, 2009, our tangible net worth was $13.6 million. If we are not able to maintain compliance with our financial covenants, certain terms of the revolving line of credit and term loan will change including an increase in the interest rate and a limitation on the amounts available for borrowing under the credit facility based on eligible accounts receivable. Further, if we do not maintain a tangible net worth of at least $12.0 million from the first date on which we are not in complete compliance with our financial covenants through June 29, 2009, and $12.5 million thereafter, we will be in default under the credit facility which could allow the lender to accelerate the repayment of the indebtedness under the credit facility. As of March 31, 2009, we were in complete compliance with all of our covenants under the credit facility.
At March 31, 2009, we had cash and cash equivalents of $6.8 million. We expect that our continued growth, strong gross margins and expense controls will enable us to achieve positive cash flow from operations in the second quarter of 2009, consequently, we believe that our current cash balance, in combination with cash receipts generated from sales of the Powerlink System and borrowings available under our credit facility, will be sufficient to meet anticipated cash needs for operating and capital expenditures through at least the next twelve months. If we do not realize expected revenue and gross profit margin levels, or if we are unable to manage our operating expenses in line with our revenues, or if we cannot maintain our days sales outstanding accounts receivable level, we may not achieve positive cash flow from operations in the second quarter of 2009, nor be able to fund our operations through at least the next twelve months.

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We believe that the future growth of our business will depend upon our ability to successfully develop new technologies and bring these technologies to market, as well as increased market acceptance of the Powerlink System. If we pursue additional research and development opportunities or fail to increase our penetration of the AAA market, or if we fail to reduce certain discretionary expenditures, as necessary, we may need to seek additional sources of financing. In the event that we require additional funding to continue our operations, we will attempt to raise the required capital through either debt or equity arrangements.
The timing and amount of our future capital requirements will depend on many factors, including:
• the rate of market acceptance of the Powerlink System;

• our requirements for additional manufacturing capacity;

• our requirements for additional IT infrastructure and systems;

• our requirements for additional facility space; and

• the need for additional capital to fund future development programs.

If we are required to obtain additional financing, we may not be able to do so on acceptable terms, if at all. Even if we are able to obtain such financing it may cause substantial dilution for our stockholders, in the case of an equity financing, or may contain burdensome restrictions on the operations of our business, in the case of debt financing.

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