_________________
| [X] | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2004. |
|---|---|
| [ ] | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______ |
| Delaware | 68-0328265 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification Number) |
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 X | No |
|---|---|
Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
| Yes | No X |
|---|---|
On November 1, 2004, there were 31,836,739 outstanding shares of Common Stock of $.001 par value, which is the Registrant’s only class of Common Stock.
| Page | ||
|---|---|---|
| Part I | Financial Information | |
| Item 1 | Condensed Consolidated Financial Statements (Unaudited) | |
| Condensed consolidated balance sheets at December 31, 2003 and September 30, 2004 | 3 | |
| Condensed consolidated statements of operations for the three and nine months ended September 30, 2003 and 2004 | 4 | |
| Condensed consolidated statements of cash flows for the nine months ended September 30, 2003 and 2004 | 5 | |
| Notes to condensed consolidated financial statements | 6 | |
| Item 2 | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| 17 | ||
| Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 25 |
| Item 4 | Controls and Procedures | 25 |
| Part II | Other Information | |
| Items 1 through 6 | 26 | |
| Signatures | 27 | |
| Exhibit Index | 28 |
2
| December 31, 2003 | September 30, 2004 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ASSETS | |||||||||||||||||
| Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 4,402 | $ | 7,146 | |||||||||||||
| Marketable securities available-for-sale | 8,166 | 14,525 | |||||||||||||||
| Accounts receivable, net | 239 | 643 | |||||||||||||||
| Other receivables | 656 | 301 | |||||||||||||||
| Inventories | 2,780 | 3,156 | |||||||||||||||
| Other current assets | 245 | 628 | |||||||||||||||
| Total current assets | 16,488 | 26,399 | |||||||||||||||
| Property and equipment, net | 141 | 419 | |||||||||||||||
| Marketable securities available-for-sale | 211 | 2,957 | |||||||||||||||
| Goodwill (Note 10) | 3,602 | 3,602 | |||||||||||||||
| Other intangibles, net of accumulated amortization of $2,224 and $3,278, | |||||||||||||||||
| respectively (Note 10) | 14,534 | 13,480 | |||||||||||||||
| Other assets | 367 | 28 | |||||||||||||||
| Total Assets | $ | 35,343 | $ | 46,885 | |||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||||||
| Current liabilities: | |||||||||||||||||
| Accounts payable and accrued expenses | $ | 1,468 | $ | 1,881 | |||||||||||||
| Current liabilities | 1,468 | 1,881 | |||||||||||||||
| Accrued compensation | -- | 300 | |||||||||||||||
| Total liabilities | 1,468 | 2,181 | |||||||||||||||
| Commitments and contingencies (Note 11) | |||||||||||||||||
| Stockholders' equity: | |||||||||||||||||
| Convertible preferred stock, $.001 par value; 5,000 shares authorized, no | |||||||||||||||||
| shares issued and outstanding | -- | -- | |||||||||||||||
| Common stock, $.001 par value; 50,000 shares authorized, 28,576 and 32,331 | |||||||||||||||||
| shares issued and outstanding at December 31, 2003 and September 30, | |||||||||||||||||
| 2004, respectively | 28 | 32 | |||||||||||||||
| Additional paid-in capital | 108,279 | 125,598 | |||||||||||||||
| Accumulated deficit | (73,919 | ) | (80,333 | ) | |||||||||||||
| Treasury stock, at cost, 495 shares at December 31, 2003 and September 30, | |||||||||||||||||
| 2004 | (661 | ) | (661 | ) | |||||||||||||
| Accumulated other comprehensive income | 148 | 68 | |||||||||||||||
| Total stockholders' equity | 33,875 | 44,704 | |||||||||||||||
| Total Liabilities and Stockholders' Equity | $ | 35,343 | $ | 46,885 | |||||||||||||
3
| Three Months Ended | Nine Months Ended | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, | September 30, | |||||||||||||
