NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
1. Description of Business, Basis of Presentation, and Operating Segment
(a)
Description of Business
Endologix, Inc. (the “Company”) is a Delaware corporation with corporate headquarters in Irvine, California and production facilities located in Irvine and Santa Rosa, California. The Company develops, manufactures, markets, and sells innovative medical devices for the treatment of aortic disorders. The Company’s products are intended for the treatment of abdominal aortic aneurysms (“AAA”). The Company’s AAA products are built on two platforms: (1) traditional minimally-invasive endovascular repair (“EVAR”) and (2) endovascular sealing (“EVAS”), the Company’s innovative solution for sealing the aneurysm sac while maintaining blood flow through two blood flow lumens. The Company’s current EVAR products include the Ovation® Abdominal Stent Graft System (“Ovation”), Endologix AFX Endovascular AAA System (“AFX”), the VELA™ Proximal Endograft System (“VELA”) and the Endologix IntuiTrak Endovascular AAA System (“IntuiTrak”). The Company’s current EVAS product is the Nellix Endovascular Aneurysm Sealing System (“Nellix EVAS System”). Sales of the Company’s EVAR and EVAS platforms (including extensions and accessories) to hospitals in the United States and Europe, and to third-party international distributors, provide the sole source of the Company’s reported revenue.
(b)
Basis of Presentation
The accompanying Consolidated Financial Statements in this Annual Report on Form 10-K have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). These financial statements include the financial position, results of operations, and cash flows of the Company, including its subsidiaries, all of which are wholly-owned. All inter-company accounts and transactions have been eliminated in consolidation. For years ended
December 31, 2017, 2016, and 2015
there were no related party transactions.
In August 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-15, “Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern.” ASU 2014-15 explicitly requires management to assess an entity's ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for all entities in the first annual period ending after December 15, 2016 and for annual periods and interim periods thereafter. We have adopted the guidance for the year ended December 31, 2016. The adoption of ASU 2014-15 did not impact our disclosures.
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs", which requires debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The ASU was effective for the Company on January 1, 2016. The Company adopted ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs" during the first quarter of 2016, utilizing retrospective application as permitted. As a result, the Company reclassified debt issuance costs from other assets to reduce the convertible notes as of December 31, 2015 and 2016. In conjunction with the Company’s adoption of ASU 2015-03, the Company also adopted an update thereof or ASU 2015-15 “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of Credit Arrangements.” As a result, the Company classified debt issuance costs related to a line-of-credit arrangement as other assets.
In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The new guidance also requires that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The Company adopted this standard and has applied it to amounts related to the TriVascular acquisition.
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory,” which requires an entity to measure inventory within the scope of the amendment at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
transportation. We adopted this new accounting standard prospectively in the first quarter of 2017. This new accounting standard did not have a significant impact on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which modifies certain aspects of the accounting for share-based payment transactions, including income taxes, classification of awards, and classification in the statement of cash flows. We adopted this standard effective January 1, 2017. As a result, excess tax benefits are no longer recorded in additional paid-in capital and instead are applied against taxes payable or recognized in the consolidated statements of operations. In addition, our income tax expense and associated effective tax rate will be impacted by fluctuations in stock price between the grant dates and vesting dates of equity awards. We also determined that there were no significant changes to disclosure or financial statement presentation and changes in accounting for excess tax benefits and deficiencies were not material as a result of adoption.
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The FASB agreed to a one-year deferral of the revenue recognition standard's effective date for all entities. The new revenue standard is effective for us on January 1, 2018. Early application is permitted, but not before the original effective date, which would have been January 1, 2017 for us. The new revenue standard permits the use of either the full retrospective or modified retrospective transition method; these methods may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application.
Accordingly, in 2016, we established a cross-functional implementation team to analyze the impact of the new revenue standard. This preliminary analysis included the review of an initial sample of contracts, as well as reviewing current accounting policies and customary business practices to identify potential differences that would result from applying the requirements of the new standard to our revenue contracts. We currently expect revenue related to the completion of an EVAR or EVAS procedure in hospitals and shipments to distributors of our products, to remain substantially unchanged. As part of our review, we separated revenue streams into portfolios of contracts with similar characteristics and selected samples thereof, as we do not expect the financial statement effects to differ materially when applying this approach to individual contracts. In addition, we are in the process of implementing appropriate changes to our business processes, systems and controls to support recognition and disclosure under the new revenue standard. We currently expect to adopt the new revenue standard in our first quarter of 2018 utilizing the modified retrospective adoption method. We continue to expect that the new revenue standard will not have a material impact on the amount and timing of revenue recognized in our consolidated financial statements; we also currently do not expect to have an adjustment to the opening balance of retained earnings under the modified retrospective adoption method in our first quarter of 2018 financial statements. We are also in the process of reviewing the expansion of our disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with our customers, as required by the new revenue standard. We are continuing to evaluate our impact and will continue to monitor any modifications or interpretations communicated by the FASB that may impact any of our final assessments.
(c) Operating Segment
The Company has
one
operating and reporting segment that is focused exclusively on the development, manufacture, marketing, and sale of EVAR and EVAS products for the treatment of aortic disorders. For the
year ended December 31, 2017
, all of the Company's revenue and related expenses were solely attributable to these activities. Substantially all of the Company's long-lived assets are located in the United States.
2. Use of Estimates and Summary of Significant Accounting Policies
The preparation of financial statements in conformity with GAAP requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, the Company's management evaluates its estimates, including those related to (i) collectibility of customer accounts; (ii) whether the cost of inventories can be recovered; (iii) the value of goodwill and intangible assets; (iv) realization of tax assets and estimates of tax liabilities; (v) likelihood of payment and value of contingent liabilities; and (vi) potential outcome of litigation. Such estimates are based on management's judgment which takes into account historical experience and various assumptions. Nonetheless, actual results may differ from management's estimates.
