e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 |
for the quarterly period ended September 30, 2006.
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o |
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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
ENDOLOGIX, INC.
(Exact name of Registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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68-0328265
(I.R.S. Employer
Identification Number) |
11 Studebaker, Irvine, California 92618
(Address of principal executive offices)
(949) 595-7200
Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer 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 þ
On October 16, 2006, there were 42,639,187 shares of the registrants only class of common stock
outstanding.
ENDOLOGIX, INC.
Form 10-Q
September 30, 2006
TABLE OF CONTENTS
2
ENDOLOGIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
(Unaudited)
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|
|
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September 30, |
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December 31, |
|
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2006 |
|
|
2005 |
|
ASSETS |
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|
|
|
|
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Current assets: |
|
|
|
|
|
|
|
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Cash and cash equivalents |
|
$ |
14,076 |
|
|
$ |
8,191 |
|
Restricted cash equivalents |
|
|
500 |
|
|
|
500 |
|
Marketable securities
available-for-sale, including unrealized
gains (losses) of $1 and $(20) |
|
|
8,900 |
|
|
|
8,959 |
|
Accounts receivable, net of allowance
for doubtful accounts of $0 and $26 |
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|
2,629 |
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|
|
1,248 |
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Other receivables |
|
|
88 |
|
|
|
175 |
|
Inventories |
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|
7,331 |
|
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|
7,372 |
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Other current assets |
|
|
690 |
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|
|
576 |
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|
|
|
|
|
|
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Total current assets |
|
|
34,214 |
|
|
|
27,021 |
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|
|
|
|
|
|
|
Property and equipment, net |
|
|
4,645 |
|
|
|
4,490 |
|
Marketable securities
available-for-sale, including unrealized
losses of $0 and $0 |
|
|
800 |
|
|
|
|
|
Goodwill |
|
|
4,631 |
|
|
|
4,631 |
|
Intangibles, net |
|
|
10,670 |
|
|
|
11,724 |
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Other assets |
|
|
78 |
|
|
|
78 |
|
|
|
|
|
|
|
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Total assets |
|
$ |
55,038 |
|
|
$ |
47,944 |
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|
|
|
|
|
|
|
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|
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|
|
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
3,115 |
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$ |
4,501 |
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|
|
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Total current liabilities |
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|
3,115 |
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|
|
4,501 |
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Long term liabilities |
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|
1,188 |
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|
|
1,236 |
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|
|
|
|
|
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Total liabilities |
|
|
4,303 |
|
|
|
5,737 |
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|
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Commitments and contingencies (Note 12) |
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|
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Stockholders equity: |
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Preferred stock, $0.001 par value; 5,000,000
shares authorized, no shares
issued and outstanding |
|
|
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Common stock, $0.001 par value; 60,000,000
shares authorized,
43,134,000 and 36,679,000 shares issued,
respectively, and 42,639,000 and
36,184,000 shares outstanding,
respectively |
|
|
43 |
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|
37 |
|
|
|
|
|
|
|
|
|
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Additional paid-in capital |
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|
163,091 |
|
|
|
141,903 |
|
Accumulated deficit |
|
|
(111,812 |
) |
|
|
(99,120 |
) |
Treasury stock, at cost, 495,000 shares |
|
|
(661 |
) |
|
|
(661 |
) |
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|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
|
74 |
|
|
|
48 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
50,735 |
|
|
|
42,207 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders
equity |
|
$ |
55,038 |
|
|
$ |
47,944 |
|
|
|
|
|
|
|
|
See accompanying notes
3
ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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|
|
|
|
|
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Three Months Ended |
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Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Product |
|
$ |
3,748 |
|
|
$ |
2,135 |
|
|
$ |
9,869 |
|
|
$ |
4,983 |
|
License |
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|
53 |
|
|
|
66 |
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|
160 |
|
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
|
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Total revenue |
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|
3,801 |
|
|
|
2,201 |
|
|
|
10,029 |
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|
|
5,177 |
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Cost of product revenue |
|
|
1,532 |
|
|
|
866 |
|
|
|
4,449 |
|
|
|
2,093 |
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|
|
|
|
|
|
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|
|
|
|
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Gross profit |
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|
2,269 |
|
|
|
1,335 |
|
|
|
5,580 |
|
|
|
3,084 |
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|
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|
|
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Operating expenses: |
|
|
|
|
|
|
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|
|
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|
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|
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Research, development and clinical |
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|
1,628 |
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|
1,513 |
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|
5,145 |
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|
|
4,346 |
|
Marketing and sales |
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|
4,023 |
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|
|
2,588 |
|
|
|
9,773 |
|
|
|
5,680 |
|
General and administrative |
|
|
1,167 |
|
|
|
1,114 |
|
|
|
4,093 |
|
|
|
3,344 |
|
|
|
|
|
|
|
|
|
|
|
|
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Total operating expenses |
|
|
6,818 |
|
|
|
5,215 |
|
|
|
19,011 |
|
|
|
13,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(4,549 |
) |
|
|
(3,880 |
) |
|
|
(13,431 |
) |
|
|
(10,286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
352 |
|
|
|
208 |
|
|
|
719 |
|
|
|
420 |
|
Other income |
|
|
5 |
|
|
|
5 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
357 |
|
|
|
213 |
|
|
|
739 |
|
|
|
420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,192 |
) |
|
$ |
(3,667 |
) |
|
$ |
(12,692 |
) |
|
$ |
(9,866 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.10 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.32 |
) |
|
$ |
(0.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and
diluted net loss per share |
|
|
42,626 |
|
|
|
35,813 |
|
|
|
39,124 |
|
|
|
33,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
4
ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(12,692 |
) |
|
$ |
(9,866 |
) |
Adjustments to reconcile net loss to net cash used in
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,708 |
|
|
|
1,225 |
|
Amortization of stock-based compensation |
|
|
1,076 |
|
|
|
67 |
|
Change in: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,381 |
) |
|
|
(956 |
) |
Inventories |
|
|
153 |
|
|
|
(3,347 |
) |
Other receivables and other assets |
|
|
(27 |
) |
|
|
(145 |
) |
Accounts payable, accrued expenses and long term
liabilities |
|
|
(1,434 |
) |
|
|
1,249 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(12,597 |
) |
|
|
(11,773 |
) |
|
|
|
|
|
|
|
Cash flows provided by investing activities: |
|
|
|
|
|
|
|
|
Purchases of available-for-sale securities |
|
|
(11,159 |
) |
|
|
(10,733 |
) |
Sales of available-for-sale securities |
|
|
10,441 |
|
|
|
15,714 |
|
Cash paid for property and equipment |
|
|
(809 |
) |
|
|
(2,989 |
) |
Increase in restricted cash |
|
|
|
|
|
|
(500 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(1,527 |
) |
|
|
1,492 |
|
|
|
|
|
|
|
|
Cash flows provided by financing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale of common stock, net of expenses |
|
|
18,753 |
|
|
|
15,497 |
|
Proceeds from sale of common stock under employee
stock purchase
plan |
|
|
319 |
|
|
|
164 |
|
Proceeds from exercise of common stock options |
|
|
934 |
|
|
|
95 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
20,006 |
|
|
|
15,756 |
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
3 |
|
|
|
(116 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
5,885 |
|
|
|
5,359 |
|
Cash and cash equivalents, beginning of period |
|
|
8,191 |
|
|
|
4,831 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
14,076 |
|
|
$ |
10,190 |
|
|
|
|
|
|
|
|
See accompanying notes
5
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT AND NUMBER OF YEARS)
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair statement of the results of the periods presented have
been included. Operating results for the unaudited three and nine-month period ended September 30,
2006 are not necessarily indicative of results that may be expected for the year ending December
31, 2006 or any other period. For further information, including information on significant
accounting policies and use of estimates, refer to the consolidated financial statements and
footnotes thereto included in the Companys Annual Report on Form 10-K for the year ended December
31, 2005.
