Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - ENDOLOGIX INC /DE/elgx_ex322x3312017-q1.htm
EX-32.1 - EXHIBIT 32.1 - ENDOLOGIX INC /DE/elgx_ex321x3312017-q1.htm
EX-31.2 - EXHIBIT 31.2 - ENDOLOGIX INC /DE/elgx_ex312x3312017-q1.htm
EX-31.1 - EXHIBIT 31.1 - ENDOLOGIX INC /DE/elgx_ex311x3312017-q1.htm
EX-10.2 - EXHIBIT 10.2 - ENDOLOGIX INC /DE/elgx_ex102.htm
EX-10.1 - EXHIBIT 10.1 - ENDOLOGIX INC /DE/elgx_ex101.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________________________________________________ 
FORM 10-Q
 __________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to ________
Commission file number 000-28440 
 __________________________________________________
elgxnewlogoa02.jpg
ENDOLOGIX, INC.
(Exact name of registrant as specified in its charter) 
 __________________________________________________  
Delaware
68-0328265
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
2 Musick, Irvine, California 92618
(Address of principal executive offices)
(949) 595-7200
(Registrant’s telephone number, including area code)
   ________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
Accelerated filer
 
o
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
Smaller reporting company
 
o
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
On May 1, 2017, there were 82,975,063 shares outstanding of the registrant’s only class of common stock.
 
 
 
 
 



ENDOLOGIX, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2017

TABLE OF CONTENTS
 
Item
Description
Page
 
 
 
 
Item 1.
 
 
Condensed Consolidated Balance Sheets at March 31, 2017 and December 31, 2016
 
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2017 and 2016
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016
 
Item 2.
Item 3.
Item 4.
 
 
 
Item 1.
Item 1A.
Risk Factors
Item 6.
 




Part I. Financial Information
 
ENDOLOGIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
(Unaudited)

March 31,

December 31,

2017

2016
ASSETS



Current assets:




Cash and cash equivalents
$
15,541


$
26,120

Restricted cash
2,001


2,001

Marketable securities
18,496


20,988

Accounts receivable, net allowance for doubtful accounts of $1,080 and $1,037, respectively.
30,386


34,430

Other receivables
952


1,787

Inventories
42,694


41,160

Prepaid expenses and other current assets
2,886


3,359

Total current assets
$
112,956


$
129,845

Property and equipment, net
22,275


23,265

Goodwill
120,736


120,711

Intangibles, net
83,560


84,511

Deposits and other assets
1,335


1,352

Total assets
$
340,862


$
359,684





LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Accounts payable
$
9,612


$
13,237

Accrued payroll
20,162


19,997

Accrued expenses and other current liabilities
10,585


11,668

Total current liabilities
$
40,359


$
44,902

Deferred income taxes
879


879

Deferred rent
7,908


7,949

Other liabilities
3,727


3,783

Contingently issuable common stock
13,400


12,200

Convertible notes
179,669


177,178

Total liabilities
$
245,942


$
246,891

Commitments and contingencies



Stockholders’ equity:



Convertible preferred stock, $0.001 par value; 5,000,000 shares authorized. No shares issued and outstanding.



Common stock, $0.001 par value; 135,000,000 shares authorized. 83,167,489 and 82,986,244 shares issued, respectively. 82,955,250 and 82,774,005 shares outstanding, respectively.
83


83

Treasury stock, at cost, 212,239 shares.
(2,942
)

(2,942
)
Additional paid-in capital
570,850


567,765

Accumulated deficit
(474,915
)

(453,601
)
Accumulated other comprehensive income
1,844


1,488

Total stockholders’ equity
$
94,920


$
112,793

Total liabilities and stockholders’ equity
$
340,862


$
359,684


The accompanying notes are an integral part of these condensed consolidated financial statements.

1



ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
(Unaudited)

Three Months Ended March 31,
 
2017

2016
Revenue
$
42,612


$
42,366

Cost of goods sold
13,970


14,425

Gross profit
28,642


27,941

Operating expenses:



Research and development
5,530


7,846

Clinical and regulatory affairs
3,835


3,884

Marketing and sales
25,900


27,918

General and administrative
8,873


9,946

Restructuring costs
166


7,323

Settlement costs


4,650

Contract termination and business acquisition expenses


4,778

Total operating expenses
44,304


66,345

Loss from operations
(15,662
)

(38,404
)
Other income (expense):



Interest income
44


62

Interest expense
(4,295
)

(3,782
)
Other expense, net
(47
)

(356
)
Change in fair value of contingent consideration related to acquisition
(1,200
)


Change in fair value of derivative liabilities


(5,088
)
Total other income (expense)
(5,498
)

(9,164
)
Net loss before income tax expense
(21,160
)

(47,568
)
Income tax expense
(154
)

(103
)
Net loss
$
(21,314
)

$
(47,671
)
Other comprehensive income (loss) foreign currency translation
356


(105
)
Comprehensive loss
$
(20,958
)

$
(47,776
)






Basic and diluted net loss per share
$
(0.26
)

$
(0.62
)
Shares used in computing basic and diluted net loss per share
82,928


76,661


The accompanying notes are an integral part of these condensed consolidated financial statements.


2



ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

Three Months Ended March 31,
 
2017

2016
Cash flows from operating activities:



Net loss
$
(21,314
)

$
(47,671
)
Adjustments to reconcile net loss to net cash used in operating activities:



Bad debt expense
23



Depreciation and amortization
2,313


2,232

Stock-based compensation
2,954


2,882

Change in fair value of derivative liabilities


5,088

Change in fair value of contingent consideration related to acquisition
1,200



Accretion of interest & amortization of deferred financing costs on convertible notes
2,547


2,279

Non-cash foreign exchange loss
4


270

Changes in operating assets and liabilities:





Accounts receivable and other receivables
5,004


(4,186
)
Inventories
(1,463
)

1,240

Prepaid expenses and other current assets
450


638

Accounts payable
(4,517
)

(4,067
)
Accrued payroll
131


4,498

Accrued expenses and other liabilities
(285
)

3,439

Net cash used in operating activities
$
(12,953
)

$
(33,358
)
Cash flows from investing activities:





Maturities of marketable securities
2,500


9,350

Purchases of property and equipment
(390
)

(891
)
Acquisition of business, net of cash acquired of $0 and $24,012, respectively


(60,622
)
Net cash (used in) provided by investing activities
$
2,110


$
(52,163
)
Cash flows from financing activities:





Proceeds from exercise of stock options
131


500

Net cash provided by financing activities
$
131


$
500

Effect of exchange rate changes on cash and cash equivalents
133


241

Net (decrease) in cash and cash equivalents
$
(10,579
)

$
(84,780
)
Cash and cash equivalents, beginning of period
26,120


124,553

Cash and cash equivalents, end of period
$
15,541


$
39,773

Supplemental disclosure of cash flow information:



Cash paid for interest
$
170


$

       Cash paid for income taxes
$
42


$
110

Non-cash investing and financing activities:



       Acquisition of property and equipment included in accounts payable
$
47


$
76

       Fair value of common stock issued for business acquisition
$


$
100,812

Fair value of warrants issued for business acquisition
$


$
44

The accompanying notes are an integral part of these condensed consolidated financial statements.

3



ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)
1. Description of Business, Basis of Presentation, and Operating Segment

(a) Description of Business

Endologix, Inc. (the "Company") is a Delaware corporation with corporate headquarters in Irvine, California and production facilities located in Irvine, California and Santa Rosa, California. The Company develops, manufactures, markets, and sells innovative medical devices for the treatment of aortic disorders. The Company's products are intended for the minimally invasive endovascular treatment of abdominal aortic aneurysms ("AAA"). The Company's AAA products include innovations for minimally-invasive endovascular aneurysm repair ("EVAR") or endovascular aneurysm sealing (“EVAS”), the Company's innovative solution for sealing the aneurysm sac while maintaining blood flow through two blood flow lumens. The Company's current EVAR products include the Ovation® Abdominal Stent Graft System (“Ovation”), and the AFX® Endovascular AAA System (“AFX”) which features the VELA™ Proximal Endograft System (“VELA”) and the AFX2 Bifurcated Endograft System (“AFX2”). The Company's current EVAS product is the Nellix® EndoVascular Aneurysm Sealing System (“Nellix EVAS System”). Sales of the Company's EVAR and EVAS platforms (including extensions and accessories) to hospitals in the U.S. and Europe, and to third-party international distributors worldwide, provide the sole source of the Company's reported revenue.

On February 3, 2016, the Company completed the previously announced acquisition of TriVascular Technologies, Inc. (“TriVascular”). The acquisition expanded our product offering and intellectual property, increased our sales force, and enhanced our product development capabilities.

The Company’s Ovation products consist of a radiopaque nitinol stent for suprarenal fixation and a low-permeability polytetrafluoroethylene (PTFE) graft. The stent is designed with integral anchors to enable fixation to the aortic wall. To seal the graft and to provide support for the aortic body legs into which the iliac limbs are deployed, the graft contains a network of inflatable rings that are filled with a liquid polymer that solidifies during the deployment procedure.

The Company's AFX products consist of (i) a cobalt chromium alloy stent covered by polytetrafluoroethylene (commonly referred to as "ePTFE") graft material (“Stent Graft”) and (ii) accompanying delivery systems. Once fixed in its proper position within the abdominal aortic bifurcation, the Company's AFX device provides a conduit for blood flow, thereby relieving pressure within the weakened or “aneurysmal” section of the vessel wall, which greatly reduces the potential for the AAA to rupture.

The Company's Nellix EVAS System product consists of (i) bilateral covered stents with endobags, (ii) a biocompatible polymer injected into the endobags to seal the aneurysm and (iii) a delivery system and polymer dispenser. The Company's EVAS product seals the entire aneurysm sac effectively excluding the aneurysm reducing the likelihood of future aneurysm rupture. Additionally, it has the potential to reduce post procedural re-interventions.
          
(b) Basis of Presentation

The accompanying Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). These financial statements include the financial position, results of operations, and cash flows of the Company, including its subsidiaries, all of which are wholly-owned. All inter-company accounts and transactions have been eliminated in consolidation. For the three months ended March 31, 2017 and 2016, there were no related party transactions.

The interim financial data as of March 31, 2017 is unaudited and is not necessarily indicative of the results for a full year. In the opinion of the Company's management, the interim data includes normal and recurring adjustments necessary for a fair presentation of the Company's financial results for the three months ended March 31, 2017. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations relating to interim financial statements. The interim financial data includes the results of TriVascular Technologies, Inc., beginning on February 3, 2016, the date of the acquisition.

The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Company's audited Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC on March 1, 2017.


4

ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



(c) Operating Segment

The Company has one operating and reporting segment that is focused exclusively on the development, manufacture, marketing, and sale of EVAR and EVAS product for the treatment of aortic disorders. For the three months ended March 31, 2017, all of the Company's revenue and related expenses were solely attributable to these activities. Substantially all of the Company's long-lived assets are located in the U.S.

2. Use of Estimates and Summary of Significant Accounting Policies

The preparation of financial statements in conformity with GAAP requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosure of contingent liabilities. On an on-going basis, the Company's management evaluates its estimates, including those related to (i) collectibility of customer accounts; (ii) whether the cost of inventories can be recovered; (iii) the value of goodwill and intangible assets; (iv) realization of tax assets and estimates of tax liabilities; (v) likelihood of payment and value of contingent liabilities; and (vi) potential outcome of litigation. Such estimates are based on management's judgment which takes into account historical experience and various assumptions. Nonetheless, actual results may differ from management's estimates.
For a complete summary of our significant accounting policies, please refer to Note 2, "Use of Estimates and Summary of Significant Accounting Policies", in Part II, Item 8, of our 2016 Annual Report on Form 10-K for the year ended December 31, 2016, filed March 1, 2017. There have been no material changes to our significant accounting policies during the three months ended March 31, 2017.

3. Balance Sheet Account Detail

(a) Property and Equipment

Property and equipment consisted of the following:
 
March 31,
2017
 
December 31,
2016
Production equipment, molds, and office furniture
$
11,853

 
$
11,714

Computer hardware and software
8,321

 
8,162

Leasehold improvements
15,494

 
15,495

Construction in progress (software and related implementation, production equipment, and leasehold improvements)
922

 
839

Property and equipment, at cost
$
36,590

 
$
36,210

Accumulated depreciation
(14,315
)
 
(12,945
)
Property and equipment, net
$
22,275

 
$
23,265


Depreciation expense for property and equipment for the three months ended March 31, 2017 and 2016 was $1.4 million and $1.3 million, respectively.

