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EX-23.1 - CONSENT OF BERGER LEWIS ACCOUNTANCY CORPORATION - ENDOLOGIX INC /DE/dex231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 8-K/A

(Amendment No. 1)

 

 

Current Report

Pursuant to Section 13 or 15(d) of The

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): December 9, 2010

 

 

ENDOLOGIX, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   000-28440   68-0328265

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

 

11 Studebaker, Irvine, CA   92618
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (949) 595-7200

N/A

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


EXPLANATORY NOTE

This Current Report on Form 8-K/A amends and supplements Item 9.01 of the Current Report on Form 8-K filed by Endologix, Inc. (the “Company”) on December 14, 2010 to include the financial statements and pro forma financial information required by parts (a) and (b) of Item 9.01 of Form 8-K that were not available at the time of the filing of the initial report. Such financial statements and pro forma financial information are required as a result of the Company’s December 10, 2010 acquisition of Nellix, Inc. (“Nellix”) by a merger of Nepal Acquisition Corporation, a wholly-owned subsidiary of the Company, with and into Nellix pursuant to the terms of that certain Agreement and Plan of Merger and Reorganization, dated as of October 27, 2010, by and among the Company, Nellix and the other parties named therein.

 

Item 9.01 Financial Statements and Exhibits.

 

(a) Financial Statements of Business Acquired.

 

  1. Nellix, Inc.

Balance Sheets as of December 31, 2009 and September 30, 2010 (unaudited).

Statements of Operations for the three months and nine months ended September 30, 2010 and 2009 (unaudited).

Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited).

Notes to Condensed Financial Statements.

 

  2. Nellix, Inc.

Independent Auditor’s Report.

Balance Sheets as of December 31, 2009 and 2008.

Statements of Operations for the years ended December 31, 2009 and 2008 and for the period from March 20, 2001 (date of inception) to December 31, 2009.

Statements of Changes in Stockholders’ Equity for the years ended December 31, 2009 and 2008 and for the period from March 20, 2001 (date of inception) to December 31, 2009.

Statements of Cash Flows for the years ended December 31, 2009 and 2008 and for the period from March 20, 2001 (date of inception) to December 31, 2009.

Notes to Financial Statements

 

(b) Pro Forma Information.

Introduction to Unaudited Pro Forma Condensed Combined Financial Information.

Unaudited Pro Forma Condensed Combined Consolidated Balance Sheet as of September 30, 2010.

 

2


Unaudited Pro Forma Condensed Combined Consolidated Statement of Operations for the year ended December 31, 2009.

Unaudited Pro Forma Condensed Combined Consolidated Statement of Operations for the nine months ended September 30, 2010.

Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial Statements.

 

(d) Exhibits

 

23.1    Consent of Berger Lewis Accountancy Corporation, independent accountants.

 

3


NELLIX, INC.

(A Development Stage Company)

BALANCE SHEETS

December 31, 2009 and September 30, 2010 (unaudited)

 

     December  31,
2009
    September  30,
2010
 
    
ASSETS     

CURRENT ASSETS:

    

Cash and Cash Equivalents

   $ 4,982,432      $ 1,219,184   

Restricted Cash

     120,000        120,000   

Prepaid Expenses

     75,737        249,202   

Other Assets

     20,458        83,498   
                

Total Current Assets

     5,198,627        1,671,884   
                

PROPERTY AND EQUIPMENT, NET

     979,388        810,854   
                

OTHER ASSETS:

    

Long Term Deposits

     30,017        30,017   

Intangible Asset, Net

     85,000        70,000   
                

Total Other Assets

     115,017        100,017   
                

TOTAL ASSETS

   $ 6,293,032      $ 2,582,755   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

CURRENT LIABILITIES:

    

Notes Payable

   $ 5,024,276      $ 10,676,347   

Capital Lease

     2,695        910   

Accounts Payable

     886,085        413,250   

Accrued Interest

     142,815        689,046   

Accrued Expenses

     627,862        1,006,045   
                

Total Current Liabilities

     6,683,733        12,785,598   
                
LONG-TERM LIABILITIES, NET OF CURRENT PORTION:     

Notes Payable

     1,683,788        —     

Capital Lease

     4,187        4,282   

Deferred Rent

     35,359        27,664   
                

Total Long-Term Liabilities, Net of Current Portion

     1,723,334        31,946   
                

Total Liabilities

     8,407,067        12,817,544   
                

STOCKHOLDERS’ EQUITY (DEFICIT)

    

Preferred Stocks: 56,933,711 Shares and Authorized: 55,096,561 and 55,096,561 Shares Issued and Outstanding, Respectively

     26,644,252        26,644,252   

Common Stocks: Par Value $0.001; 85,000,000 Shares Authorized; 8,248,858 and 8,312,283 Shares Issued and Outstanding, Respectively

     253,550        277,810   

Additional Paid in Capital

     1,051,432        3,412,387   

(Deficit Accumulated) During the Development Stage

     (30,063,269     (40,569,240
                

Total Stockholders’ Equity (Deficit)

     (2,114,035     (10,234,789
                

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 6,293,032      $ 2,582,755   
                

The Accompanying Notes are an Integral Part of these Financial Statements

 

4


NELLIX, INC.

(A Development Stage Company)

STATEMENTS OF OPERATIONS

Three Months and Nine Months Ended September 30, 2010 and 2009 (unaudited)

 

     Nine Months Ended
September 30,
    Three Months Ended
September 30,
 
     2010     2009     2010     2009  

Operating expenses:

        

Salary and Wages

   $ 3,477,445      $ 3,707,260      $ 1,299,636      $ 1,198,464   

Development Expenses

     2,297,783        2,440,634        607,526        901,741   

Professional Services

     573,848        557,921        274,778        163,436   

Depreciation

     323,572        276,341        108,528        93,647   

Travel & Lodging

     217,940        259,604        74,540        59,860   

Rent

     178,873        187,778        60,292        72,141   

Marketing & Selling Expenses

     40,247        73,487        8,166        49,195   

Repairs and Maintenance

     123,861        116,540        34,529        38,973   

Shipping and Delivery

     40,045        74,773        13,230        32,710   

Insurance

     40,125        73,796        17,962        22,761   

Utilities

     28,877        26,110        11,733        7,785   

Taxes & Licenses

     50,754        21,324        12,483        22,663   

Office Expenses

     28,873        26,110        7,035        7,934   

Membership Dues

     12,260        7,306        920        2,560   

Equipment Maintenance and Rent

     7,797        7,811        2,904        3,340   
                                

Total Operating Expenses

     7,442,300        7,856,795        2,534,262        2,677,210   
                                

Other income (expense):

        

Interest Income

     726        12,787        260        2,052   

Other Income

     298        6,387        —          15   

(Loss) on Disposal of Fixed Assets

     —          (1,158     —          (1,158

Interest Expense

     (1,033,728     (515,521     (481,843     (175,559

Interest Expense Warrants and Beneficial Conversion

     (2,030,167     (178,585     (910,053     (93,127
                                

Total Other Expense

     (3,062,871     (676,090     (1,391,636     (267,777
                                

Loss Before Provision for Income Taxes

     (10,505,171     (8,532,885     (3,925,898     (2,944,987

Provision for Income Taxes

     800        800        —          —     
                                

Net Loss

   $ (10,505,971   $ (8,533,685   $ (3,925,898   $ (2,944,987
                                

The Accompanying Notes are an Integral Part of these Financial Statements

 

5


NELLIX, INC.

(A Development Stage Company)

STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2010 and 2009

 

     2010     2009  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net Loss

   $ (10,505,970   $ (8,533,864

Adjustments to Reconcile Net Loss to Net Cash Used by Operating Activities:

    

Depreciation and Amortization

     323,572        276,341   

Stock Based Compensation

     21,722        27,555   

Beneficial Conversion Feature

     1,086,040        —     

Interest Expense from Issuance of Warrants

     1,274,916        228,255   

Loss on Disposal of Fixed Assets

     —          1,158   

(Increase) Decrease in Assets:

    

Prepaid Expenses

     (173,465     (1,008

Deposits

     (63,040     (17,574

Increase (Decrease) in Liabilities:

    

Accounts Payable

     (472,835     173,572   

Accrued Liabilities

     378,183        688,792   

Accrued Interest

     546,231        (68,747

Accrued Rent

     (7,695     (3,663
                

Net Cash Used by Operating Activities

     (7,592,341     (7,229,183
                

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of Property and Equipment

     (140,037     (135,390

Purchase of Intangible Asset

     —          (100,000
                

Net Cash Used by Investing Activities

     (140,037     (235,390
                

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from Issuance of Common Stock

     2,537        33,926   

Proceeds from Loans

     8,273,962        3,000,000   

Payments on Loans

     (4,305,679     (1,889,491

Payments on Capital Lease

     (1,690     (1,838

Fees Related to Issuance of Preferred Stock

     —          2,881   
                

Net Cash Provided by Financing Activities

     3,969,130        1,145,478   
                

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (3,763,248     (6,319,095

CASH AND CASH EQUIVALENTS, Beginning of Period

     4,982,432        14,243,574   
                

CASH AND CASH EQUIVALENTS, End of Period

   $ 1,219,184      $ 7,924,479   
                

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

    

Cash Paid for Income Taxes

   $ 800      $ 800   
                

Cash Paid for Interest

   $ 440,269      $ 569,621   
                

The Accompanying Notes are an Integral Part of these Financial Statements

 

6


NELLIX, INC.

(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS

NOTE 1 — GENERAL INFORMATION:

Business Activity — Nellix, Inc. (the “Company”), is a Delaware corporation located in Palo Alto, California. The Company is addressing a large patient population with difficult to cure aneurysms in the aorta. The solution being developed provides a revolutionary polymer based endograft insertable into and sealing the aneurysm providing protection from rupture. The technology provides a distinct advantage over current therapies.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Accounting — The financial statements of the Company have been prepared on the accrual basis of accounting and have been prepared in accordance with generally accepted accounting principles. 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.

Interim Financial Statements — The financial statements, footnotes and any matters referred to for the three month and nine month periods ending September 30, 2010 and 2009 are unaudited. They are, in the opinion of management, using generally accepted accounting principles as deemed appropriate. As such, the interim financial information should be read in conjunction with the audited Financial Statements for the years ending December 31, 2009 and 2008. Interim results are not necessarily indicative of results expected in future periods.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the period. Accordingly, actual results could differ from those estimates.

Cash and Cash Equivalents — Cash and cash equivalents include highly liquid investments and investments with a maturity of three months or less. The Company invests its excess cash in money market funds which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. Management believes it is not exposed to any significant risk on cash accounts.

Property and Equipment — Property and equipment are stated at cost. Property and equipment having a useful life of more than one year and a cost greater than $1,000 are capitalized. Maintenance and repairs are expensed as incurred. Property and equipment are being depreciated or amortized utilizing the straight line method over various estimated useful lives for financial reporting purposes.