The following critical accounting policies and estimates were used in the preparation of the accompanying Consolidated Financial Statements:
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(i) Cash and Cash Equivalents
We consider all highly liquid investments that are readily convertible into cash and have a maturity of three months or less at the time of purchase to be cash equivalents. The cost of these investments approximates their fair value.
(ii) Marketable securities
At December 31, 2016, the Company’s investments included short-term marketable securities, which were classified as held-to-maturity investments as the Company had the positive intent and ability to hold the investments to maturity. These investments were therefore recorded on an amortized cost basis. Discounts or premiums were amortized to interest income using the interest method. Marketable securities are investments with original maturities of greater than 90 days. Management reviewed the Company’s investments as of December 31, 2016, and concluded that there were no securities with other than temporary impairments in the investment portfolio. The Company’s investments were matured during the year ended
December 31, 2017
and at
December 31, 2017
, the Company had no marketable securities.
(ii) Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount, inclusive of applicable value-added tax ("VAT"), and do not bear interest. Revenue is recorded net of VAT. The allowance for doubtful accounts is management's best estimate of the amount of probable credit losses in existing accounts receivable. Account balances are charged off against the allowance after appropriate collection efforts are exhausted.
(iii) Inventories
The Company values inventory at the lower of the actual cost to purchase or manufacture the inventory, or net realizable value for such inventory. Cost is determined on the first-in, first-out method. The Company regularly reviews inventory quantities in process and on hand, and when appropriate, records a provision for obsolete and excess inventory. The provision is based on actual loss experience and a forecast of product demand compared to its remaining shelf life.
(iv) Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line basis over the following estimated useful lives:
|
|
|
|
Property Class
|
|
Useful Life
|
Office furniture
|
|
Seven years
|
Computer hardware
|
|
Three years
|
Computer software
|
|
Three to eight years
|
Production equipment and molds
|
|
Three to seven years
|
Leasehold improvements
|
|
Shorter of expected useful life or remaining term of lease
|
Upon sale or disposition of property and equipment, any gain or loss is included in the accompanying Consolidated Statements of Operations and Comprehensive Loss. Property and equipment are tested for impairment only when impairment indicators are present.
(v) Goodwill and Intangible Assets
Intangible assets with definite lives are amortized over their estimated useful lives using a method that reflects the pattern over which the economic benefit is expected to be realized, and is as follows:
|
|
|
|
Intangible Asset Class
|
|
Useful Life
|
Goodwill
|
|
Indefinite lived
|
Trademarks and tradenames
|
|
Indefinite lived
|
Developed technology
|
|
Eleven to thirteen years
|
Customer relationships
|
|
Ten years
|
In-process research and development will be amortized upon commencement of commercial sales and it is expected to be amortized over its useful life.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
Goodwill and other intangible assets with indefinite lives are not subject to amortization, but are tested for impairment annually or whenever events or changes in business circumstances suggest the potential of an impairment. Under the FASB guidance, the evaluation of indefinite-lived intangible assets for impairment allows for a qualitative assessment to be performed, which is similar to the FASB guidance for evaluating goodwill for impairment. In performing these qualitative assessments, the Company considered relevant events and conditions, including but not limited to: macroeconomic trends, industry and market conditions, overall financial performance, cost factors, company-specific events, legal and regulatory factors and the Company's market capitalization. The Company completed its annual indefinite lived intangible asset impairment test as of
June 30, 2017
, with no resulting impairment.
The Company most recently completed its annual test for impairment of goodwill as of
June 30, 2017
, with no resulting impairment, as its market capitalization was in substantial excess of the value of its total stockholders' equity (the Company has
one
"reporting unit" for purposes of the goodwill impairment test).
Intangible assets with finite lives are tested for impairment only when impairment indicators are present.
(vi) Fair Value Measurements
In determining the fair value of its assets and liabilities, the Company uses various valuation approaches. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (i) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (ii) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level input that is significant to the overall fair value measurement.
The Company’s held-to-maturity securities, which are fixed income investments, are comprised of obligations of United States government agencies, corporate debt securities and other interest bearing securities. These held-to-maturity securities are recorded at amortized cost and are therefore not included in the Company’s market value measurement disclosure. Money market funds, which are cash and cash equivalents, are valued using quoted market prices with no valuation adjustments applied. Accordingly, these securities are categorized in Level 1. The recorded values of all our other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
The recorded values of all our accounts receivable and accounts payable approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
(vii) Contingent Consideration for Business Acquisition
The Company's management determined the fair value of contingently issuable common stock on the Nellix acquisition date (see Note 9) using a probability-based income approach with an appropriate discount rate (determined using both Level 1 and Level 3 inputs). Changes in the fair value of this contingently issuable common stock are determined at each period end and are recorded in the other income (expense) section of the accompanying Consolidated Statements of Operations and Comprehensive Loss, and the current and non-current liabilities section of the accompanying Consolidated Balance Sheets.