(b) Inventories

Inventories consisted of the following:
 
March 31,
2017
 
December 31,
2016
Raw materials
$
12,127

 
$
13,133

Work-in-process
11,844

 
10,139

Finished goods
18,723

 
17,888

Total Inventories
$
42,694

 
$
41,160



5

ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



(c) Goodwill and Intangible Assets

The following table presents goodwill, indefinite lived intangible assets, finite lived intangible assets and related accumulated amortization: 

March 31,
2017

December 31,
2016
Goodwill
$
120,736


$
120,711







Intangible assets:





Indefinite lived intangibles





Trademarks and trade names
$
2,708


$
2,708

In-process research and development
11,200

 
11,200

 
 
 
 
Finite lived intangibles





Developed technology
$
67,600


$
67,600

Accumulated amortization
(4,573
)

(3,810
)
Developed technology, net
$
63,027


$
63,790







Customer relationships
$
7,500


$
7,500

Accumulated amortization
(875
)

(687
)
 Customer relationships, net
$
6,625


$
6,813







Intangible assets (excluding goodwill), net
$
83,560


$
84,511


The change in the carrying amount of goodwill for the three months ended March 31, 2017 is as follows (in thousands):

Balance at January 1, 2017
120,711

Foreign currency translation adjustment
25

Balance at March 31, 2017
$
120,736

Amortization expense for intangible assets for the three months ended March 31, 2017 and 2016 was $0.9 million and $1.0 million, respectively.
Estimated amortization expense for the five succeeding years and thereafter is as follows:
Remainder of 2017
$
2,852

2018
4,575

2019
6,037

2020
7,678

2021
8,920

2022 & Thereafter
39,590

Total
$
69,652



(d) Marketable securities

Investments in held-to-maturity marketable securities consist of the following at March 31, 2017 and December 31, 2016:


6

ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)




March 31, 2017

Amortized
Cost

Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair Value
Agency bonds
$
3,992


$


$
(2
)

$
3,990

Corporate bonds
10,506




(10
)

10,496

Commercial paper
3,998






3,998

Total
$
18,496


$


$
(12
)

$
18,484










December 31, 2016

Amortized
Cost

Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair Value
Agency bonds
$
6,488


$
2


$


$
6,490

Corporate bonds
10,513




(21
)

10,492

Commercial paper
3,987






3,987

Total
$
20,988


$
2


$
(21
)

$
20,969


At March 31, 2017, the Company’s investments included 6 held-to-maturity debt securities in unrealized loss positions with a total unrealized loss of approximately $12 thousand and a total fair market value of approximately $14.5 million. All investments with gross unrealized losses have been in unrealized loss positions for less than 8 months. The unrealized losses were caused by interest rate fluctuations. There was no change in the credit risk of the securities. The Company does not intend to sell the securities and it is not likely that the Company will be required to sell the securities before the expected recovery of their amortized cost bases. There were no realized gains or losses on the investments for the three months ended March 31, 2017. All of the Company's investments of held-to-maturity securities will mature within less than 12 months with an average maturity of 2 months.

(e) Fair Value Measurements

The following fair value hierarchy table presents information about each major category of the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016:

 Fair value measurement at reporting date using:
 
Quoted prices in
active markets for
identical assets
(Level 1)

Significant other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

Total
At March 31, 2017











Cash and cash equivalents
$
15,541


$


$


$
15,541

Restricted cash
$
2,001


$


$


$
2,001

Contingently issuable common stock
$


$


$
13,400


$
13,400

At December 31, 2016











Cash and cash equivalents
$
26,120


$


$


$
26,120

Restricted cash
$
2,001


$


$


$
2,001

Contingently issuable common stock
$


$


$
12,200


$
12,200


There were no re-measurements to fair value during the three months ended March 31, 2017 of financial assets and liabilities that are not measured at fair value on a recurring basis. There were no transfers between Level 1, Level 2 or Level 3 securities during the three months ended March 31, 2017.


7

ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



(f) Financial Instruments Not Recorded at Fair Value on a Recurring Basis

We measure the fair value of our Senior Notes carried at amortized cost quarterly for disclosure purposes. The estimated fair value of the Senior Notes is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar securities. Based on the market prices, the fair value of our long-term debt was $204.0 million as of March 31, 2017 and $187.6 million as of December 31, 2016.

We measure the fair value of our held-to-maturity marketable securities carried at amortized cost quarterly for disclosure purposes. The fair value of marketable securities is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar instruments.

4. Stock-Based Compensation

The Company classifies stock-based compensation expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss, based on the department to which the recipient belongs. Stock-based compensation expense included in cost of goods sold and operating expenses during the three months ended March 31, 2017 and 2016, was as follows:

Three Months Ended

March 31,

2017

2016
Cost of goods sold
$
169


$
273

Operating expenses:





Research and development
260


363

Clinical and regulatory affairs
260


(100
)
Marketing and sales
1,058


1,130

General and administrative
1,207


1,216

Total operating expenses
$
2,785


$
2,609

Total
$
2,954


$
2,882



8

ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



5. Net Loss Per Share
Net loss per share was calculated by dividing net loss by the weighted average number of common shares outstanding for the three months ended March 31, 2017 and 2016.

Three Months Ended

March 31,

2017

2016
Net loss
$
(21,314
)

$
(47,671
)
Shares used in computing basic and diluted net loss per share
82,928


76,661

Basic and diluted net loss per share
$
(0.26
)

$
(0.62
)

The following outstanding Company securities, using the treasury stock method, were excluded from the above calculations of net loss per share because their impact would have been anti-dilutive:

Three Months Ended

March 31,

2017

2016
Common stock options
696


1,023

Restricted stock awards
120


125

Restricted stock units
252


155

  Total
1,068


1,303

As discussed in Note 6, in December 2013, the Company issued $86.3 million in aggregate principal amount of 2.25% Convertible Senior Notes due 2018 (the “2.25% Senior Notes”) in an underwritten public offering. In November 2015, the Company also issued $125.0 million aggregate principal amount of 3.25% Convertible Senior Notes due 2020 (the “3.25% Senior Notes”) in an underwritten public offering. Upon any conversion, the 2.25% Senior Notes and/or 3.25% Senior Notes, (collectively the "Senior Notes") may be settled, at the Company’s election, in cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock. For purposes of calculating the maximum dilutive impact, the Company presumed that the Senior Notes will be settled in common stock with the resulting potential common shares included in diluted earnings per share if the effect is more dilutive. The effect of the conversion of the Senior Notes is excluded from the calculation of diluted loss per share because the impact of these securities would be anti-dilutive. The potential dilutive effect of these securities is shown in the chart below:

Three Months Ended

March 31,

2017

2016
Conversion of the Notes
14,767


14,767


The effect of the contingently issuable common stock is excluded from the calculation of basic net loss per share until all necessary conditions for issuance have been satisfied. Refer to Note 9 of the Notes to the Condensed Consolidated Financial Statements for further discussion.

6. Credit Facilities

2.25% Convertible Senior Notes

On December 10, 2013, the Company issued $86.3 million in aggregate principal amount of 2.25% Convertible Senior Notes (the “2.25% Senior Notes”). The 2.25% Senior Notes mature on December 15, 2018 unless earlier repurchased by the Company or converted. The Company received net proceeds of approximately $82.6 million from the sale of the 2.25% Senior Notes, after deducting underwriting discounts and commissions and offering expenses payable by the Company. Interest is payable on the 2.25% Senior Notes on June 15 and December 15 of each year, beginning June 15, 2016.

9

ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)




The 2.25% Senior Notes are governed by the terms of a base indenture (the “Base Indenture”), as supplemented by the first supplemental indenture relating to the 2.25% Senior Notes (the “First Supplemental Indenture,” and together with the Base Indenture, the “Indenture”), between the Company and Wells Fargo Bank, National Association (the “Trustee”), each of which were entered into on December 10, 2013.

The 2.25% Senior Notes are senior unsecured obligations and are: (a) senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the 2.25% Senior Notes; (b) equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; (c) effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and (d) and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries.

The Company may not redeem the 2.25% Senior Notes prior to December 15, 2016. On or after December 15, 2016, the Company may redeem for cash all or any portion of the 2.25% Senior Notes, at its option, but only if the closing sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the second trading day immediately preceding the date on which the Company provides notice of redemption, exceeds 130% of the conversion price on each applicable trading day. The redemption price will equal 100% of the principal amount of the 2.25% Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2.25% Senior Notes.

Holders may convert their 2.25% Senior Notes at any time prior to the close of business on the business day immediately preceding September 15, 2018 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2014, if the closing sale price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the 2.25% Senior Notes in effect on each applicable trading day; (2) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the 2.25% Senior Notes for each such trading day was less than 98% of the closing sale price of the Company’s common stock on such date multiplied by the then-current conversion rate; (3) if the Company calls all or any portion of the notes for redemption, at any time prior to the close of business on the second scheduled trading day prior to the redemption date; or (4) upon the occurrence of specified corporate events. On or after September 15, 2018 until the close of business on the second scheduled trading day immediately preceding the stated maturity date, holders may surrender their 2.25% Senior Notes for conversion at any time, regardless of the foregoing circumstances.

Upon conversion, the Company will, at its election, pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock.

The initial conversion rate of the 2.25% Senior Notes will be 41.6051 shares of the Company’s common stock for each $1,000 principal amount of 2.25% Senior Notes, which represents an initial conversion price of approximately $24.04 per share. Following certain corporate transactions that occur on or prior to the stated maturity date or the Company’s delivery of a notice of redemption, the Company will increase the conversion rate for a holder that elects to convert its 2.25% Senior Notes in connection with such a corporate transaction.

If a fundamental change (as defined in the Indenture) occurs prior to the stated maturity date, holders may require the Company to purchase for cash all or any portion of their 2.25% Senior Notes at a fundamental change purchase price equal to 100% of the principal amount of the 2.25% Senior Notes to be purchased, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date.
The 2.25% Senior Notes Indenture contains customary terms and covenants and events of default with respect to the 2.25% Senior Notes. If an event of default (as defined in the Indenture) occurs and is continuing, either the Trustee or the holders of at least 25% in aggregate principal amount of the outstanding 2.25% Senior Notes may declare the principal amount of the 2.25% Senior Notes to be due and payable immediately by notice to the Company (with a copy to the Trustee). If an event of default arising out of certain events of bankruptcy, insolvency or reorganization involving the Company or a significant subsidiary (as set forth in the Indenture) occurs with respect to us, the principal amount of the 2.25% Senior Notes and accrued and unpaid interest, if any, will automatically become immediately due and payable.


10

ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



The Company was not required to separate the conversion option in the 2.25% Senior Notes under ASC 815, "Derivatives and Hedging", and has the ability to settle the 2.25% Senior Notes in cash, common stock or a combination of cash and common stock, at its option. In accordance with cash conversion guidance contained in ASC 470-20, "Debt with Conversion and Other Options", the Company accounted for the 2.25% Senior Notes by allocating the issuance proceeds between the liability and the equity component. The equity component is classified in stockholders’ equity and the resulting discount on the liability component is accreted such that interest expense equals the Company’s nonconvertible debt borrowing rate. The separation was performed by first determining the fair value of a similar debt that does not have an associated equity component. That amount was then deducted from the initial proceeds of the 2.25% Senior Notes as a whole to arrive at a residual amount, which was allocated to the conversion feature that is classified as equity. The initial fair value of the indebtedness was $66.9 million resulting in a $19.3 million allocation to the embedded conversion option. The embedded conversion option was recorded in stockholders’ equity and as debt discount, to be subsequently accreted to interest expense over the term of the 2.25% Senior Notes. Underwriting discounts and commissions and offering expenses totaled $3.7 million and were allocated between the liability and the equity component in proportion to the allocation of proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. As a result, $2.9 million attributable to the indebtedness was recorded as deferred financing costs in other assets, to be subsequently amortized as interest expense over the term of the 2.25% Senior Notes, and $0.8 million attributable to the equity component was recorded as a reduction to additional paid-in-capital in stockholders’ equity. During the three months ended March 31, 2016, the Company adopted ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs" utilizing retrospective application as permitted. As a result, the Company reclassified $1.9 million of debt issuance costs from current and non-current other assets to reduce the 2.25% Senior Notes as of December 31, 2015.