The accompanying financial statements have been prepared assuming the Company will continue as a
going concern. For the nine months ended September 30, 2006, the Company incurred a net loss of
$12,692. As of September 30, 2006, the Company had an accumulated deficit of $111,812.
Historically, the Company has relied on the sale and issuance of equity securities to provide a
significant portion of funding for its operations. In April 2006, the Company filed a shelf
registration statement with the Securities and Exchange Commission that would permit from time to
time, the Company to offer and sell up to a total of $50,000 of common stock. In June 2006, the
Company completed a sale of its common stock that resulted in gross proceeds of $20,000.
At September 30, 2006, the Company had cash, cash equivalents, restricted cash equivalents and
marketable securities available for sale of $24,276. The Company believes that its current cash
balance, in combination with cash receipts generated from sales of the Powerlink® System, will be
sufficient to fund ongoing operations through at least December 31, 2007. However, if the Company
does not realize its expected revenue and gross margin levels, or if the Company is unable to
manage its operating expenses in line with its revenues, it may require additional financing to
fund its operations.
In the event that the Company requires additional funding, it would attempt to raise the required
capital through either debt or equity arrangements. The Company cannot provide any assurance that
the required capital would be available on acceptable terms, if at all, or that any financing
activity would not be dilutive to its current stockholders. If the Company were not able to raise
additional funds, it would be required to significantly curtail its operations which would have an
adverse effect on its financial position, results of operations and cash flows.
2. Stock-Based Compensation
Effective January 1, 2006, the Company adopted Financial Accounting Standards Board Statement No.
123(R) Share Based Payment, or FAS 123R. FAS 123R establishes the accounting required for share
based compensation, and requires companies to measure and recognize compensation expense for all
share-based payments at the grant date based on the fair value of the award. This compensation
expense shall be included in the statement of operations over the requisite service
6
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
period. The
provisions of FAS 123R apply to new stock options and stock options outstanding, but
not yet vested on the effective date. For all unvested options outstanding as of January 1, 2006,
compensation expense previously measured under Statement of Financial Accounting Standards No.
123, or FAS 123, Accounting for Stock-Based Compensation, but unrecognized, will be recognized
using the straight-line method over the remaining vesting period. For share-based payments granted
subsequent to January 1, 2006, compensation expense, based on the fair value on the date of grant,
as defined by FAS 123R, will be recognized using the straight-line method from the date of grant
over the service period of the employee receiving the award.
FAS 123R requires the estimation of forfeitures when recognizing compensation expense and that this
estimate of forfeitures be adjusted over the requisite service period should actual forfeitures
differ from such estimates. Changes in estimated forfeitures are recognized through a cumulative
catch-up adjustment, which is recorded in the period of change and which impacts the amount of
unamortized compensation expense to be recognized in future periods. Share-based compensation
expense recognized in the Companys consolidated statements of operations in 2006 includes (i)
compensation expense for share-based payment awards granted prior to, but not vested as of December
31, 2005, based on the grant-date fair value estimated in accordance with the pro forma provisions
of FAS 123 and (ii) compensation expense for the share-based payment awards granted subsequent to
December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions
of FAS 123R. As share-based compensation expense recognized in the consolidated statement of
operations for the first three quarters of fiscal 2006 is based on awards ultimately expected to
vest, it has been reduced for estimated forfeitures. In the Companys pro forma information
required by FAS 123 for the periods prior to fiscal year 2006, the Company accounted for
forfeitures as they occurred.
The Company elected to adopt FAS 123R using the modified prospective application approach which
requires the Company to value unvested stock options granted prior to its adoption of FAS 123R
under the fair value method and expense these amount in the statement of operations over the stock
options remaining vesting period. Prior periods are not required to be restated. Prior to the
effective date of FAS 123R the Company applied the disclosure-only provisions of FAS 123. In
accordance with the provision of FAS 123, the Company applied Accounting Principles Board Opinion
No. 25, or APB 25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock option plans. Under the provisions of APB 25, the Company recognized
compensation expense only to the extent that the exercise price of the Companys employee stock
options is less than the market price of the underlying stock at date of grant.
The Company uses the Black-Scholes option pricing model which requires extensive use of financial
estimates and accounting judgment, including estimates of the expected period of time employees
will retain their vested stock options before exercising them, the expected volatility of the
Companys common stock over the expected term, and the number of shares that are expected to be
forfeited before they are vested. Application of alternative assumptions could produce
significantly different estimates of the fair value of the stock-based compensation and as a
result, significantly different results recognized in the consolidated statements of operations.