(viii) Revenue Recognition
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
The Company recognizes revenue when all of the following criteria are met:
|
|
•
|
Appropriate evidence of a binding arrangement exists with the customer;
|
|
|
•
|
The sales price for the EVAR or EVAS product (including device extensions and accessories) is established with the customer;
|
|
|
•
|
The EVAR or EVAS product has been used by the hospital in an EVAR procedure, or the distributor has assumed title with no right of return; and
|
|
|
•
|
Collection of the corresponding receivable from the customer is reasonably assured at the time of sale.
|
For sales made to hospitals, the Company recognizes revenue upon completion of an EVAR or EVAS procedure, when the EVAR or EVAS products are implanted in a patient. For sales made to distributors, the Company recognizes revenue when title passes, which is typically at the time of shipment, as this represents the period that the customer has assumed custody of the EVAR or EVAS product, without right of return, and assumed risk of loss.
The Company does not offer rights of return, other than honoring a standard warranty.
(ix) Shipping Costs
Shipping costs billed to customers are reported within revenue, with the corresponding costs reported within costs of goods sold.
(x) Foreign Currency Transactions
The assets and liabilities of the Company's foreign subsidiaries are translated at the rates of exchange at the balance sheet date. The income and expense items of these subsidiaries are translated at average monthly rates of exchange. Gains and losses resulting from foreign currency transactions, which are denominated in a currency other than the respective entity’s functional currency are included in other income (expense), net, within the accompanying Consolidated Statements of Operations and Comprehensive Loss. Foreign currency translation adjustments between the respective entity's functional currency and the United States dollar are recorded to accumulated other comprehensive loss within the stockholders' equity section of the accompanying Consolidated Balance Sheets. There were no items reclassified out of accumulated other comprehensive loss and into net loss during the years ended
December 31, 2017, 2016, and 2015
. The only activity in the accumulated other comprehensive loss was related to foreign currency translation.
(xi) Income Taxes
The Company records the estimated future tax effects of temporary differences between the tax basis of assets and
liabilities and amounts reported in the financial statements, as well as operating losses and tax credit carry forwards. The Company has recorded a valuation allowance to substantially reduce its net deferred tax assets, because the Company believes that, based upon a number of factors, it is more likely than not that substantially all the deferred tax assets will not be realized. If the Company were to determine that it would be able to realize additional deferred tax assets in the future, an adjustment to the valuation allowance on its deferred tax assets would increase net income in the period such determination was made. In the event that the Company were assessed interest and/or penalties from taxing authorities, such amounts would be included in "income tax expense" within the Consolidated Statements of Operations and Comprehensive Loss in the period the notice was received.
(xii) Net Loss Per Share
Net loss per common share is computed using the weighted average number of common shares outstanding
during the periods presented. Because of the net losses during the years ended
December 31, 2017, 2016, and 2015
, options to purchase the common stock, restricted stock awards, and restricted stock units of the Company were excluded from the computation of net loss per share for these periods because the effect would have been antidilutive.
(xiii) Research and Development Costs
Research and development costs are expensed as incurred.
(xiv) Product Warranty
Within six months of shipment, certain customers may request replacement of products they receive that do not meet product specifications; no other warranties are offered. The Company contractually disclaims responsibility for any damages associated with physician's use of its EVAR or EVAS product. Historically, the Company has not experienced a significant amount of costs associated with its warranty policy.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
3. Balance Sheet Account Detail
(a) Property and Equipment
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Production equipment, molds, and office furniture
|
$
|
12,118
|
|
|
$
|
11,714
|
|
Computer hardware and software
|
8,115
|
|
|
8,162
|
|
Leasehold improvements
|
15,499
|
|
|
15,495
|
|
Construction in progress (software and related implementation, production equipment, and leasehold improvements)
|
743
|
|
|
839
|
|
Property and equipment, at cost
|
36,475
|
|
|
36,210
|
|
Accumulated depreciation
|
(17,263
|
)
|
|
(12,945
|
)
|
Property and equipment, net
|
$
|
19,212
|
|
|
$
|
23,265
|
|
Depreciation expense for property and equipment for the years ended
December 31, 2017
,
2016
, and
2015
was
$5.0 million
,
$5.3 million
, and
$4.6 million
, respectively.
(b) Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Raw materials
|
$
|
12,226
|
|
|
$
|
13,133
|
|
Work-in-process
|
7,736
|
|
|
10,139
|
|
Finished goods
|
25,191
|
|
|
17,888
|
|
Inventories
|
$
|
45,153
|
|
|
$
|
41,160
|
|
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(c) Goodwill and Intangible Assets
The following table presents goodwill, indefinite lived intangible assets, finite lived intangible assets, and related accumulated amortization:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Goodwill
|
$
|
120,927
|
|
|
$
|
120,711
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
Indefinite lived intangibles
|
|
|
|
Trademarks and trade names
|
$
|
2,708
|
|
|
$
|
2,708
|
|
In-process research and development
|
11,200
|
|
|
11,200
|
|
|
|
|
|
Finite lived intangibles
|
|
|
|
Developed technology
|
$
|
67,600
|
|
|
$
|
67,600
|
|
Accumulated amortization
|
(7,167
|
)
|
|
(3,810
|
)
|
Developed technology, net
|
$
|
60,433
|
|
|
$
|
63,790
|
|
|
|
|
|
Customer relationship
|
$
|
7,500
|
|
|
$
|
7,500
|
|
Accumulated amortization
|
(1,438
|
)
|
|
(687
|
)
|
Customer relationship, net
|
$
|
6,062
|
|
|
$
|
6,813
|
|
|
|
|
|
Intangible assets (excluding goodwill), net
|
$
|
80,403
|
|
|
$
|
84,511
|
|
The change in the carrying amount of goodwill for the
year ended December 31, 2017
is as follows (in thousands):
|
|
|
|
|
|
|
Balance at January 1, 2017
|
|
|
120,711
|
|
Foreign currency translation adjustment
|
|
|
216
|
|
Balance at December 31, 2017
|
|
|
$
|
120,927
|
|
Amortization expense for intangible assets for the years ended
December 31, 2017
,
2016
, and
2015
was
$4.1 million
,
$3.8 million
, and
$1.3 million
, respectively.
