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
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For the quarterly period ended March 31, 2009.
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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
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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
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68-0328265
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification Number)
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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 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
o
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.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
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No
þ
On May 5, 2009, there were 43,895,449 shares of the registrants only class of common stock
outstanding.
ENDOLOGIX, INC.
Form 10-Q
March 31, 2009
TABLE OF CONTENTS
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Page
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Part I. Financial Information
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Item 1. Condensed Consolidated Financial Statements (Unaudited)
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3
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4
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5
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6
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12
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16
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16
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17
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17
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18
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19
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EX-31.1
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EX-31.2
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EX-32.1
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EX-32.2
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2
ENDOLOGIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
(Unaudited)
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March 31,
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December 31,
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2009
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2008
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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6,847
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$
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7,611
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Restricted cash equivalents
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500
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500
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Accounts receivable, net of allowance for
doubtful accounts of $76 and $72,
respectively
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7,283
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6,371
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Other receivables
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34
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3
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Inventories
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7,393
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7,099
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Other current assets
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425
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443
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Total current assets
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22,482
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22,027
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Property and equipment, net
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2,770
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2,993
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Goodwill
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4,631
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4,631
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Intangibles, net
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7,157
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7,508
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Other assets
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97
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104
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Total assets
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$
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37,137
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$
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37,263
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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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$
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5,752
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$
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5,401
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Short-term portion of debt
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1,000
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750
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Total current liabilities
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6,752
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6,151
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Long term debt
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4,000
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4,250
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Other long term liabilities
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1,029
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1,045
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Long term liabilities
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5,029
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5,295
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Total liabilities
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11,781
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11,446
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Commitments and contingencies (Note 11)
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Stockholders equity:
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Convertible preferred stock, $0.001 par
value; 5,000,000 shares authorized, no
shares issued and outstanding
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Common stock, $0.001 par value;
60,000,000 shares authorized, 44,365,000
and 44,365,000 shares issued,
respectively, and 43,870,000 and
43,870,000 shares outstanding,
respectively
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44
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44
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Additional paid-in capital
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170,989
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170,239
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Accumulated deficit
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(144,908
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(143,730
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Treasury stock, at cost, 495,000 shares
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(661
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(661
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Accumulated other comprehensive income
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(108
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(75
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Total stockholders equity
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25,356
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25,817
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Total liabilities and stockholders equity
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$
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37,137
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$
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37,263
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See accompanying notes
3
ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended
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March 31,
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2009
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2008
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Revenue:
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Product
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$
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11,834
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$
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8,317
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License
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12
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Total revenue
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11,834
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8,329
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Cost of product revenue
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2,905
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2,531
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Gross profit
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8,929
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5,798
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Operating expenses:
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Research, development and clinical
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1,355
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1,498
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Marketing and sales
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6,622
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5,800
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General and administrative
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2,068
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2,272
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Total operating expenses
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10,045
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9,570
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Loss from operations
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(1,116
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(3,772
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Other income:
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Interest income, net
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12
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80
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Interest expense, net
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(62
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)
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Other income (expense)
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(11
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Total other income (expense)
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(61
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80
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Net loss
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$
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(1,177
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$
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(3,692
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Basic and diluted net loss per share
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$
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(0.03
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$
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(0.09
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Shares used in computing basic and diluted net loss per share
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43,345
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42,953
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See accompanying notes
4
ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months Ended
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March 31,
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2009
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2008
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Cash flows from operating activities:
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Net loss
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$
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(1,177
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$
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(3,692
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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657
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623
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Stock-based compensation
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742
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568
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Change in:
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Accounts receivable
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(912
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(258
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Inventories
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(278
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595
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Other receivables and other assets
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(6
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)
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298
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Accounts payable and accrued expenses
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335
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402
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Net cash used in operating activities
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(639
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(1,464
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)
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Cash flows provided by investing activities:
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Cash paid for property and equipment
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(92
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(60
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Net cash used in investing activities
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(92
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)
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(60
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Effect of exchange rate changes on cash and cash equivalents
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(33
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106
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Net decrease in cash and cash equivalents
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(764
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)
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(1,418
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)
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Cash and cash equivalents, beginning of period
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7,611
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8,728
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Cash and cash equivalents, end of period
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$
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6,847
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$
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7,310
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Supplemental Disclosure of Cash Flow Activities:
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Cash paid during the year for interest
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$
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62
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$
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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 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 month period ended March 31, 2009 are not necessarily indicative of results
that may be expected for the year ending December 31, 2009 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, 2008.