Accrued Personal Time Off — Personal time off is accrued for full time employees. Accrued personal time off represents amounts earned, but not taken as of December 31, 2009 and 2008. The accrued personal time off balance as of December 31, 2009 and September 30, 2010 was $107,557 and $159,925, respectively, and is included in accrued expenses.

Income Taxes — Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the depreciation of property and equipment and net operating loss carryovers for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for research tax credits that are available to offset future income taxes.

 

7


NELLIX, INC.

(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued)

 

Stock Based Compensation — The Company adopted ASC 718 10 (formerly Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), Share Based Payment (Statement 123(R))), which requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award.

ASC 718 10 established accounting and disclosure requirements using a grant date fair value based method of accounting for share based employee compensation plans. The compensation cost is recognized by the Company over the employee’s requisite service period (vesting period).

The fair value of each option award is estimated on the date of grant using a Black Scholes option pricing model that uses assumptions noted in the following table. The Company is unable to reasonably estimate the expected volatility of the Company’s share price, therefore, the expected volatility is based on the historical volatility of the Company’s industry sector index. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

The fair value of each option is estimated on the date of grant using the Black Scholes option pricing model with the following weighted average assumptions for the nine months ended September 30,:

 

     2010     2009  

Expected Volatility

     51.0     51.0

Risk Free Interest Rate

     2.80     2.80

Expected Life of an Option

     5        5   

Expected Dividends

     —          —     

Stock, stock options, and warrants for stock issued to nonemployees are accounted for at fair value in accordance with the provisions of ASC 718 10 and Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods, or Services. Stock based awards to nonemployees not immediately vested are subject to periodic revaluation over the vesting terms.

NOTE 3 — RESTRICTED CASH:

During 2005, the Company purchased a revolving certificate of deposit from Silicon Valley Bank under an agreement with the bank in favor of a credit card company, pursuant to the terms of the credit agreement. The certificate of deposit, in the amount of $120,000, is on automatic renewal every 30 days. The amount is classified as restricted cash on the balance sheet at December 31, 2009 and September 30, 2010.

 

8


NELLIX, INC.

(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued)

 

NOTE 4 — PROPERTY AND EQUIPMENT:

The cost and related accumulated depreciation of the property and equipment as of December 31, 2009 and September 30, 2010 was as follows:

 

     December 31,
2009
    September 30,
2010
 

Testing and Demo Equipment

   $ 1,355,833      $ 1,410,091   

Computer Equipment and Software

     153,488        166,938   

Molds

     142,943        57,311   

Furniture and Fixture

     69,463        69,463   

Leasehold Improvement

     45,561        203,522   
                
     1,767,288        1,907,325   

Accumulated Depreciation

     (787,900     (1,096,471
                

Property and Equipment, Net

   $ 979,388      $ 810,854   
                

Depreciation expense for the three months ended September 30, 2010 and 2009 was $103,528, and $93,647, respectively. Depreciation expense for the nine months ended September 30, 2010 and 2009 was $308,572, and $281,115, respectively.

NOTE 5 — CAPITAL LEASE:

On March 12, 2007 the Company entered into a capital lease for an office copier with Xerox Corporation. The lease term is for 60 months with a fair market value buy out option at the end of the lease. The monthly principal and interest payments equal $266.92. The cost and accumulated depreciation of the asset acquired under the capital lease as of December 31, 2009 and September 30, 2010 was as follows:

 

     December 31,
2009
    September 30,
2010
 

Office Equipment

   $ 13,102      $ 13,102   

Office Equipment — Accumulated Depreciation

     (6,333     (8,298
                
   $ 6,769      $ 4,804   

Future minimum lease payments under the capital lease are as follows:

 

Year Ending December 31:

  

2010

   $ 801   

2011

     3,203   

2012

     1,602   

2013

     —     
        

Total Future Minimum Lease Payments

     5,606   

Less Amount Representing Interest at a Rate of 9.0%

     (414
        

Present Value of Future Minimum Lease Payments

     5,192   

Less Current Portion

     (910
        
   $ 4,282   

 

9


NELLIX, INC.

(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued)

 

NOTE 6 — LONG TERM DEBT:

On July 23, 2008 the Company entered into lending agreement with Venture Lending & Leasing V, Inc. The initial amount available for lending is $6,000,000 which might be increased to a total of $16,000,000 upon meeting certain requirements related to Series D fund raising. The proceeds may be used to fund further growth of the Company, no restrictions on use. The terms are interest only payments through December 31, 2008 bearing interest at 1% per month. Thereafter the loan converts to 30 monthly principal and interest payments bearing interest at an annual rate of 9.75%. A final principal payment is due at a rate of 5.345% of the total funded amount. In connection of issuance of debt, the Company granted warrants to purchase Series C shares equal to 3.5% of the commitment, plus 7.5% of amount of debt funded. The fair value of these warrants amounting to $188,147 was recorded as a deferred issuance cost and was included as a discount on debt. The deferred issuance cost will be amortized over the life of the loan.

On July 23, 2008 the Company entered into an equipment line of credit for $1,100,000 of which $100,000 may be used to cover soft costs. The term of the loan is 36 months principal and interest payments, bearing interest at an annual rate of 9.75%. A final principal payment is due at a rate of 4.7% of the total funded amount for hard costs and a rate of 3.7% for soft costs. In connection of issuance of debt, the Company granted warrants to purchase Series C shares equal to 3.5% of the commitment, plus 2% of amount of debt funded. The fair value of these warrants amounting to $34,494 was recorded as a deferred issuance cost and was included as a discount on debt. Deferred issuance cost is being amortized over the life of the loan.

On September 28, 2009 the Company entered into a bridge loan subordinated secured convertible promissory note with Essex Woodlands Health Ventures VII, L.P (together with its affiliates entities as Essex may determine “Essex”), and certain existing investors. The initial amount available for lending is $6,000,000. The terms are all unpaid principal, together with an unpaid and accrued interest of 10% per annum are due and payable on August 31, 2010. In connection of issuance of debt, the Company granted warrants to purchase Series C 3 Preferred shares equal to 15% of the amount borrowed. It was determined that beneficial conversion existed at date of issuance. This resulted in an estimated fair value of $385,910, which has been capitalized as a deferred finance cost included as a discount on debt and is being amortized over the promissory note life of 11 months. During the year ended December 31, 2009, $107,643 was amortized to interest expense in connection with beneficial conversion. The fair value of the warrants amounting to $442,881 was recorded as a deferred issuance cost and was included as a discount on debt and being amortized over the life of the loan.

During 2010 the Company entered into various bridge loan subordinated secured convertible promissory notes with Essex Woodlands Health Ventures VII, L.P (together with its affiliates entities as Essex may determine “Essex”), and certain existing investors. The total amount of the various bridge loans totaled $8,694,765. The terms are all unpaid principal, together with an unpaid and accrued interest of 10% per annum due and payable on or before maturity date of December 31, 2010. In connection with the issuance of debt, the Company granted warrants to purchase Series C 3 Preferred shares equal to 15% of the amount borrowed. It was determined, that beneficial conversion existed at date of issuance. This resulted in an estimated fair value of $1,099,332, which has been capitalized as a deferred finance cost included as a discount on debt and is being amortized over the promissory note life ranging from 7 to 11 months. During the period ended September 30, 2010, $347,143 was amortized to interest expense in connection with beneficial conversion. The fair value of the warrants amounting to $1,261,623 was recorded as a deferred issuance cost and was included as a discount on debt and being amortized over the life of the loan.

 

10


NELLIX, INC.

(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued)

 

The entire balance of notes payable are scheduled to mature in 2010.

NOTE 7 — CONVERTIBLE PREFERRED STOCK:

The Company as of September 30, 2010 is authorized to issue 591,691 shares of Series A, 9,004,080 shares of Series B, 23,634,989 shares of Series C 1, 12,792,536 shares of Series C 2, and 10,910,475 shares of Series C 3. Preferred Stock, respectively, of which 591,691, 8,957,770, 23,044,241, 11,592,384, and 10,910,475 shares are issued and outstanding as of December 31, 2009 and September 30, 2010.

A Funding — On October 30, 2001, the Company sold 591,691 shares at $.03 per share for proceeds totaling $177,507.

Series B Funding — On August 24, 2005, the Company sold 8,957,770 shares at $.36 per share for proceeds totaling $3,224,803.

Series C-1 Funding — On November 22, 2006, the Company sold 23,044,241 shares at $.4871 per share for proceeds totaling $11,020,755

Series C-2 Funding — On February 29, 2008, the Company sold 11,592,384 shares at $.54993 per share for proceeds totaling $6,375,318.

Series C-3 Funding — On October 31, 2008, the Company sold 10,766,822 shares at $.54993 per share for proceeds totaling $5,920,999.

The rights, preferences and privileges of the convertible preferred stock (the “Preferred Stock”) are as follows:

Dividends — Holders of Preferred Stock shall be entitled to receive dividends when and if declared by the Company’s Board of Directors. The right to receive dividends on shares of Preferred Stock shall not be cumulative, and no right to such dividends shall accrue to holders of Preferred Stock by reason of the fact that dividends on said shares are not declared or paid in any calendar year. Dividends to Preferred Stock, if any, shall be paid prior to payment of any dividends on the Common Stock. Thereafter, Holders of Preferred Stock shall participate pro rata with the Common Stock.

Liquidation Preference — Holders of Preferred Stock shall be entitled to receive a liquidation preference prior to any payment on the Common Stock. Series A Preferred shall receive $.30 per share, Series B Preferred shall receive $.36, Series C-1 shall receive $.54993 per share, Series C-2 shall receive $.54993, and Series C-3 shall receive $.54993 before any Common Stock holders. Thereafter, the remaining assets of the Company, if any, shall be distributed to the holders of Preferred Stock and the holders of Common Stock on a pro rata as converted basis. An acquisition of the Company or a disposition of substantially all its assets shall be treated as a liquidation.

 

11


NELLIX, INC.

(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued)

 

Voting — Holders of Preferred Stock shall vote with the Common Stock on an as converted basis and have other certain separate protective provision voting rights as defined in the Company’s amended and restated Certificate of Incorporation.

Conversion and Anti-Dilution — The Preferred Stock shall be convertible into Common Stock on a one for one basis (subject to anti dilution adjustments) at the option of the holder at any time. The Preferred Stock shall automatically convert into Common Stock upon (i) the closing of a firmly underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, at a offering price not less than $1.91 and raising at least $25 million.

Right of First Offer and Co- Sale — The Company grants to each significant holder the right of first offer to purchase its pro rata share of new securities. A significant holder pro rata share, for purposes of this right of first offer, is equal to the ratio of the number of shares owned by such significant holder immediately prior to the issuance of new securities.

Restricted Shares — The investors acknowledges that the shares must be held indefinitely unless subsequently registered under the securities act. The Company has no present intention of registering the shares.

NOTE 8 — STOCK OPTION PLAN AND WARRANTS:

The Company’s Stock Plan (the Plan) was adopted by the Company’s Board of Directors during 2001, and amended on November 21, 2006. The purpose of the Plan is to attract and retain the best available personnel for positions of substantial responsibility, to provide incentive to employees, directors and consultants and to promote the success of the Company’s business. Options granted under the Plan may be Incentive Stock Options (“ISOs”) or Nonstatutory Stock Options (“NSOs”), as determined by the Plan administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan.