As of March 31, 2017, the Company had outstanding borrowings of $78.8 million, and deferred financing costs of $1.2 million, related to the 2.25% Senior Notes. There are no principal payments due during the term. Annual interest expense on these notes will range from $5.7 million to $6.9 million through maturity.

Capped Call Transactions

On December 10, 2013, in connection with the pricing of the 2.25% Senior Notes and the exercise in full of their overallotment option by the underwriters, the Company entered into privately-negotiated capped call transactions (the “Capped Call Transactions”) with Bank of America, N.A., an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated. The Capped Call Transactions initial conversion rate and number of options substantially corresponds to each $1,000 principal amount of 2.25% Senior Notes. The Company used approximately $7.4 million of the net proceeds from the 2.25% Senior Notes offering to pay for the cost of the Capped Call Transactions.

The Capped Call Transactions are separate transactions entered into by the Company with Bank of America, N.A., are not part of the terms of the 2.25% Senior Notes and will not change the holders’ rights under the 2.25% Senior Notes. The Capped Call Transactions have anti-dilution adjustments substantially similar to those applicable to the 2.25% Senior Notes. The Capped Call Transactions are derivative instruments that are recorded within stockholders’ equity because they meet an exemption from mark-to-market derivative accounting.

The Capped Call Transactions are expected generally to reduce the potential dilution and/or offset potential cash payments that the Company is required to make in excess of the principal amount upon conversion of the 2.25% Senior Notes in the event that the market price per share of the Company’s common stock, as measured under the terms of the Capped Call Transactions, is greater than the strike price of the Capped Call Transactions, which initially corresponds to the $24.04 conversion price of the 2.25% Senior Notes. If, however, the market price per share of the Company’s common stock, as measured under the terms of the Capped Call Transactions, exceeds the initial cap price of $29.02, there would nevertheless be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that such market price exceeds the cap price of the Capped Call Transactions.

The Company will not be required to make any cash payments to Bank of America, N.A. or any of its affiliates upon the exercise of the options that are a part of the Capped Call Transactions, but will be entitled to receive from Bank of America, N.A. (or an affiliate thereof) a number of shares of the Company’s common stock and/or an amount of cash generally based on the amount by which the market price per share of the Company’s common stock, as measured under the terms of the Capped Call Transactions, is greater than the strike price of the Capped Call Transactions during the relevant valuation period under the Capped Call Transactions. However, if the market price of the Company’s common stock, as measured under the terms of the Capped Call Transactions, exceeds the cap price of the Capped Call Transactions during such valuation period under the Capped Call Transactions, the number of shares of common stock and/or the amount of cash the Company expects to receive upon

11

ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



exercise of the Capped Call Transactions will be capped based on the amount by which the cap price exceeds the strike price of the Capped Call Transactions.

For any conversions of 2.25% Senior Notes prior to the close of business on the 55th scheduled trading day immediately preceding the stated maturity date of the 2.25% Senior Notes, including without limitation upon an acquisition of the Company or similar business combination, a corresponding portion of the Capped Call Transactions will be terminated. Upon such termination, the portion of the Capped Call Transactions being terminated will be settled at fair value (subject to certain limitations), as determined by Bank of America, N.A., in its capacity as calculation agent under the Capped Call Transactions, which the Company expects to receive from Bank of America, N.A., and no payments will be due Bank of America, N.A. The capped call expires on December 13, 2018.

3.25% Convertible Senior Notes due 2020
On November 2, 2015, the Company issued $125.0 million aggregate principal amount of 3.25% Senior Convertible Notes due 2020 (the “3.25% Senior Notes”). The 3.25% Senior Notes are governed by the Base Indenture, as amended and supplemented by the second supplemental indenture relating to the 3.25% Senior Notes (the “Second Supplemental Indenture,” and together with the Base Indenture, the “3.25% Senior Notes Indenture”), dated as of November 2, 2015, by and between the Company and the Trustee.
The 3.25% Senior Notes are senior unsecured obligations and are: senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the 3.25% Senior Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated, including the 2.25% Senior Notes; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries.
The 3.25% Senior Notes accrue interest at a rate of 3.25% per year, payable semi-annually in arrears on May 1 and November 1 of each year, commencing May 1, 2016. The 3.25% Senior Notes mature on November 1, 2020, unless earlier purchased, redeemed or converted into shares of common stock in accordance with the terms of the 3.25% Senior Notes Indenture.
The Company may not redeem the 3.25% Senior Notes prior to November 1, 2018. On or after November 1, 2018, the Company may redeem for cash all or any portion of the 3.25% Senior Notes, at its option, but only if the closing sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the second trading day immediately preceding the date on which the Company provides notice of redemption, exceeds 130% of the conversion price on each applicable trading day. The redemption date can be no sooner than 30 trading days from the date on which notice of redemption is provided to the holders, during which time, up until two trading days prior to the redemption, the holders may elect to convert all or a portion of the 3.25% Senior Notes into shares of the Company’s common stock. The redemption price will equal 100% of the principal amount of the 3.25% Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 3.25% Senior Notes.
The 3.25% Senior Notes are convertible at the option of the holders: (1) in the calendar quarter following any quarter in which, for at least 20 out of the 30 consecutive trading days (whether or not consecutive) ending on the last day of the quarter, the closing price of the Company’s common stock is more than 130% of the then-current conversion price of the 3.25% Senior Notes; (2) in the five business days following any five day period in which the trading price per $1,000 note was less than 98% of the product of the closing sale price of the Company’s common stock and the current conversion rate; (3) in the event that the Company has provided notice of redemption, but no later than two trading days prior to Company’s proposed redemption date; or (4) upon the occurrence of specified corporate events. On or after August 1, 2020 until the close of business on the second scheduled trading day immediately preceding the stated maturity date, holders may surrender their 3.25% Senior Notes for conversion at any time, regardless of the foregoing circumstances.
The initial conversion rate of the 3.25% Senior Notes is 89.4314 shares of the Company’s common stock per 1,000 principal amount of the 3.25% Senior Notes, which is equivalent to an initial conversion price of approximately $11.18 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events. Upon conversion, the Company will at its election pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock.
If a fundamental change (as defined in the 3.25% Senior Notes Indenture) occurs prior to the stated maturity date, holders may require the Company to purchase for cash all or any portion of their 3.25% Senior Notes at a fundamental change purchase price equal to 100% of the principal amount of the 3.25% Senior Notes to be purchased, plus accrued and unpaid interest.

12

ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



The 3.25% Senior Notes Indenture contains customary terms and covenants and events of default with respect to the 3.25% Senior Notes. If an event of default (as defined in the 3.25% Senior Notes Indenture) occurs and is continuing, either the Trustee or the holders of at least 25% in aggregate principal amount of the outstanding 3.25% Senior Notes may declare the principal amount of the 3.25% Senior Notes to be due and payable immediately by notice to the Company (with a copy to the Trustee). If an event of default arising out of certain events of bankruptcy, insolvency or reorganization involving the Company or a significant subsidiary (as set forth in the 3.25% Senior Notes Indenture) occurs with respect to us, the principal amount of the 3.25% Senior Notes and accrued and unpaid interest, if any, will automatically become immediately due and payable.
Upon issuance and through December 31, 2015, the Company was not required to separate the conversion option from the 3.25% Senior Notes under ASC 815, "Derivatives and Hedging". However, because the Company has the ability to settle the 3.25% Senior Notes in cash, common stock or a combination of cash and common stock, the Company applied the cash conversion guidance contained in ASC 470-20, "Debt With Conversion and other Options", and accounted for the 3.25% Senior Notes by allocating the issuance proceeds between the liability-classified debt component and a separate equity component attributable to the conversion option. The equity component is classified in stockholders’ equity and the resulting discount on the liability component is accreted such that interest expense equals the Company’s borrowing rate for nonconvertible loan products of similar duration. The separation was performed by first determining the fair value of a similar debt that does not have an associated equity component. That amount was then deducted from the initial proceeds of the 3.25% Senior Notes as a whole to arrive at a residual amount, which was allocated to the conversion feature that is classified as equity. The initial fair value of the indebtedness was $97.8 million resulting in a $27.2 million allocation to the embedded conversion option. The embedded conversion option was recorded in stockholders’ equity and as a debt discount, to be subsequently accreted to interest expense over the term of the 3.25% Senior Notes. Underwriting discounts and commissions and offering expenses totaled $3.7 million and were allocated between the liability and the equity component in proportion to the allocation of proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. As a result, $2.9 million attributable to the indebtedness was recorded as deferred financing costs  in other assets, to be subsequently amortized as interest expense over the term of the 3.25% Senior Notes, and $0.8 million attributable to the equity component was recorded as a reduction to additional paid-in-capital in stockholders’ equity. The company adopted ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs" during the first quarter of 2016, utilizing retrospective application as permitted. As a result, the Company reclassified $2.9 million of debt issuance costs from other assets to reduce the convertible notes as of December 31, 2015.
As of March 31, 2017, the Company had outstanding borrowings of $104.3 million, and deferred financing costs of $2.2 million, related to the 3.25% Senior Notes. There are no principal payments due during the term. Annual interest expense on these 3.25% Senior Notes will range from $9.1 million to $10.7 million through maturity.
In connection with its merger with TriVascular Technologies, Inc. ("TriVascular") in February 2016, the Company issued 13.6 million shares of common stock as consideration to the former stockholders. As a result of the Company's issuance of such shares in the merger, the quantity of authorized common shares available for future issuance was reduced to a level insufficient to honor all of the potential common shares underlying instruments then outstanding. Such instruments include the conversion options related to the 3.25% Senior Notes and 2.25% Senior Notes, employee stock options, restricted stock units, contingently issuable common stock relating to the prior Nellix acquisition, and stock warrants. The creation of this authorized share deficiency in February 2016 required the Company, during the first quarter of 2016, to separate as a stand-alone derivative the 3.25% Senior Notes conversion option and a portion of the 2.25% Senior Notes conversion option for which no authorized shares are available to effect share settlement in the event of a conversion. Accordingly, in February 2016 the Company re-classed $24.8 million of the conversion features originally recorded in stockholder’s equity of the Senior Notes to derivative liabilities which will be marked to market each period until the Company authorizes sufficient new common shares to alleviate the deficiency.
On June 2, 2016, the Company amended their Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 100,000,000 to 135,000,000, which is currently at a level sufficient to alleviate the share deficiency. Accordingly, on June 2, 2016, the Company re-classed $68.6 million of the conversion features of the Senior Notes from derivative liabilities to additional paid-in capital.
For the three months ended March 31, 2016, the Company recorded $5.1 million as a fair value adjustment of derivative liabilities. The primary factor causing the change in the fair value of the derivative liability was during the period February 3, 2016 through June 2, 2016 when the Company's stock price increased. Adjustments to the fair value of the derivative liabilities are recognized within other income (expense) in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
The value of the derivative liabilities were estimated using a “with” and “without” approach utilizing observable and unobservable inputs causing this to be a Level 3 measurement. In the “with” scenario, the value of the Senior Notes were estimated in a binomial lattice model that considers all terms of the Senior Notes, including the conversion features, with a range of probabilities and assumptions related to the timing and likelihood of the conversion features being exercised by either the

13

ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



Company or the holders of the Senior Notes. In the “without” scenario the value of the Senior Notes absent the conversion options were estimated. The difference between the values estimated in the “with” and “without” scenarios represents the value of the derivative liabilities. Changes in the value of the derivative liabilities were driven by changes in the Company’s stock price, expected volatility, credit spreads, and market yields.

Bank of America line of credit

On July 21, 2015, the Company entered into a revolving credit facility with Bank of America, N.A. (“BOA”), whereby the Company could borrow up to $20.0 million (the “BOA Credit Facility”). All amounts owing under the BOA Credit Facility would become due and payable upon its expiration on July 21, 2017. A sub-feature in the line of credit allowed for the issuance of up to $10.0 million in letters of credit. The BOA Credit Facility was collateralized by all of the Company's assets, except its intellectual property. The BOA Credit Facility could be terminated at any time during the two year term by the Company upon three business days notice. The BOA Credit Facility usage was priced at a spread over the one, two, three and six month LIBOR rates, and was subject to a covenant related to timely providing publicly reported information and a liquidity covenant tied to “Unencumbered Liquid Assets” ("ULA") of not less than $30.0 million. If not in default, the Company had the ability to reduce the ULA covenant requirement by reducing the BOA Credit Facility, with the ULA maintained at 1.5 times the BOA Credit Facility.
The Company terminated the BOA Credit Facility on July 29, 2016 concurrent with its entry into a credit and security agreement with MidCap.