7
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
The following assumptions were used to estimate the fair value of stock options granted using the
Black-Scholes valuation method:
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, |
|
|
2006 |
Expected Life (in years) (1) |
|
|
5.5 |
|
Expected Volatility (2) |
|
|
68.8%-77.3 |
% |
Risk Free Interest Rate (3) |
|
|
4.6%-5.0 |
% |
Dividend Yield (4) |
|
|
0.0 |
% |
|
|
|
1) |
|
Estimated based on historical experience. |
|
2) |
|
Volatility based on historical experience over a period equivalent to the expected life
in years. |
|
3) |
|
Based on the US Treasury constant maturity interest rate with a term consistent with
the expected life of the options granted. |
|
4) |
|
The Company does not pay dividends on its common stock and the Company currently does
not have any plans to pay or declare any cash dividends. |
Pursuant to the Companys 1996 Stock Option/Issuance Plan (the 1996 Plan) and the Companys 2006
Stock Incentive Plan (the 2006 Plan), either incentive stock options or non-qualified options
awards may be granted and under the 1997 Supplemental Stock Option Plan (the 1997 Plan and
together with the 1996 Plan and 2006 Plan, the Plans), non-qualified option awards may be
granted. Under the Plans, options are granted at a price not less than 100% for incentive stock
options and 85% for non-qualified stock options of the value of the Companys common stock on the
date of grant and are exercisable over a maximum term of ten years from the date of grant and
generally vest over a four-year period. At September 30, 2006, there were approximately 1,920
shares of common stock available for future stock option grants.
The following table summarizes option activity for all plans during the first nine months of
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
|
|
|
Exercise |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Price per |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Share |
|
Life (Years) |
|
Value |
|
Outstanding at December 31, 2005 |
|
|
2,678 |
|
|
$ |
4.53 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,126 |
|
|
|
3.75 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(316 |
) |
|
|
2.95 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(166 |
) |
|
|
4.74 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(6 |
) |
|
|
2.50 |
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
3,316 |
|
|
$ |
4.41 |
|
|
|
7.73 |
|
|
$ |
1,154 |
|
|
Exercisable at September 30, 2006 |
|
|
1,470 |
|
|
$ |
4.48 |
|
|
|
5.99 |
|
|
$ |
650 |
|
|
Vested or expected to vest |
|
|
2,866 |
|
|
$ |
4.44 |
|
|
|
7.49 |
|
|
$ |
1,015 |
|
|
8
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
The weighted average fair value per option granted during the three months ended September
30, 2006 and 2005 was $2.54 and $3.29, respectively. During the nine months ended September 30,
2006 and 2005, the weighted average fair value per option granted was $2.53 and $3.56,
respectively. These amounts were estimated using the Black-Scholes option pricing model with the
assumptions listed above. The aggregate intrinsic value of stock options exercised, represented in
the table above, was $1 and $1,347 for the three and nine months ended September 30, 2006,
respectively. The stock options granted during the third quarter of 2006 were outstanding for only
a portion of the period, and as such, the compensation expense recognized was only for the period
that the options were outstanding. As of September 30, 2006 there was $4,109 of total unrecognized
compensation cost related to approximately 1,944 non-vested outstanding stock options, with a per
share weighted
average fair value of $2.11. The unrecognized expense is anticipated to be recognized over a
weighted average period of 3.1 years.
Expense recorded pursuant to FAS 123R during was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2006 |
|
General and Administrative |
|
$ |
123 |
|
|
$ |
485 |
|
Marketing and Sales |
|
|
124 |
|
|
|
304 |
|
Research, Development, and Clinical |
|
|
92 |
|
|
|
255 |
|
Cost of Sales |
|
|
4 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
$ |
343 |
|
|
$ |
1,079 |
|
In addition, the Company has $112 of stock based compensation capitalized in inventory as of
September 30, 2006.
Had the Company previously recognized compensation costs as prescribed by FAS 123, previously
reported net loss, basic earnings per share and diluted earnings per share would have changed to
the pro forma amounts shown for the three and nine months ended September 30, 2005, as follows:
9
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
|
|
|
|
|
|
|
Three Months |
|
|
Ended |
|
|
September 30, |
|
|
2005 |
Net loss
|
|
|
|
|
as reported |
|
$ |
(3,667 |
) |
Pro forma fair value expense |
|
|
(648 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(4,315 |
) |
|
|
|
|
|
Earnings per share: |
|
|
|
|
Basic and diluted-as reported |
|
$ |
(0.10 |
) |
Basic and diluted-pro forma |
|
$ |
(0.12 |
) |
|
|
|
|
|
|
|
Nine Months |
|
|
Ended |
|
|
September 30, |
|
|
2005 |
Net loss
|
|
|
|
|
as reported |
|
$ |
(9,866 |
) |
Pro forma fair value expense |
|
|
(1,514 |
) |
|
|
|
|
|
Pro forma net loss |
|
$ |
(11,380 |
) |
|
Earnings per share: |
|
|
|
|
Basic and diluted-as reported |
|
$ |
(0.30 |
) |
Basic and diluted-pro forma |
|
$ |
(0.34 |
) |
The Company accounts for non-employee stock-based awards, in which goods or services are the
consideration received for the stock options issued, in accordance with the provisions of SFAS No.
123R and EITF 96-18 Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. Compensation expense for
non-employee stock-based awards is recognized in accordance with FASB Interpretation 28,
Accounting for Stock Appreciation Rights and Other Variable Stock Options or Award Plans, an
Interpretation of APB Opinions No. 15 and 25, or FIN 28. The Company records compensation expense
based on the then-current fair values of the stock options at each financial reporting date.
Compensation recorded during the service period is adjusted in subsequent periods for changes in
the stock options fair value until the options vest.
10
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
Under the 2004 Performance Compensation Plan (the Performance Plan), Performance Units are
granted at a discount to the fair market value (as defined in the Performance Plan) of the
Companys common stock on the grant date (Base Value). The Performance Units vest over
three-years; one-third vests at the end of the first year, and the remainder vests ratably on a
quarterly basis. The difference between the twenty-day average closing market price of the
Companys common stock and the Base Value of the vested Performance Unit will be payable in cash at
the first to occur of (a) a change of control (as defined in the Performance Plan), (b) the
termination of employment for any
reason other than Cause (as defined in the Performance Plan), or (c) upon exercise of the
Performance Unit, which cannot occur until eighteen months from the grant date.