For the three months ended March 31, 2009, the Company incurred a net loss of $1,177. As of
March 31, 2009, the Company had an accumulated deficit of $144,908. Historically, the Company has
relied on the sale and issuance of equity securities to provide a significant portion of funding
for its operations.
At March 31, 2009, we had cash and cash equivalents of $6,847. The Company believes that its
current cash balance, in combination with cash receipts generated from sales of the Powerlink
System and borrowings available under its credit facility, will be sufficient to meet anticipated
cash needs for operating and capital expenditures for at least the next twelve months. If the
Company does not realize expected revenue and gross profit margin levels, or if it is unable to
manage its operating expenses in line with revenues, or if it cannot maintain its days sales
outstanding accounts receivable level, 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. The
financial statements do not include any adjustments that might result from the outcome of these
uncertainties.
2. Stock-Based Compensation
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.
6
Expense recorded pursuant to FAS 123R during the three months ended March 31, 2009 and 2008
was as follows:
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Three Months
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Three Months
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Ended
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Ended
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March 31,
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March 31,
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2009
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2008
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General and Administrative
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$
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385
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$
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205
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Marketing and Sales
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238
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227
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Research, Development, and Clinical
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81
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59
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Cost of Sales
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38
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79
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Total
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$
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742
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$
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570
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In addition, the Company had $85 of stock based compensation capitalized into inventory as of
March 31, 2009, and $78 of stock based compensation capitalized into inventory as of December 31,
2008.
During the three months ended March 31, 2009, the Company granted no shares of restricted
stock. The Company recognizes the expense associated with the issuance of restricted stock ratably
over the requisite service period. Included in the table above is $173 of stock based compensation
expense recognized during the three months ended March 31, 2009, related to restricted stock
granted in 2008.
Under the 2004 Performance Compensation Plan, or the Performance Plan, Performance Units were
granted at a discount to the fair market value (as defined in the Performance Plan) of the
Companys common stock on the grant date, or the 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 month periods ended March 31, 2009
and 2008, respectively. The total accrued compensation expense as of March 31, 2009 and December
31, 2008 was $0 and there were an aggregate of 110 Performance Units outstanding. The Company
recorded no change in expense for the three months ended March 31, 2009, and an expense totaling
$18 for the three months ended March 31, 2008, in accordance with FIN 28. During the three months
ended March 31, 2009, no Performance Units expired. If incurred, the expense is 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 twenty-day average closing market price of
the Companys common stock and the Base Value as compensation expense each period until exercised
unless the base value exceeds the twenty day average closing market price, in which case no
compensation cost is accrued.
3. Net Loss Per Share
Net 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 months ended March 31, 2009 and the three months ended March 31, 2008
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 March 31, 2009 and 2008,
the number of shares used to compute diluted net loss per share would have been increased by
approximately 4,823 and 3,935 shares, respectively. Of these amounts, 4,574 shares and 3,879 shares
had an exercise price above the average closing price for the three months ended March 31, 2009 and
2008, respectively.
4. Restricted Cash Equivalents
The Company has a $475 line of credit with a bank in conjunction with a corporate credit card
agreement. At March 31, 2009, 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 $500 in cash and cash equivalents with the bank.
7
5. Inventories
Inventories are stated at the lower of cost, determined on a first in, first out basis, or
market value. Inventories consist of the following:
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March 31,
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December 31,
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2009
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2008
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Raw materials
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$
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2,468
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$
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2,467
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Work-in-process
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2,162
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2,058
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Finished goods
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3,110
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3,342
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7,740
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7,867
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Less reserve for excess and obsolescence
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(347
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)
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(768
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)
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$
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7,393
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$
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7,099
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|
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6. Long Term Liabilities
Long term liabilities consisted of the following:
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March 31,
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December 31,
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2009
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2008
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Term loan
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$
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3,000
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$
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3,000
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Line of credit facility
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2,000
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2,000
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Deferred tax
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|
|
1,029
|
|
|
|
1,029
|
|
Deferred rent
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
6,029
|
|
|
|
6,045
|
|
Current portion of long-term debt
|
|
|
(1,000
|
)
|
|
|
(750
|
)
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
5,029
|
|
|
$
|
5,295
|
|
|
|
|
|
|
|
|
On February 21, 2007, the Company entered into a revolving credit facility with Silicon Valley
Bank whereby the Company may borrow up to $5.0 million under a revolving line of credit. All
outstanding amounts under the revolving line of credit bear interest at a variable rate equal to
the lenders prime rate plus 0.5%, which is payable on a monthly basis. The unused portion is
subject to an unused revolving line facility fee, payable quarterly, in arrears, on a calendar year
basis, in an amount equal to one quarter of one percent per annum of the average unused portion of
the revolving line of credit, as determined by the bank. The credit facility is collateralized by
all of the Companys assets with the exception of its intellectual property. All amounts owing
under the revolving line of credit become due and payable in July 2010. In September, 2008, the
Company drew down $2.0 million. As of March 31, 2009, the Company had $2.0 million in outstanding
borrowings under the revolving line of credit.