| 2003 |
2004 |
2003 |
2004 | |||||||||||
| Revenue: | ||||||||||||||
| Product | $ | 285 | $ | 1,064 | $ | 1,070 | $ | 2,267 | ||||||
| License | 634 | 294 | 2,000 | 1,113 | ||||||||||
| Total revenue | 919 | 1,358 | 3,070 | 3,380 | ||||||||||
| Cost of product revenue | 133 | 665 | 498 | 1,323 | ||||||||||
| Gross profit | 786 | 693 | 2,572 | 2,057 | ||||||||||
| Operating expenses: | ||||||||||||||
| Research, development and clinical | 1,506 | 1,491 | 5,067 | 4,588 | ||||||||||
| Marketing and sales | 183 | 791 | 620 | 1,664 | ||||||||||
| General and administrative | 652 | 914 | 1,487 | 2,444 | ||||||||||
| Minority interest | -- | -- | (16 | ) | -- | |||||||||
| Total operating expenses | 2,341 | 3,196 | 7,158 | 8,696 | ||||||||||
| Loss from operations | (1,555 | ) | (2,503 | ) | (4,586 | ) | (6,639 | ) | ||||||
| Other income (expense): | ||||||||||||||
| Interest income | 52 | 96 | 252 | 234 | ||||||||||
| Gain on sale of assets | 13 | -- | 5 | 3 | ||||||||||
| Other expense | (2 | ) | (2 | ) | (6 | ) | (12 | ) | ||||||
| Total other income | 63 | 94 | 251 | 225 | ||||||||||
| Net loss | ($ 1,492 | ) | ($ 2,409 | ) | ($ 4,335 | ) | ($ 6,414 | ) | ||||||
| Basic and diluted net loss per share | ($ 0.05 | ) | ($ 0.08 | ) | ($ 0.17 | ) | ($ 0.21 | ) | ||||||
| Shares used in computing basic and diluted net | ||||||||||||||
| loss per share | 27,281 | 31,753 | 25,093 | 30,917 | ||||||||||
See accompanying notes
4
| Nine Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| September 30, | ||||||||
| 2003 | 2004 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | ($4,335 | ) | ($ 6,414 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 1,123 | 1,120 | ||||||
| Stock-based compensation | 77 | -- | ||||||
| Amortization of deferred compensation | 64 | 152 | ||||||
| Bad debt expense (recovery) | (104 | ) | 6 | |||||
| Loss on sale of assets | 17 | -- | ||||||
| Minority interest in losses of subsidiary | (16 | ) | -- | |||||
| Change in: | ||||||||
| Trade accounts receivable | 580 | (410 | ) | |||||
| Inventories | (547 | ) | (376 | ) | ||||
| Other receivables and other assets | 204 | 311 | ||||||
| Accounts payable and accrued expenses | (355 | ) | 713 | |||||
| Net cash used in operating activities | (3,292 | ) | (4,898 | ) | ||||
| Cash flows provided by (used in) investing activities: | ||||||||
| Purchases of available-for-sale securities | (6,251 | ) | (24,832 | ) | ||||
| Sales of available-for-sale securities | 5,049 | 15,683 | ||||||
| Final distribution to subsidiary minority interest shareholder | (67 | ) | -- | |||||
| Capital expenditures for property and equipment | (23 | ) | (344 | ) | ||||
| Net cash provided by (used in) investing activities | 1,292 | (9,493 | ) | |||||
| Cash flows provided by financing activities: | ||||||||
| Proceeds from sale of common stock, net of expenses | 8,384 | 15,360 | ||||||
| Proceeds from sale of common stock under employee stock purchase plan | 95 | 127 | ||||||
| Proceeds from exercise of common stock options | 29 | 1,684 | ||||||
| Purchases of treasury stock | (456 | ) | -- | |||||
| Net cash provided by financing activities | 8,052 | 17,171 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (6 | ) | (36 | ) | ||||
| Net increase in cash and cash equivalents | 3,462 | 2,744 | ||||||
| Cash and cash equivalents, beginning of period | 2,606 | 4,402 | ||||||
| Cash and cash equivalents, end of period | $ | 6,068 | $ | 7,146 | ||||
See accompanying notes
5
Endologix, Inc. (formerly named Radiance Medical Systems, Inc. referred to as “Endologix” or the “Company”) was incorporated in California in March 1992 and reincorporated in Delaware in June 1993. In May 2002, the Company merged with privately held Endologix, Inc., and changed its name to Endologix, Inc.