There were no Performance Units granted during the three and nine month periods ended September 30,
2006. The Company granted a total of 0 and 180 Performance Units at a weighted average Base Value
per unit of $0 and $3.33, during the three and nine months ended September 30, 2005. The total
accrued compensation expense as of September 30, 2006 was $286, at which time there were an
aggregate of 273 Performance Units outstanding. The total accrued compensation expense as of
December 31, 2005, was $923 and there were 363 total Performance Units outstanding. The Company
recorded a reduction of expense totalling $98 and $467 for the three months and nine months ended
September 30, 2006, respectively, and a reduction of expense of $233 and $171 for the three months
and nine months ended September 30, 2005, respectively, in accordance with FIN 28. During the three
months and nine months ended September 30, 2006, 10 and 48 Performance Units were exercised
resulting in a payout of $2 and $168, respectively. The expense was included in marketing and
sales expense in the consolidated statements of operations. The Company records changes in the
estimated compensation expense over the vesting period of the Performance Units, and once fully
vested, records the difference between the closing market price of the Companys common stock and
the Base Value as compensation expense each period until exercised.
3. Net Income (Loss) Per Share
Net income (loss) per common share is computed using the weighted average number of common shares
outstanding during the periods presented. Certain options with an exercise price below the average
market price for the three and nine month periods ended September 30, 2006 and the three and nine
month periods ended September 30, 2005 have been excluded from the calculation of diluted earnings
per share, as they are anti-dilutive. If anti-dilutive stock options were included for the three
months ended September 30, 2006 and 2005, the number of shares used to compute diluted net loss per
share would have been increased by approximately 210 shares and 458 shares, respectively. In
addition, options to purchase 2,140 shares and 1,068 shares, respectively, with an exercise price
above the average market price for the three months ended September 30, 2006 and 2005,
respectively, were excluded from the computation of diluted loss per share because the effect would
also have been anti-dilutive.
If anti-dilutive stock options were included for the nine months ended September 30, 2006 and 2005,
the number of shares used to compute diluted net loss per share would have been increased by
approximately 320 shares and 551 shares, respectively. In addition, options to purchase 1,662
shares and 722 shares, respectively, with an exercise price above the average market price for the
nine
11
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
months ended September 30, 2006 and 2005, respectively, were excluded from the computation of
diluted loss per share because the effect would also have been anti-dilutive.
4. Restricted Cash Equivalents
The Company has a $500 line of credit with a bank in conjunction with a corporate credit card
agreement. At September 30, 2006, the Company had pledged all of its cash equivalents held at the
bank as collateral on the line of credit. Per the agreement, the Company must maintain a balance
of at least $500 in cash and cash equivalents with the bank.
5. Marketable Securities Available-For-Sale
The Company accounts for its investments pursuant to SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities.
The Company has classified its entire investment portfolio as available-for-sale.
Available-for-sale securities are stated at fair value with unrealized gains and losses recorded in
accumulated other comprehensive income. Management evaluates the classification of its securities
based on the Companys short-term cash needs. The cost of securities sold is based on the specific
identification method. During the three and nine month periods ended September 30, 2006 and 2005,
the Company had no realized gains or losses.
The Companys investments in debt securities are diversified among high credit quality securities
in accordance with the Companys investment policy. A major financial institution manages the
Companys investment portfolio. As of September 30, 2006, $8,600 and $1,100 of the Companys debt
securities had original contractual maturities more than 90 days and less than one year, and
between one to two years, respectively. As of December 31, 2005, $3,490 and $5,469 of the
Companys debt securities had original contractual maturities more than 90 days and less than one
year, and between one to two years, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Holding |
|
|
Fair |
|
|
|
|
|
|
Holding |
|
|
Fair |
|
|
|
Cost |
|
|
Gain |
|
|
Value |
|
|
Cost |
|
|
Loss |
|
|
Value |
|
U.S. Treasury and
other agencies debt
securities |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
5,573 |
|
|
$ |
(14 |
) |
|
$ |
5,559 |
|
Corporate debt securities |
|
|
9,699 |
|
|
|
1 |
|
|
|
9,700 |
|
|
|
3,406 |
|
|
|
(6 |
) |
|
|
3,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,699 |
|
|
$ |
1 |
|
|
$ |
9,700 |
|
|
$ |
8,979 |
|
|
$ |
(20 |
) |
|
$ |
8,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
6. Inventories
Inventories are stated at the lower of cost, determined on a first in, first out basis, or market
value. Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Raw materials |
|
$ |
1,421 |
|
|
$ |
3,885 |
|
Work-in-process |
|
|
2,896 |
|
|
|
1,361 |
|
Finished goods |
|
|
3,014 |
|
|
|
2,126 |
|
|
|
|
|
|
|
|
|
|
$ |
7,331 |
|
|
$ |
7,372 |
|
|
|
|
|
|
|
|
Inventory reserves, primarily associated with the voluntary catheter recall, were $36 and $426 as
of September 30, 2006 and December 31, 2005, respectively.
7. License Revenue
In June 1998, the Company licensed to Guidant Corporation, an international interventional
cardiology products company, the right to manufacture and distribute stent delivery products using
the Companys Focus technology. In April 2006, Abbot Laboratories acquired Guidants vascular
business. This acquisition included all rights under licenses. The Company receives royalty
payments based upon the sale of products using the Focus technology. The agreement includes minimum
annual royalties of $250 and expires in 2008. During the three months ended September 30, 2006 and
2005, the Company recorded $53 and $66, respectively, in license revenue due on product sales by
Guidant or Abbott Laboratories. During the nine months ended September 30, 2006 and 2005, the
Company recorded $160 and $194, respectively, in license revenue due on product sales by Guidant or
Abbott Laboratories.
8. Product Revenue by Geographic Region
The Company had product sales, based on the locations of the customer, by region as follows:
13
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
United States |
|
$ |
3,376 |
|
|
$ |
1,581 |
|
|
$ |
8,269 |
|
|
$ |
3,099 |
|
Netherlands |
|
|
258 |
|
|
|
538 |
|
|
|
1,136 |
|
|
|
1,807 |
|
Other |
|
|
114 |
|
|
|
16 |
|
|
|
464 |
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,748 |
|
|
$ |
2,135 |
|
|
$ |
9,869 |
|
|
$ |
4,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales to the Netherlands are to a distributor which sells into selected European
markets.