Estimated amortization expense for the five succeeding years and thereafter is as follows:
|
|
|
|
|
|
Amortization Expense
|
2018
|
$
|
4,095
|
|
2019
|
4,300
|
|
2020
|
4,944
|
|
2021
|
7,020
|
|
2022
|
8,734
|
|
2023 and thereafter
|
37,402
|
|
Total
|
$
|
66,495
|
|
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(d) Marketable securities
Investments in held-to-maturity marketable securities consist of the following at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gain
|
|
Gross
Unrealized
Loss
|
|
Fair Value
|
Agency bonds
|
|
$
|
6,488
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
6,490
|
|
Corporate bonds
|
|
10,513
|
|
|
—
|
|
|
(21
|
)
|
|
$
|
10,492
|
|
Commercial paper
|
|
3,987
|
|
|
—
|
|
|
—
|
|
|
3,987
|
|
Total
|
|
$
|
20,988
|
|
|
$
|
2
|
|
|
$
|
(21
|
)
|
|
$
|
20,969
|
|
At
December 31, 2017
, the Company had no marketable securities. There were no realized gains or losses on the investments for the year ended
December 31, 2017
.
(e) Fair Value Measurements
The following fair value hierarchy table presents information about each major category of the Company’s assets and liabilities measured at fair value on a recurring basis as of
December 31, 2017 and 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement at reporting date using:
|
|
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
|
Significant other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Total
|
At December 31, 2017
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
57,991
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
57,991
|
|
Restricted cash
|
|
$
|
2,608
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,608
|
|
Contingently issuable common stock
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,300
|
|
|
$
|
9,300
|
|
At December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,120
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
26,120
|
|
Restricted cash
|
|
$
|
2,001
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,001
|
|
Contingently issuable common stock
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,200
|
|
|
$
|
12,200
|
|
There were no remeasurements to fair value during the
years ended December 31, 2017 and 2016
of financial assets and liabilities that are not measured at fair value on a recurring basis. There were no transfers between Level 1, Level 2, or Level 3 securities during the
years ended December 31, 2017 and 2016
.
(f) Instruments Not Recorded at Fair Value on a Recurring Basis
The Company measures the fair value of their Senior Notes carried at amortized cost quarterly for disclosure purposes. The estimated fair value of the Senior Notes is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues. Based on the market prices, the fair value of our Senior Notes was
$131.2 million
as of
December 31, 2017
and
$187.6 million
as of
December 31, 2016
.
The Company measures the fair value of its Term Loan carried at amortized cost quarterly for disclosure purposes. The estimated fair value of the Term Loan is determined by Level 3 inputs and is based primarily on unobservable inputs that are not corroborated by market data. The fair value of the Company's Term Loan was
$101.9 million
as of
December 31, 2017
.
Due to its short-term nature, the Company believes that the carrying value of its revolving line of credit approximated its fair value at
December 31, 2017
.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
The Company measures the fair value of our held-to-maturity marketable securities carried at amortized cost quarterly for disclosure purposes. The fair value of certain marketable securities is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar instruments.
4. Stock-Based Compensation
2015 Stock Incentive Plan
The Company has one active stockholder-approved stock-based compensation plan, the 2015 Stock Incentive Plan (the "2015 Plan"), which replaced the Company's former stockholder-approved plans. Incentive stock options, non-qualified options, restricted stock awards, restricted stock units, and stock appreciation rights may be granted under the 2015 Plan.
The maximum number of shares of the Company's common stock available for issuance under the 2015 Plan is
9.8 million
shares. As of
December 31, 2017
,
0.9 million
shares were available for grant. It is the Company's policy that before stock is issued through the exercise of stock options, the Company must first receive all required cash payment for such shares. The stock issuable under the Plan shall be shares of authorized new unissued shares.
Stock-based awards are governed by agreements between the Company and the recipients. Incentive stock options and nonqualified stock options may be granted under the 2015 Plan at an exercise price of not less than
100%
of the closing fair market value of the Company's common stock on the respective date of grant. The grant date is generally the first day of employment for new hire grants and the date of approval for all others. Awards are approved by either a delegated member of the Company's Executive Management or by the Compensation Committee of the Board of Directors for awards that exceed the Company's Executive Management's authority.
The Company's standard stock-based award vests
25%
on the first anniversary of the date of grant, or for new hires, the first anniversary of their initial date of employment with the Company. Awards vest monthly thereafter on a straight-line basis over
three years
. Stock options must be exercised, if at all, no later than
10
years from the date of grant. Upon termination of employment with the Company, vested stock options may be exercised within
90
days from the last date of employment. In the event of an optionee's death, disability, or retirement, the exercise period is
365
days from the last date of employment.
2017 Inducement Stock Incentive Plan
On October 27, 2017, the Board of Directors (the “Board”) of the Company adopted the 2017 Inducement Stock Incentive Plan (the “2017 Inducement Plan”). The 2017 Inducement Plan provides for the grant of equity-based awards in the form of non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, performance shares and performance units. In accordance with Nasdaq Listing Rules, awards under the 2017 Inducement Plan may only be made to an employee who has not previously been an employee of the Company or a member of the Board, or an employee or member of the board of directors of any subsidiary of the Company, or following a bona fide period of non-employment with the Company or any subsidiary of the Company, if he or she is granted such award in connection with his or her commencement of employment with the Company or a subsidiary of the Company and such grant is an inducement material to his or her entering into employment with the Company or such subsidiary.