The aggregate number of shares that may be issued pursuant to options under the original Stock Plan was 11,534,374 shares. Options under the Plan may be granted for periods of up to ten years, unless optionee at the time of grant owns stock representing more than 10% of the voting power of all classes of stock of the Company, the term of the option shall be 5 years from date of grant. The exercise price for grants to optionee with less than 10% ownership of all classes of stocks shall equal no less than 100% of the fair market value of the shares on the date of grant. For optionee owning more than 10% of the voting power of all classes of stock, the exercise price shall equal no less than 110% of the fair market value per share on the date of grant. Grants to any other service provider shall have a exercise price equal to 85% of the fair market value per share.

 

12


NELLIX, INC.

(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued)

 

To date, ISO’s and NSO’s have been issued and may be exercised at any time after the date of grant for all or any part of the shares subject to the option agreement, except for officers, directors, and consultants. Officers, directors, and consultants, shall exercise options at a rate of no less than 20% per year over 5 years from the date the options are granted. The options vest, as described in the option agreements, over different periods of time which vary from one month to forty eight months; or are vested subject to the achievement of various milestones. A portion of the shares subject to the options vest on the vesting commencement date, which is usually the grant date of the options, and a prorated portion of the options vest each month thereafter, subject to the optionee continuing to be a service provider on such dates. Until the options vest the shares acquired are considered restricted shares and are subject to the Company’s right to repurchase. If the right to repurchase is exercised, the Company shall pay the optionee an amount equal to the exercise price for each of the the restricted shares being purchased.

 

     Outstanding Shares  
     Shares Available
for Grant
    Number of
Shares
    Weighted Average
Exercise Price
 

Balance at December 31, 2008

     1,776,871        8,915,393      $ 0.04   

Granted

     (1,554,319     1,554,319      $ 0.05   

Exercised

     —          (2,584,798   $ 0.04   

Canceled

     632,947        (632,947   $ 0.04   
                        

Balance at December 31, 2009

     855,499        7,251,967      $ 0.04   
                        

Granted

     —          —        $ 0.04   

Exercised

     —          (63,437   $ 0.04   

Canceled

     168,522        (168,522   $ 0.04   
                        

Balance at September 30, 2010

     1,024,021        7,020,008      $ 0.04   
                        

The following table provides certain information with respect to stock options outstanding and those exercisable at September 30, 2010.

 

Weighted Average

Exercise Price

   Stock Options
Outstanding
   Weighted Average
Remaining
Contractual Life
   Stock Options
Exercisable

$0.03

        10,000    3.0        10,000

$0.04

   5,516,789    7.9    3,107,670

$0.05

   1,493,219    9.4       345,918

The Company stock plan provides for acceleration of exercisable of the options upon the occurrence of certain events relating to change of control of the Company.

Total stock based compensation for the three months ended September 30, 2010 and 2009 was $7,143 and $9,003, respectively. Total stock based compensation for the nine months ended September 30, 2010 and 2009 was $21,722 and $27,555, respectively.

Warrants

In connection with the 7,100,000 equipment financing agreement entered into on July 23, 2008 a warrant to purchase 1,200,152 series C 3 preferred shares at an exercise price of $.5499 was issued to the lender. This warrant is outstanding and exercisable at December 31, 2009 and expires in 10 years. The Company valued the

 

13


NELLIX, INC.

(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued)

 

warrant using Black Scholes option pricing model on the grant date, applying an expected life of 2.5 years, risk free rate of 2.80%, an expected dividend yield of zero percent, volatility of 51% and a value of Preferred Stock at $.5499 per share. This resulted in an estimated fair value of $222,641, which has been capitalized as a deferred finance cost and is being amortized over the loan period of 2.5 years. During the nine months ended September 30, 2010, $68,404 was amortized to interest expense.

In connection with the $6,000,000 subordinated secured convertible promissory note entered into on September 28, 2009 a warrant to purchase 818,285 series C 3 preferred shares at an exercise price of $.01 was issued to the lender. This warrant is outstanding and exercisable at December 31, 2009 and expires in 5 years. The Company valued the warrant using Black Scholes option pricing model on the grant date, applying an expected life of 5 years, risk free rate of 2.80%, an expected dividend yield of zero percent, volatility of 51% and a value of Preferred Stock at $.5499 per share. This resulted in an estimated fair value of $442,881, which has been capitalized as a deferred finance cost and is being amortized over the loan period of 11 months. During the nine months ended September 30, 2009, $442,881 was amortized to interest expense.

In connection with the $8,546,015 subordinated secured convertible promissory note entered into on various dates during 2010 a warrant to purchase 2,331,029 series C 3 preferred shares at an exercise price of $.01 was issued to the lender. This warrant is outstanding and exercisable at September 30, 2010 and expires in 5 years. The Company valued the warrant using Black Scholes option pricing model on the grant date, applying an expected life of 5 years, risk free rate of 2.80%, an expected dividend yield of zero percent, volatility of 51% and a value of Preferred Stock at $.5499 per share. This resulted in an estimated fair value of $995,894, which has been capitalized as a deferred finance cost and is being amortized over the loan periods that range from 7 to 11 months. During the nine months ended September 30, 2010, $728,984 was amortized to interest expense.

The allocated fair value of the warrants was recorded as additional paid in capital.

NOTE 9 — OPERATING LEASE COMMITMENTS AND DEFERRED RENT OBLIGATIONS:

The Company leased 7,467 square feet of office space located at 2465B Faber Place, Palo Alto, California under an operating lease that required monthly base rent payments, plus utilities, and triple net expense. The lease expires April 14, 2012. The lease agreement requires the Company to purchase $2,000,000 commercial general liability and property damage insurance policy.

Rent expenses under the lease agreements were $60,292 and $72,141 for the three months ended September 30, 2010 and 2009 respectively. Rent expenses under the lease agreements were $178,873 and $187,778 for the nine months ended September 30, 2010 and 2009 respectively.

Future minimum lease payments are as follows:

 

Year Ending December 31,

   Amount  

2010

   $ 43,682   

2011

     180,104   

2012

     52,530   
        

Total Future Minimum Lease Payments

   $ 276,316   
        

Total base rent payments are charged to expense on the straight line method over the terms of the facility leases that contain defined escalation clause. The Company has recorded deferred lease obligations to reflect the excess of rent expense over cash payments since inception of these leases.

 

14


NELLIX, INC.

(A Development Stage Company)

NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued)

 

NOTE 10 — SUBSEQUENT EVENT:

On October 27, 2010, the Company announced it entered into an Agreement and Plan of Merger with Endologix, Inc. (“Endologix”) whereby a newly formed subsidiary of Endologix will merge with and into the Company. As part of the merger transaction, the Company will receive shares of Endologix’s common stock with a value of $15 million at the closing and up to $39 million upon the achievement of certain milestones.

 

15


INDEPENDENT AUDITOR’S REPORT

To the Board of Directors

Nellix, Inc.

Palo Alto, California

We have audited the accompanying balance sheets of Nellix, Inc. (a development stage company) as of December 31, 2009 and 2008, and the related statements of operations, changes in stockholders’ equity, and cash flows for the years then ended and for the period from March 20, 2001 (date of inception) to December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nellix, Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended and for the period from March 20, 2001 (date of inception) to December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 4, certain conditions indicated that Nellix, Inc. may be unable to continue as a going concern. The accompanying financial statements do not include any adjustments to the financial statements that might be necessary should the Company be unable to continue as a going concern.

BERGER LEWIS ACCOUNTANCY CORPORATION

San Jose, California

August 11, 2010

 

16


NELLIX, INC.

(A Development Stage Company)

BALANCE SHEETS

December 31, 2009 and 2008

 

     December 31,  
     2009     2008  
ASSETS     

CURRENT ASSETS:

    

Cash and Cash Equivalents

   $ 4,982,432      $ 14,243,574   

Restricted Cash

     120,000        120,000   

Prepaid Expenses

     75,737        44,878   

Deposits

     —          44,675   

Other Assets

     20,458        —     
                

Total Current Assets

     5,198,627        14,453,127   
                

PROPERTY AND EQUIPMENT, NET

     979,388        1,126,458   
                

OTHER ASSETS:

    

Long Term Deposits

     30,017        30,017   

Intangible Asset, Net

     85,000        —     
                

Total Other Assets

     115,017        30,017   
                

TOTAL ASSETS

   $ 6,293,032      $ 15,609,602   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

CURRENT LIABILITIES:

    

Notes Payable

   $ 5,024,276      $ 2,428,835   

Capital Lease

     2,695        2,476   

Accounts Payable

     886,085        324,792   

Accrued Interest

     142,815        68,747   

Accrued Expenses

     627,862        127,793   
                

Total Current Liabilities

     6,683,733        2,952,643   
                

LONG-TERM LIABILITIES, NET OF CURRENT PORTION:

    

Notes Payable

     1,683,788        4,396,400   

Capital Lease

     4,187        7,191   

Deferred Rent

     35,359        41,004   
                

Total Long-Term Liabilities, Net of Current Portion

     1,723,334        4,444,595   
                

Total Liabilities

     8,407,067        7,397,238   
                

STOCKHOLDERS’ EQUITY (DEFICIT)

    

Preferred Stocks: 56,933,711 Shares and Authorized: 55,096,561 and 55,096,561 Shares Issued and Outstanding, Respectively

     26,644,252        26,641,371   

Common Stocks: Par Value $0.001; 85,000,000 Shares Authorized; 8,248,858 and 5,937,793 Shares Issued and Outstanding, Respectively

     253,550        113,416   

Additional Paid in Capital

     1,051,432        —     

(Deficit Accumulated) During the Development Stage

     (30,063,269     (18,542,423
                

Total Stockholders’ Equity (Deficit)

     (2,114,035     8,212,364   
                

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 6,293,032      $ 15,609,602   
                

The Accompanying Notes are an Integral Part of these Financial Statements.

 

17


NELLIX, INC.