In July 2008, the Company entered into an amendment to the credit facility which added a term
loan whereby the Company may borrow up to $3.0 million. In September 2008, the Company drew $3.0
million on the term loan, all of which was outstanding at March 31, 2009. The term loan requires
interest only payments at a variable rate equal to the lenders prime rate plus 1.0%, which is
payable on a monthly basis through March 31, 2009. The term loan principal is due in 36 monthly
installments beginning in April 2009.
The Companys existing credit facility with Silicon Valley Bank contains negative covenants on
the operation of its business and financial covenants, including requiring the Company to maintain
a tangible net worth of $13.0 million. As of March 31, 2009, the Companys tangible net worth was
$13.6 million. If the Company is not able to maintain compliance with its financial covenants,
certain terms of the revolving line of credit and term loan will change including an increase in
the interest rate and a limitation on the amounts available for borrowing under the credit facility
based on eligible accounts receivable. Further, if the Company does not maintain a tangible net
worth of at least $12.0 million from the first date on which the Company is not in complete
compliance with its financial covenants through June 29, 2009, and $12.5 million thereafter, it
will be in default under the credit facility which could allow the lender to accelerate the
repayment of the indebtedness under the credit facility.
As of March 31, 2009, the Company was in compliance with all covenants.
7. Product Revenue by Geographic Region
8
The Company had product sales, based on the locations of its customer, by region as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
United States
|
|
$
|
10,176
|
|
|
$
|
6,849
|
|
Japan
|
|
|
802
|
|
|
|
364
|
|
Germany
|
|
|
443
|
|
|
|
620
|
|
Other European countries
|
|
|
224
|
|
|
|
232
|
|
Latin America
|
|
|
189
|
|
|
|
241
|
|
Other
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
$
|
11.834
|
|
|
$
|
8,317
|
|
|
|
|
|
|
|
|
Product sales to Germany are to LeMaitre Vascular, Inc. which sells into selected European markets.
8. Concentrations of Credit Risk and Significant Customers
During the three months ended March 31, 2009 and 2008, no single customer accounted for more
than 10% of total revenue.
As of March 31, 2009 and December 31, 2008, no single customer accounted for more than 10% of
the Companys accounts receivable balance.
9. Comprehensive Loss
The Companys comprehensive loss included the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Net loss
|
|
$
|
(1,177
|
)
|
|
$
|
(3,692
|
)
|
Foreign currency translation adjustment
|
|
|
(33
|
)
|
|
|
106
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(1,210
|
)
|
|
$
|
(3,586
|
)
|
|
|
|
|
|
|
|
10. Intangible Assets and Goodwill
The following table details the intangible assets, estimated lives, related accumulated
amortization and goodwill:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Developed technology (10 year life)
|
|
$
|
14,050
|
|
|
$
|
14,050
|
|
Accumulated amortization
|
|
|
(9,601
|
)
|
|
|
(9,250
|
)
|
|
|
|
|
|
|
|
Net developed technology
|
|
|
4,449
|
|
|
|
4,800
|
|
Trademarks and trade names (Indefinite life)
|
|
|
2,708
|
|
|
|
2,708
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
7,157
|
|
|
$
|
7,508
|
|
|
|
|
|
|
|
|
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, 2008
and will continue to test for impairment annually as of June 30 each 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 March 31, 2009 and 2008, respectively. Estimated amortization expense for the
remainder of 2009 and the four succeeding fiscal years is as follows:
|
|
|
|
|
2009
|
|
$
|
1,054
|
|
2010
|
|
$
|
1,405
|
|
2011
|
|
$
|
1,405
|
|
2012
|
|
$
|
585
|
|
9
11. Commitments and Contingencies
Legal Matters
The Company is involved in various claims and legal proceedings of a nature considered normal
to its business, including product liability, intellectual property, employment and other matters.