The Board has reserved
2,000,000
shares of the Company’s common stock for issuance pursuant to awards granted under the 2017 Inducement Plan, and the 2017 Inducement Plan will be administered by the Compensation Committee of the Board. As of December 31, 2017, 1.7 million shares were available for grant.
Employee Stock Purchase Plan
Under the terms of the Company's Amended and Restated 2006 Employee Stock Purchase Plan, as amended (the "ESPP"), eligible employees can purchase common stock through payroll deductions. As of
December 31, 2017
,
1.0 million
shares were available for grant. The purchase price is equal to the closing price of the Company's common stock on the first or last day of the offering period (whichever is less), minus a
15%
discount. The Company uses the Black-Scholes option-pricing model, in combination with the discounted employee price, in determining the value of ESPP expense to be recognized during each offering period.
The table below summarizes the stock-based compensation recognized, common stock shares purchased by Company employees, and the average purchase price per share as part of the ESPP program during the years ended
December 31, 2017, 2016, and 2015
.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Stock-based compensation expense
|
$
|
850
|
|
|
$
|
1,205
|
|
|
$
|
921
|
|
Common stock shares purchased by Company employees
|
446,490
|
|
|
394,120
|
|
|
355,557
|
|
Average purchase price per share
|
$
|
5.64
|
|
|
$
|
8.17
|
|
|
$
|
8.33
|
|
Stock Options and Restricted Stock
The Company values stock-based awards, including stock options and restricted stock, as of the date of grant (and is marked-to-market at each reporting period for unvested grants issued to non-employees).
The Company recognizes stock-based compensation expense (net of estimated forfeitures) using the straight-line method over the requisite or implicit service period, as applicable. Forfeitures of employee awards are estimated at the time of grant and the forfeiture assumption is periodically adjusted for actual employee vesting behavior. For purposes of this estimate, the Company has applied an estimated forfeiture rate of
11%
,
11%
, and
14%
for the years ended
December 31, 2017, 2016, and 2015
, respectively.
Stock-Based Compensation Expense Summary
The Company classifies related compensation expense in the accompanying Consolidated Statements of Operations and Comprehensive Loss, based on the Company department to which the recipient belongs. Stock-based compensation expense included in cost of goods sold and operating expenses for years ended
December 31, 2017, 2016, and 2015
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Cost of goods sold
|
$
|
828
|
|
|
$
|
944
|
|
|
$
|
1,000
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
1,259
|
|
|
1,528
|
|
|
1,005
|
|
Clinical and regulatory affairs
|
770
|
|
|
672
|
|
|
858
|
|
Marketing and sales
|
3,796
|
|
|
4,335
|
|
|
3,237
|
|
General and administrative
|
4,991
|
|
|
4,807
|
|
|
3,155
|
|
Total operating expenses
|
$
|
10,816
|
|
|
$
|
11,342
|
|
|
$
|
8,255
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
11,644
|
|
|
$
|
12,286
|
|
|
$
|
9,255
|
|
In addition, the Company had
$0.4 million
,
$0.5 million
, and
$0.6 million
of stock-based compensation capitalized in inventory as of
December 31, 2017
,
2016
, and
2015
, respectively.
Valuation Assumptions
The grant-date fair value per share for restricted stock awards was based upon the closing market price of the Company’s common stock on the award grant-date.
The fair value of stock options granted was estimated at the date of grant using the Black-Scholes option-pricing model. The following assumptions were used to determine fair value for the stock awards granted in the applicable year:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Average expected option life (in years) (a)
|
5.6
|
|
5.5
|
|
5.5
|
Volatility (b)
|
51.3%
|
|
44.2%
|
|
43.3%
|
Risk-free interest rate (c)
|
1.9%
|
|
1.2%
|
|
1.6%
|
Dividend yield (d)
|
—
|
|
—
|
|
—
|
Weighted-average grant-date fair value per stock option
|
$2.51
|
|
$3.45
|
|
$6.37
|
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(a) Determined by the historical stock option exercise behavior of the Company's employees (maximum term is
10 years
).
(b) Measured using daily price observations for a period equal to the stock options' expected terms.
(c) Based upon the United States Treasury yields in effect (for a period equaling the stock options' expected terms).
(d) The Company has never paid cash dividends on its common stock and does not expect to declare any cash dividends.
Stock Option Activity
Stock option activity during the
year ended December 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Stock Options
|
|
Weighted
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Life (Years)
|
|
Aggregate Intrinsic Value
|
Outstanding — January 1, 2017
|
8,673,215
|
|
9.22
|
|
|
|
|
|
Granted
|
5,370,408
|
|
5.44
|
|
|
|
|
|
Exercised
|
(129,478)
|
|
4.21
|
|
|
(a)
|
$
|
226
|
|
Forfeited
|
(1,405,534)
|
|
8.20
|
|
|
|
|
|
Expired
|
(684,279)
|
|
11.38
|
|
|
|
|
|
Outstanding — December 31, 2017
|
11,824,332
|
|
$7.56
|
|
7.1
|
(b)
|
$
|
4,570
|
|
Vested and Expected to Vest — December 31, 2017
|
10,629,743
|
|
7.67
|
|
6.9
|
(b)
|
$
|
4,173
|
|
Vested — December 31, 2017
|
5,041,775
|
|
8.48
|
|
4.9
|
(b)
|
$
|
2,530
|
|
(a) Represents the
total difference
between the Company's stock price at the time of exercise and the stock option exercise price,
multiplied
by the number of options exercised.