(A Development Stage Company)

STATEMENTS OF OPERATIONS

Years Ended December 31, 2009 and 2008 and for the Period

from March 20, 2001 (Date of Inception) to December 31, 2009

 

     2009     2008     March 20, 2001
(Inception) to
December 31,
2009
 

OPERATING EXPENSES:

      

Salary and Wages

   $ 4,521,331      $ 3,976,023      $ 12,099,031   

Development Expenses

     3,521,073        3,595,088        10,172,349   

Professional Services

     665,763        752,223        2,776,922   

Depreciation

     385,439        295,200        820,134   

Travel & Lodging

     376,971        434,387        1,135,484   

Rent

     248,071        239,381        679,724   

Marketing & Selling Expenses

     159,170        32,884        285,358   

Repairs and Maintenance

     151,091        137,324        362,366   

Shipping and Delivery

     105,203        103,692        245,326   

Insurance

     94,266        85,299        244,487   

Utilities

     37,114        25,935        81,099   

Taxes & Licenses

     34,377        33,560        66,696   

Office Expenses

     35,186        66,246        207,020   

Membership Dues

     13,694        14,604        34,679   

Equipment Maintenance and Rent

     10,694        9,550        27,212   
                        

Total Operating Expenses

     10,359,443        9,801,396        29,237,887   
                        

OTHER INCOME (LOSS):

      

Interest Income

     13,775        208,435        778,063   

Other Income

     6,519        —          6,519   

(Loss) on Disposal of Fixed Assets

     (4,195     (407     (17,531

Interest Expense

     (814,070     (315,036     (1,222,601

Interest Expense Warrants and Beneficial Conversion

     (362,632     —          (362,632
                        

Total Other Loss

     (1,160,603     (107,008     (818,182
                        

Loss Before Provision for Income Taxes

     (11,520,046     (9,908,404     (30,056,069

PROVISION FOR INCOME TAXES

     800        800        7,200   
                        

NET LOSS

   $ (11,520,846   $ (9,909,204   $ (30,063,269
                        

The Accompanying Notes are an Integral Part of these Financial Statements.

 

18


NELLIX, INC.

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2009 and 2008 and for the Period from

March 20, 2001 (Date of Inception) to December 31, 2009

 

    Convertible Stock     Common Stock              
    Shares     Amounts     Stock
Issuance
Costs
    Shares     Amount     Additional
Paid In
Capital
    Stock
Issuance
Costs
    Accumulated
Deficit
    Total
Stockholders
Equity
 

BALANCE, DECEMBER 31, 2007

    32,593,702      $ 14,423,065      $ (111,759     5,631,476      $ 39,837      $ 39,896      $ (12,501   $ (8,633,218   $ 5,745,320   

Net Loss

    —          —          —          —          —          —          —          (9,909,205     (9,909,205

Issuance of Series C 2 Preferred Stock

    11,592,384        6,375,318        (6,918     —          —          —          —          —          6,368,400   

Issuance of Series C 3 Preferred Stock

    10,766,822        5,920,999        (40,868     —          —          —          —          —          5,880,131   

Series C 3 Preferred Stock, in lieu of Cash Compensation

    143,653        79,001        —          —          —          —          —          —          79,001   

Issuance of Common Stock

    —          —          —          306,317        26        1,277        —          —          1,303   

Issuance of Common Stock, in lieu of Cash Compensation

    —          —          —          —          274        7,740        —          —          8,014   

Employee Stock Based Compensation

    —          —          —          —          —          36,867        —          —          36,867   

Warrants Issued to Purchased 1,200,152 Preferred Stock

    —          —          2,533        —          —          —          —          —          2,533   
                                                                       

BALANCE, DECEMBER 31, 2008

    55,096,561      $ 26,798,383      $ (157,012     5,937,793      $ 40,137      $ 85,780      $ (12,501   $ (18,542,423   $ 8,212,364   

Net Loss

    —          —          —          —          —          —          —          (11,520,846     (11,520,846

Recovery of Expense to Issue Stock

    —          —          2,883        —          —          —          —          —          2,883   

Issuance of Common Stock

    —          —          —          2,311,065        2,585        100,807        —          —          103,392   

Employee Stock Based Compensation

    —          —          —          —          —          36,740        —          —          36,740   

Warrants Issued to Purchase 818,285 Preferred Shares in Connection with Bridge Loan

    —          —          —          —          —          1,051,432        —          —          1,051,432   
                                                                       

BALANCE, DECEMBER 31, 2009

    55,096,561      $ 26,798,383      $ (154,129     8,248,858      $ 42,722      $ 1,274,7      $ (12,501   $ (30,063,269   $ (2,114,035 )
                                                                       

The Accompanying Notes are an Integral Part of these Financial Statements.

 

19


NELLIX, INC.

(A Development Stage Company)

STATEMENTS OF CASH FLOWS

Years Ended December 31, 2009 and 2008 and for the Period from March 20, 2001

(Date of Inception) to December 31, 2009

 

     2009     2008     March 20, 2001
(Inception) to
December 31, 2009
 

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net Loss

   $ (11,520,846   $ (9,909,204   $ (30,063,269

Adjustments to Reconcile Net Loss to Net Cash Used by Operating Activities:

      

Depreciation and Amortization

     385,439        295,200        797,524   

Stock Based Compensation

     36,740        126,415        200,049   

Beneficial Conversion Feature

     107,643        —          107,643   

Interest Expense from Issuance of Warrants

     254,970        —          254,970   

Loss on Disposal of Fixed Assets

     4,195        407        14,140   

(Increase) Decrease in Assets:

      

Restricted Cash

     —          (60,000     (120,000

Prepaid Expenses

     (30,857     (11,437     (75,740

Deposits

     24,217        (44,676     (50,475

Increase (Decrease) in Liabilities:

      

Accounts Payable

     561,294        (76,467     886,085   

Accrued Liabilities

     500,068        5,697        627,862   

Accrued Interest

     74,068        68,747        142,815   

Accrued Rent

     (5,645     41,004        35,359   
                        

Net Cash Used by Operating Activities

     (9,608,714     (9,564,314     (27,243,037
                        

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Purchase of Property and Equipment

     (227,566     (480,903     (1,785,557

Purchase of Intangible Asset

     (100,000     —          (100,000
                        

Net Cash Used by Investing Activities

     (327,566     (480,903     (1,885,557
                        

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Proceeds from Issuance of Preferred Stock

     —          12,296,317        26,719,385   

Proceeds from Issuance of Common Stock

     103,392        1,303        151,127   

Proceeds from Equipment Loan

     3,000,000        6,374,287        10,342,524   

Payments on Equipment Loan

     (2,428,353     (373,661     (2,945,642

Payments on Capital Lease

     (2,785     (2,275     (6,219

Fees Related to Issuance of Preferred Stock

     2,883        (47,786     (150,149
                        

Net Cash Provided by Financing Activities

     675,137        18,248,185        34,111,026   
                        

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (9,261,143     8,202,968        4,982,432   

CASH AND CASH EQUIVALENTS, Beginning of Year

     14,243,575        6,040,607        —     
                        

CASH AND CASH EQUIVALENTS, End of Year

   $ 4,982,432      $ 14,243,575      $ 4,982,432   
                        

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

      

Cash Paid for Income Taxes

   $ 800      $ 800      $ 7,200   
                        

Cash Paid for Interest

   $ 739,070      $ 246,198     
                        

The Accompanying Notes are an Integral Part of these Financial Statements.

 

20


NELLIX, INC.

(A Development Stage Company)

 

NOTE 1 — GENERAL INFORMATION:

Business Activity — Nellix, Inc. (the “Company”), is a Delaware corporation located in Palo Alto, California. The Company is addressing a large patient population with difficult to cure aneurysms in the aorta. The solution being developed provides a revolutionary polymer based endograft insertable into and sealing the aneurysm providing protection from rupture. The technology provides a distinct advantage over current therapies.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Accounting — The financial statements of the Company have been prepared on the accrual basis of accounting.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the period. Accordingly, actual results could differ from those estimates.

Cash and Cash Equivalents — Cash and cash equivalents include highly liquid investments and investments with a maturity of three months or less. The Company invests its excess cash in money market funds which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. Management believes it is not exposed to any significant risk on cash accounts.

Property and Equipment — Property and equipment are stated at cost. Property and equipment having a useful life of more than one year and a cost greater than $1,000 are capitalized. Maintenance and repairs are expensed as incurred. Property and equipment are being depreciated or amortized utilizing the straight-line method over various estimated useful lives for financial reporting purposes.

Accrued Personal Time Off — Personal time off is accrued for full-time employees. Accrued personal time off represents amounts earned, but not taken as of December 31, 2009 and 2008. The accrued personal time off balance as of December 31, 2009 and 2008 was $107,557 and $64,763, respectively, and is included in accrued expenses.

Income Taxes — Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the depreciation of property and equipment and net operating loss carryovers for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for research tax credits that are available to offset future income taxes.

Stock-Based Compensation — The Company adopted ASC 718-10 (formerly Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), Share Based Payment (Statement 123(R))), which requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award.

ASC 718-10 established accounting and disclosure requirements using a grant date fair value based method of accounting for share-based employee compensation plans. The compensation cost is recognized by the Company over the employee’s requisite service period (vesting period).

The fair value of each option award is estimated on the date of grant using a Black-Scholes-option pricing model that uses assumptions noted in the following table. The Company is unable to reasonably estimate the

 

21


NELLIX, INC.

(A Development Stage Company)

 

expected volatility of the Company’s share price, therefore, the expected volatility is based on the historical volatility of the Company’s industry sector index. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

     2009  

Expected Volatility

     51.0

Risk Free Interest Rate

     2.80

Expected Life of an Option

     5   

Expected Dividends

     —     

Stock, stock options, and warrants for stock issued to nonemployees are accounted for at fair value in accordance with the provisions of ASC 718-10 and Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods, or Services. Stock-based awards to nonemployees not immediately vested are subject to periodic revaluation over the vesting terms.

Intangible Asset — A patent acquired during 2009, was purchased for $100,000. The patent will potentially be used in the Company’s endograft design. The patent has a value of $85,000, net of accumulated amortization of $15,000. The patent is amortized using the straight-line basis over the remaining life of the patent. During the year ended December 31, 2009, amortization of the patent was $15,000.

Impairment of Long-Lived Assets — Long-lived assets and intangibles held and used by the Company are reviewed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable in accordance with ASC 360 10 (formerly Statement of Financial Accounting Standards (“SFAS”) No. 144 Accounting for the Impairment or Disposal of Long Lived Assets). An asset is considered to be impaired when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying value. Any impairment loss is measured as the excess of carrying value over the fair market value of the asset.

Reclassifications — Certain prior year amounts have been reclassified to conform with current year presentation.

Accounting for Uncertainty in Income Taxes — Effective January 1, 2009, the Nellix, Inc. implemented the new accounting requirements associated with uncertainty in income taxes using the provisions of FASB ASC 740-10 (formerly Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, (FIN 48)). Accordingly, an entity shall initially recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. It also provides guidance for derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of December 31, 2009, the Nellix, Inc. has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.

Subsequent Events — Management of the Company has evaluated events and transactions subsequent to December 31, 2009 for potential recognition or disclosure in the financial statements. The Company has a subsequent event that required recognition or disclosure in the financial statements for the fiscal year ended December 31, 2009, see Note 13. Subsequent events have been evaluated through the date the financial statements became available to be issued, August 11, 2010.

 

22


NELLIX, INC.

(A Development Stage Company)

 

Recent Accounting Pronouncements -

FASB Accounting Standards Codification — On July 1, 2009, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Codification (ASC) 105-10, Generally Accepted Accounting Principles (GAAP) (Codification). ASC 105-10 establishes the exclusive authoritative reference for U.S. GAAP in financial statements, except for SEC rules and interpretive releases, which are also authoritative for SEC registrants. The Codification supersedes all existing non SEC accounting and reporting standards. The Company has included the references to the Codification, as appropriate, in these financial statements.