Management is of the opinion that the outcome of these matters will not have a material adverse
effect on the Companys financial position, results of operations, or cash flow. However, as
certain matters are ongoing, there is no assurance that these will be resolved favorably by the
Company or will not result in a material liability.
12. Related Party Transactions
A director of the Company is also a director of a hospital facility from whom the Company
contracts for physician training and clinical research services. Payments totaling $13 and $29 for
the periods ended March 31, 2009 and 2008, respectively, were made to this hospital. In addition,
this hospital purchased products from the Company totaling $308 and $221 for the three months ended
March 31, 2009 and 2008, respectively. All transactions were in accordance with normal commercial
terms and conditions.
13. Recent Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), or
SFAS 141(R), Business Combinations (revised 2007). SFAS 141(R) is a revision to previously
existing guidance on accounting for business combinations. The statement retains the fundamental
concept of the purchase method of accounting, and introduces new requirements for the recognition
and measurement of assets acquired, liabilities assumed and noncontrolling interests. The statement
is effective for fiscal years beginning after December 15, 2008. As of March 31, 2009 the adoption
of SFAS 141(R) had no impact on the Companys consolidated financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, or SFAS
160, Noncontrolling Interests in Consolidated Financial Statements. The Statement requires that
noncontrolling interests be reported as stockholders equity. The Statement also establishes a
single method of accounting for changes in a parents ownership interest in a subsidiary as long as
that ownership change does not result in deconsolidation. SFAS 160 is required to be applied
prospectively in 2009, except for the presentation and disclosure requirements which are to be
applied retrospectively. The statement is effective for fiscal years beginning after December 15,
2008. As of March 31, 2009 the adoption of SFAS 160 had no impact on the Companys consolidated
financial statements.
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. In
February 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No.
FAS 157-2, or FSP FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year
deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities,
except those that are recognized or disclosed in the financial statements at fair value at least
annually. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 applies under other accounting pronouncements that require or permit fair value
measurements and does not require any new fair value measurements. The standard describes a fair
value hierarchy based on three levels of inputs, the first two of which are considered observable
and the last unobservable, that may be used to measure fair value. As of March 31, 2009, the
adoption of SFAS 157 had no impact on the Companys consolidated financial statements. As of March
31, 2009, the adoption of FSP FAS 157-2 had no impact on the Companys consolidated financial
statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, or SFAS
161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133. This new standard requires enhanced disclosures for derivative instruments,
including those used in hedging
10
activities. It is effective for fiscal years and interim periods beginning after November 15,
2008. As of March 31, 2009 the adoption of SFAS 161 had no impact on the Companys consolidated
financial statements.
In April 2008, the FASB issued Staff Position No. FAS 142-3, or FSP FAS 142-3, Determination
of the Useful Life of Intangible Assets, which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP FAS
142-3 allows an entity to use its own historical experience in renewing or extending similar
arrangements, adjusted for specified entity-specific factors, in developing assumptions about
renewal or extension used to determine the useful life of a recognized intangible asset and will be
effective for fiscal years and interim periods beginning after December 15, 2008. Additional
disclosures are required to enable financial statement users to assess the extent to which the
expected future cash flows associated with the asset are affected by the entitys intent and/or
ability to renew or extend the arrangement. The guidance for determining the useful life of a
recognized intangible asset is to be applied prospectively to intangible assets acquired after the
effective date. The disclosure requirements are to be applied prospectively to all intangible
assets recognized as of, and subsequent to, the effective date. As of March 31, 2009 the adoption
of FSP FAS 142-3 had no impact on the Companys consolidated financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, or FSP 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities. FSP 03-6-1 clarifies
that share-based payment awards that entitle their holders to receive nonforfeitable dividends
before vesting should be considered participating securities. As participating securities, these
instruments should be included in the calculation of basic earnings per share. FSP 03-6-1 is
effective for financial statements issued for fiscal years beginning after December 15, 2008, as
well as interim periods in those years. Once effective, all prior period earnings per share data
presented must be adjusted retrospectively and early application is not permitted. As of March 31,
2009 the adoption of FSP 03-6-1 had no impact on the Companys consolidated financial statements.