MidCap Credit Facility

On July 29, 2016, the Company entered into a credit and security agreement with MidCap Financial Trust ("MidCap"), as agent for the lenders party thereto and as a lender, whereby the Company may borrow up to the lesser of $50.0 million or its applicable borrowing base of asset-based revolving loans (the “MidCap Credit Facility”). All amounts owing under the MidCap Credit Facility shall accrue interest at a rate equal to the LIBOR Rate plus four and one tenth percent (4.10%). For purposes of the MidCap Credit Facility, LIBOR Rate means a per annum rate of interest equal to the greater of (a) one half of one percent (0.50%) and (b) the rate determined by MidCap by dividing (i) the Base LIBOR Rate, meaning the base London interbank offer rate for the applicable interest period, by (ii) the sum of one minus the daily average during such interest period of the aggregate maximum reserve requirement then imposed under Regulation D of the Board of Governors of the Federal Reserve System for “Eurocurrency Liabilities” (as defined therein). At March 31, 2017, the interest rate was 5.0%. The Company is subject to other fees in addition to interest on outstanding borrowings (“Other Fees”) related to the MidCap Credit Facility. A balance minimum of the lesser of $10.0 million and average borrowing base during the immediately preceding month (“Minimum Balance”) is used in calculating Other Fees as described hereto. The Unused Line Fee is based on the difference between the preceding month’s average outstanding borrowings and the Minimum Balance, multiplied by 0.50% per annum. Additionally, a Minimum Balance Fee is assessed on the positive difference between the Minimum Balance and the preceding month’s average outstanding borrowings, multiplied by the highest, per annum, prevailing interest rate during the month per the MidCap Credit Facility agreement. Lastly, a Collateral Management Fee is assessed on the greater of the preceding month’s average outstanding borrowings or the Minimum Balance, multiplied by 0.50% per annum.

Deferred financing costs directly related to the MidCap Credit Facility such as legal, origination, and professional services fees totaled $0.9 million. In conjunction with the Company’s adoption of ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs” during the first quarter of 2016, the Company also adopted an update thereof or ASU 2015-15 “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of Credit Arrangements.” As a result, $0.9 million attributable to the MidCap Credit Facility was recorded as deferred financing costs in other assets, to be subsequently amortized as interest expense over the term of the MidCap Credit Facility. The MidCap Credit Facility also contains a lockbox arrangement clause requiring the Company to maintain a lockbox bank account in favor of the MidCap Credit Facility; Company cash receipts remitted to the lockbox bank account are swept on a regular basis to reduce outstanding borrowings related to the MidCap Credit Facility.

As of March 31, 2017, the Company had $0 in outstanding borrowings and $0.8 million in deferred financing costs related to the MidCap Credit Facility.

The MidCap Credit Facility includes a subjective acceleration clause that would prompt outstanding borrowings under the credit facility to become immediately due and payable, together with accrued interest and Other Fees. A material adverse change

14

ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



in the Company’s business condition, any default in performance or compliance of the terms set in the MidCap Credit Facility, or the inability to repay the outstanding borrowings based on MidCap’s discretion, can trigger the subjective acceleration clause.

The MidCap Credit Facility is secured by substantially all of the Company's assets, excluding its intellectual property (“Collateral”), and places customary limitations on indebtedness, liens, distributions, acquisitions, investments, and other activities of the Company in a manner designed to protect the Collateral. The Company could be materially affected if it violates any covenants, as MidCap could declare all outstanding borrowing related to the MidCap Credit Facility, together with accrued interest and Other Fees, to be immediately due and payable. The MidCap Credit Facility is also subject to customary affirmative and negative covenants for asset-based revolving credit facilities, including a minimum net revenue covenant. As of March 31, 2017, the Company was in compliance with all financial covenants. The MidCap Credit Facility is scheduled to terminate on July 29, 2020.

In conjunction with the Company’s termination of the BOA Credit Facility and concurrent entry into a credit and security agreement with MidCap in July 2016, the Company entered into a corporate credit card agreement whereby the Company is required to maintain a $2.0 million deposit in favor of the credit card issuer. The deposit account related to these credit cards will be presented as restricted cash on the Company’s Condensed Consolidated Balance Sheet.

On April 3, 2017, the Company replaced the MidCap Credit Facility with a new revolving line of credit with Deerfield ELGX Revolver, LLC and paid $2.6 million in termination fees to MidCap. See Note 13 of the Notes to the Condensed Consolidated Financial Statements.

7. Revenue by Geographic Region
The Company's revenue by geographic region, was as follows:

Three Months Ended
 
March 31,
 
2017

2016
United States
$
30,889


72.5%

$
29,869


70.5%
Total International
$
11,723


27.5%

$
12,497


29.5%
Revenue
$
42,612


100.0%

$
42,366


100.0%

8. Commitments and Contingencies
(a) Leases
The Company leases its administrative, research, and manufacturing facilities located in Irvine, California, Santa Rosa, California and an administrative office located in Rosmalen, The Netherlands. These facility lease agreements require the Company to pay operating costs, including property taxes, insurance and maintenance. In addition, the Company has certain equipment under long-term agreements that are accounted for as operating leases.
In conjunction with the TriVascular merger, the Company assumed the lease for TriVascular's facility in Santa Rosa, California. The facility is being used for manufacturing, research & development, and administrative purposes and consists of 110,000 square feet under an operating lease scheduled to expire in February 2018, which may be renewed for an additional 5 years, at the Company's option.

15

ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



Future minimum payments by year under non-cancelable leases with initial terms in excess of one year were as follows as of March 31, 2017:
Remainder of 2017
$
2,793

2018
2,652

2019
2,431

2020
2,515

2021
2,484

2022 and thereafter
20,401

Total
$
33,276


Facilities rent expense for the three months ended March 31, 2017 and 2016 was $0.9 million and $0.8 million, respectively.
(b) Employment Agreements and Retention Plan
The Company has employment agreements with certain of its executive officers under which payment and benefits would become payable in the event of termination by the Company for any reason other than cause, death or disability or termination by the employee for good reason (collectively, an “Involuntary Termination”) prior to, upon or following a change in control of the Company. The severance payment will generally be in a range of six to eighteen months of the employee’s then current salary for an Involuntary Termination prior to a change in control of the Company, and will generally be in a range of eighteen to twenty-four months of the employee’s then current salary for an Involuntary Termination upon or following a change in control of the Company.
(c) Legal Matters
We are from time to time involved in various claims and legal proceedings of a nature we believe are normal and incidental to a medical device business. These matters may include product liability, intellectual property, employment, and other general claims. Such cases and claims may raise complex factual and legal issues and are subject to many uncertainties, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. We accrue for contingent liabilities when it is probable that a liability has been incurred and the amount can be reasonably estimated. The accruals are adjusted periodically as assessments change or as additional information becomes available.

LifePort Sciences LLC v. Endologix, Inc.
On December 28, 2012, LifePort Sciences, LLC ("LifePort") filed a complaint against the Company in the U.S. District Court, District of Delaware, alleging that certain of the Company's products infringe U.S. Patent Nos. 5,489,295, 5,676,696, 5,993,481, 6,117,167, 6,302,906, and 8,192,482, which were alleged to be owned by LifePort. On March 17, 2016, the Company entered into a Settlement and Patent License Agreement with LifePort (the “Settlement Agreement”) whereby LifePort granted the Company license rights to patents in exchange for a settlement of $4.7 million. The Settlement Agreement resolves this litigation and fully and finally releases the Company and LifePort from any claims arising out of or in connection with the litigation or the subject patents. The Settlement Agreement also contained a covenant not to sue for other patents owned by LifePort. However, since the subject patents were all expired and the Company was not currently using and has no plans to use the other patents owned by LifePort in products that could reach technological feasibility during the covenant not to sue period, there is no alternative future use and the full amount was recorded as settlement costs in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss.

Shareholder Litigation

In January 2017, two stockholders purporting to represent a class of persons who purchased the Company’s securities between August 2, 2016 and November 16, 2016, filed lawsuits against the Company and certain of its officers in the United States District Court for the Central District of California. The lawsuits allege that the Company made materially false and misleading statements and failed to disclose material adverse facts about its business, operational and financial performance, in violation of federal securities laws, relating to Food and Drug Administration (FDA) Premarket Approval (PMA) for the Company’s Nellix EVAS System. The Company believes the lawsuits are without merit and intends to defend itself vigorously.

16

ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



(d) Contract Termination

In the three months ended March 31, 2016, the Company sent notices of termination to certain of its distributors providing for the termination of the respective distribution agreements. In accordance with ASC No. 420 “Exit or Disposal Cost Obligations”, the Company expensed distributor termination costs in the period in which the written notification of termination occurred. As a result, the Company incurred termination costs of $1.6 million for the three months ended March 31, 2016. Such termination costs are included in contract termination and business acquisition expenses for the three months ended March 31, 2016.

9. Contingently Issuable Common Stock
On October 27, 2010, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Nepal Acquisition Corporation, a wholly-owned subsidiary of the Company (“Merger Sub”), Nellix, Inc. ("Nellix"), certain of Nellix’s stockholders named therein and Essex Woodlands Health Ventures, Inc., as representative of the former Nellix stockholders. On December 10, 2010 (the “Nellix Closing Date”), the Company completed the merger (the “Merger”) of Merger Sub with and into Nellix pursuant to the terms of the Merger Agreement. The purchase price consisted of 3.2 million shares of the Company's common stock, issuable to the former Nellix stockholders as of the Nellix Closing Date, then representing a value of $19.4 million. Under the agreement, additional payments, solely in the form of shares of the Company's common stock (the “Contingent Payment”), could be made upon the achievement of a revenue milestone and a regulatory approval milestone (collectively, the “Nellix Milestones”).
Under the merger agreement, the ultimate value of each Contingent Payment would be determined on the date that each Nellix Milestone is achieved. The number of issuable shares would be established using an applicable per share price, which is subject to a ceiling and/or floor, resulting at the closing of the merger in a potential maximum of 10.2 million shares issuable upon the achievement of the Nellix Milestones. As of the Closing Date, the aggregate fair value of the cash Contingent Payment was estimated to be $28.2 million.

The Merger Agreement provides that, in addition to the shares of common stock of the Company (the “Common Stock”) issued to the former Nellix stockholders at the closing of the Merger, if 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 the Common Stock to the former stockholders of Nellix. The dollar value of the shares of the Common Stock to be issued upon achievement of the PMA Milestone will be equal to $15.0 million (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 is subject to a stock price floor of $4.50 per share, but not subject to a stock price ceiling.
As of March 31, 2017 the Company's stock price last closed at $7.24 per share. Thus, had the PMA Milestone been achieved on March 31, 2017 the Contingent Payment would have comprised 2.2 million shares (based on the 30-day average closing stock price ending 5 days prior to the announcement), representing a value of $16.2 million.
The value of the Contingent Payment is derived using a discounted income approach model, with a range of probabilities and assumptions related to the timing and likelihood of achievement of the PMA Milestone (which include Level 3 inputs - see Note 3(e) and the Company's stock price (Level 1 input) as of the balance sheet date). These varying probabilities and assumptions and changes in the Company's stock price have required fair value adjustments of the Contingent Payment in periods subsequent to the Nellix Closing Date.
The Contingent Payment fair value will continue to be evaluated on a quarterly basis until milestone achievement occurs, or until the expiration of the "earn-out period," as defined within the Nellix purchase agreement. Adjustments to the fair value of the Contingent Payment are recognized within other income (expense) in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
 
Fair Value of Contingently Issuable Common Stock
December 31, 2016
$
12,200

Fair Value Adjustment of Contingent Payment for the three months ended March 31, 2017
1,200

March 31, 2017
$
13,400


10. Income Tax Expense

17

ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)




The Company applied an estimated annual effective tax rate (“ETR”) approach for calculating a tax provision for interim periods. The Company recorded a provision for income taxes of $0.2 million and $0.1 million for the three months ended March 31, 2017 and 2016, respectively. The Company's ETR was (0.7)% and (0.2)% for the three months ended March 31, 2017 and 2016, respectively. The Company's ETR for the three months ended March 31, 2017 differs from the U.S. federal statutory tax rate of 34% primarily as a result of nondeductible expenses (including the Nellix Contingent Payment), state income taxes, foreign income taxes, and the impact of a full valuation allowance on its deferred tax assets.

