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ELGX > SEC Filings for ELGX > Form 10-Q on 7-May-2013All Recent SEC Filings

Show all filings for ENDOLOGIX INC /DE/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ENDOLOGIX INC /DE/


Quarterly Report


Cautionary Note Regarding Forward-Looking Statements 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, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are based on management's reasonable 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 products, general economic and business conditions, the regulatory environment in which we operate, the level and availability of third party payor medical reimbursements, competitive activities, protection of intellectual property rights or other risks. 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 our actual results, performance or achievements to differ materially from our expectations are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 14, 2013, 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 by 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 thereof to conform such information to actual results or to changes in our opinions or expectations.

Our Business
Our corporate headquarters and manufacturing facility is located in Irvine, California. We develop, manufacture, market, and sell innovative medical devices for the treatment of aortic disorders. Our principal product is a stent graft and delivery catheter for the treatment of abdominal aortic aneurysms ("AAA") through minimally-invasive endovascular repair.

We sell our products through (i) our direct U.S. and European sales forces and
(ii) third-party distributors in Europe, Asia, Latin America, and in other parts of the world.

See Item 1. of our Annual Report on Form 10-K for the year ended December 31, 2012, "Business" section for a discussion of:
• Market Overview and Opportunity

• Our Products

• Manufacturing and Supply

• Marketing and Sales

• Competition

• Clinical Trials and Product Developments

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Recent Highlights of Our Product Development Initiatives and Regulatory Approvals


We received CE Mark approval of the Nellix System in January 2013. In February 2013. We commenced a limited market introduction of the Nellix System in Europe in February 2013. We hope to receive IDE approval from the FDA for the Nellix System in the third quarter of 2013, and hope to receive FDA premarket approval in the U.S. in 2016.

We believe that the Nellix System represents groundbreaking technology for EVAR of AAA. Unlike all currently available ELG devices, which leave the AAA sac fully intact, the Nellix System seals the AAA sac with a biostable polymer to reduce endoleaks and secondary interventions.

We believe the other advantages of the Nellix System include: (i) a low profile
(17Fr outer diameter), which is beneficial for the delivery of the device; (ii)
ease of use and reduced total time of device deployment for physicians; (iii) low expected reintervention rate; and (iv) the potential for reduced CT scan post-procedure follow up.


In April 2013 we received FDA premarket approval ("PMA") for a broadened indication for our AFX system to include totally percutaneous endovascular aneurysm repair ("PEVAR") for AAA. We have completed the PEVAR training and certification of our U.S. sales force. Beginning in May 2013, we intend to commence the training of physicians in the U.S. on the PEVAR procedure.

Vascular access for EVAR requires femoral artery exposure (commonly referred to as surgical "cut-down") of one or both femoral arteries, allowing for safe introduction of ELG systems. Complications from femoral artery exposure in the setting of EVAR is an inherent risk of current surgical practice. PEVAR procedures do not require an open surgical cut-down of either femoral artery, as access to the femoral artery is achieved via a needle-puncture through the skin. Advantages to the patient and to the health care system of an entirely percutaneous procedure include reduced surgical procedure times, less post-operative pain, and fewer access-related wound complications. To date, our ELG system is the only one approved by the FDA specifically for full percutaneous access.


In April 2013, we received CE Mark approval for several sizes of our Ventana System, and to date have enrolled 76 patients in our U.S. IDE study. We believe that these currently approved sizes allow us to treat approximately 30% of AAA patients whose aneurysms extent to, or above, the renal arteries. In reviewing our first 120 global procedures with Ventana, we have seen good overall safety results, but a higher than expected number of renal re-interventions. Before we continue enrolling patients in the IDE clinical study and progressing with the European limited market introduction, we plan to integrate our next generation covered renal stent and conduct additional testing and training to optimize future outcomes. We hope to resume enrolling patients in the IDE study and commence the limited market introduction in Europe by the end of 2013.

We plan to commence a limited market introduction of a new aortic extension for the AFX system in the U.S. in the third quarter 2013. This enhanced device is expected to further simplify the EVAR procedure and provide physicians with improved deployment accuracy.