11
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 although not all
forward-looking statements contain these words. Such forward-looking statements involve known and
unknown risks, including, but not limited to, market acceptance of our sole technology, the
Powerlink
®
System products, 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, 2008,
including but not limited to those factors discussed in Managements 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 persons acting on our behalf are expressly qualified in their
entirety by these cautionary statements. We expressly disclaim any intent or obligation to update
information contained in any forward-looking statement after the date hereof to conform such
information to actual results or to changes in our opinions or expectations.
Overview
Organizational History
We were incorporated in California in March 1992 under the name Cardiovascular Dynamics, Inc.
and reincorporated in Delaware in June 1993. In January 1999, we merged with privately held
Radiance Medical Systems, Inc. and changed our name to Radiance Medical Systems, Inc. and in May
2002, we merged with privately held Endologix, Inc., and changed our name to Endologix, Inc.
Our Business
We are engaged in the development, manufacture, sale and marketing of minimally invasive
therapies for the treatment of aortic disorders. 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 a
leading cause of death in the United States today.
The Powerlink System is a catheter and endoluminal stent graft, or ELG, system. The device
consists of a self-expanding cobalt chromium alloy stent cage covered by ePTFE, a common surgical
graft material. The Powerlink ELG is implanted in the abdominal aorta, which is accessed through
the femoral artery. Once the Powerlink ELG is deployed into its proper position, blood flow is
shunted away from the weakened or aneurismal section of the aorta, reducing pressure and the
potential for the aorta to rupture. Our clinical trials demonstrated that implantation of our
products reduces the mortality and morbidity rates associated with conventional AAA surgery, as
well as provides a clinical alternative for many patients who could not undergo conventional
surgery. Sale of our Powerlink System in the United States, Europe, Japan, and Latin America is the
primary source of our reported revenues.
In February 2008, Cosmotec Co., Ltd., or Cosmotec, our distributor in Japan, obtained Shonin
approval to market the Powerlink System from the Japanese Ministry of Health. Shonin is equivalent
to FDA approval of a premarket approval, or PMA, application in the United States. We commenced commercial sales to
Japan in February 2008 through Cosmotec.
12
We continue to conduct clinical trials for other products related to the Powerlink System. All
the required 63 patients have been enrolled in a clinical trial for a 34mm infrarenal bifurcated
device designed to treat patients with large aortic necks.
Results of Operations
Comparison of the Three Months Ended March 31, 2009 and 2008
Product Revenue
. Product revenue increased 42% to $11.8 million in the three months ended
March 31, 2009 from $8.3 million in the three months ended March 31, 2008. Domestic sales increased
49% to $10.2 million in the three months ended March 31, 2009 from $6.8 million in the three months
ended March 31, 2008. The increase in domestic sales was primarily due to increased productivity of
our sales representatives, as well as the introduction of two new products in 2008. In addition,
we began marketing our new system to deliver and deploy the Powerlink system in the first quarter
of 2009. The new delivery system, called IntuiTrak, was designed to further simplify the implant
procedure, and contributed to the increase in domestic revenue.
International sales increased 13% to $1.7 million in the three months ended March 31, 2009
from $1.5 million for the comparable period in the prior year. This increase was driven primarily
by higher sales to Cosmotec in Japan due to greater market acceptance.
We expect that product revenue will continue to grow, both sequentially and compared to prior
year periods. We anticipate that product revenue will be between $47.0 to $50.0 million for the
year ended December 31, 2009.
Cost of Product Revenue
. The cost of product revenue increased 15% to $2.9 million in the
three months ended March 31, 2009 from $2.5 million in the three months ended March 31, 2008, due
to an increase in the volume of Powerlink System sales. As a percentage of product revenue, cost of
product revenue decreased to 25% in the first quarter of 2009 as compared to 30% in the same period
of 2008. The percentage decline in the cost of product revenue was due to the full substitution of
in-house produced ePTFE graft material for higher-cost purchased graft material, in the products
sold during the 2009 period.
We believe that gross profit will increase in 2009 due to the expected higher commercial sales
of the Powerlink System both in and outside of the United States. We also expect gross margin as a
percentage of product revenues to increase modestly due to expected higher average selling prices
for the IntuiTrak delivery system and due to efficiencies from higher manufacturing volumes
required to support sales growth.
Research, Development and Clinical.