(b) Represents the
total difference
between the Company's closing stock price on the last trading day of period reported on and the stock option exercise price,
multiplied
by the number of in-the-money options as of the period reported on. The amount of intrinsic value will change based on the fair market value of the Company's stock.
For years ended December 31,
2017
,
2016
and
2015
the total intrinsic value of options exercised was
$0.2 million
,
$2.7 million
and
$3.2 million
respectively. The Company recognized stock option expense of
$7.7 million
,
$7.4 million
and
$5.3 million
for the years ended
December 31, 2017, 2016, and 2015
, respectively.
As of
December 31, 2017
, there was
$14.5 million
of total unrecognized compensation expense related to granted, but unvested stock options, which is expected to be recognized over a weighted average period of
2.7
years.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
The following table summarizes information regarding outstanding stock option grants as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
Range of Exercise Prices
|
|
Granted
Stock Options
Outstanding
|
|
Weighted-
Average
Remaining
Contractual
Life (Years)
|
|
Weighted-
Average
Exercise
Price
|
|
Granted
Stock Options
Exercisable
|
|
Weighted-
Average
Exercise
Price
|
$
|
1.64
|
|
—
|
$
|
4.42
|
|
|
2,390,446
|
|
5.6
|
|
$
|
3.76
|
|
|
1,135,219
|
|
$
|
3.27
|
|
4.49
|
|
—
|
6.62
|
|
|
3,626,065
|
|
8.6
|
|
5.72
|
|
|
691,585
|
|
5.72
|
|
6.66
|
|
—
|
7.53
|
|
|
2,865,141
|
|
7.6
|
|
7.39
|
|
|
1,298,962
|
|
7.40
|
|
7.57
|
|
—
|
15.51
|
|
|
2,373,560
|
|
5.9
|
|
12.22
|
|
|
1,543,700
|
|
12.52
|
|
15.53
|
|
—
|
17.58
|
|
|
569,120
|
|
6.3
|
|
16.58
|
|
|
372,309
|
|
16.53
|
|
$
|
1.64
|
|
—
|
$
|
17.58
|
|
|
11,824,332
|
|
7.1
|
|
$
|
7.56
|
|
|
5,041,775
|
|
$
|
8.48
|
|
Non-Employee - Stock Options
As of
December 31, 2017, 2016, and 2015
, a total of
1,500
,
11,500
, and
31,500
non-employee stock options, respectively, were outstanding and fully vested.
Restricted Stock Award Activity
The following table summarizes activity and related information for the Company's restricted stock awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted Stock Awards(2)
|
|
Weighted Average
Fair
Value per Share at Grant Date
|
|
Grant Date Fair Value
|
|
Vest Date Fair Value(1)
|
Unvested as of December 31, 2016
|
1,310,019
|
|
|
$
|
10.19
|
|
|
|
|
|
|
|
Granted
|
1,590,662
|
|
|
5.01
|
|
|
$
|
7,969
|
|
|
|
|
Forfeited
|
(470,626
|
)
|
|
9.74
|
|
|
|
|
|
|
|
Vested
|
(293,612
|
)
|
|
11.39
|
|
|
|
|
|
$
|
1,757
|
|
Unvested as of December 31, 2017
|
2,136,443
|
|
|
$
|
6.27
|
|
|
|
|
|
|
(1) Represents the Company's stock price on the vesting date
multiplied
by the number of vested shares.
(2) Shares granted in
2017
include
513,011
performance stock units that have certain performance conditions required to be achieved to vest.
For years ended December 31,
2017
,
2016
and
2015
, the weighted average grant date fair value of shares granted was
$5.01
,
$8.29
, and
$16.03
, respectively.
For years ended December 31,
2017
,
2016
and
2015
, the total fair value of shares vested was
$1.8 million
,
$2.6 million
, and
$2.2 million
, respectively.
The Company recognized restricted stock expense of
$3.0 million
,
$3.7 million
, and
$2.8 million
for the years ended
December 31, 2017, 2016, and 2015
, respectively. As of
December 31, 2017
, there was
$5.2 million
of unrecorded expense related to issued restricted stock that will be recognized over an estimated weighted average period of
1.9
years.
Non-Employee Restricted Stock
During the years ended
December 31, 2017, 2016, and 2015
,
$79 thousand
,
$30 thousand
, and
$0.1 million
, respectively, was recorded as compensation expense for the change in the fair value of unvested non-employee restricted stock. There were
no
restricted stock units granted to non-employees during the year ended December 31, 2016.
As of
December 31, 2017, 2016, and 2015
, a total of
41,000
,
41,000
, and
72,000
shares of unvested restricted stock, respectively, issued to non-employees were outstanding.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
Award Modifications
During
2017
, there was an award modification affecting
one
employee. The employee was provided with twelve months of accelerated vesting for all awards outstanding which included stock options, restricted stock units, and four performance stock units. The total incremental stock compensation expense recognized for the years ended
2017
,
2016
and
2015
related to awards modifications was
$286,000
,
$273,000
and
$46,000
, respectively.