The Company has evaluated the available evidence supporting the realization of its deferred tax assets, including the amount and timing of future taxable income, and has determined that it is more likely than not that its net deferred tax assets will not be realized in the U.S. and certain foreign jurisdictions. Due to uncertainties surrounding the realization of the deferred tax assets, the Company maintains a full valuation allowance against substantially all deferred tax assets. If/when the Company determines that it will be able to realize some portion or all of its deferred tax assets, an adjustment to its valuation allowance on its deferred tax assets would have the effect of increasing net income in the period(s) such determination is made.

11. Restructuring Charges

In the three months ended March 31, 2017, the Company recorded $0.2 million in restructuring costs within operating expenses related to focused reductions of its workforce. The Company began substantially formulating plans around this workforce reduction during the first quarter of 2016 in conjunction with its merger of TriVascular. The targeted reductions and other restructuring activities were initiated to provide efficiencies and realign resources as well as to allow for continued investment in strategic areas and drive growth. The Company expects to incur a total of $11.3 million in restructuring charges upon the completion of the plan, which represents the Company’s best estimate as of March 31, 2017. The recognition of restructuring charges requires that the Company make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned reductions of workforce. At the end of each reporting period, the Company will evaluate the remaining accrued balance to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with developed plans. The following table reflects the movement of activity of the restructuring reserve for the three months ended March 31, 2017:


One-time Termination Benefits
Accrual balance as of December 31, 2016
$
2,754

Restructuring charges
166

Utilization
(1,453
)
Accrual balance as of March 31, 2017
$
1,467


The accrual balance as of March 31, 2017 is classified within accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheet.

12. TriVascular Merger

On February 3, 2016, the Company completed its merger with TriVascular pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated October 26, 2015, by and among Endologix, TriVascular and Teton Merger Sub, Inc., a Delaware corporation and direct wholly-owned subsidiary of Endologix (“Merger Sub”). Pursuant to the terms of the Merger Agreement, Endologix acquired all of TriVascular’s outstanding capital stock through the merger of Merger Sub with and into TriVascular (the “Merger”), with TriVascular surviving the Merger as a wholly-owned subsidiary of Endologix. The Company completed the merger in order to become the innovation leader with broad clinical indications for the treatment of AAA, leverage the combined company’s commercial capabilities, and provide an accelerated path to profitability. The total purchase consideration given related to the acquisition follows:

18

ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



Cash consideration
$
84,634

Common stock consideration
100,812
Fair value of assumed TriVascular stock warrants
44
Total purchase consideration
$
185,490

Common stock consideration consisted of 13,586,503 shares of Endologix common stock, worth $100.8 million based on the market value of $7.42 per share as of the effective date of the Merger on February 3, 2016.
In connection with the Merger, the Company assumed stock warrants, originally issued by TriVascular, and converted them to Endologix stock warrants. The fair value of the stock warrants represents a component of the total consideration for the Merger. Stock warrants assumed were valued using the Black-Scholes option pricing model as of the effective date of the Merger.
The acquisition was recorded by allocating the costs of the net assets acquired based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. The fair values were based on management’s analysis, including work performed by third-party valuation specialists. The following presents the allocation of the purchase consideration to the assets acquired and liabilities assumed on February 3, 2016 (in thousands):
  Cash and cash equivalents
$
24,012

  Short-term investments
3,008

  Accounts receivable
5,780

  Inventories
17,765

  Prepaid expenses and other current assets
1,895

  Property and equipment
3,152

  Intangible assets
46,200

  Other assets
317

  Accounts payable
(2,214
)
  Accrued liabilities and other
(6,450
)
  Notes payable
(61
)
  Net assets acquired
$
93,404

Goodwill
$
92,086

Total preliminary purchase consideration
$
185,490


The goodwill is primarily attributable to strategic opportunities that arose from the acquisition of TriVascular, such as broadening the product portfolio for the treatment of AAA and leveraging the combined company’s technology and commercial capabilities. The goodwill is not deductible for tax purposes.

Pro Forma Condensed Combined Financial Information (Unaudited)

The following unaudited pro forma combined financial information summarizes the results of operations for the period indicated as if the TriVascular merger had been completed as of January 1, 2015. Pro forma information reflects adjustments that are expected to have a continuing impact on our results of operations and are directly attributable to the merger. The unaudited pro forma results include adjustments to reflect, among other things, the amortization of the inventory step-up, direct transaction costs relating to the acquisition, the incremental intangible asset amortization to be incurred based on the preliminary values of each identifiable intangible asset, and to eliminate interest expense related to legacy TriVascular's former loans, which was repaid upon completion of the TriVascular merger. The pro forma amounts do not purport to be indicative of the results that

19

ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



would have actually been obtained if the merger had occurred as of January 1, 2015 or that may be obtained in the future, and do not reflect future synergies, integration costs, or other such costs or savings.

Three Months Ended

March 31, 2016
Combined net sales
$
45,037

Combined net loss from continuing operations
(48,223
)
Combined basic and diluted net loss per share
$
(0.59
)
13. Subsequent Event

Facility Agreement
On April 3, 2017 (the “Agreement Date”), the Company entered into a Facility Agreement (the “Facility Agreement”) with affiliates of Deerfield Management Company, L.P. (collectively, “Deerfield”), pursuant to which Deerfield agreed to loan to the Company up to $120.0 million, subject to the terms and conditions set forth in the Facility Agreement (the “Term Loan”). The Company drew the entire principal amount of the Term Loan on the Agreement Date. The Company agreed to pay Deerfield a yield enhancement fee equal to 2.25% of the principal amount of the funds disbursed on the Agreement Date. The Company also agreed to reimburse Deerfield for all reasonable out-of-pocket expenses incurred by Deerfield in connection with the negotiation and documentation of the Facility Agreement up to a capped amount. Concurrently with entering into the Facility Agreement, the Company entered into a Guaranty and Security Agreement with Deerfield (the “Security Agreement”), pursuant to which, as security for the repayment of the Company’s obligations under the Facility Agreement, the Company granted to Deerfield a first priority security interest in substantially all of the Company’s assets including intellectual property, with the priority of such security interest being pari passu with the security interest granted pursuant to the Facility Agreement.
The net proceeds from the Term Loan were approximately $113.7 million, after deducting the yield enhancement and out-of-pocket expenses. As described below, in April 2017 the Company used approximately $67.1 million of the net proceeds from the Term Loan to repurchase $68 million aggregate principal amount of outstanding 2.25% Senior Notes, plus the accrued but unpaid interest thereon, from the holders thereof in privately negotiated transactions. The Company and Bank of America, N.A., also unwound the portion of the Capped Call Transactions related to the repurchased 2.25% Senior Notes. Endologix intends to use the remainder of the net proceeds from the Term Loan for working capital and general corporate purposes.
Any amounts drawn under the Facility Agreement will accrue interest at a rate of 6.87% per annum, payable quarterly in arrears beginning on July 1, 2017 and on the first business day of each calendar quarter thereafter and on the Maturity Date, unless repaid earlier. The Company will be required to pay Deerfield on each of April 2, 2021, April 2, 2022 and April 2, 2023 (the “Maturity Date”), an amortization payment equal to $40 million (or, if on the Maturity Date, the remaining outstanding principal amount of the Term Loan).
Upon a change of control of the Company, if the acquirer satisfies certain conditions set forth in the Facility Agreement, such acquirer may assume the outstanding principal amount under the Facility Agreement without penalty. If such acquirer does not satisfy the conditions set forth in the Facility Agreement, Deerfield may, at its option, require the Company to repay the outstanding principal balance under the Facility Agreement plus, depending on the timing of the change of control transaction, the Company may be required to pay a make-whole premium and will be required to pay a change of control fee.
At any time on or after the fourth anniversary of the Agreement Date, the Company has the right to prepay any amounts owed under the Facility Agreement without premium or penalty, unless such prepayment occurs in connection with a change of control of the Company, in which case the Company must pay Deerfield a change of control fee unless such change of control occurs beyond a certain period after the Maturity Date. At any time prior to the fourth anniversary of the Agreement Date, any prepayment made by the Company will be subject to a make-whole premium and, if such prepayment occurs in connection with a change of control of the Company, a change of control fee.

20

ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(Unaudited)



Any amounts drawn under the Facility Agreement may become immediately due and payable upon customary events of default, as defined in the Facility Agreement, or the consummation of certain change of control transactions, as described above.
The Facility Agreement contains various representations and warranties, events of default, and affirmative and negative covenants, customary for financings of this type, including reporting requirements, requirements that the Company maintain timely reporting with the U.S. Securities and Exchange Commission (the “Commission”) and restrictions on the ability of the Company and its subsidiaries to incur additional liens on their assets, incur additional indebtedness and acquire and dispose of assets outside the ordinary course of business.

Warrants
In connection with the execution of the Facility Agreement, the Company issued to Deerfield warrants to purchase an aggregate of 6,470,000 shares of common stock of the Company at an exercise price of $9.23 per share (the “Warrants”). The number of shares of common stock of the Company into which the Warrants are exercisable and the exercise price of the Warrants will be adjusted to reflect any stock splits, recapitalizations or similar adjustments in the number of outstanding shares of common stock of the Company.
The Warrants expire on the seventh anniversary of the Agreement Date. Subject to certain exceptions, the Warrants contain limitations such that the Company may not issue shares of common stock of the Company to Deerfield upon the exercise of the Warrants if such issuance would result in Deerfield beneficially owning in excess of 4.985% of the total number of shares of common stock of the Company then issued and outstanding.
The holders of the Warrants may exercise the Warrants for cash, on a cashless basis or through a reduction of an amount of principal outstanding under the Term Loan. In connection with certain major transactions, the holders may have the option to convert the Warrants, in whole or in part, into the right to receive the transaction consideration payable upon consummation of such major transaction in respect of a number of shares of common stock of the Company equal to the Black-Scholes value of the Warrants, as defined therein, and in the case of other major transactions, the holders may have the right to exercise the Warrants, in whole or in part, for a number of shares of common stock of the Company equal to the Black-Scholes value of the Warrants.
Registration Rights Agreement
In connection with the Term Loan and the issuance of the Warrants, the Company entered into a Registration Rights Agreement with Deerfield (the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, the Company has agreed to file a registration statement on Form S-3 (or if Form S-3 is not then available, such other form of registration statement as is then available) with the Commission on or prior to the 30th day following the Agreement Date, to register for resale the shares of common stock of the Company issuable upon the exercise of the Warrants. The aforementioned registration statement was filed on Form S-3 on May 2, 2017.
Credit and Security Agreement
On the Agreement Date, the Company entered into a Credit and Security Agreement (the “Credit Agreement”) with Deerfield ELGX Revolver, LLC (“Deerfield Revolver”), pursuant to which the Company may borrow up to the lesser of $50 million or its applicable borrowing base from time to time prior to March 31, 2020 (the “Revolver”). Any outstanding principal under the Revolver will accrue interest at a rate equal to 3-month LIBOR (with a 1% floor) plus 4.60%, payable monthly in arrears on the first business day of the immediately succeeding calendar month and on the maturity date. The Company is subject to other fees in addition to interest on the outstanding principal amount under the Revolver, including in connection with an early termination of the Revolver. The Revolver replaces the Company’s $50 million asset-based revolving line of credit with MidCap Financial Trust. The Company’s obligations under the Credit Agreement are secured by a first priority security interest in substantially all of the Company’s assets including intellectual property, with the priority of such security interest being pari passu with the security interest granted pursuant to the Term Loan.