9. Concentrations of Credit Risk and Significant Customers
During the three months ended September 30, 2006, no single customer accounted for more than 10% of
total revenues. During the nine months ended September 30, 2006, revenue from Edwards Lifesciences
AG was $1,136, which represented 11% of total revenues. During the three and nine months ended
September 30, 2005, revenues from Edwards Lifesciences AG were $467 and $1,341, which represented
21% and 26% of total revenues, respectively. No other single customer in the three month and nine
month periods ended September 30, 2006 or 2005 accounted for more than 10% of total revenues.
As of September 30, 2006 and December 31, 2005, no single customer accounted for more than 10% of
the Companys accounts receivable balance.
10. Comprehensive Loss
The Companys comprehensive loss included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net loss |
|
$ |
(4,192 |
) |
|
$ |
(3,667 |
) |
|
$ |
(12,692 |
) |
|
$ |
(9,866 |
) |
Unrealized holding
gain/(loss) arising
during the period,
net |
|
|
9 |
|
|
|
(6 |
) |
|
|
23 |
|
|
|
14 |
|
Foreign currency
translation
adjustment |
|
|
(9 |
) |
|
|
(79 |
) |
|
|
3 |
|
|
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(4,192 |
) |
|
$ |
(3,752 |
) |
|
$ |
(12,666 |
) |
|
$ |
(9,968 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
14
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
11. Intangible Assets and Goodwill
The following table details the intangible assets, estimated lives, related accumulated
amortization and goodwill:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
Developed technology (10 year life) |
|
$ |
14,050 |
|
|
$ |
14,050 |
|
Accumulated amortization |
|
|
(6,088 |
) |
|
|
(5,034 |
) |
|
|
|
|
|
|
|
|
|
|
7,962 |
|
|
|
9,016 |
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
(Indefinite life) |
|
|
2,708 |
|
|
|
2,708 |
|
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
10,670 |
|
|
$ |
11,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, (Indefinite life) |
|
$ |
4,631 |
|
|
$ |
4,631 |
|
|
|
|
|
|
|
|
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and other
intangible assets with indeterminate lives are no longer subject to amortization but are tested for
impairment annually or whenever events or changes in circumstances indicate that the asset might be
impaired. The Company most recently performed its annual impairment analysis as of June 30, 2006
and will continue to test for impairment annually as of June 30 for each subsequent year. No
impairment was indicated in the last analysis. Intangible assets with finite lives continue to be
subject to amortization, and any impairment is determined in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.
The Company recognized amortization expense on intangible assets of $351 and $351
during the three months ended September 30, 2006 and 2005, respectively. The Company recognized
amortization expense on intangible assets of $1,054 and $1,054 during the nine months ended
September 30, 2006 and 2005, respectively. Estimated amortization expense for the remainder of
2006 and the five succeeding fiscal years is as follows:
|
|
|
|
|
2006 |
|
$ |
351 |
|
2007 |
|
$ |
1,405 |
|
2008 |
|
$ |
1,405 |
|
2009 |
|
$ |
1,405 |
|
2010 |
|
$ |
1,405 |
|
2011 |
|
$ |
1,405 |
|
15
ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
12. Commitments and Contingencies
Sole-Source, Related-Party Supplier Agreement
In February 1999, the former Endologix entered into a supply agreement with Bard Peripheral
Vascular, Inc., a subsidiary of C.R. Bard, Inc. to purchase a key component for its Powerlink
System. The agreement expires in December 2007 and then automatically renews for additional one
year periods, unless a party provides notice not to renew at least thirty days prior to the renewal
period. Under the terms of a second amendment to the supply agreement dated September 8, 2006, the
minimum purchase requirements were reduced and the Company must purchase a certain dollar value of
the component for the year, as opposed to quantity of units, for the remaining term of the
agreement.
Under the terms of the second amendment, the Company must purchase a minimum of $2,500 of
material in 2006 and $2,875 of material in 2007. During the three months and nine months ended
September 30, 2006, the Company purchased approximately $366 and $646, respectively, of such
materials toward fulfilling its 2006 purchase commitments. The Company will complete its 2006
commitment by purchasing an additional $1,854 of the material. The Company is economically
dependent on this vendor, which is the sole source for this key component.
Legal Matters
A state court product liability action was served on the Company on October 7, 2003, in the
Circuit Court of Cook County, Illinois. Plaintiff seeks damages for pain and suffering, disability
and disfigurement, loss of enjoyment of life and loss of capacity to earn a living. Plaintiff
claims these injuries arose on or about October 1, 2001, following an abdominal aortic aneurysm
repair with a graft designed, manufactured and distributed by the Company. Compensatory damages
together with interest, costs and disbursements are sought. Punitive damages are not sought. The
Company maintains insurance for compensatory damages for claims of this nature. The Company is
contesting the case vigorously. The parties are currently engaged in oral discovery. At the present
stage of this matter, management is unable to estimate possible minimum or maximum amounts of loss
contingencies, direct or indirect, in regard to this lawsuit. The Company views the prospect of an
unfavorable outcome as not probable at this time; accordingly, the Company has not accrued a loss
contingency as of September 30, 2006.
The Company is a party to ordinary disputes arising in the normal course of business.
Management believes that the outcome of these matters will not have a material adverse effect on
the Companys consolidated financial position, results of operations or cash flows.
16
NDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT AND NUMBER OF YEARS)
(Unaudited)
13. Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, or
SFAS 157, Fair Value Measurements, which defines fair value, establishes guidelines for measuring
fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any
new fair value measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November
15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial
statements, including for interim periods, for that fiscal year. The Company is currently
evaluating the impact of SFAS 157.
In July 2006, the Financial Accounting Standards Board issued Interpretation Number 48, or FIN
48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in
tax positions. This Interpretation requires that the Company recognize in its financial statements
the impact of a tax position, if that position is more likely than not of being sustained on audit,
based on the technical merits of the position. The provisions of FIN 48 are effective as of the
beginning of the Companys 2007 fiscal year, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. The Company is currently
evaluating the impact of adopting FIN 48 on its financial statements.