The Company is engaged in the development, manufacture, marketing and sale of minimally invasive therapies for the treatment of vascular disease. The Company’s primary focus is the marketing and sale of the Powerlink® System, a catheter-based alternative treatment for abdominal aortic aneurysms, or AAA. AAA is a weakening of the wall of the aorta, the largest artery of the body. Once AAA develops, it continues to enlarge, and if left untreated becomes increasingly susceptible to rupture. Prior to the restructuring in September 2001 and the merger in May 2002 (Note 10), the Company was developing proprietary devices to deliver radiation to prevent the recurrence of blockages in arteries following balloon angioplasty, vascular stenting, arterial bypass surgery and other interventional treatments of blockages in coronary and peripheral arteries. The Company also manufactured, licensed and sold angioplasty catheters and stent products primarily through medical device distributors. The Company operates in a single business segment.
For the nine months ended September 30, 2004, the Company incurred a net loss of $6,414. As of September 30, 2004, the Company had an accumulated deficit of $80,333. The Company believes that current cash and cash equivalents and marketable securities will be sufficient to meet anticipated cash needs for operating and capital expenditures through at least December 31, 2005. Failure of the market to accept the products, or failure to reduce certain discretionary expenditures, if necessary, could have a material adverse effect on the Company, including its ability to achieve its expected cash position through December 31, 2005.
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 presentation have been included. Operating results for the unaudited nine month period ended September 30, 2004 are not necessarily indicative of results that may be expected for the year ending December 31, 2004, 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
The Company has elected to follow
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”), and related interpretations in accounting for its
employee stock options because the alternative fair value accounting provided for under
SFAS No. 123 (“SFAS No. 123”), “Accounting for Stock-Based
Compensation,” and amended by SFAS No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure,” requires use of option
6
valuation models that were not developed for use in valuing employee stock options. Under the provisions of APB 25, the Company recognizes compensation expense only to the extent that the exercise price of the Company’s employee stock options is less than the market price of the underlying stock on the date of grant. SFAS No. 123 requires the presentation of pro forma information as if the Company has accounted for its employee stock options granted under the fair value method. The fair value for these options was estimated at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.
In calculating the pro forma information, the fair value was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: for the third quarter and first nine months of 2003, a risk-free interest rate of 2.4%; a dividend yield of 0%; a volatility of the expected market price of the Company’s common stock of 80.0%; and a weighted-average expected life of the options of 5.0 years; and for the third quarter and first nine months of 2004, a risk-free interest rate of 3.1%; a dividend yield of 0%; a volatility of the expected market price of the Company’s common stock of 76.6%; and a weighted-average expected life of the options of 5.0 years.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information for the quarters ended September 30, 2003 and 2004 is as follows:
| 2003 | 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| Net loss, as reported | $ | (1,492 | ) | $ | (2,409 | ) | ||
| Add: Stock based employee compensation expense included in reported net loss, net | ||||||||
| of related tax effects | 77 | -- | ||||||
| Deduct: Total stock-based employee compensation expense determined under fair | ||||||||
| value based method for all awards | (40 | ) | (214 | ) | ||||
| Pro forma net loss | $ | (1,455 | ) | $ | (2,623 | ) | ||
| Net loss per share: | ||||||||
| Basic and diluted-as reported | $ | (0.05 | ) | $ | (0.08 | ) | ||
| Basic and diluted-pro forma | $ | (0.05 | ) | $ | (0.08 | ) | ||
7
The Company’s pro forma information for the nine month periods ended September 30, 2003 and 2004 is as follows:
| 2003 | 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| Net loss, as reported | $ | (4,335 | ) | $ | (6,414 | ) | ||
| Add: Stock based employee compensation expense included in reported net loss, net | ||||||||
| of related tax effects | 77 | -- | ||||||
| Deduct: Total stock-based employee compensation | ||||||||
| expense determined under fair value based method for | ||||||||
| all awards | (162 | ) | (551 | ) | ||||
| Pro forma net loss | $ | (4,420 | ) | $ | (6,965 | ) | ||
| Net loss per share: | ||||||||