21


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Concerning Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward looking statements are intended to qualify for the safe harbor established by the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by the use of forward-looking terminology such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology, or by discussions of strategies, opportunities, plans or intentions. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements. We have based these forward-looking statements largely on our current expectations based on information currently available to us and projections about future events and trends affecting the financial condition of our business. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. These forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Actual results could differ materially from those projected in forward-looking statements as a result of the following factors, among others:

risks associated with our merger with TriVascular Technologies, Inc. (“TriVascular”), including
but not limited to the failure to realize anticipated revenue, operating and cost synergies and other potential benefits
of the merger; costs, fees, expenses and charges associated with the merger which may negatively impact our
financial condition and operating results; and business disruption after the merger, including adverse effects on
employee retention and business relationships with suppliers, customers and other business partners;
failure to realize the anticipated benefits from previous business combination transactions, including our acquisition
of Nellix, Inc. (“Nellix”);
continued market acceptance, use and endorsement of our products;
quality problems with our products;
consolidation in the health care industry;
the success of our clinical trials relating to products under development;
our ability to maintain strong relationships with certain key physicians;
continued growth in the number of patients qualifying for treatment of abdominal aortic aneurysms through our products;
our ability to effectively compete with the products offered by our competitors;
the level and availability of third party payor reimbursement for our products;     
our ability to effectively develop new or complementary products and technologies;
our ability to manufacture our endovascular systems to meet demand;
changes to our international operations including currency exchange rate fluctuations;
our ability to effectively manage our business and keep pace with our anticipated growth;
our ability to develop and retain a direct sales force in the United States and select European countries;
the nature of and any changes to domestic and foreign legislative, regulatory and other legal requirements that apply to us, our products, our suppliers and our competitors;     
the timing of and our ability to obtain and maintain any required regulatory clearances and approvals;
our ability to protect our intellectual property rights and proprietary technologies;
our ability to operate our business without infringing the intellectual property rights and proprietary technology of third parties;
product liability claims;
pending and future litigation;
reputational damage to our products caused by the use, mis-use or off-label use of our products or government or voluntary recalls of our products;
our utilization of single source supplier for specialized components of our product lines;
our ability to attract, retain, and motivate qualified personnel;
our ability to make future acquisitions and successfully integrate any such future-acquired businesses;
our ability to maintain adequate liquidity to fund our operational needs and research and developments expenses;
our ability to identify and manage risks; and
general macroeconomic and world-wide business conditions.

Our actual results, performance or achievements may differ materially from any future results, performance or achievements expressed or implied from such forward-looking statements. Important factors that could cause our actual results, performance or

22


achievements to differ materially from our expectations are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 1, 2017, including but not limited to those factors discussed in “Management's Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” “Consolidated Financial Statements” and “Notes to Consolidated Financial Statements.” All subsequent written and oral forward-looking statements attributable to us or by persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.

Our forward-looking statements speak only as of the date each such statement is made. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations, except as required by applicable law or the rules and regulations of the SEC and The NASDAQ Stock Market, LLC.

Overview
Our Business
Our corporate headquarters is located in Irvine, California and we have manufacturing facilities located in Irvine and Santa Rosa, California. We develop, manufacture, market, and sell innovative medical devices for the treatment of aortic disorders. Our principal products are intended for the treatment of abdominal aortic aneurysms ("AAA"). Our AAA products are built on one of two platforms: (a) traditional minimally-invasive endovascular aneurysm repair ("EVAR") or (b) endovascular aneurysm sealing (“EVAS”), our innovative solution for sealing the aneurysm sac while maintaining blood flow through two blood flow lumens. Our current EVAR products include the AFX® Endovascular AAA System, or the AFX System, the VELA® Proximal Endograft, and the Ovation® Abdominal Stent Graft System, or the Ovation System. Our current EVAS product is the Nellix ® Endovascular Aneurysm Sealing System, or the Nellix EVAS System. We sell our products through our direct U.S. and European sales forces and third-party international distributors and agents in other parts of the world.
See Item 1. of our Annual Report on Form 10-K for the year ended December 31, 2016, entitled "Business," for a discussion of:
Market Overview and Opportunity
Our Products
Manufacturing and Supply
Marketing and Sales
Competition
Product Developments and Clinical Trials

When used in this report, “we,” “our,” “us” or “Endologix,” refer to Endologix, Inc. and our consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires. Endologix®, AFX®, Nellix®, IntuiTrak®, Ovation®, VELA®, Ovation Prime®, Duraply®, Ovation Alto®, and CustomSeal®, are registered trademarks of Endologix, Inc. and its subsidiaries. ActiveSeal™ and the respective product logos are trademarks of Endologix, Inc. and its subsidiaries.

Recent Highlights of Our Product Development Initiatives, Clinical Trials and Regulatory Approvals

Nellix EVAS System
 
The Nellix EVAS System consists of (i) bilateral covered stents with endobags, (ii) a biocompatible polymer injected into the endobags to seal the aneurysm and (iii) a delivery system and polymer dispenser. The Nellix EVAS System seals the entire aneurysm sac effectively excluding the aneurysm reducing the likelihood of future aneurysm rupture. We have the following trials in process to build independent and collective clinical and economic evidence of clinical safety and effectiveness:

EVAS FORWARD Global Registry - This study is designed to provide real world clinical results to demonstrate the effectiveness and broad applicability of the Nellix EVAS System. The first phase of the registry included 300 patients enrolled in up to 30 international centers. The first patient in the registry was treated in October 2013. In September 2014, we announced completion of patient enrollment in the Nellix EVAS FORWARD Global Registry. In November 2016, we announced updated data on 300 patients with a mean follow-up of 25 months. In 2017, the EVAS FORWARD Global Registry 2 commenced a post market evaluation of the Nellix 3.5 EVAS System. In November 2016, we also announced positive 2-year results from the Nellix EVAS FORWARD Global Registry. The following outcomes were presented at the annual VEITH meeting:

37% of the patients had complex anatomies;
98% freedom from any persistent endoleaks at latest follow-up;
No secondary interventions for Type II endoleaks;
97% freedom from aneurysm-related mortality; and

23



99% freedom from cardiovascular mortality.

EVAS FORWARD IDE - We developed this pivotal clinical trial to evaluate the safety and effectiveness of the Nellix EVAS System. This study is a prospective single arm registry which enrolled 179 patients at 29 centers in the United States and Europe. In November 2014, we completed enrollment in the EVAS FORWARD IDE, and we submitted the one year results to the U.S. Food and Drug Administration (the “FDA”) in March 2016. In May 2016, we announced the results of the one year clinical data from the EVAS FORWARD IDE study that demonstrate that the Nellix EVAS System met the study primary endpoints for major adverse events at 30 days (safety) and treatment success at one year (effectiveness).

In November 2016, we provided an update on the Nellix PMA process and reported that the FDA had requested that we provide current patient follow-up data at two-years from the EVAS FORWARD IDE Study. We reported that we expect this data to be available and submitted to the FDA in the second quarter of 2017, followed by a possible FDA Advisory Committee Panel meeting by the end of 2017, and potential PMA approval of the Nellix EVAS System in the second quarter of 2018.

ASCEND Registry - In April 2016, we announced the first data presentation with one-year outcomes from the ASCEND Registry (Aneurysm Study for Complex AAA: Evaluation of Nellix Durability), a physician-initiated registry of the Nellix EVAS System used with aortic branch stent grafts for the treatment of patients with complex AAAs. 

AFX

The AFX System consists of (i) a cobalt chromium alloy stent covered by expanded polytetrafluoroethylene (commonly referred to as “ePTFE”) graft material and (ii) accompanying delivery systems. Once fixed in its proper position within the abdominal aortic bifurcation, the AFX System provides a conduit for blood flow, thereby relieving pressure within the weakened or “aneurysmal” section of the vessel wall, which greatly reduces the potential for the AAA to rupture. In February 2014, we launched a new proximal extension in the United States, VELA, designed to be used in conjunction with our AFX bifurcated device. VELA features a circumferential graft line marker and controlled delivery system that enable predictable deployment and final positional adjustments. We began a commercial introduction of VELA in Europe in January 2015.

In September 2014, we announced a new clinical study called LEOPARD (Looking at EVAR Outcomes by Primary Analysis of Randomized Data). This study will provide a real-world comparison of the AFX System versus other commercially available EVAR devices. We designed the LEOPARD study to randomize and enroll up to 800 patients at 80 leading centers throughout the United States and commenced enrollment in the first quarter of 2015. The centers are a mix of our current and new customers, with each investigator selecting one competitive device to randomize against the AFX System. The LEOPARD study is being led by an independent steering committee of leading physicians who are involved with the study and responsible for presenting the results over the five-year follow-up period.

In December 2015, we announced that the AFX System received Shonin approval from the Japanese Ministry of Health, Labor and Welfare (“MHLW”).

In February 2016, we announced the completion of the first United States commercial implant of our AFX2 Bifurcated Endograft System (“AFX2”). AFX2 reduces procedure steps for the delivery and deployment of the bifurcated endograft. AFX2 also facilitates percutaneous endovascular aneurysm repair (“PEVAR”) by providing the lowest profile contralateral access through a 7F introducer. These improvements bring together our ActiveSeal™ technology, DuraPly® PTFE graft material and VELA Proximal Endograft, into an integrated new EVAR system.

In December 2016, we received notice from our Notified Body in the European Union that the CE Mark for the AFX System and AFX2 would be suspended due to reports of Type III endoleaks with a prior generation of the device. We had, for our current generation of AFX products, implemented device and graft material improvements and updated instructions for use resulting in a substantial reduction in reported Type III endoleaks. We provided documentation of the foregoing reduction in Type III endoleaks to our Notified Body. In January 2017, we received notice from our Notified Body that the CE Mark for the AFX System and AFX2 had been re-instated, effective immediately.

In addition, in December 2016, we placed a temporary hold on shipments of the AFX System and AFX2 to complete an investigation of a manufacturing issue with some sizes of these devices. In late December 2016, we removed the temporary hold on, and resumed shipments of, all sizes of the AFX System and some sizes of AFX2, and in January 2017 we removed the temporary hold on, and resumed shipments of, all sizes of AFX2.

Ovation

24




The Ovation System consists of (i) a radiopaque nitinol suprarenal stent with integral anchors, (ii) a low-permeability
polytetrafluoroethylene (“PTFE”), aortic body graft that contains a network of inflatable rings filled with a liquid polymer that
solidifies during the deployment procedure, (iii) nitinol iliac limb stents encapsulated with PTFE, and (iv) accompanying ultra-low
profile delivery systems, auto injector and fill polymer kit. The Ovation System creates a custom seal that conforms to anatomical
irregularities and the ultra-low profile system navigates tortuous anatomies.
         
In May 2011, we initiated a three-year European Post Market Registry to enroll 500 patients across 30 European Centers. Enrollment ended in December 2013. In January 2017, we announced positive three-year results from the Ovation EU Post Market Registry. The data were presented at the 2017 LINC meeting and showed that the Ovation platform has the broadest range of patient applicability on IFU of all commercially available infrarenal endovascular AAA devices. The resulting outcomes included:

99% freedom from aneurysm-related mortality;
99% freedom from migration, rupture, and conversion;
97% freedom from Type I/III endoleak; and
Excellent freedom from secondary intervention for occlusion (97%), Type I endoleak (97%) and Type II endoleak 95%.

In October 2014, TriVascular initiated the LIFE Study to illustrate the potential advantages of a fast tract protocol including PEVAR, no general anesthesia, no time in ICU and a one night stay in the hospital with the Ovation System. In May 2016, we announced the completion of enrollment of 250 patients at 34 sites participating in the LIFE Study. In September 2016, we announced the results of the one-month clinical data from the LIFE Study that demonstrate that the Ovation System met the study primary endpoint for major adverse events at 30 days and the following highlights of the presentation, with outcomes covering one-month follow-up, include:

Low major adverse event (MAE) rate of 0.4%;
No ruptures, conversion, or secondary interventions;
99% and 100% freedom from type I and type III endoleak;
Fast-Track completed in 216 (87%) patients, with positive results compared to non-Fast-Track patients;
Procedure time of 84 minutes vs. 110 minutes;
General anesthesia use 0% vs. 18%;
ICU stay 0% vs. 32%; and
Mean hospital stay 1.2 vs. 1.9 days.

In early 2015, TriVascular initiated the LUCY Study, a multi-center post-market registry designed to explore the clinical benefits associated with EVAR using the Ovation Abdominal Stent Graft Platform in female patients with AAA, as compared to males. It is the first prospective study evaluating EVAR in females, a population that has historically been underrepresented in EVAR clinical trials. We announced completion of enrollment of 225 patients in the LUCY study in February 2017.