17
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |
In addition to the historical financial information included herein, this Quarterly Report on Form
10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934 that are based on managements
beliefs, as well as on assumptions made by and information currently available to management. All
statements other than statements of historical fact included in this Quarterly Report on Form 10-Q,
including without limitation, statements under Managements Discussion and Analysis of Financial
Condition and Results of Operations and statements located elsewhere herein regarding our
financial position and business strategy, may constitute forward-looking statements. You generally
can identify forward-looking statements by the use of forward-looking terminology such as
believes, may, will, expects, intends, estimates, anticipates, plans, seeks, or
continues, or the negative thereof or variations thereon or similar terminology. Such
forward-looking statements involve known and unknown risks, including, but not limited to, market
acceptance of our sole technology, the Powerlink® System, economic and market conditions, the
regulatory environment in which we operate, the availability of third party payor medical
reimbursements, competitive activities or other 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 actual results to differ materially from our expectations are disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2005, including but not limited to those
factors discussed in Item 1A. Risk Factors. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly qualified in their
entirety by these cautionary statements. We do not undertake any obligation to update information
contained in any forward-looking statement.
Overview
Organizational History
We were formed in 1992 as Cardiovascular Dynamics, Inc., and our common stock began trading
publicly in 1996. The current Endologix, Inc. resulted from the May 2002 acquisition of all of the
capital stock of a private company, Endologix, Inc., which we refer to herein as the former
Endologix, and the subsequent change of our company name from Radiance Medical Systems, Inc. to
Endologix, Inc.
Our Business
We are engaged in the development, manufacture, sale and marketing of minimally invasive
therapies for the treatment of vascular disease. Our primary focus is the development of the
Powerlink® System, a catheter-based alternative treatment to surgery for abdominal aortic
aneurysms, or AAA. AAA is a weakening of the wall of the aorta, the largest artery of the body.
Once AAA develops, it continues to enlarge and if left untreated becomes increasingly susceptible
to rupture. The overall patient mortality rate for ruptured AAA is approximately 75%, making it
the 13th leading cause of death in the United States.
The Powerlink System is a catheter and endoluminal stent graft, or ELG system. The
self-expanding cobalt chromium alloy cage is covered by ePTFE, a commonly-used surgical graft
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Item 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued). |
material. The Powerlink ELG is implanted in the abdominal aorta by gaining access through the
femoral artery. Once deployed into its proper position, the blood flow is shunted away from the
weakened or aneurismal section of the aorta, reducing pressure and the potential for the aorta to
rupture. We believe that implantation of the Powerlink System will reduce the mortality and
morbidity rates associated with conventional AAA surgery. We are currently selling the Powerlink
System in the United States and Europe, and in other selected markets.
In 2005, the Japanese Ministry of Health notified us that although they believed the clinical
results of the PowerWeb study were good, the structure of the clinical trial was such that they
would not grant Shonin Approval for the PowerWeb System. They requested that we submit the data on
the FDA-approved Powerlink System and that we would be able to utilize the clinical results from
the PowerWeb trial as supplementary data. This permitted us to submit our Powerlink System data for
Shonin approval without the need for an additional clinical trial, and upon approval will permit us
to have a single technology platform for Europe, the U.S. and Japan. We estimate that we will
receive Shonin approval by the end of 2006. Following Shonin approval and the establishment of
hospital reimbursement, which we expect to be in place by the second half of 2007, we will commence
commercial distribution.
We also continue to conduct clinical trials for the suprarenal Powerlink System and for other
products related to the Powerlink System. As of September 30, 2006, 144 of the 193 patients
required have been enrolled for the second arm of a U.S. Pivotal Phase II clinical trial for the
suprarenal Powerlink System. As of September 30, 2006, 39 of the 60 patients have been enrolled in
a U.S. Pivotal Phase II clinical trial utilizing a 34 mm proximal cuff in conjunction with a
commercial bifurcated Powerlink System to treat patients with large aortic necks. We believe that
approximately 10-15% of all potential patients are refused minimally invasive treatment due to
anatomic considerations.
We have experienced an operating loss for each of the last five years and expect to continue
to incur operating losses for at least the next twelve months. Our business is subject to a number
of challenges inherent in a company with a single technology which was recently introduced on a
commercial basis, such as the difficulty in predicting physician acceptance of our product and the
difficulty of planning for the growth of our operations relative to the market demand for our
product. Consequently, our results of operations have varied significantly from quarter to
quarter, and we expect that our results of operations will continue to vary significantly in the
future.
Other Matters
Accounting Changes
We began expensing the cost of stock based compensation on January 1, 2006, when it adopted
Financial Accounting Standards Board Statement No. 123(R), Share Based Payment, or FAS 123R.
See Note 2 to the Condensed Consolidated Financial Statements for information regarding this
accounting change.
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Item 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued). |
Results of Operations
Comparison of the Three Months Ended September 30, 2006 and 2005
Product Revenue. Product revenue increased 76% to $3.7 million in the three months ended
September 30, 2006 from $2.1 million in the three months ended September 30, 2005. Domestic sales
increased 114% to $3.4 million in the three months ended September 30, 2006 from $1.6 million in
the three months ended September 30, 2005. The increase in domestic sales was due to our
investment in additional field sales personnel, and increased market acceptance of the Powerlink
System.
International sales decreased 33% to $372,000 in the three months ended September 30, 2006
from $554,000 for the comparable period in the prior year. This decrease is primarily due to lower
sales to Edwards Lifesciences AG in the three months ended September 30, 2006 as compared to the
three months ended September 30, 2005. Edwards Lifesciences AG has informed us that they will not
renew our distribution agreement beyond its current expiration at December 31, 2006, other than to
assist us and their hospital customers in a transition to a new arrangement for supplying the
Powerlink System in these territories.
We expect that product revenue will continue to grow, both sequentially and compared to prior
year periods, particularly in the U.S. market where we continue to develop and expand our direct
sales force.
License Revenue. License revenue decreased 20% to $53,000 for the three months ended
September 30, 2006 from $66,000 for the three months ended September 30, 2005. We anticipate that
license revenue will remain approximately unchanged in 2006 as compared to comparable periods in
2005. The agreement with Guidant, which was assumed by Abbott Laboratories in connection with its
acquisition of Guidants vascular business, expires in 2008, unless terminated sooner, and provides
for minimum annual royalties of $250,000.
Cost of Product Revenue. The cost of product revenue increased 77% to $1.5 million in the
three months ended September 30, 2006 from $866,000 in the three months ended September 30, 2005.