Characteristics of Our Revenue and Expenses

Revenue is derived from sales of our ELG System (including extensions and accessories) to hospitals upon completion of an EVAR procedure, or from sales to distributors upon title transfer (which is typically at shipment), provided our other revenue recognition criteria have been met. Cost of Goods Sold

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Cost of goods sold includes compensation (including stock-based compensation) and benefits of production personnel and production support personnel. Cost of goods sold also includes certain royalty fees to third parties, amortization of our developed technology intangible asset, depreciation expense for production equipment, production materials and supplies expense, allocated facilities-related expenses, and certain direct costs such as shipping. Research and Development
Research and development expenses consist of compensation (including stock-based compensation) and benefits for research and development personnel, materials and supplies, research and development consultants, and allocated facilities-related costs. Our research and development activities primarily relate to the development and testing of new devices and methods to treat aortic disorders. Clinical and Regulatory
Clinical and regulatory expenses consist of compensation (including stock-based compensation) and benefits for clinical and regulatory personnel, regulatory and clinical payments related to studies, and allocated facilities-related costs. Our clinical and regulatory activities primarily relate to studies in order to gain regulatory approval for the commercialization of our devices. Sales and Marketing

Sales and marketing expenses primarily consist of compensation (including stock-based compensation) and benefits for our sales force, sales support, and marketing personnel. It also includes costs attributable to marketing our products to our customers and prospective customers.

General and Administrative
General and administrative expenses primarily include compensation (including stock-based compensation) and benefits for personnel that support our general operations such as information technology, executive management, financial accounting, customer service, and human resources. General and administrative expenses also include bad debt expense, patent and legal fees, financial audit fees, insurance, recruiting fees, other professional services, the federal Medical Device Excise Tax, and allocated facilities-related expenses.

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Critical Accounting Policies and Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. While management believes these estimates are reasonable and consistent, they are by their very nature, estimates of amounts that will depend on future events. Accordingly, actual results could differ from these estimates. Our Audit Committee of the Board of Directors periodically reviews our significant accounting policies. Our critical accounting policies arise in conjunction with the following:
•Revenue recognition and accounts receivable
•Inventory - lower of cost or market
•Goodwill and intangible assets - impairment analysis
•Income taxes
•Stock-based compensation
•Contingent consideration for business acquisition
•Litigation accruals Revenue Recognition and Accounts Receivable We recognize revenue when all of the following criteria are met:

•We have appropriate evidence of a binding arrangement with our customer;
•The sales price for our ELG System (including extensions and accessories) is established with our customer;
•Our ELG System has been used by the hospital in an EVAR procedure, or our distributor has assumed title with no right of return, as applicable; and
•Collection from our customer is reasonably assured at the time of sale. For sales made to a direct customer (i.e., hospitals), we recognize revenue upon completion of an EVAR procedure, when our ELG Device is implanted in a patient. For sales to distributors, we recognize revenue at the time of title transfer, which is typically at shipment. We do not offer any right of return to our customers, other than honoring our standard warranty. In the event that we enter into a bill and hold arrangement with a customer, which is uncommon, though occurred throughout 2012 for a certain ROW distributor (as discussed in Note 7 to our Annual Report on Form 10-K for the year ended December 31, 2012), the following conditions must be met for revenue recognition:

(i) The risks of ownership must have passed to the customer;

(ii) The customer must have made a fixed and written commitment to purchase the ELG Systems;

(iii) The customer must request that the transaction be on a bill and hold basis;

(iv) There must be a fixed schedule for delivery of the ELG Systems. The date for delivery must be reasonable and must be consistent with the customer's business purpose;

(v) We must have no remaining specific performance obligations and its earnings process must be complete;

(vi) The customer's ordered ELG Systems must be segregated from our inventory and cannot be used to fulfill other customer orders; and

(vii) The ELG Systems must be complete and ready for shipment.

In addition to the above requirements, we also consider other pertinent factors prior to its recognition of revenue for bill and hold arrangements, such as:

(i) The date by which payment is expected from the customer, and whether we have modified our normal billing and credit terms for the customer;

(ii) Our past experiences with, and pattern of, bill and hold transactions;

(iii) Whether the customer has the expected risk of loss in the event of a decline in the market value of the ELG Systems;

(iv) Whether our custodial risks are insurable and insured; and

(viii) Whether extended procedures are necessary in order to assure that there are no exceptions to the customer's commitment to accept and pay for the ELG Systems (i.e., that the business reasons for the bill and hold have not introduced a contingency to the customer's commitment).

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We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to pay amounts due. These estimates are based on our review of the aging of customer balances, correspondence with the customer, and the customer's payment history.