In June 2015, the FDA approved the next generation Ovation iX Iliac Stent Graft for the Ovation System, and in July 2015, the FDA approved the Ovation iX Abdominal Stent Graft System. In September 2015, the first patients were treated with the Ovation iX Abdominal Stent Graft System in Europe, and in August 2015, TriVascular initiated the launch of the Ovation iX System in the United States.

In November 2016, we announced at VEITH that the five-year results from the Global Ovation Pivotal Trial were positive and showed the following outcomes:

Broad patient applicability, with 40% of the patients treated outside the labeled indications of other endovascular aortic repair (EVAR) devices;
Stable aortic neck diameters with an average expansion of 0.1%, compared to 25% as reported with other EVAR devices;
Lowest reported MAE rate across EVAR IDE trials;
97% Freedom from secondary interventions related to type I endoleak; and
No migration, type III endoleaks or conversions.

In August 2016, we announced that the first two patients were treated with the Ovation Alto® Abdominal Stent Graft System(“Ovation Alto”), which is the newest device in the Ovation System. Ovation Alto is an investigational device, currently not approved in any market. Ovation Alto expands EVAR to include the treatment of patients with complex AAAs, specifically patients with very short or otherwise challenging aortic neck anatomy. This is achieved by the conformable O-rings with CustomSeal® polymer that have been repositioned near the top of the endograft, providing seal just below the renal arteries. In November 2016, we received Investigational Device Exemption (“IDE”) approval from the FDA to conduct a clinical study with Ovation Alto in the United States.

25




In March 2017, we announced enrollment of the first patients in the Expanding Patient Applicability with Polymer Sealing Ovation Alto Stent Graft (ELEVATE) IDE clinical study, our pivotal clinical trial to evaluate the safety and effectiveness of Ovation Alto for the repair of infrarenal AAAs. The ELEVATE IDE clinical trial is approved to enroll 75 patients at up to 12 centers in the United States.

Characteristics of Our Revenue and Expenses
Revenue
We derive revenue from sales of our EVAR and EVAS products (including extensions and accessories) to hospitals upon completion of AAA repair procedures, or from sales to distributors upon title transfer (which is typically at shipment), provided our other revenue recognition criteria have been met.
Cost of Goods Sold
Cost of goods sold includes compensation (including stock-based compensation) and benefits of production personnel and production support personnel. Cost of goods sold also includes depreciation expense for production equipment, production materials and supplies expense, allocated facilities-related expenses and certain direct costs such as shipping.
Research and Development
Research and development expenses consist of compensation (including stock-based compensation) and benefits for research and development personnel, materials and supplies, research and development consultants, outsourced and licensed research and development costs and allocated facilities-related costs. Our research and development activities primarily relate to the development and testing of new devices and methods to treat aortic disorders.
Clinical and Regulatory
Clinical and regulatory expenses consist of compensation (including stock-based compensation) and benefits for clinical and regulatory personnel, regulatory and clinical payments related to studies, regulatory costs related to registration and approval activities and allocated facilities-related costs. Our clinical and regulatory activities primarily relate to gaining regulatory approval for the commercialization of our devices.
Marketing and Sales
Marketing and Sales expenses primarily consist of compensation (including stock-based compensation) and benefits for our sales force, clinical specialists, internal sales support functions and marketing personnel. It also includes costs attributable to marketing our products to our customers and prospective customers.
General and Administrative
General and administrative expenses primarily include compensation (including stock-based compensation) and benefits for personnel that support our general operations such as information technology, executive management, financial accounting, and human resources. General and administrative expenses also include bad debt expense, patent and legal fees, financial audit fees, insurance, recruiting fees, other professional services, the federal Medical Device Excise Tax and allocated facilities-related expenses.


26



Results of Operations
Operations Overview - Three Months Ended March 31, 2017 versus 2016
The following table presents our results of continuing operations and the related percentage of the period's revenue (in thousands):

Three Months Ended March 31,

2017

2016
Revenue
$
42,612


100.0%

$
42,366


100.0%
Cost of goods sold
13,970


32.8%

14,425


34.0%
Gross profit
28,642


67.2%

27,941


66.0%
Operating expenses:









Research and development
5,530


13.0%

7,846


18.5%
Clinical and regulatory affairs
3,835


9.0%

3,884


9.2%
Marketing and sales
25,900


60.8%

27,918


65.9%
General and administrative
8,873


20.8%

9,946


23.5%
Restructuring costs
166


0.4%

7,323


17.3%
Settlement costs


—%

4,650


11.0%
Contract termination and business acquisition expenses


—%

4,778


11.3%
Total operating expenses
44,304


104.0%

66,345


156.6%
Loss from operations
(15,662
)

(36.8)%

(38,404
)

(90.6)%
Total other income (expense)
(5,498
)

(12.9)%

(9,164
)

(21.6)%
Net loss before income tax expense
(21,160
)

(49.7)%

(47,568
)

(112.3)%
Income tax expense
(154
)

(0.4)%

(103
)

(0.2)%
Net loss
$
(21,314
)

(50.0)%

$
(47,671
)

(112.5)%

Comparison of the Three Months Ended March 31, 2017 versus 2016
Revenue

Three Months Ended March 31,





2017

2016

Variance

Percent Change

(in thousands)




Revenue
$
42,612


$
42,366


$
246


0.6%

US Sales. Net sales totaled $30.9 million in the three months ended March 31, 2017, a 3.4% increase from $29.9 million in three months ended March 31, 2016, driven by strong sales growth for the Ovation System.
International Sales. Net sales of products in our international regions totaled $11.7 million in the three months ended March 31, 2017, a 6.2% decrease from $12.5 million in the three months ended March 31, 2016, primarily due to the temporary suspension of our CE Mark for the AFX System, lower sales of the Nellix EVAS System related to the narrowed indication partially offset by strong sales of the Ovation System. Our international sales for the three months ended March 31, 2017 included an unfavorable foreign currency impact of approximately $0.3 million when compared to the net sales for the three months ended March 31, 2016, which had a 2.3 percentage point unfavorable impact on the growth rate representing constant currency decline of 3.9%.
     

27



Cost of Goods Sold, Gross Profit, and Gross Margin

Three Months Ended March 31,





2017

2016

Variance

Percent Change

(in thousands)




Cost of goods sold
$
13,970


$
14,425


$
(455
)

(3.2
)%
Gross profit
28,642


27,941


701


2.5
 %
Gross margin percentage (gross profit as a percent of revenue)
67.2
%

66.0
%





Gross margin percentage for the three months ended March 31, 2017 increased to 67.2% from 66.0% for the three months ended March 31, 2016. The three months ended March 31, 2016 included a $2.2 million impact of purchase price accounting for inventory acquired in the TriVascular merger. Excluding this impact, cost of goods increased $1.7 million in the three months ended March 31, 2017 versus 2016. This increase is driven by less leverage of fixed overhead due to lower production volume in 2017.

Operating Expenses

Three Months Ended March 31,





2017

2016

Variance

Percent Change

(in thousands)




Research and development
$
5,530


$
7,846


$
(2,316
)

(29.5)%
Clinical and regulatory affairs
3,835


3,884


(49
)

(1.3)%
Marketing and sales
25,900


27,918


(2,018
)

(7.2)%
General and administrative
8,873


9,946


(1,073
)

(10.8)%
Restructuring costs
166


7,323


(7,157
)

(97.7)%
Settlement costs


4,650


(4,650
)

(100.0)%
Contract termination and business acquisition expenses


4,778


(4,778
)

(100.0)%
Research and Development. The $2.3 million decrease in research and development expenses was attributable to timing of project spending and synergies related to the TriVascular merger.
Clinical and Regulatory Affairs. The slight decrease in clinical and regulatory affairs expenses are due to synergies related to the TriVascular merger.
Marketing and Sales. The $2.0 million decrease in marketing and sales expenses for the three months ended March 31, 2017, as compared to the prior year period, was driven by synergies as a result of the integration of the TriVascular sales and marketing organization.
General and Administrative. The $1.1 million decrease in general and administrative expenses is primarily attributable to a decrease in headcount related to synergies as a result of the TriVascular merger. The targeted reductions were initiated to provide efficiencies and realign resources as well as to allow for continued investment in strategic areas and drive growth.
Restructuring Costs. The $7.2 million decrease in restructuring costs for the three months ended March 31, 2017, as compared to the prior year period is comprised of costs associated with TriVascular executive change in control agreements, severance and retention bonuses as a result of the TriVascular merger.

Settlement Costs. The $4.7 million decrease in settlement costs for the three months ended March 31, 2017, as compared to the prior year period, was a result of the LifePort settlement.

Contract Termination and Business Acquisition Expenses. The $4.8 million decrease in contract termination and business acquisition expenses for the three months ended March 31, 2017, as compared to the prior year period, was primarily related to termination of some of our international distributors as well as deal related expenses associated with the TriVascular merger.



28




Other income (expense), net

Three Months Ended March 31,





2017

2016

Variance

Percent Change

(in thousands)




Other income (expense), net
$
(5,498
)

$
(9,164
)

$
3,666


(40.0)%

Other Income (Expense), Net. Other expense of $5.5 million for the three months ended March 31, 2017 consists mainly of interest expense associated with our convertible notes and change in fair value of contingent consideration related to the Nellix acquisition of $1.2 million. Other expense for the three months ended March 31, 2016 consists mainly of interest expense associated with our convertible note and change in fair value of derivative liabilities of $5.1 million.
Provision for Income Taxes

Three Months Ended March 31,





2017

2016

Variance

Percent Change

(in thousands)




Income tax expense
$
(154
)

$
(103
)

$
(51
)

49.5%
Our income tax expense was $154 thousand and our effective tax rate was (0.7)% for the three months ended March 31, 2017 due to our tax positions in various jurisdictions. During the three months ended March 31, 2017 and 2016, we had operating legal entities in the U.S., Canada, Italy, New Zealand, Poland and the Netherlands (including registered sales branches in certain countries in Europe).

Liquidity and Capital Resources
The chart provided below summarizes selected liquidity data and metrics as of March 31, 2017, December 31, 2016, and March 31, 2016:

March 31, 2017

December 31, 2016

March 31, 2016

(in thousands, except financial metrics data)
Cash and cash equivalents
$
15,541


$
26,120


$
39,773

Marketable securities
$
18,496


$
20,988


$
46,441

Accounts receivable, net
$
30,386


$
34,430


$
36,592

Total current assets
$
112,956


$
129,845


$
172,308

Total current liabilities
$
40,359


$
44,902


$
59,623

Working capital surplus (a)
$
72,597


$
84,943


$
112,685

Current ratio (b)
2.8


2.9


2.9

Days sales outstanding ("DSO") (c)
64


67


78

Inventory turnover (d)
1.3


2.0


1.6

(a) total current assets minus total current liabilities as of the corresponding balance sheet date.
(b) total current assets divided by total current liabilities as of the corresponding balance sheet date.
(c) net accounts receivable at period end divided by revenue for the current period multiplied by the number of days in the period.
(d) cost of goods sold divided by the average inventory balance for the corresponding period.

29



Operating Activities
In the three months ended March 31, 2017, our operating activities used $13.0 million in cash. This was primarily the result of a net loss of $21.3 million, non-cash operating expenses of $9.0 million, and changes in operating assets and liabilities of $0.7 million. In the three months ended March 31, 2016, our operating activities used $33.4 million in cash. This was primarily the result of a net loss of $47.7 million, net non-cash operating expenses of $12.8 million and changes in operating assets and liabilities of $1.6 million.
During the three months ended March 31, 2017 and 2016, our cash collections from customers totaled $46.9 million and $41.5 million, respectively, representing 110.0% and 97.9% of reported revenue for the same periods.
Investing Activities
Cash provided by investing activities for the three months ended March 31, 2017 was $2.1 million, as compared to cash used in investing activities of $52.2 million in the prior year period. For the three months ended March 31, 2017, cash provided by investing activities consisted of $2.5 million in maturities of marketable securities; offset by $0.4 million used for machinery and equipment purchases. For the three months ended March 31, 2016, cash used in investing activities consisted of $60.6 million used for the acquisition of TriVascular and $0.9 million used for machinery and equipment purchases. This was offset by proceeds from the maturities of marketable securities of $9.4 million.
Financing Activities
Cash provided by financing activities was $0.1 million for the three months ended March 31, 2017, as compared to cash provided by financing activities of $0.5 million in the prior year period. For the three months ended March 31, 2017 and 2016, cash provided by financing activities consisted of proceeds of $0.1 million and $0.5 million, respectively, from the exercise of stock options.
Credit Arrangements

See Notes 6 and 13 of the Notes to the Condensed Consolidated Financial Statements.
Future Capital Requirements
We believe that the future growth of our business will depend upon our ability to successfully develop new technologies for the treatment of aortic disorders and successfully bring these technologies to market. We expect to incur significant expenditures in completing product development and clinical trials.
The timing and amount of our future capital requirements will depend on many factors, including:

the need for working capital to support our sales growth;
the need for additional capital to fund future development programs;
the need for additional capital to fund our sales force expansion;
the need for additional capital to fund strategic acquisitions;
our requirements for additional facility space or manufacturing capacity;
our requirements for additional information technology infrastructure and systems; and
adverse outcomes from potential litigation and the cost to defend such litigation.
 