Cost of product revenue increased due to the increase in volume of Powerlink System sales. As a
percentage of product revenue, cost of product revenue remained relatively consistent at 41% in the
third quarter of 2006 as compared to 42% in the same period of 2005. The percentage decrease was
primarily due to higher average selling prices for the Powerlink System in the U.S. commercial
market. Average selling prices are higher to U.S. customers because we sell direct to hospitals,
while international sales are made to distributors. By year end 2006, however, we expect this cost
percentage to increase as we expect to recognize the higher cost of acquisition of a key component
of the Powerlink System, which we purchase from Bard Peripheral Vascular, Inc., or BPVI, a
subsidiary of C.R. Bard, Inc. and as we recognize additional costs associated with FAS 123(R).
Research, Development and Clinical. Research, development and clinical expense increased
8% to $1.6 million in the three months ended September 30, 2006 as compared to $1.5 million
for the
three months ended September 30, 2005. The increase in the third quarter of 2006 was
primarily due to a $92,000 charge for stock compensation expense pursuant to the adoption of SFAS
123(R) at January 1, 2006.
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Item 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued). |
Also, we continue to conduct product research and development of our Powerlink System product
line and complementary technologies, and we anticipate continuing enrollment in the suprarenal arm
of the pivotal U.S. clinical trials throughout 2006. We began enrollment in a third arm of our
pivotal U.S. clinical trials for study of a larger diameter cuff in the third quarter of 2005. We
expect that research, development, and clinical expense will remain in the range of $1.6 million to
$1.8 million during the remaining quarter of 2006.
Marketing and Sales. Marketing and sales expense increased 55% to $4.0 million in the three
months ended September 30, 2006 from $2.6 million in the three months ended September 30, 2005.
The increase in the third quarter of 2006 resulted primarily from the expansion of our sales force
and marketing expenditures to support the U.S. commercial launch of the Powerlink System, somewhat
offset by lower European sales and marketing expenses. We anticipate that marketing and sales
expense will increase over the remainder of 2006 and will be materially higher than the comparable
periods of 2005 as we continue to increase the size of our direct sales force in the U.S. market.
Additionally, the increase in the third quarter of 2006 was partially due to a $124,000 charge for
stock compensation expense pursuant to the adoption of SFAS 123(R) at January 1, 2006.
General and Administrative. General and administrative expense increased 5% to $1.2 million
in the three months ended September 30, 2006, from $1.1 million in the three months ended September
30, 2005. The increase in the third quarter of 2006 was due to a $123,000 charge for stock
compensation expense pursuant to the adoption of SFAS 123(R) at January 1, 2006, partially offset
by a decrease in consulting fees. We expect general and administrative expense to increase to the
$1.3 million to $1.5 million range in the next two quarters as the majority of costs related to
compliance with Section 404 of the Sarbanes-Oxley Act is incurred during these periods.
Other Income. Other income increased 68% to $357,000 in the three months ended September 30,
2006, from $213,000 in the same period of 2005. The increase in other income was generated
primarily from interest income resulting from higher interest rates and higher invested cash
balances in the 2006 period. We expect that interest income will decline in upcoming quarters as
the level of invested cash decreases.
Comparison of the Nine Months Ended September 30, 2006 and 2005
Product Revenue. Product revenue increased 98% to $9.9 million in the nine months ended
September 30, 2006 from $5.0 million in the nine months ended September 30, 2005. Domestic sales
increased 167% to $8.3 million in the nine months ended September 30, 2006 from $3.1 million in the
nine months ended September 30, 2005. The increase in domestic sales was due to our investment in
additional field sales personnel, and increased acceptance of the Powerlink System.
International sales declined 15% to $1.6 million in the nine months ended September 30, 2006
from $1.8 million for the comparable period in the prior year. This decrease is due to lower sales
to European distributors during the first nine months of 2006.
License Revenue. License revenue decreased 18% to $160,000 for the nine months ended
September 30, 2006 from $194,000 for the nine months ended September 30, 2005. The agreement with
Guidant, which was assumed by Abbott Laboratories, expires in 2008, unless terminated sooner, and
provides for minimum annual royalties of $250,000.
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Item 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued). |
Cost of Product Revenue. The cost of product revenue increased 113% to $4.4 million in the
nine months ended September 30, 2006 from $2.1 million in the nine months ended September 30, 2005.
Cost of product revenue increased due to the increase in volume of Powerlink System sales and
because of a charge of $326,000 for a reserve to complete the final phase of our limited catheter
recall. As a percentage of product revenue, cost of product revenue increased to 45% in the nine
months ended September 30, 2006 from 42% in the same period of 2005. The percentage increase was
partially offset by higher average selling prices for the Powerlink System in the U.S. commercial
market.
Research, Development and Clinical. Research, development and clinical expense increased
18% to $5.1 million in the nine months ended September 30, 2006 as compared to $4.3 million for the
nine months ended September 30, 2005. The increase primarily resulted from continued product
research and development of our Powerlink System product line and complimentary technologies, and
continued enrollment in the suprarenal arm of the pivotal U.S. clinical trials. A $255,000 charge
for stock compensation expense pursuant to the adoption of SFAS 123(R) at January 1, 2006, also
contributed to the increase.
Marketing and Sales. Marketing and sales expense increased 72% to $9.8 million in the nine
months ended September 30, 2006 from $5.7 million in the nine months ended September 30, 2005. The
increase resulted primarily from the expansion of our sales force and sales support work force to
support the ongoing U.S. commercial launch of the Powerlink System, somewhat offset by lower
European sales and marketing expenses. Additionally, the increase was partially due to a $304,000
charge for stock compensation expense pursuant to the adoption of SFAS 123(R) at January
1, 2006.
General and Administrative. General and administrative expense increased 22% to $4.1 million
in the nine months ended September 30, 2006, from $3.3 million in the nine months ended September
30, 2005. The increase was partially due to a $485,000 charge for stock compensation expense
pursuant to the adoption of SFAS 123(R) at January 1, 2006, as well as increases in headcount to
support infrastructure growth, and recruiting fees.
Other Income. Other income increased 76% to $739,000 in the nine months ended September 30,
2006, from $420,000 in the same period of 2005. The increase in other income related primarily to
increased interest income due to higher interest rates and higher invested cash balances in the
2006 period.
Liquidity and Capital Resources
For the nine months ended September 30, 2006, we incurred a net loss of $12.7 million. As of
September 30, 2006, we had an accumulated deficit of $111.8 million. Historically, we have relied
on the sale and issuance of equity securities to provide a significant portion of funding for our
operations. In 2004 and 2005, we completed two private placements of our common stock, which
resulted in aggregate net proceeds of $30.9 million.