Inventory - Lower of Cost or Market
We adjust our inventory value for estimated amounts of obsolete or unmarketable items. Such assumptions involve projections of future customer demand, as driven by economic and market conditions, and the product's shelf life. If actual demand, or economic or market conditions are less favorable than those projected by us, additional inventory write-downs may be required. Goodwill and Intangible Assets - Impairment Analysis Goodwill and other intangible assets with indefinite lives are not subject to amortization, but are tested for impairment annually as of June 30, or whenever events or changes in circumstances indicate that the asset might be impaired. We evaluate the possible impairment (i) if/when events or changes in circumstances occur that indicate that the carrying value of assets may not be recoverable; or
(ii) in the case of goodwill and indefinite lived intangible assets, our annual impairment assessment date of June 30. Income Taxes
Our consolidated balance sheets reflect net deferred tax assets that primarily represent the tax benefit of net operating loss carryforwards and credits and timing differences between book and tax recognition of certain revenue and expense items, net of a valuation allowance. When it is more likely than not that all or some portion of deferred tax assets may not be realized, we establish a valuation allowance for the amount that may not be realized. Each quarter, we evaluate the need to retain all or a portion of the valuation allowance on our net deferred tax assets. Our evaluation considers historical earnings, estimated future taxable income and ongoing prudent and feasible tax planning strategies. Adjustments to the valuation allowance increase or decrease net income or loss in the period such adjustments are made. If our estimates require adjustments, it could have a significant impact on our consolidated financial statements.
Changes in tax laws and rates could also affect recorded deferred tax assets in the future. Management is not aware of any such changes that would have a material effect on our consolidated financial statements. Stock-Based Compensation
We recognize stock-based compensation expense for employees over the equity award vesting period, based on its fair value at the date of grant. For awards granted to consultants, the award is marked-to-market each reporting period, with a corresponding adjustment to stock-based compensation expense. The fair value of equity awards that are expected to vest is amortized on a straight-line basis over (i) the requisite service period or (ii) the period from grant date to the expected date of the completion of the performance condition for vesting of the award. Stock-based compensation expense recognized is net of an estimated forfeiture rate, which is updated as appropriate.
We use the Black-Scholes option pricing model to value stock option grants. The Black-Scholes option pricing model requires the input of highly subjective assumptions, including the expected volatility of our common stock, expected risk-free interest rate, and the option's expected life.
A portion of restricted stock vesting is dependent on us achieving certain regulatory and financial milestones. We use significant judgment in estimating the likelihood and timing of achieving these milestones. As of each financial statement reporting period, we reassess the likelihood and estimate the timing of reaching these milestones, and will adjust expense accordingly. Contingent Consideration for Business Acquisition We determine the fair value of contingently issuable common stock related to the Nellix acquisition using a probability-based income approach using an appropriate discount rate. Changes in the fair value of the contingently issuable common stock are determined each period end and recorded in the other income (expense) section of the Condensed Consolidated Statements of Operations and Comprehensive Loss and the non-current liabilities section of the Condensed Consolidated Balance Sheet.

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Litigation Accruals

From time to time we are involved in various claims and legal proceedings of a nature considered normal and
incidental to our business. These matters may include product liability, intellectual property, employment, and other general claims. We accrue for contingent liabilities when it is probable that a liability has been incurred and the amount can be reasonably estimated. The accruals are adjusted periodically as assessments change or as additional information becomes available.

Results of Operations
Operations Overview - Three Months Ended March 31, 2013 versus 2012
The following table presents our results of continuing operations and the
related percentage of the period's revenue (in thousands):
                                         Three Months Ended March 31,
                                          2013                  2012
Revenue                            $ 29,784    100.0%   $  24,519    100.0%
Cost of goods sold                    7,256     24.4%       5,403     22.0%
Gross profit                         22,528     75.6%      19,116     78.0%
Operating expenses:
Research and development              3,519     11.8%       3,761     15.3%
Clinical and regulatory affairs       2,364     7.9%        1,402     5.7%
Marketing and sales                  15,249     51.2%      13,547     55.3%
General and administrative            5,885     19.8%       4,080     16.6%
Total operating expenses             27,017     90.7%      22,790     92.9%
Loss from operations                 (4,489 )  (15.1)%     (3,674 )  (15.0)%
Total other (expense)                (4,506 )  (15.1)%    (12,455 )  (50.8)%
Net loss before income tax expense   (8,995 )  (30.2)%    (16,129 )  (65.8)%
Income tax expense                     (339 )  (1.1)%        (574 )  (2.3)%
Net loss                           $ (9,334 )  (31.3)%  $ (16,703 )  (68.1)%

Comparison of the Three Months Ended March 31, 2013 versus 2012 Revenue
Three Months Ended March 31, 2013 2012 Variance Percent Change

(in thousands)

Revenue $ 29,784 $ 24,519 $ 5,265 21.5%

Our 21.5% revenue increase of $5.3 million over the prior year period primarily resulted from:

(i) $3.7 million increase in U.S. sales due to (a) the expansion of our U.S. sales force through the addition of sales representatives and clinical specialists (that exclusively provide field support to our sales representatives, increasing overall sales force productivity), and (b) the continued physician adoption of AFX which was launched in the U.S. in August 2011; and

(ii) $1.8 million increase in European sales due to the expansion of our European sales force (which began direct sales activity in September 2011), and to a lesser extent, the limited market introduction of our Nellix System in February 2013.