Research, development and clinical expense was relatively
unchanged at $1.4 million in the three months ended March 31, 2009 as compared to $1.5 million for
the three months ended March 31, 2008.
We expect that research, development, and clinical expense will increase sequentially over the
remaining quarters of 2009 as we pursue opportunities to develop additional new products for the
treatment of aortic disorders.
Marketing and Sales
. Marketing and sales expense increased 14% to $6.6 million in the three
months ended March 31, 2009 from $5.8 million in the three months ended March 31, 2008. The
increase in the first quarter of 2009 resulted primarily from:
|
|
|
marketing costs related to the launch of the IntuiTrak delivery system,
|
|
|
|
|
expenses related to more intensive training of sales representatives, and
|
|
|
|
|
higher commission expense on the 49% increase in domestic sales between those periods.
|
We anticipate that marketing and sales expense will increase for the remaining quarters of the
year due to the addition of four to six additional sales territories, the higher compensation
associated with the anticipated sales growth, the addition of executive staff in the second
quarter, and the increase in marketing related costs for the broader launch of the IntuiTrak Express delivery system for Powerlink XL in the third quarter
of the 2009 fiscal year.
13
General and Administrative
. General and administrative expense decreased 9% to $2.1 million in
the three months ended March 31, 2009 from $2.2 million in the three months ended March 31, 2008.
The decrease is primarily due to the resolution of certain legal matters ongoing during the first
quarter of 2008, offset by higher compensation expense paid in 2009.
We expect general and administrative expenses to be in the $1.9 million to $2.1 million range
per quarter through the balance of 2009.
Other Income(Expense)
. Other income decreased 176% to ($61,000) in the three months ended
March 31, 2009 from $80,000 in the same period of 2008. The decrease in other income was primarily
the result of interest expense in 2009 due to drawing down on the term loan and revolving line of
credit with Silicon Valley Bank in September 2008, the non-recurrence of income related to a credit
card rebate program and the loss in the value of our investment in Cianna Medical.
Liquidity and Capital Resources
For the three months ended March 31, 2009, we incurred net losses of $1.2 million. As of March
31, 2009, we had an accumulated deficit of approximately $144.9 million. Historically, we have
relied on the sale and issuance of equity securities to provide a significant portion of funding
for our operations.
In February 2007, we entered into a revolving credit facility with Silicon Valley Bank whereby
we may borrow up to $5.0 million under a revolving line of credit. All outstanding amounts under
the revolving line of credit bear interest at a variable rate equal to the lenders prime rate plus
0.5%, which is payable on a monthly basis. The unused portion is subject to an unused revolving
line facility fee, payable quarterly, in arrears, on a calendar year basis, in an amount equal to
one quarter of one percent per annum of the average unused portion of the revolving line of credit,
as determined by the bank. The credit facility also contains customary covenants regarding
operations of our business and financial covenants relating to ratios of current assets to current
liabilities and tangible net worth during any calendar quarter and is collateralized by all of our
assets with the exception of our intellectual property. All amounts owing under the revolving line
of credit become due and payable in July 2010. In September 2008, we drew down $2.0 million. As of
March 31, 2009, we had $2.0 million in outstanding borrowings under the revolving line of credit.
In July 2008, we entered into an amendment to the credit facility which added a term loan
whereby we may borrow up to $3.0 million. In September 2008, we drew down the $3.0 million term
loan, all of which was outstanding at March 31, 2009. The term loan requires interest only payments
at a variable rate equal to the lenders prime rate plus 1.0%, which is payable on a monthly basis
through March 31, 2009. The term loan principal is due in 36 monthly installments beginning in
April 2009.
Our existing credit facility with Silicon Valley Bank contains negative covenants on the
operation of our business and financial covenants, including requiring us to maintain a tangible
net worth of $13.0 million. As of March 31, 2009, our tangible net worth was $13.6 million. If we
are not able to maintain compliance with our financial covenants, certain terms of the revolving
line of credit and term loan will change including an increase in the interest rate and a
limitation on the amounts available for borrowing under the credit facility based on eligible
accounts receivable. Further, if we do not maintain a tangible net worth of at least $12.0 million
from the first date on which we are not in complete compliance with our financial covenants through
June 29, 2009, and $12.5 million thereafter, we will be in default under the credit facility which
could allow the lender to accelerate the repayment of the indebtedness under the credit facility.