5. Net Loss Per Share
Net loss per share was computed by dividing net loss by the weighted average number of common shares outstanding for the years ended
December 31, 2017, 2016, and 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net loss
|
$
|
(66,400
|
)
|
|
$
|
(154,677
|
)
|
|
$
|
(50,424
|
)
|
Shares used in computing basic and diluted net loss per share
|
83,325
|
|
|
80,976
|
|
|
67,671
|
|
Basic and diluted net loss per share
|
$
|
(0.80
|
)
|
|
$
|
(1.91
|
)
|
|
$
|
(0.75
|
)
|
The following outstanding Company securities, using the treasury stock method, were excluded from the above calculations of net loss per share because their impact would have been anti-dilutive due to the net losses during the years ended
December 31, 2017, 2016, and 2015
:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Common stock options
|
520
|
|
1,248
|
|
1,651
|
Restricted stock awards
|
119
|
|
129
|
|
133
|
Restricted stock units
|
250
|
|
370
|
|
230
|
Total
|
889
|
|
1,747
|
|
2,014
|
Conversion of Senior Notes
As discussed in Note 6, in December 2013, the Company issued
$86.3 million
in aggregate principal amount of
2.25%
Convertible Senior Notes due 2018 (the “
2.25%
Senior Notes”) in an underwritten public offering. In October 2015, the Company also issued
$125.0 million
in aggregate principal amount of
3.25%
Convertible Senior Notes due 2020 (the “
3.25%
Senior Notes”) in an underwritten public offering. Upon any conversion, the
2.25%
Senior Notes and/or
3.25%
Senior Notes, (collectively the "Senior Notes") may be settled, at the Company’s election, in cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock. For purposes of calculating the maximum dilutive impact, it is presumed that the Senior Notes will be settled in common stock with the resulting potential common shares included in diluted earnings per share if the effect is more dilutive. The effect of the conversion of the Senior Notes is excluded from the calculation of diluted loss per share because the impact of these securities would be anti-dilutive.
Deerfield Warrants
On April 3, 2017, the Company entered into a Facility Agreement (the “Facility Agreement”) with affiliates of Deerfield Management Company, L.P. (collectively, “Deerfield”), pursuant to which Deerfield agreed to loan to the Company up to
$120.0 million
, subject to the terms and conditions set forth in the Facility Agreement (the “Term Loan”). Pursuant to the terms of the Facility Agreement, the Company issued warrants to Deerfield to purchase an aggregate of
6,470,000
shares of common stock of the Company at an exercise price of
$9.23
per share (the “Deerfield Warrants”). The number of shares of common stock of the Company into which the Warrants are exercisable and the exercise price of the Warrants will be adjusted to reflect any stock splits, recapitalizations or similar adjustments in the number of outstanding shares of common stock of the Company. Refer to Note 6 of the Notes to the Condensed Consolidated Financial Statements for further discussion.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
The potential dilutive effect of these securities is shown in the chart below:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Conversion of the Senior Notes
|
11,939
|
|
14,767
|
|
14,767
|
Deerfield Warrants
|
6,470
|
|
—
|
|
—
|
The effect of the contingently issuable common stock is excluded from the calculation of basic loss per share until all necessary conditions for issuance have been satisfied. Refer to Note 9 of the Notes to the Consolidated Financial Statements for further discussion.
6. Credit Facilities
2.25% Convertible Senior Notes
On December 10, 2013, the Company issued
$86.3 million
in aggregate principal amount of
2.25%
Senior Notes. The
2.25%
Senior Notes mature on December 15, 2018 unless earlier repurchased by the Company or converted. The Company received net proceeds from the sale of the
2.25%
Senior Notes of approximately
$82.6 million
, after deducting underwriting discounts and commissions and offering expenses payable by the Company. Interest is payable on the
2.25%
Senior Notes on June 15 and December 15 of each year, beginning June 15, 2014.
The
2.25%
Senior Notes are governed by the terms of a base indenture (the “Base Indenture”), as supplemented by the first supplemental indenture relating to the
2.25%
Senior Notes (the “First Supplemental Indenture,” and together with the Base Indenture, the “
2.25%
Senior Notes Indenture”), between the Company and Wells Fargo Bank, National Association (the “Trustee”), each of which were entered into on December 10, 2013.
The
2.25%
Senior Notes are senior unsecured obligations and are: (a) senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the 2.25% Senior Notes; (b) equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; (c) effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and (d) structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries.
On or after December 15, 2016, the Company may redeem for cash all or any portion of the
2.25%
Senior Notes, at its option, but only if the closing sale price of the Company’s common stock for at least
20
trading days (whether or not consecutive) during any
30
consecutive trading day period ending on, and including, the second trading day immediately preceding the date on which the Company provides notice of redemption, exceeds
130%
of the conversion price on each applicable trading day. The redemption price will equal
100%
of the principal amount of the
2.25%
Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the
2.25%
Senior Notes.
Holders may convert their
2.25%
Senior Notes at any time prior to the close of business on the business day immediately preceding September 15, 2018 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2014, if the closing sale price of the Company’s common stock, for at least
20
trading days (whether or not consecutive) in the period of
30
consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than
130%
of the conversion price of the
2.25%
Senior Notes in effect on each applicable trading day; (2) during the
five
consecutive business-day period following any
five
consecutive trading-day period in which the trading price for the
2.25%
Senior Notes for each such trading day was less than
98%
of the closing sale price of the Company’s common stock on such date multiplied by the then-current conversion rate; (3) if the Company calls all or any portion of the
2.25%
Senior Notes for redemption, at any time prior to the close of business on the second scheduled trading day prior to the redemption date; or (4) upon the occurrence of specified corporate events. On or after September 15, 2018 until the close of business on the second scheduled trading day immediately preceding the stated maturity date, holders may surrender their
2.25%
Senior Notes for conversion at any time, regardless of the foregoing circumstances.
Upon conversion, the Company will at its election pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
The initial conversion rate will be
41.6051
shares of the Company’s common stock for each $1,000 principal amount of
2.25%
Senior Notes, which represents an initial conversion price of approximately
$24.04
per share. Following certain corporate transactions that occur on or prior to the stated maturity date or the Company’s delivery of a notice of redemption, the Company will increase the conversion rate for a holder that elects to convert its
2.25%
Senior Notes in connection with such a corporate transaction.