In April 2006, we filed a shelf registration statement with the Securities and Exchange
Commission that permits us to offer and sell from time to time up to a total of $50.0 million of
our common stock. In June 2006, we completed a registered direct public offering of our common
stock that resulted in gross proceeds to us of $20.0 million.
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Item 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued). |
At September 30, 2006, we had cash, cash equivalents, restricted cash equivalents and
marketable securities available for sale of $24.3 million. We believe that current cash and cash
equivalents and marketable securities, together with cash receipts generated from sales of the
Powerlink System, will be sufficient to meet anticipated cash needs for operating and capital
expenditures until Endologix becomes cash flow positive. However, we expect to continue to incur
substantial costs and cash outlays in the remainder of 2006 and 2007 to support our operations, and
U.S. marketing of the Powerlink System. In the event that our revenues are less than anticipated,
our expenses are greater than anticipated, or both, we may be required to seek additional financing
to support our operations and the expanded commercial launch of the Powerlink System. We may not
be able to obtain such financing on reasonable terms or at all, which would adversely affect the
operation of our business and execution of our business strategy. In addition, any such financing,
if completed, may dilute existing stockholders.
We believe that our future cash and capital requirements may be difficult to predict and will
depend on many factors, including:
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continued market acceptance of the Powerlink System; |
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our ability to successfully expand our commercial launch of the Powerlink System; |
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the development of sales and marketing resources; |
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the success of our research and development programs for future products; |
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the clinical trial and regulatory approval processes for future products; |
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the costs involved in intellectual property rights enforcement or litigation; |
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the level of hospital reimbursement for ELG procedures and other competitive
factors; |
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viability of our sole manufacturing facility through unforeseen natural or other
disasters; |
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reliance on a sole-source supplier for a key raw material; and |
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the establishment of collaborative relationships with other parties. |
As of September 30, 2006, inventory decreased 1% to $7.3 million from $7.4 million as of
December 31, 2005. The decrease in raw materials to $1.4 million from $3.9 million was partially
offset by the increase in work in process to $2.9 million from $1.4 million. In general, our raw
material and in-process inventories have an indefinite shelf life, and finished goods have a three
year shelf life.
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Item 2. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued). |
In February 1999, the former Endologix entered into a supply agreement with BPVI to purchase a
key component for the Powerlink System. The supply agreement expires in December 2007 and then
automatically renews for additional one year periods, unless either party provides notice not to
renew at least thirty days prior to the renewal period. The supply agreement was amended for a
second time on September 8, 2006. Under the terms of the second amendment, the minimum purchase
requirements for 2006 and 2007 were reduced and we will purchase a minimum dollar value of
components, as opposed to quantity of components, for the remainder of the term. Our minimum
purchase commitment for 2006 is $2.5 million and for 2007 is $2.9 million. During the nine months
ended September 30, 2006 and 2005, we purchased approximately $646,000 and $1.9 million,
respectively, of such components, toward fulfilling our 2006 and 2005 purchase commitments,
respectively. We will complete our 2006 commitment by purchasing an additional $1.9 million of
components prior to December 31, 2006. We are economically dependent on this vendor, which is the
sole source for this key component.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our financial instruments include cash, short-term and long-term investment grade debt
securities. At September 30, 2006, the carrying values of our financial instruments approximated
their fair values based on current market prices and rates. It is our policy not to enter into
derivative financial instruments. We do not currently have material foreign currency exposure as
the majority of our assets are denominated in U.S. currency and our foreign-currency based
transactions are not material. Accordingly, we do not have a significant currency exposure at
September 30, 2006.
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 of the end of the period covered by this report,
pursuant to Rules 13a-15 (e) and 15d-15 (e) under the Securities Exchange Act of 1934, as amended,
or the Exchange Act. 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 Securities and Exchange Commission rules and forms
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 has been no change in our internal control over financial reporting during the period
covered by this report that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
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Part II.
OTHER INFORMATION
Item 5. OTHER INFORMATION
On September 8, 2006, we entered into a second amendment to the supply agreement dated
February 12, 1999 between us and BPVI, which we refer to herein as the Amendment. Pursuant to the
terms and conditions of the supply agreement, we purchase certain components from BVPI for use in
our products. The Amendment amends the supply agreement by establishing minimum component purchase
requirements for the remainder of 2006 and 2007 based upon a specified dollar amount of components.
Prior to the Amendment, the minimum component purchase requirements set forth in the supply
agreement were based upon units of components.
The foregoing description of the Amendment does not purport to be complete and is qualified in
its entirety by reference to the Amendment, which is attached hereto
as Exhibit 10.6.2 and
incorporated herein by reference.
Item 6. EXHIBITS
The following exhibits are filed herewith:
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Exhibit 10.1
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Form of Stock Option Agreement under the 2006 Stock Incentive Plan. |
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Exhibit 10.2
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Form of Restricted Stock Award Agreement under the 2006 Stock Incentive Plan. |
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Exhibit 10.6.2
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Second Amendment to Supply Agreement, dated September 8, 2006, between Endologix, Inc. and Bard
Peripheral Vascular, Inc. |
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Exhibit 31.1
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Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934. |
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Exhibit 31.2
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Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934. |
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Exhibit 32.1
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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. |
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Exhibit 32.2
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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. |
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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.
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ENDOLOGIX, INC. |
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Date: November 9, 2006
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/s/ Paul McCormick |
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President and Chief Executive Officer
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(Principal Executive Officer) |
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Date: November 9, 2006
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/s/ Robert J. Krist |
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Chief Financial Officer and Secretary
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(Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
The following exhibits are filed herewith:
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Exhibit 10.1
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Form of Stock Option Agreement under the 2006 Stock Incentive Plan. |
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Exhibit 10.2
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Form of Restricted Stock Award Agreement under the 2006 Stock Incentive Plan. |
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Exhibit 10.6.2
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Second Amendment to Supply Agreement, dated September 8, 2006, between Endologix, Inc. and Bard
Peripheral Vascular, Inc. |
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Exhibit 31.1
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Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934. |
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Exhibit 31.2
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Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934. |
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Exhibit 32.1
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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. |
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Exhibit 32.2
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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. |
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