ASC 820 10 (formerly SFAS No. 157) — In September 2006, the FASB issued ASC 820-10 (formerly SFAS No. 157) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820-10 applies under other accounting pronouncements that require or permit fair value measurements. The FASB previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, ASC 820-10 does not require any new fair value measurements. However, for some entities, application of ASC 820-10 will change current practice. In February 2008, the FASB issued ASC 820-10-65-1 (formerly FSP No. 157 2) that defers the effective date of ASC 820-10 for non financial assets and non financial liabilities, except for items that are recognized or disclosed at fair value in financial statements on a recurring basis for fiscal years beginning after November 15, 2008. In addition, the FASB also agreed to exclude from the scope of ASC 820-10 fair value measurements made for purposes of applying ASC 840 (formerly SFAS No. 13, Accounting for Leases), and related interpretive accounting pronouncements. The adoption of ASC 820-10 for financial assets and liabilities did not have a significant impact on the Company’s results of operations, cash flows or balance sheets. The adoption of ASC 820-10 on non financial assets and liabilities, did not have a significant impact on the Company’s results of operations, cash flows or balance sheets.

ASC 825-10 (formerly SFAS No. 159) — In February 2007, the FASB issued ASC 825-10 (formerly SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities) which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of ASC 825-10 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. ASC 825-10 is effective for an entity’s first fiscal year that begins after November 15, 2007. The Company has adopted ASC 825-10 but did not elect to measure any eligible financial instruments at fair value under this guidance.

NOTE 3 — RESTRICTED CASH:

During 2005, the Company purchased a revolving certificate of deposit from Silicon Valley Bank under an agreement with the bank in favor of a credit card company, pursuant to the terms of the credit agreement. The certificate of deposit, in the amount of $120,000, expired on January 23, 2010 and automatically renews for 30 days. The amount is classified as restricted cash on the balance sheet at December 31, 2009 and 2008.

NOTE 4 — DEVELOPMENT STAGE OPERATIONS:

Development stage operations have consisted primarily of the research and development of intellectual properties, recruiting and training personnel, developing markets, and raising capital. Due to the development nature of the Company, the Company sustained substantial losses from operations in the current and previous years. The Company’s ability to continue is dependent on raising additional funds.

The Company is in the process of raising $40-50M for its D financing round to provide funding through 2012, including European commercialization and IDE trials and one year clinical follow-up. Essex is anticipated to contribute an additional $10M in new capital on top of current bridge loans. To date the Company has met

 

23


NELLIX, INC.

(A Development Stage Company)

 

with dozens of potential investors and has approximately six investors in various stages of due diligence. It is meeting with new investors to increase this pool of potential investors. The goal is to complete this financing process in Q4, 2010. To help fund operations until this time, the Company is planning to raise an additional $3.4 million in two tranches by extending the current bridge financing. The proceeds will be used to maintain operations until financing is complete. The board has approved the terms of this bridge loan and the first of two bridge payments for $1.7M is scheduled for August 25, 2010.

NOTE 5 — PROPERTY AND EQUIPMENT:

The cost and related accumulated depreciation of the property and equipment as of December 31, 2009 and 2008 consisted of the following:

 

     2009     2008  

Testing and Demo Equipment

   $ 1,355,833      $ 1,216,466   

Computer Equipment and Software

     153,488        143,825   

Molds

     142,943        70,634   

Furniture and Fixture

     69,463        75,159   

Leasehold Improvement

     45,561        45,561   
                
     1,767,288        1,551,645   

Accumulated Depreciation

     (787,900     (425,187
                

Property and Equipment, Net

   $ 979,388      $ 1,126,458   
                

Depreciation expense for the year ended December 31, 2009 and 2008 totaled $385,439, and $295,200, respectively.

NOTE 6 — CAPITAL LEASE:

On March 12, 2007 the Company entered into a capital lease for an office copier with Xerox Corporation. The lease term is for 60 months with a fair market value buy-out option at the end of the lease. The monthly principal and interest payments equal $266.92. The cost and accumulated depreciation of the asset acquired under the capital lease as of December 31, 2009 and 2008 was as follows:

 

     2009     2008  

Office Equipment

   $ 13,102      $ 13,102   

Office Equipment — Accumulated Depreciation

     (6,333     (3,712
                
   $ 6,769      $ 9,390   
                

Future minimum lease payments under the capital lease are as follows:

 

Year Ending December 31:

      

2010

   $ 3,203   

2011

     3,203   

2012

     1,601   

2013

     —     
        

Total Future Minimum Lease Payments

     8,007   

Less Amount Representing Interest at a Rate of 9.0%

     (816
        

Present Value of Future Minimum Lease Payments

     7,191   

Less Current Portion

     (2,695
        
   $ 4,496   
        

 

24


NELLIX, INC.

(A Development Stage Company)

 

NOTE 7 — LONG-TERM DEBT:

Long-term debt as of December 31, 2009 and 2008, consisted of the following:

 

     2009     2008  
July 2007 the Company entered into a $1,500,000 equipment line of credit financing agreement with Venture Lending & Leasing IV and V, Inc., secured by the equipment Venture Lending agrees to accept for funding of the loan draws. The Company may use 10% of the total commitment balance to purchase soft cost items. Each loan draw is a separate 36 month term loan requiring monthly principal and interest payments. Interest is paid at a rate equal to 9.75%. A final principal payment for equipment loans equal to 4.7% for hard cost and 3.7% for soft cost loans of the original principal balance is due on term date.    $ 480,410      $ 883,175   
On July 23, 2008 the Company entered into lending agreement with Venture Lending & Leasing V, Inc. The initial amount available for lending is $6,000,000 which might be increased to a total of $16,000,000 upon meeting certain requirements related to Series D fund raising. The proceeds may be used to fund further growth of the Company, no restrictions on use. The terms are, interest only payments through December 31, 2008 bearing interest at 1% per month. Thereafter the loan converts to 30 monthly principal and interest payments bearing interest at an annual rate of 9.75%. A final principal payment is due at a rate of 5.345% of the total funded amount. In connection of issuance of debt, the Company granted warrants to purchase Series C shares equal to 3.5% of the commitment, plus 7.5% of amount of debt funded. The fair value of these warrants amounting to $188,147 was recorded as a deferred issuance cost and was included as a discount on debt. The deferred issuance cost will be amortized over the life of the loan.      3,680,833        5,713,822   
On July 23, 2008 the Company entered into an equipment line of credit for $1,100,000 of which $100,000 may be used to cover soft costs. The term of the loan is 36 months principal and interest payments, bearing interest at an annual rate of 9.75%. A final principal payment is due at a rate of 4.7% of the total funded amount for hard costs and a rate of 3.7% for soft costs. In connection of issuance of debt, the Company granted warrants to purchase Series C shares equal to 3.5% of the commitment, plus 2% of amount of debt funded. The fair value of these warrants amounting to $34,494 was recorded as a deferred issuance cost and was included as a discount on debt. Deferred issuance cost is being amortized over the life of the loan.      144,436        228,238   
On September 28, 2009 the Company entered into a bridge loan subordinated secured convertible promissory note with Essex Woodlands Health Ventures VII, L.P (together with its affiliates entities as Essex may determine “Essex”), and certain existing investors. The initial amount available for lending is $6,000,000. The terms are all unpaid principal, together with an unpaid and accrued interest of 10% per annum are due and payable on August 31, 2010. In connection of issuance of debt, the Company granted warrants to purchase Series C 3 Preferred shares equal to 15% of the amount borrowed. It was determined, that beneficial conversion existed at date of issuance. This resulted in an estimated fair value of $385,910, which has been capitalized as a deferred finance cost included as a discount on debt and is being amortized over the promissory note life of 11 months. During the year ended December 31, 2009, $107,643 was amortized to interest expense in connection with beneficial conversion. The Fair value of the warrants amounting to $442,881 was recorded as a deferred issuance cost and was included as a discount on debt and being amortized over the life of the loan.    $ 2,402,385      $ —     
                

Total Long Term Debt

     6,708,064        6,825,235   

Current Portion

     (5,024,276     (2,428,835
                

Total Long Term Debt, Net of Current Portion

   $ 1,683,788      $ 4,396,400   
                

 

25


NELLIX, INC.

(A Development Stage Company)

 

Scheduled maturities for the above long term debt are as follows:

 

Year Ending December 31,

   Amount  

2010

   $ 5,024,276   

2011

     1,683,788   
        

Total

   $ 6,708,064   
        

NOTE 8 — PROVISION FOR INCOME TAXES:

The components for the income tax provision consisted of the following:

 

     2008      2007  

Current:

     

Federal

   $ —         $ —     

State

     800         800   
                 
     800         800   
                 

Total Income Taxes

   $ 800       $ 800   
                 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company’s deferred tax assets consisted of the following:

 

     2009     2008  

Net Operating Loss Carryovers

   $ 12,047,302      $ 7,306,600   

Research Tax Credits

     1,426,458        916,458   

Depreciation

     (236,719     (104,475

Valuation Allowance

     (13,237,041     (8,118,583
                

Deferred Tax Assets, Net

   $ —        $ —     
                

The net deferred tax asset and tax research credits have been fully offset by a valuation allowance because, based on the available evidence, management cannot conclude that it is more likely than not that the deferred tax assets will be realized.

As of December 31, 2009 the Company had estimated federal and state net operating loss (the “NOL”), carryforwards of approximately $30,300,000 (Federal) and approximately $29,000,000 (California). The Federal loss carryforwards are allowed to be carried over for 20 years, with expiration at various dates through 2028. California NOLs expire at various dates through 2028.

Due to the “change in ownership” provisions of the Internal Revenue Code, a portion of the Company’s net operating loss carryforwards may be subject to an annual limitation on their utilization against taxable income in future periods. Due to the limitation, the net operating loss carryforwards may expire before ultimately becoming available to reduce future income tax liabilities.

 

26


NELLIX, INC.

(A Development Stage Company)

 

NOTE 9 — CONVERTIBLE PREFERRED STOCK:

The Company as of December 31, 2009 is authorized to issue 591,691 shares of Series A, 9,004,080 shares of Series B, 23,634,989 shares of Series C 1, 12,792,536 shares of Series C 2, and 10,910,475 shares of Series C 3. Preferred Stock, respectively, of which 591,691, 8,957,770, 23,044,241, 11,592,384, and 10,910,475 shares are issued and outstanding as of December 31, 2009.

Series A Funding — On October 30, 2001, the Company sold 591,691 shares at $.03 per share for proceeds totaling $177,507.

Series B Funding — On August 24, 2005, the Company sold 8,957,770 shares at $.36 per share for proceeds totaling $3,224,803.

Series C 1 Funding — On November 22, 2006, the Company sold 23,044,241 shares at $.4871 per share for proceeds totaling $11,020,755

Series C 2 Funding — On February 29, 2008, the Company sold 11,592,384 shares at $.54993 per share for proceeds totaling $6,375,318.

Series C 3 Funding — On October 31, 2008, the Company sold 10,766,822 shares at $.54993 per share for proceeds totaling $5,920,999.