We believe that our world-wide cash resources are adequate to operate our business. We presently have several operating subsidiaries and branches outside of the U.S. As of March 31, 2017, these subsidiaries and branches held an aggregate of $6.5 million in foreign bank accounts to fund their local operations. A portion of these balances relate to undistributed earnings, and are deemed by management to be permanently reinvested in the corresponding country in which our subsidiary operates. Management has no present or planned intention to repatriate foreign earnings into the U.S. However, in the event that we require additional funds in the U.S. and must repatriate any foreign earnings to meet those needs, we would then need to accrue, and ultimately pay, incremental income tax expenses on such “deemed dividend,” unless we then had sufficient net operating losses to offset this potential tax liability.

In the event we require additional financing in the future, it may not be available on commercially reasonable terms, if at all. Even if we are able to obtain financing, it may cause substantial dilution (in the case of an equity financing), or may contain

30



burdensome restrictions on the operation of our business (in the case of debt financing). If we are not able to obtain required financing, we may need to curtail our operations and/or our planned product development.
Contractual Obligations
Contractual obligation payments by year with initial terms in excess of one year were as follows as of March 31, 2017 (in thousands):

Payments due by period


Contractual Obligations
Total
Remainder of 2017
2018
2019
2020
2021
2022 and thereafter
Long-term debt obligations
$
211,250

$

$
86,250

$

$
125,000

$

$

Interest on convertible notes
20,132

6,003

6,003

4,063

4,063



Operating lease obligations
33,276

2,793

2,652

2,431

2,515

2,484

20,401

Total
$
264,658

$
8,796

$
94,905

$
6,494

$
131,578

$
2,484

$
20,401

Refer to Notes 6 and 13 of the Notes to the Condensed Consolidated Financial Statements for a discussion of long-term debt obligations and Note 8 of the Notes to the Condensed Consolidated Financial Statements for a discussion of operating lease obligations.
Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements (except for operating leases) that provide financing, liquidity, market or credit risk support, or involve derivatives. In addition, we have no arrangements that may expose us to liability that are not expressly reflected in the accompanying Condensed Consolidated Financial Statements.

As of March 31, 2017, we did not have any relationships with unconsolidated entities or financial partnerships, often referred to as "structured finance" or "special purpose entities," established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not subject to any material financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Critical Accounting Policies and Estimates
We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States. The preparation of the financial statements requires the use of judgments and estimates that affect the reported amounts of revenues, expenses, assets, liabilities and shareholders’ equity. We have adopted accounting policies and practices that are generally accepted in the industry in which we operate. If these estimates differ significantly from actual results, the impact to the condensed consolidated financial statements may be material.
There have been no material changes in our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for our fiscal year ended December 31, 2016. Please refer to Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for a discussion of our critical accounting policies and estimates.

Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU ") No. 2014-09, "Revenue from Contracts with Customers", which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The FASB agreed to a one-year deferral of the revenue recognition standard's effective date for all entities. The new revenue standard is effective for us on January 1, 2018. Early application is permitted, but not before the original effective date, which would have been January 1, 2017 for us. The new revenue standard permits the use of either the full retrospective or modified retrospective transition method; these methods may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application.

Accordingly, in 2016, we established a cross-functional implementation team to analyze the impact of the new revenue standard. This preliminary analysis included the review of an initial sample of contracts, as well as reviewing current accounting policies and customary business practices to identify potential differences that would result from applying the requirements of the new standard to our revenue contracts. As we continue to assess all potential effects of the new revenue standard, we currently expect revenue related to the completion of an EVAR or EVAS procedure in hospitals, when the EVAR or EVAS

31



products are implanted in a patient, to remain substantially unchanged. We also plan to select a larger sample from our population of contracts in search of additional attributes. In addition, we identified, and are in the process of implementing, appropriate changes to our business processes, systems and controls to support recognition and disclosure under the new revenue standard. We currently expect to adopt the new revenue standard in our first quarter of 2018 utilizing the modified retrospective adoption method. We currently do not expect the new revenue standard to have a material impact on the amount and timing of revenue recognized in our consolidated financial statements. The foregoing preliminary assessments or expectations are subject to change pending further analysis through the 2017 year.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory,” which requires an entity to measure inventory within the scope of the amendment at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We adopted this new accounting standard prospectively in the first quarter of 2017. This new accounting standard did not have a significant impact on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, which amends the FASB Accounting Standards Codification and creates Topic 842, “Leases.” The new topic supersedes Topic 840, “Leases,” and increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosures of key information about leasing arrangements. The guidance is effective for reporting periods beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method. We are currently assessing the impact this guidance will have on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which modifies certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards, and classification in the statement of cash flows. We adopted this standard effective January 1, 2017. As a result, excess tax benefits are no longer recorded in additional paid-in capital and instead are applied against taxes payable or recognized in the condensed consolidated statements of operations. In addition, our income tax expense and associated effective tax rate will be impacted by fluctuations in stock price between the grant dates and vesting dates of equity awards. We also determined that there were no significant changes to disclosure or financial statement presentation and changes in accounting for excess tax benefits and deficiencies were not material as a result of adoption.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance on the presentation and classification of specific cash flow items to improve consistency within the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the effect that ASU 2016-15 will have on our consolidated financial statements and related disclosures.

In October 2016, the FASB issued ASU No. 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” which requires an entity to immediately recognize the tax consequences of intercompany transfer other than inventory. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently assessing the impact this guidance will have on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. This accounting standards update changes the procedural steps in applying the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance is effective prospectively for annual and interim periods beginning after December 15, 2019, with early adoption permitted. We are currently assessing the impact this guidance will have on our consolidated financial statements.


32



Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We do not believe that we currently have material exposure to interest rate or foreign currency transaction risks.

Interest Rate and Market Risk. We have investments in U.S. Government and agency securities, corporate bonds and other debt securities. As a result, we are exposed to potential loss from market risks that may occur as a result of changes in interest rates, changes in credit quality of the issuer or otherwise.

We generally place our marketable security investments in high quality credit instruments, as specified in our investment policy guidelines. A hypothetical 100 basis point increase in interest rates would result in an approximate $38 thousand decrease in the fair value of our investments as of March 31, 2017. We believe, however, that the conservative nature of our investments mitigates our interest rate exposure, and our investment policy limits the amount of our credit exposure to any one issuer (with the exception of United States agency obligations) and type of instrument. We do not expect any material loss from our marketable security investments and therefore believe that our potential interest rate exposure is limited. We intend to hold the majority of our investments to maturity, in accordance with our business plans.

We do not use derivative financial instruments in our investment portfolio. We are averse to principal loss and try to ensure the safety and preservation of our invested funds by limiting default risk, market risk, and reinvestment risk. We attempt to mitigate default risk by investing in only high credit quality securities and by positioning our portfolio to appropriately respond to a significant reduction in the credit rating of any investment issuer or guarantor.

We were exposed to market risk for changes in interest rates on the MidCap Credit Facility. All outstanding amounts under the MidCap Credit Facility bore interest at a variable rate equal to LIBOR, plus 4.10%. As of March 31, 2017, we had no amounts outstanding under the MidCap Credit Facility.

Our 3.25% Senior Notes and 2.25% Senior Notes bear fixed interest rates, and therefore, would not be subject to interest rate risk. The Capped Call Transactions are derivative instruments that qualify for classification within stockholders’ equity because they meet an exemption from mark-to-market derivative accounting. The settlement amounts for the capped call transactions are each determined based upon the difference between a strike price and a traded price of our common stock.

Foreign Currency Transaction Risk. While a majority of our business is denominated in the U.S. dollar, a portion of our revenue and expenses are denominated in foreign currencies. Fluctuations in the rate of exchange between the U.S. dollar and the Euro or the British Pound Sterling may affect our results of operations and the period-to-period comparisons of our operating results. Foreign currency transaction gains and losses are caused by transactions denominated in a currency other than the functional currency and must be remeasured at each balance sheet date or upon settlement. Foreign currency transaction realized and unrealized gains and losses resulted in approximately $4 thousand of loss during the three months ended March 31, 2017, primarily related to intercompany payables and receivables associated with our European operations. We expect to reduce our exposure through future settlements.

Market Price Sensitive Instruments. In connection with our merger with TriVascular Technologies, Inc. (“TriVascular”) in February 2016, we issued 13.6 million shares of our common stock as consideration to the former stockholders of TriVascular. As a result of our issuance of such shares in the merger, the quantity of authorized common shares available for future issuance at that time was reduced to a level insufficient to honor all of the potential common shares underlying instruments then outstanding. Such instruments included the conversion options related to the 3.25% Senior Notes and 2.25% Senior Notes, employee stock options, restricted stock units, contingently issuable common stock relating to the Nellix acquisition, and stock warrants. The creation of this authorized share deficiency in February 2016 required us, during the first quarter of 2016, to separate as a stand-alone derivative the 3.25% Senior Notes conversion option and a portion of the 2.25% Senior Notes conversion option for which no authorized shares are available to effect share settlement in the event of a conversion. Accordingly, in February 2016 we re-classed $24.8 million of the equity component of the Senior Notes to derivative liabilities which will be marked to market each period.  For the three months ended March 31, 2016, we recorded $5.1 million as a fair value adjustment of derivative liabilities primarily based on our stock price increasing from $7.42 to $8.36 from the date of reclassification. The value of the derivative liability and our earnings was subject to market price risk until we increased the number of our authorized common shares to alleviate the deficiency. In June 2016, upon the approval of our stockholders, we amended our certificate of incorporation to increase the number of our authorized common shares eliminating the authorized share deficiency.
 

33



Item 4.
CONTROLS AND PROCEDURES.

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information 

Item 1.
Legal Proceedings.

Refer to Note 8 of the Notes to the Condensed Consolidated Financial Statements for a discussion of our legal proceedings.
We are from time to time involved in various other legal proceedings, most of which are routine litigation in the normal course of our business. We believe that the resolution of the legal proceedings in which we are involved will not have a material adverse effect on our financial position or results of operations.

Item 1A.
Risk Factors.

In evaluating an investment in our common stock, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC on March 1, 2017, as well as the information contained in this Quarterly Report and our other reports we file with the SEC.  There have been no material changes in the risk factors as previously disclosed under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.


34



Item 6.
Exhibit Index.
The following exhibits are filed or furnished herewith: 
Exhibit 10.1
*
Employment Agreement, dated as of February 3, 2016, by and between Endologix, Inc. and Michael Chobotov, Ph.D.
 
 
 
Exhibit 10.2
*
Employment Agreement, dated as of February 3, 2016, by and between Endologix, Inc. and Shari O’Quinn.
 
 
 
Exhibit 31.1
 
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
 
 
Exhibit 31.2
 
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
 
 
Exhibit 32.1
(1)
Certification of Chief Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
 
 
 
Exhibit 32.2
(1)
Certification of Chief Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
 
 
 
Exhibit 101.INS
 
XBRL Instance Document
 
 
 
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Lin Base Document
 
 
 
Exhibit 101.DEF
 
XBRL Taxonomy Extension Definition Link Base Document
 
 
 
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Link Base Document
 
 
 
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Link Base Document
*    Filed herewith.
(1)
Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

35




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 thereunto duly authorized.
 
 
 
ENDOLOGIX, INC.
 
 
 
Date:
May 5, 2017
/s/ John McDermott
 
 
Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
 
Date:
May 5, 2017
 /s/ Vaseem Mahboob
 
 
Chief Financial Officer (Principal Financial and Accounting Officer)
 
 
 


36