As of March 31, 2009, we were in complete compliance with all of our covenants under the credit
facility.
At March 31, 2009, we had cash and cash equivalents of $6.8 million. We expect that our
continued growth, strong gross margins and expense controls will enable us to achieve positive cash
flow from operations in the second quarter of 2009, consequently, we believe that our current cash
balance, in combination with cash receipts generated from sales of the Powerlink System and
borrowings available under our credit facility, will be sufficient to meet anticipated cash needs
for operating and capital expenditures through at least the next twelve months. If we do not
realize expected revenue and gross profit margin levels, or if we are unable to manage our
operating expenses in line with our revenues, or if we cannot maintain our days sales outstanding
accounts receivable level, we may not achieve positive cash flow from operations in the second quarter of 2009, nor be able to fund
our operations through at least the next twelve months.
14
We believe that the future growth of our business will depend upon our ability to successfully
develop new technologies and bring these technologies to market, as well as increased market
acceptance of the Powerlink System. If we pursue additional research and development opportunities
or fail to increase our penetration of the AAA market, or if we fail to reduce certain
discretionary expenditures, as necessary, we may need to seek additional sources of financing. In
the event that we require additional funding to continue our operations, we will attempt to raise
the required capital through either debt or equity arrangements.
The timing and amount of our future capital requirements will depend on many factors,
including:
|
|
|
the rate of market acceptance of the Powerlink System;
|
|
|
|
|
our requirements for additional manufacturing capacity;
|
|
|
|
|
our requirements for additional IT infrastructure and systems;
|
|
|
|
|
our requirements for additional facility space; and
|
|
|
|
|
the need for additional capital to fund future development programs.
|
If we are required to obtain additional financing, we may not be able to do so on acceptable
terms, if at all. Even if we are able to obtain such financing it may cause substantial dilution
for our stockholders, in the case of an equity financing, or may contain burdensome restrictions on
the operations of our business, in the case of debt financing.
15
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not believe that we currently have material exposure to interest rate, foreign currency
exchange rate or other relevant market risks.
Interest Rate and Market Risk.
Our exposure to market risk for changes in interest rates
relates primarily to our revolving line of credit and our term loan with Silicon Valley Bank. Under
our revolving line of credit, all outstanding amounts bear interest at a variable rate equal to the
lenders prime rate plus 0.5%. As of March 31, 2009, we had $2.0 million outstanding under our
revolving line of credit. The interest rate under the revolving line of credit was 4.5% at March
31, 2009. Under our term loan, interest only payments are due monthly at a variable rate equal to
the lenders prime rate plus 1.0% through March 31, 2009, and the principle will be repaid in 36
monthly installments beginning in April 2009. As of March 31, 2009, we had $3.0 million outstanding
under our term loan. The interest rate under the term loan was 5.0% at March 31, 2009. Under both
the term loan and the revolving line of credit, interest is payable on a monthly basis which may
expose us to market risk due to changes in interest rates.
We do not use derivative financial instruments in our investment portfolio. We place our
investments with high credit quality issuers and, by policy, limit the amount of credit exposure to
any one issuer. 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 constantly
positioning our portfolio to respond appropriately to a significant reduction in a credit rating of
any investment issuer or guarantor. At March 31, 2009, our investment portfolio included only money
market instruments.
Foreign Currency Transaction Risk.
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
transaction exchange risk is not material.
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.
16
Part II.
OTHER INFORMATION
Item 6. EXHIBITS
The following exhibits are filed herewith:
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Exhibit 10.12.2
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Second Amendment to Loan and Security Agreement, dated as
of March 3, 2009, by and between Endologix and Silicon
Valley Bank (Incorporated by reference to Exhibit 10.1 to
Endologix Current Report on Form 8-K, filed with the SEC
on March 5, 2009).
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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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17
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: May 7, 2009
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/s/ John McDermott
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President and Chief Executive Officer
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(Principal Executive Officer)
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Date: May 7, 2009
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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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18
EXHIBIT INDEX
The following exhibits are filed herewith:
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|
Exhibit 10.12.2
|
|
Second Amendment to Loan and Security Agreement, dated as
of March 3, 2009, by and between Endologix and Silicon
Valley Bank (Incorporated by reference to Exhibit 10.1 to
Endologix Current Report on Form 8-K, filed with the SEC
on March 5, 2009).
|
|
|
|
Exhibit 31.1
|
|
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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|
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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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19
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