The rights, preferences and privileges of the convertible preferred stock (the “Preferred Stock”) are as follows:

Dividends — Holders of Preferred Stock shall be entitled to receive dividends when and if declared by the Company’s Board of Directors. The right to receive dividends on shares of Preferred Stock shall not be cumulative, and no right to such dividends shall accrue to holders of Preferred Stock by reason of the fact that dividends on said shares are not declared or paid in any calendar year. Dividends to Preferred Stock, if any, shall be paid prior to payment of any dividends on the Common Stock. Thereafter, Holders of Preferred Stock shall participate pro rata with the Common Stock.

Liquidation Preference — Holders of Preferred Stock shall be entitled to receive a liquidation preference prior to any payment on the Common Stock. Series A Preferred shall receive $.30 per share, Series B Preferred shall receive $.36, Series C 1 shall receive $.54993 per share, Series C 2 shall receive $.54993, and Series C 3 shall receive $.54993 before any Common Stock holders. Thereafter, the remaining assets of the Company, if any, shall be distributed to the holders of Preferred Stock and the holders of Common Stock on a pro rata as converted basis. An acquisition of the Company or a disposition of substantially all its assets shall be treated as a liquidation.

Voting — Holders of Preferred Stock shall vote with the Common Stock on an as converted basis and have other certain separate protective provision voting rights as defined in the Company’s amended and restated Certificate of Incorporation.

Conversion and Anti Dilution — The Preferred Stock shall be convertible into Common Stock on a one for one basis (subject to anti dilution adjustments) at the option of the holder at any time. The Preferred Stock shall automatically convert into Common Stock upon (i) the closing of a firmly underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, at a offering price not less than $1.91 and raising at least $25 million.

 

27


NELLIX, INC.

(A Development Stage Company)

 

Right of First Offer and Co Sale — The Company grants to each significant holder the right of first offer to purchase its pro rata share of new securities. A significant holder pro rata share, for purposes of this right of first offer, is equal to the ratio of the number of shares owned by such significant holder immediately prior to the issuance of new securities.

Restricted Shares — The investors acknowledges that the shares must be held indefinitely unless subsequently registered under the securities act. The Company has no present intention of registering the shares.

NOTE 10 — STOCK OPTION PLAN AND WARRANTS:

The Company’s Stock Plan (the Plan) was adopted by the Company’s Board of Directors during 2001, and amended on November 21, 2006. The purpose of the Plan is to attract and retain the best available personnel for positions of substantial responsibility, to provide incentive to employees, directors and consultants and to promote the success of the Company’s business. Options granted under the Plan may be Incentive Stock Options (“ISOs”) or Nonstatutory Stock Options (“NSOs”), as determined by the Plan administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan.

The aggregate number of shares that may be issued pursuant to options under the original Stock Plan was 11,534,374 shares. Options under the Plan may be granted for periods of up to ten years, unless optionee at the time of grant owns stock representing more than 10% of the voting power of all classes of stock of the Company, the term of the option shall be 5 years from date of grant. The exercise price for grants to optionee with less than 10% ownership of all classes of stocks shall equal no less than 100% of the fair market value of the shares on the date of grant. For optionee owning more than 10% of the voting power of all classes of stock, the exercise price shall equal no less than 110% of the fair market value per share on the date of grant. Grants to any other service provider shall have a exercise price equal to 85% of the fair market value per share.

To date, ISO’s and NSO’s have been issued and may be exercised at any time after the date of grant for all or any part of the shares subject to the option agreement, except for officers, directors, and consultants. Officers, directors, and consultants, shall exercise options at a rate of no less than 20% per year over 5 years from the date the options are granted. The options vest, as described in the option agreements, over different periods of time which vary from one month to forty eight months; or are vested subject to the achievement of various milestones. A portion of the shares subject to the options vest on the vesting commencement date, which is usually the grant date of the options, and a prorated portion of the options vest each month thereafter, subject to the optionee continuing to be a service provider on such dates. Until the options vest the shares acquired are considered restricted shares and are subject to the Company’s right to repurchase. If the right to repurchase is exercised, the Company shall pay the optionee an amount equal to the exercise price for each of the restricted shares being purchased.

 

28


NELLIX, INC.

(A Development Stage Company)

 

 

           Outstanding Shares  
     Shares Available
for Grant
    Number of
Shares
    Weighted Average
Exercise Price
 

Balance at March 20, 2001

     —          —          —     

Authorized

     11,534,374       

Granted

     (37,679     37,679      $ 0.01   
                        

Balance at December 31, 2001

     11,496,695        37,679      $ 0.01   

Granted

     (427,770     427,770      $ 0.03   

Canceled

     18,840        (18,840   $ 0.02   
                        

Balance at December 31, 2002

     11,087,765        446,609      $ 0.03   

Granted

     (10,000     10,000      $ 0.03   
                        

Balance at December 31, 2003

     11,077,765        456,609      $ 0.03   
                        

Balance at December 31, 2004

     11,077,765        456,609      $ 0.03   

Granted

     (1,584,000     1,584,000      $ 0.04   

Canceled

     30,000        (30,000   $ —     
                        

Balance at December 31, 2005

     9,523,765        2,010,609      $ 0.04   

Granted

     (1,405,400     1,405,400      $ 0.04   

Exercised

     —          (250,000   $ 0.03   

Canceled

     15,000        (15,000   $ 0.04   
                        

Balance at December 31, 2006

     8,133,365        3,151,009      $ 0.04   

Granted

     (2,894,419     2,894,419      $ 0.04   

Exercised

     —          (833,427   $ 0.04   

Canceled

     75,000        (75,000   $ 0.04   
                        

Balance at December 31, 2007

     5,313,946        5,137,001      $ 0.04   

Granted

     (3,653,901     3,653,901      $ 0.04   

Exercised

     —          241,317      $ 0.04   

Canceled

     116,826        (116,826   $ 0.04   
                        

Balance at December 31, 2008

     1,776,871        8,915,393      $ 0.04   

Granted

     (1,554,319     1,554,319      $ 0.05   

Exercised

     —          (2,584,798   $ 0.04   

Canceled

     632,947        (632,947   $ 0.04   
                        

Balance at December 31, 2009

     855,499        7,251,967      $ 0.04   
                        

The following table provides certain information with respect to stock options outstanding and those exercisable at December 31, 2009.

 

Weighted Average

Exercise Price

  

Stock Options Outstanding

  

Weighted Average

Remaining Contractual Life

  

Stock Options Exercisable

$0.03

         10,000    3.0         10,000

$0.04

   5,683,148    7.9    3,171,107

$0.05

   1,558,819    9.4    345,918

The Company stock plan provides for acceleration of exercisable of the options upon the occurrence of certain events relating to change of control of the Company.

In connection with its stock option grants, the Company recorded employee stock based compensation expense of $36,740 and $200,049, respectively, for the year ended December 31, 2009 and for the period from March 20, 2001 (Date of Inception) to December 31, 2009, respectively.

 

29


NELLIX, INC.

(A Development Stage Company)

 

Warrants

In connection with the 7,100,000 equipment financing agreement entered into on July 23, 2008 a warrant to purchase 1,200,152 series C 3 preferred shares at an exercise price of $.5499 was issued to the lender. This warrant is outstanding and exercisable at December 31, 2009 and expires in 10 years. The Company valued the warrant using Black Scholes option pricing model on the grant date, applying an expected life of 2.5 years, risk free rate of 2.80%, an expected dividend yield of zero percent, volatility of 51% and a value of Preferred Stock at $.5499 per share. This resulted in an estimated fair value of $222,641, which has been capitalized as a deferred finance cost and is being amortized over the loan period of 2.5 years. During the year ended December 31, 2009, $131,436 was amortized to interest expense.

In connection with the $6,000,000 subordinated secured convertible promissory note entered into on September 28, 2009 a warrant to purchase 818,285 series C 3 preferred shares at an exercise price of $.01 was issued to the lender. This warrant is outstanding and exercisable at December 31, 2009 and expires in 5 years. The Company valued the warrant using Black Scholes option pricing model on the grant date, applying an expected life of 5 years, risk free rate of 2.80%, an expected dividend yield of zero percent, volatility of 51% and a value of Preferred Stock at $.5499 per share. This resulted in an estimated fair value of $442,881, which has been capitalized as a deferred finance cost and is being amortized over the loan period of 11 months. During the year ended December 31, 2009, $123,533 was amortized to interest expense.

The allocated fair value of the warrants was recorded as additional paid in capital.

NOTE 11 — EMPLOYEE BENEFIT PLAN:

The Company has a salary savings plan, which qualifies under Section 401(k) of the Internal Revenue Code. Under the plan, participating employees may defer up to 90% of their pretax salary, but no more than statutory limits. There were no employer matching contributions for the years ended December 31, 2009 and 2008.

NOTE 12 — OPERATING LEASE COMMITMENTS AND DEFERRED RENT OBLIGATIONS:

The Company leased 7,467 square feet of office space located at 2465B Faber Place, Palo Alto, California under an operating lease that required monthly base rent payments, plus utilities, and triple net expense. The lease expires April 14, 2012. The lease agreement requires the Company to purchase $2,000,000 commercial general liability and property damage insurance policy.

Rent expenses under the lease agreements were $248,071 and $239,381 for the years ended December 31, 2009 and 2008 respectively.

Future minimum lease payments are as follows:

 

Year Ending December 31,

   Amount  

2010

   $ 174,728   

2011

     180,104   

2012

     52,530   
        

Total Future Minimum Lease Payments

   $ 407,362   
        

Total base rent payments are charged to expense on the straight line method over the terms of the facility leases that contain defined escalation clause. The Company has recorded deferred lease obligations to reflect the excess of rent expense over cash payments since inception of these leases.

 

30


NELLIX, INC.

(A Development Stage Company)

 

NOTE 13 — SUBSEQUENT EVENT:

On March 31, 2010, the Company amended September 28, 2009 bridge loan subordinated secured convertible promissory note with Essex Woodlands Health Ventures VII, L.P (together with its affiliates entities as Essex may determine “Essex”), and certain existing investors. The amendment permits the Company to increase the commitment amount to $10,000,000. The Company received additional bridge loan funding totaling $6,894,766, since year end.

During July 2010, the Company was out of compliance with certain covenants related to WTI growth capital loan. The out of compliance issue could potential cause the lender to place a lien on the intellectual property. At time of release the Company returned to compliance with covenants.

On August 2, 2010, the Company paid off all principal and accrued interest totaling $3,040,328 consists of $118,377 to Venture Lending & Leasing IV and $2,921,951 to Venture Lending & Leasing V respectively for loans issued on September 24, 2007 and July 23, 2008. The Company is now free of covenants associated with WTI growth capital loan.

