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ELGX > SEC Filings for ELGX > Form 10-Q on 5-Aug-2013All Recent SEC Filings

Show all filings for ENDOLOGIX INC /DE/

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:
• continued market acceptance of our products;

• our ability to effectively compete with the products offered by our competitors;

• the level and availability of third party payor reimbursement for our products;

• our ability to successfully commercialize products which incorporate the technology obtained in the Nellix acquisition;

• our ability to effectively develop new or complementary technologies;

• changes to our international operations;

• our ability to effectively manage our business and keep pace with our anticipated growth;

• our ability to develop and retain a direct sales force in the U.S. and select European countries;

• the nature of and any changes to legislative, regulatory and other legal requirements that apply to us, our products, our suppliers and our competitors;

• the timing of and our ability to obtain and maintain any required regulatory clearances and approvals;

• our ability to protect our intellectual property rights and proprietary technologies;

• our ability to operate our business without infringing the intellectual property rights and proprietary technology of third parties;

• litigation expenses;

• our ability to attract, retain, and motivate qualified personnel;

• our ability to make future acquisitions and successfully integrate any such future-acquired businesses;

• our ability to maintain adequate liquidity to fund our operational needs; and

• general macroeconomic and world-wide 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 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.

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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

Endologix®, AFX® and Nellix® are registered trademarks of Endologix, Inc., and Ventana™ and the respective product logos are trademarks of Endologix, Inc.

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. We hope to receive investigational device exemption ("IDE") approval from the Food and Drug Administration ("FDA") for the Nellix System by the end of 2013, and hope to receive FDA premarket approval ("PMA") in the U.S. in 2016.

We believe that the Nellix System represents groundbreaking technology for endovascular aneurysm repair ("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 requirement of CT scan post-procedure follow up.


In April 2013 we received FDA 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 and clinical specialists. In May 2013, we commenced the training classes for 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.


Our Ventana fenestrated EVAR (FEVAR) system has been used to treat approximately 120 patients world-wide, including 80 in our U.S. IDE study. In reviewing these first 120 global procedures with Ventana, we have seen good overall safety results, but a higher than expected number of renal re-interventions. We have temporarily suspended further enrollment in the Ventana U.S. IDE study and delayed commercial introduction in Europe until we have an opportunity to fully evaluate physician training, clinical indications, and product enhancements. After completing our evaluation, we will meeting with regulatory

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agencies, including the FDA and EU notified bodies. We expect to have an update on our progress and regulatory path toward 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. at the end of 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
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, fees for research and development consultants, outsourced research and development costs, 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. Marketing and Sales

Marketing and sales expenses primarily consist of compensation (including stock-based compensation) and benefits for our sales force, internal sales support functions, 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, and human resources. General and administrative expenses also include bad debt expense, patent registration fees, legal fees, financial audit fees, insurance costs, 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 Income (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 and Six Months Ended June 30, 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 June 30,                  Six Months Ended June 30,
                            2013                  2012                  2013                  2012
Revenue              $ 33,964     100.0%   $25,509    100.0%    $ 63,748     100.0%     $50,028    100.0%
Cost of goods sold      8,960     26.4%     6,277      24.6%      16,216      25.4%     11,703      23.4%
Gross profit           25,004     73.6%     19,232     75.4%      47,532      74.6%     38,325      76.6%
Operating expenses:
Research and
development             3,822     11.3%     4,995      19.6%       7,341      11.5%      8,810      17.6%
Clinical and
regulatory affairs      2,189      6.4%     1,862      7.3%        4,553      7.1%       3,264      6.5%
Marketing and sales    16,520     48.6%     13,083     51.3%      32,044      50.3%     26,218      52.4%
General and
administrative          4,993     14.7%     4,457      17.5%      10,604      16.6%      8,872      17.7%
Contract termination
and business
acquisition expenses        -       -%       422       1.7%            -       -%         422       0.8%
Total operating
expenses               27,524     81.0%     24,819     97.3%      54,542      85.6%     47,586      95.1%
Loss from operations   (2,520 )   (7.4)%   (5,587)    (21.9)%     (7,010 )   (11.0)%    (9,261)    (18.5)%
Total other
(expense)               8,046     23.7%    (1,233)    (4.8)%       3,540      5.6%     (13,688)    (27.4)%
Net income (loss)
before income tax
expense                 5,526     16.3%    (6,820)    (26.7)%   $ (3,470 )   (5.4)%    (22,949)    (45.9)%
Income tax benefit
(expense)                 144      0.4%      124       0.5%         (195 )   (0.3)%      (450)     (0.9)%
Net income (loss)    $  5,670     16.7%    $(6,696)   (26.2)%   $ (3,665 )   (5.7)%    $(23,399)   (46.8)%

Comparison of the Three Months Ended June 30, 2013 versus 2012 Revenue
Three Months Ended June 30, 2013 2012 Variance Percent Change

(in thousands)

Revenue $ 33,964 $ 25,509 $ 8,455 33.1%

Our 33.1% revenue increase of $8.5 million over the prior year period primarily resulted from:

(i) a $5.0 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) a $2.2 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 June 30,
                                                    2013            2012         Variance       Change
                                                      (in thousands)
Cost of goods sold                            $       8,960      $   6,277     $    2,683       42.7 %
Gross profit                                         25,004         19,232          5,772       30.0 %
Gross margin percentage (gross profit as a
percent of revenue)                                    73.6 %         75.4 %

The $2.7 million increase in cost of goods sold was driven by our revenue increase of $8.5 million.

Gross margin for the three months ended June 30, 2013 decreased to 73.6% from 75.4% for the three months ended
June 30, 2012. This decrease is primarily due to our product mix and the greater proportion of our total revenue being derived from international sales, as well as certain current period charges, aggregating to $1.2 million, to adjust our inventory to its net realizable value.

Operating Expenses
                                           Three Months Ended June 30,
                                               2013              2012        Variance      Percent Change
                                                 (in thousands)
Research and development                $          3,822     $    4,995     $  (1,173 )         (23.5 )%
Clinical and regulatory affairs                    2,189          1,862           327            17.6  %
Marketing and sales                               16,520         13,083         3,437            26.3  %
General and administrative                         4,993          4,457           536            12.0  %
Contract termination and business
acquisition expenses                                   -            422          (422 )        (100.0 )%

Research and Development. The $1.2 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. We temporarily suspended further enrollment in the Ventana U.S. IDE study and delayed its commercial introduction, as previously discussed within the "Recent Highlights of our Product Development Initiatives and Regulatory Approvals" section. Clinical and Regulatory Affairs. The $0.3 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 $3.4 million increase in marketing and sales expenses for the three months ended June 30, 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 $0.5 million increase in general and administrative expenses is primarily attributable to (i) the federal Medical Device Excise Tax (which took effect January 1, 2013), and (ii) increased stock-based compensation expense.
Contract Termination and Business Acquisition Expenses.
Prior period expense of $0.4 million is associated with professional fees incurred as part of the July 2012 acquisition of our Italian distributor's business. This transaction allowed us to begin selling our products through the acquired Italian sales force, and to directly contract with sub-dealers of our products in Italy.

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