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Cost of Goods Sold, Gross Profit, and Gross Margin

                                              Three Months Ended March 31,
                                                   2013            2012         Variance     Change
                                                     (in thousands)
Cost of goods sold                           $       7,256      $   5,403     $    1,853      34.3%
Gross profit                                        22,528         19,116          3,412      17.8%
Gross margin percentage (gross profit as a
percent of revenue)                                   75.6 %         78.0 %

The $1.9 million increase in cost of goods sold was driven by our revenue increase of $5.3 million.

Gross margin for the three months ended March 31, 2013 decreased to 75.6% from 78.0% for the three months ended
March 31, 2012. This decrease is primarily due to our product mix and the greater proportion of our total revenue being derived from international sales.

Operating Expenses
                                           Three Months Ended March 31,
                                               2013              2012          Variance      Percent Change
                                                  (in thousands)
Research and development                $          3,519     $     3,761     $     (242 )         (6.4 )%
Clinical and regulatory affairs                    2,364           1,402            962           68.6  %
Marketing and sales                               15,249          13,547          1,702           12.6  %
General and administrative                         5,885           4,080          1,805           44.2  %

Research and Development. The $0.2 million decrease in research and development expenses was primarily driven by a decrease in Nellix and Ventana development activities. These devices have reached a more mature stage of development as compared to the prior year. The Nellix system has progressed to production and commercialization beginning in February 2013, and we expect to launch the Ventana system in Europe on a limited market release basis by December 2013. Clinical and Regulatory Affairs. The $1.0 million increase in clinical and regulatory affairs expenses was primarily driven by the continued enrollment and follow-up costs associated with our Ventana U.S. IDE clinical trial and FDA and CE regulatory activities.
Marketing and Sales. The $1.7 million increase in marketing and sales expenses for the three months ended March 31, 2013, as compared to the prior year period, was primarily related to (i) marketing costs to support the growth of our U.S. business; (ii) an increased sales force in the U.S.; and (iii) costs related to the continued growth and development of our direct sales force in Europe. We expect that sales and marketing expense will remain significantly above prior year amounts due to (i) the continued expansion of our U.S. and European sales forces; (ii) increased activity in U.S. and European trade shows and other marketing initiatives; and (iii) an increase in variable compensation due to our expected sales growth in 2013.
General and Administrative. The $1.8 million increase in general and administrative expenses is attributable to (i) additional personnel to support our business growth; (ii) increased travel and administrative expenses associated with the expansion of our European operations; and (iii) the federal Medical Device Excise Tax (which took effect January 1, 2013).

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Other income (expense), net
                                        Three Months Ended March 31,
                                            2013              2012        Variance    Percent Change
                                               (in thousands)
Other income (expense), net                      684              (1 )        685              >100%

Other Income (Expense), Net. Other income of $0.7 million for the three months ended March 31, 2013 includes a $1.3 million distribution from our former products liability carrier. The carrier was organized as a mutual insurance company prior to its merger with a publicly-traded insurance company. This merger resulted in a one-time cash distribution to all of its "eligible members", which included us. Partially offsetting this amount was a $0.6 million net currency remeasurement of certain assets and liabilities that were not transacted in the functional currency of the corresponding operating entity.

Provision for Income Taxes
                                        Three Months Ended March 31,
                                            2013               2012          Variance     Percent Change
                                               (in thousands)
Income tax expense                   $            339     $        574     $     (235 )        (40.9 )%

Our income tax expense was $0.3 million and our effective tax rate was (3.8)% for the three months ended March 31, 2013. During the three months ended March 31, 2013 and 2012, we had operating legal entities in the U.S., Italy, and the Netherlands (including registered sales branches in certain countries in Europe). We have certain minimum tax liabilities attributable to our operations in these countries and in the U.S.

Liquidity and Capital Resources
The chart provided below summarizes selected liquidity data and metrics as of
March 31, 2013, December 31, 2012, and March 31, 2012:
                                        March 31, 2013       December 31, 2012      March 31, 2012
                                               (in thousands, except financial metrics data)
Cash and cash equivalents              $        42,029     $            45,118     $        14,636
Accounts receivable, net               $        25,661     $            22,600     $        17,685
Total current assets                   $        88,180     $            87,567     $        53,464
Total current liabilities              $        18,780     $            17,194     $        14,721
. . .
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