 

31


UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma combined financial information is presented to illustrate the estimated effects of Endologix, Inc.’s (the “Company”) merger with Nellix, Inc. (“Nellix”) on December 10, 2010 (the “Merger”) pursuant to the terms of that certain Agreement and Plan of Merger and Reorganization, dated as of October 27, 2010 (the “Merger Agreement”), by and among the Company, Nellix and the other parties named therein, and reflects the Company’s historical results as adjusted on a pro forma basis to give effect to (a) the Merger and (b) the private placement offering of the Company’s common stock (the “Private Placement Transaction”) contemplated by that certain Securities Purchase Agreement, dated as of October 27, 2010, as amended December 9, 2010 (the “Purchase Agreement”), by and between the Company and Essex Woodlands Health Ventures Fund VII, L.P. (“Essex Woodlands Fund VII”). The estimated adjustments to effect the Merger and the Private Placement Transaction are described in the notes to the unaudited pro forma combined financial information.

The unaudited pro forma combined balance sheet information reflects the Merger and the Private Placement Transaction as if they occurred on September 30, 2010, and the unaudited pro forma combined statement of operations information for the twelve months ended December 31, 2009 and the nine months ended September 30, 2010 reflect the Merger and the Private Placement Transaction as if they occurred on January 1, 2009.

The unaudited pro forma combined financial information was derived by adjusting the Company’s historical financial statements. The Company’s management believes that the adjustments provide a reasonable basis for presenting the significant effects of the Merger and the Private Placement Transaction. The unaudited pro forma combined financial information is provided for illustrative purposes only and is based upon available information and assumptions that the Company’s management believes are reasonable under the circumstances. The unaudited pro forma combined financial information is not necessarily indicative of what the operating results or financial position of the Company would have been had the Merger and the Private Placement Transaction been completed on the dates indicated, nor are they necessarily indicative of future operating results or financial position. The Company and Nellix may have performed differently had they been combined during the periods presented.

The pro forma adjustments are preliminary and are based upon available information and certain assumptions described in the accompanying notes to unaudited pro forma condensed combined financial information that management believes are reasonable under the circumstances. All known revisions to the purchase price allocations will be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 10-K”). Allocations within the Company’s 2010 10-K may differ from the allocations within this Amendment No. 1 to Current Report on Form 8-K (the “Amended Report”) as the pro forma adjustments in this Amended Report are based on the Nellix balance sheet as of September 30, 2010, whereas the 2010 10-K purchase accounting will be based on the Nellix balance sheet as of December 10, 2010. The establishment of the fair value of consideration for acquisitions requires the extensive use of accounting estimates and management judgment to establish the fair value of consideration, including contingent consideration. The allocation of the purchase price of tangible and identifiable intangible assets acquired and liabilities assumed also requires the extensive use of accounting estimates and management judgment to determine their respective fair values. The purchase price for Nellix was allocated to identifiable tangible and intangible assets acquired and liabilities assumed based on a preliminary estimate of fair values as of December 10, 2010, with any excess being allocated to goodwill. Significant judgment is required in determining the fair values of identifiable intangible assets, certain tangible assets and certain liabilities assumed. Such a valuation requires detailed estimates and assumptions. Management believes the fair values assigned to the assets to be acquired and liabilities to be assumed are based on reasonable estimates and assumptions. Preliminary fair value estimates and resulting purchase price allocations may change if additional information becomes available.

 

32


UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET

AS OF SEPTEMBER 30, 2010

(in thousands)

 

    Historical     Pro Forma
Adjustments
(Merger)
    Pro Forma
Adjustments
(Private
Placement
Transaction)
    Pro Forma
Combined
 
    Endologix     Nellix        
    (Unaudited)  

ASSETS

         

Current assets:

         

Cash and cash equivalents

  $ 22,871      $ 1,219      $ 120 (A)    $ 15,000 (H)    $ 39,210   

Restricted cash equivalents

    —          120        (120 )(A)        —     

Accounts receivable

    12,675        —          —            12,675   

Other receivables

    127        —          —            127   

Inventories

    7,286        —          —            7,286   

Other current assets

    429        332        —            761   
                                       

Total current assets

    43,388        1,671        —          15,000        60,059   
                                       

Property and equipment, net

    2,100        812            2,912   

Goodwill

    4,631        —          11,790 (B)      4,214 (H)      20,635   

Intangibles, net

    5,050        70        31,305 (C)        36,425   

Other assets

    178        30            208   
                                       

Total assets

  $ 55,347      $ 2,583      $ 43,095      $ 19,214      $ 120,239   
                                       

LIABILITIES AND STOCKHOLDERS’ EQUITY

         

Current liabilities:

         

Accounts payable and accrued expenses

  $ 9,404      $ 2,110      $ (689 )(D)      $ 10,825   

Current portion of long term debt

    82        10,676        (10,676 )(D)        82   
                                 

Total current liabilities

    9,486        12,786        (11,365       10,907   

Long-term liabilities:

         

Long term debt

    21        4        (4 )(D)        21   

Other long-term liabilities

    1,034        28        23,300 (E)        24,362   
                                 

Total long-term liabilities

    1,055        32        23,296          24,383   
                                 

Total liabilities

    10,541        12,818        11,931          35,290   
                                 

Commitments and contingencies

         

Stockholders’ equity:

         

Preferred stock

    —          26,644        (26,644 )(F)        —     

Common stock

    50        278        (278 )(F)      3 (H)      56   
        3 (G)     

Additional paid-in capital

    192,652        3,412        (3,412 )(F)      19,211 (H)      232,789   
        20,926 (G)     

Accumulated deficit

    (147,235     (40,569     40,569 (F)        (147,235

Treasury stock, at cost

    (661     —              (661
                                       

Total stockholders’ equity

    44,806        (10,235     31,164        19,214        74,806   
                                       

Total liabilities and stockholders’ equity

  $ 55,347      $ 2,583        43,095        19,214      $ 120,239   
                                       

See accompanying notes to unaudited pro forma condensed combined consolidated financial statements.

 

33


UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED

STATEMENT OF OPERATIONS

For the year ended December 31, 2009

(in thousands, except per share date)

 

     Historical     Pro Forma
Adjustments
(Merger)
    Pro Forma
Combined
 
     Endologix     Nellix      

Revenues

     52,441        —          —        $ 52,441   

Cost of revenue

     13,181        —          —          13,181   
                                

Gross profit

     39,260        —          —          39,260   

Operating expenses:

        

Research, development and clinical

     6,569        —          8,448 (I)      15,017   

Marketing and sales

     26,483        —          198 (I)      26,681   

General and administrative

     8,550        —          1,713 (I)      10,263   

Salary and Wages

     —          4,521        (4,521 )(I)      —     

Development Expenses

     —          3,521        (3,521 )(I)      —     

Professional Services

     —          666        (666 )(I)      —     

Depreciation

     —          385        (385 )(I)      —     

Travel & Lodging

     —          377        (377 )(I)      —     

Rent

     —          248        (248 )(I)      —     

Marketing and Selling Expenses

     —          159        (159 )(I)      —     

Repairs and Maintenance

     —          151        (151 )(I)      —     

Shipping and Delivery

     —          105        (105 )(I)      —     

Insurance

     —          94        (94 )(I)      —     

Utilities

     —          37        (37 )(I)      —     

Taxes & Licenses

     —          34        (34 )(I)      —     

Office Expenses

     —          35        (35 )(I)      —     

Membership Dues

     —          14        (14 )(I)      —     

Equipment Maintenance & Rent

     —          12        (12 )(I)      —     
                                

Total operating expenses

     41,602        10,359        —          51,961   
                                

Loss from operations

     (2,342     (10,359     —          (12,701

Other income (expense):

        

Interest income

     48        14        —          62   

Interest expense

     (192     (1,177     —          (1,369

Other income (expense)

     52        2        —          54   
                                

Total other expense

     (92     (1,161     —          (1,253
                                

Net loss

   $ (2,434   $ (11,520     —        $ (13,954
                                

Basic and diluted net loss per share

   $ (0.05     —          —        $ (0.27
                                

Shares used in computing basic and diluted net loss per share

     45,194        —          6,341 (J)      51,535   
                                

See accompanying notes to unaudited pro forma condensed combined consolidated financial statements.

 

34


UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED

STATEMENT OF OPERATIONS

For the nine months ended September 30, 2010

(in thousands, except per share date)

 

     Historical     Pro Forma
Adjustments
(Merger)
    Pro Forma
Combined
 
     Endologix     Nellix      

Revenues

   $ 48,008        —          —        $ 48,008   

Cost of revenue

     10,795        —          —          10,795   
                                

Gross profit

     37,213        —          —          37,213   

Operating expenses:

        

Research, development and clinical

     8,039        —          6,089 (I)      14,128   

Marketing and sales

     23,134        —          159 (I)      23,293   

General and administrative

     6,957        —          1,194 (I)      8,151   

Salary and Wages

     —          3,477        (3,477 )(I)      —     

Development Expenses

     —          2,298        (2,298 )(I)      —     

Professional Services

     —          574        (574 )(I)      —     

Depreciation

     —          324        (324 )(I)      —     

Travel & Lodging

     —          218        (218 )(I)      —     

Rent

     —          179        (179 )(I)      —     

Marketing and Selling Expenses

     —          40        (40 )(I)      —     

Repairs and Maintenance

     —          124        (124 )(I)      —     

Shipping and Delivery

     —          40        (40 )(I)      —     

Insurance

     —          40        (40 )(I)      —     

Utilities

     —          29        (29 )(I)      —     

Taxes & Licenses

     —          51        (51 )(I)      —     

Office Expenses

     —          29        (29 )(I)      —     

Membership Dues

     —          12        (12 )(I)      —     

Equipment Maintenance & Rent

     —          7        (7 )(I)      —     
                                

Total operating expenses

     38,180        7,442        —          45,572   
                                

Loss from operations

     (917     (7,442     —          (8,359

Other income (expense):

        

Interest income

     22        1        —          23   

Interest expense

     (11     (3,064     —          (3,075

Other income (expense)

     (165     —          —          (165
                                

Total other expense

     (154     (3,063     —          (3,217
                                

Net loss

   $ (1,071   $ (10,505     —        $ (11,576
                                

Basic and diluted net loss per share

   $ (0.02     —          —        $ (0.21
                                

Shares used in computing basic and diluted net loss per share

     48,390        —          6,341 (J)      54,731   
                                

See accompanying notes to unaudited pro forma condensed combined consolidated financial statements.

 

35


NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED

FINANCIAL STATEMENTS

1. Description of Transaction

On December 10, 2010, the Company completed the Merger pursuant to the terms of the Merger Agreement. As a result of the Merger, Nellix became a wholly-owned subsidiary of the Company.

Upon the closing of the Merger, and in accordance with the terms of the Merger Agreement, the Company issued the Closing Merger Shares (as defined in the Merger Agreement) to the stockholders of Nellix in exchange for the shares of Nellix common stock and preferred stock outstanding immediately prior to the closing of the Merger, other than dissenting shares. In addition, the Company may be required to issue to the Nellix stockholders as contingent consideration additional shares of the Company’s common stock upon the Company’s achievement of certain performance milestones set forth in the Merger Agreement.

Concurrent with the closing of the Merger, and in accordance with the terms of the Purchase Agreement, the Company issued and sold to Essex Woodlands Fund VII, and Essex Woodlands Fund VII purchased from the Company, the Private Placement Shares (as defined in the Purchase Agreement), at purchase price of $4.731 per share, resulting in gross proceeds to the Company of $15,000,000.

2. Basis of Presentation

The unaudited pro forma condensed combined consolidated financial statements, which have been prepared by the Company have been derived from historical consolidated financial statements of the Company and historical financial statements of Nellix.

The unaudited pro forma condensed combined consolidated financial statements were prepared in accordance with Securities and Exchange Commission Regulation S-X Article 11, using the purchase method of accounting based on Accounting Standards Codification (ASC) 805, “Business Combinations”, and are based on the historical consolidated financial statements of the Company and the acquired business lines after giving effect to the shares of the Company’s common stock to be issued by the Company to consummate the Merger, as well as pro forma adjustments.

ASC 805 requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values, as determined in accordance with ASC 820, “Fair Value Measurements,” as of the acquisition date and that the fair value of acquired in-process research and development be recorded on the balance sheet regardless of the likelihood of success as of the acquisition date. In addition, ASC 805 establishes that the consideration transferred be measured at the closing date of the asset acquisition at the then-current market price, which may be different than the amount of consideration assumed in these unaudited pro forma condensed combined consolidated financial statements.

ASC 820, as amended, defines the term “fair value” and sets forth the valuation requirements for any asset or liability measured at fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined in

 

36


NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

 

ASC 820, as amended, as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal (or the most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. As a result of these standards, the Company may be required to record assets which are not intended to be used or sold and/or to value assets at fair value measures that do not reflect the Company’s intended use of those assets. Many of these fair value measurements can be highly subjective and it is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

Under the purchase method of accounting, the assets acquired and liabilities assumed will be recorded as of the completion of the asset acquisition, primarily at their respective fair values and added to those of our company. Financial statements and reported results of operations of the Company issued after completion of the Merger will reflect these values, but will not be retroactively restated to reflect the historical financial position or results of operations of Nellix.

Under ASC 805, acquisition-related transaction costs (i.e., advisory, legal, valuation, other professional fees) and certain acquisition-related restructuring charges impacting the target company are expensed in the period in which the costs are incurred.

3. Accounting Policies

Following the consummation of the Merger, we are performing a detailed review of Nellix’s accounting policies. As a result of that review, it may become necessary to conform the combined company’s financial statements to be consistent with those accounting policies that are determined to be more appropriate for the combined company. The unaudited pro forma condensed combined consolidated financial statements do not assume any differences in accounting policies.

4. Preliminary Purchase Price Determination

The following is a preliminary estimate of consideration expected to be transferred to effect the Merger:

The total estimated consideration is $48.4 million.

 

Initial consideration for completion of merger

   $ 25.1   

Discounted consideration for contingent payments

     23.3   
        

Total purchase consideration

   $ 48.4   
        

Contingent Merger Consideration

In addition to the initial consideration, the former stockholders of Nellix may receive additional shares of common stock upon the Company’s achievement of certain performance milestones, provided that the Company achieves such performance milestones prior to the expiration of one of Nellix’s significant patents (the “Earn-Out Period”). These payments are collectively referred to as the “Contingent Payments” and such shares are collectively referred to as the “Contingent Merger Shares.”

OUS Milestone

In the event that the Company’s sales of one of Nellix’s products (the “Nellix Product”) outside of the United States exceed $10,000,000 within a certain time period following the Company’s receipt of CE mark approval for the Nellix Product (the “OUS Milestone”), the Company will issue additional shares of its common stock to the former Nellix stockholders. The dollar value of the shares of common stock to be issued upon achievement of the OUS Milestone ranges from a high of $24,000,000 if the OUS Milestone is achieved within eight months following receipt of CE mark approval, to a low of $10,000,000 if the OUS Milestone is achieved in any twelve-month period more than six years following receipt of CE mark approval. For example, if the Company achieves the OUS Milestone during any consecutive twelve-month period ending after the one year anniversary of CE mark approval, but on or prior to the three year anniversary of CE mark approval, the Company will issue a number of additional shares of common stock with a dollar value equal to $20,000,000. The price per share of the shares of common stock to be issued upon achievement of the OUS Milestone will be equal to the average per share closing price of the Company’s common stock on the NASDAQ Global Market for the 30 consecutive trading days ending on the fifth trading day immediately preceding the date on which the OUS Milestone is achieved, subject to a floor of $3.50 and a ceiling of $7.50. The maximum aggregate number of shares of common stock issuable to the Nellix stockholders if the OUS Milestone is achieved is 6,857,142.

PMA Milestone

In the event that the Company receives approval from the FDA to sell the Nellix Product in the United States (the “PMA Milestone”), the Company will issue additional shares of its common stock to the former stockholders of Nellix. The dollar value of the shares of common stock to be issued upon achievement of the PMA Milestone will be equal to $15,000,000 (less the dollar value of certain cash payments and other deductions). The price per share of the shares of the common stock to be issued upon achievement of the PMA Milestone will be equal to the average per share closing price of the common stock on the NASDAQ Global Market for the 30 consecutive trading days ending on the fifth trading day immediately preceding the date on which the Company receives approval from the FDA to sell the Nellix Product in the United States, subject to a stock price floor of $4.50 per share, but not subject to a stock price ceiling. The maximum aggregate number of shares of common stock issuable to the Nellix stockholders if we achieve the PMA Milestone is 3,333,333.

Acceleration of Contingent Payments

In the event that prior to the expiration of the Earn-Out Period, the Company undergoes a Change of Control (as defined in the Merger Agreement), the Company is obligated to issue all then unissued Contingent Merger Shares due upon the achievement of the OUS Milestone and the PMA Milestone, whether or not the Company is then using or commercializing the Nellix Product, unless the Company has abandoned the technology and intellectual property related to the Nellix Product for clinical safety or efficacy reasons.

Management has preliminarily estimated the probabilities of success for the above milestones, and has taken into account the probability of a Change of Control. On the basis of this analysis, the value of contingent merger consideration is discounted.

5. Preliminary Allocation of Consideration Transferred

The estimated consideration of $48.4 million was allocated to the net tangible and intangible assets acquired and liabilities assumed based on their fair values as follows (in millions):

 

Cash and Cash Equivalents

   $ 1.3   

Other current Assets

     0.3   

Identifiable Intangible Assets

     31.3   

Fixed Assets

     0.8   

Other Assets

     0.1   

Accounts Payable and Accrued Expenses

     (1.4 )

Goodwill

     16.0   
        

Total purchase consideration

   $ 48.4   
        

Of the total consideration, the Company allocated $31.3 million to identifiable intangible assets that are not yet being amortized as they are considered to be in-process research and development (“IPR&D”), which when completed will begin to be amortized over its estimated useful life. The Company expects to utilize the straight line method of amortization for the IPR&D when completed. This allocation is preliminary and is based on the Company’s estimates. The amount ultimately allocated to intangible assets may differ materially from this preliminary allocation.

The fair value of the identified intangible assets was estimated by performing a discounted cash flow analysis using the “income” approach. This method includes a forecast of direct revenues and costs associated with the respective intangible assets and charges for economic returns on tangible and intangible assets utilized in cash flow generation. Net cash flows attributable to the identified intangible assets are discounted to their present value at a rate commensurate with the perceived risk. The projected cash flow assumptions considered contractual relationships, customer attrition, eventual development of new technologies and market competition.

Assumptions used in forecasting cash flows for each of the identified intangible assets included consideration of the following:

 

   

Historical performance including sales and profitability.

 

   

Business prospects and industry expectations.

 

   

Estimated economic life of asset.

 

   

Development of new technologies.

 

   

Acquisition of new customers.

 

   

Attrition of existing customers.

 

   

Obsolescence of technology over time.

The factors that contributed to a purchase price resulting in the recognition of goodwill include:

 

   

The Company’s belief that the Merger will create a more diverse medical device company with expansive offerings which will enable the Company to expand its product offerings.

 

   

The Company’s belief that it and Nellix are each committed to improving cost structures and that the Company’s and Nellix’s combined efforts after the Merger should result in a realization of cost savings and an improvement of overall efficiencies.

 

37


NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

 

6. Pro Forma Adjustments

Pro forma adjustments reflect those matters that are a direct result of the Merger, which are factually supportable and, for pro forma adjustments to the pro forma condensed combined consolidated statement of operations, are expected to have continuing impact. The pro forma adjustments are based on preliminary estimates which may change as additional information is obtained.

Adjustments included in the column under the heading “Pro Forma Adjustments” represent the following:

 

  (A) Pursuant to the Merger Agreement, the cash held by Nellix at the time of the Merger was used to buy additional shares of the Company’s common stock.

 

  (B) Goodwill represents the excess of purchase price over the fair value of Nellix’s net assets, including identifiable intangible assets, acquired in the Merger. Goodwill to be recorded in connection with the Merger may differ from the amount presented here as management obtains all information that it has arranged to obtain and that is known to be available, and adjusts the allocation of purchase price accordingly and because the purchase price accounting will be based on the Company’s stock price at the closing of the Merger.

 

  (C) Portions of the purchase price are expected to be allocated to indefinite IPR&D which was identified by the Company’s management and has been valued on a number of factors in a preliminary appraisal. The pro forma adjustment amounts reflect the Company’s management’s preliminary estimates of the fair values of assets to be acquired and liabilities to be assumed at the date of the Merger.

 

  (D) Pursuant to the Merger Agreement, Nellix used proceeds from the Merger to pay off all debt, including accrued interest.

 

  (E) Represents the estimated discounted value of future contingent payments related to the Merger Agreement. These estimates are preliminary because the Company’s management has not yet obtained all of the information that it has arranged to obtain and that is known to be available.

 

  (F) The pro forma adjustments represent the elimination of Nellix’s stockholders equity accounts.

 

  (G) The value of shares of the Company’s common stock issued at the closing of the Merger, based on $6.06 per share, which represents the closing price of the Company’s common stock on December 10, 2010, the date of closing of the Merger.

 

  (H) The pro forma adjustments represent the Private Placement Transaction whereby the Company sold 3,170,577 shares of its common stock at a price of $4.731 per share on December 10, 2010 to Essex Woodlands Fund VII for total aggregate consideration of $15,000,000. The difference between the closing price of the Company’s common stock on December 10, 2010 of $6.06 per share and the purchase price of $4.731 per share, a total of $4,214,000, was traded as additional purchase consideration.

 

  (I) To reclassify Nellix accounts to conform with our captions.

 

  (I) The weighted average number of shares is based on the Company’s historical weighted average shares outstanding and increased to give effect to the issuance of approximately 6,370,000 shares in connection with the Merger and the Private Placement Transaction.

 

38


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 hereunto duly authorized.

 

    ENDOLOGIX, INC.
Date: January 10, 2011     /s/    ROBERT J. KRIST        
    Robert J. Krist
    Chief Financial Officer


EXHIBIT INDEX

 

Exhibit

Number

  

Description

23.1

   Consent of Berger Lewis Accountancy Corporation, independent accountants.