If a fundamental change (as defined in the
2.25%
Senior Notes Indenture) occurs prior to the stated maturity date, holders may require the Company to purchase for cash all or any portion of their
2.25%
Senior Notes at a fundamental change purchase price equal to
100%
of the principal amount of the
2.25%
Senior Notes to be purchased, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date.
The
2.25%
Senior Notes Indenture contains customary terms and covenants and events of default with respect to the
2.25%
Senior Notes. If an event of default (as defined in the
2.25%
Senior Notes Indenture) occurs and is continuing, either the Trustee or the holders of at least
25%
in aggregate principal amount of the outstanding
2.25%
Senior Notes may declare the principal amount of the
2.25%
Senior Notes to be due and payable immediately by notice to the Company (with a copy to the Trustee). If an event of default arising out of certain events of bankruptcy, insolvency or reorganization involving the Company or a significant subsidiary (as set forth in the
2.25%
Senior Notes Indenture) occurs with respect to us, the principal amount of the
2.25%
Senior Notes and accrued and unpaid interest, if any, will automatically become immediately due and payable.
The Company was not required to separate the conversion option in the
2.25%
Senior Notes under ASC 815, "Derivatives and Hedging", and has the ability to settle the
2.25%
Senior Notes in cash, common stock or a combination of cash and common stock, at its option. In accordance with cash conversion guidance contained in ASC 470-20, "Debt with Conversion and Other Options", the Company accounted for the
2.25%
Senior Notes by allocating the issuance proceeds between the liability and the equity component. The equity component is classified in stockholders’ equity and the resulting discount on the liability component is accreted such that interest expense equals the Company’s nonconvertible debt borrowing rate. The separation was performed by first determining the fair value of a similar debt that does not have an associated equity component. That amount was then deducted from the initial proceeds of the
2.25%
Senior Notes as a whole to arrive at a residual amount, which was allocated to the conversion feature that is classified as equity. The initial fair value of the indebtedness was
$66.9 million
resulting in a
$19.3 million
allocation to the embedded conversion option. The embedded conversion option was recorded in stockholders’ equity and as debt discount, to be subsequently accreted to interest expense over the term of the
2.25%
Senior Notes. Underwriting discounts and commissions and offering expenses totaled
$3.7 million
and were allocated between the liability and the equity component in proportion to the allocation of proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. As a result,
$2.9 million
attributable to the indebtedness was recorded as deferred financing costs in other assets, to be subsequently amortized as interest expense over the term of the
2.25%
Senior Notes, and
$0.8 million
attributable to the equity component was recorded as a reduction to additional paid-in-capital in stockholders’ equity. During the three months ended March 31, 2016, the Company adopted ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs" utilizing retrospective application as permitted. As a result, the Company reclassified
$1.9 million
of debt issuance costs from current and non-current other assets to reduce the
2.25%
Senior Notes as of December 31, 2015.
On April 3, 2017, the Company entered into the Facility Agreement with Deerfield, pursuant to which Deerfield agreed to loan to the Company up to
$120 million
, subject to the terms and conditions set forth in the Facility Agreement. The Company used a portion of the proceeds from the Term Loan to repurchase
$68 million
aggregate principal amount of outstanding 2.25% Senior Notes, plus the accrued but unpaid interest thereon, from the holders thereof in privately negotiated transactions. Refer to the section entitled Deerfield Facility Agreement below for further discussion. The embedded conversion option of the 2.25% Senior Notes, which was originally recorded in additional paid-in capital, was reduced by
$2.2 million
. Additionally,
$3.2 million
related to the reduction of outstanding principal related to the 2.25% Senior Notes was charged to loss on debt extinguishment on the Company’s Consolidated Statements of Operations and Comprehensive Loss.
As of
December 31, 2017
, the Company had outstanding borrowings of
$17.4 million
, and deferred financing costs of
$0.2 million
, related to the 2.25% Senior Notes. There are no principal payments due during the term. Annual interest expense on these notes will range from
$1.1 million
to
$1.5 million
through maturity.
Capped Call Transactions
On December 10, 2013, in connection with the pricing of the
2.25%
Senior Notes and the exercise in full of their overallotment option by the underwriters, the Company entered into privately-negotiated capped call transactions (the “Capped Call Transactions”) with Bank of America, N.A., an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated. The Capped Call Transactions initial conversion rate and number of options substantially corresponds to each $1,000 principal
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
amount of
2.25%
Senior Notes. The Company used approximately
$7.4 million
of the net proceeds from the
2.25%
Senior Notes offering to pay for the cost of the Capped Call Transactions.
The Capped Call Transactions are separate transactions entered into by the Company with Bank of America, N.A., are not part of the terms of the
2.25%
Senior Notes and will not change the holders’ rights under the
2.25%
Senior Notes. The Capped Call Transactions have anti-dilution adjustments substantially similar to those applicable to the
2.25%
Senior Notes. The Capped Call Transactions are derivative instruments that qualify for classification within stockholders’ equity because they meet an exemption from mark-to-market derivative accounting.
The Capped Call Transactions are expected generally to reduce the potential dilution and/or offset potential cash payments that the Company is required to make in excess of the principal amount upon conversion of the
2.25%
Senior Notes in the event that the market price per share of the Company’s common stock, as measured under the terms of the Capped Call Transactions, is greater than the strike price of the Capped Call Transactions, which initially corresponds to the
$24.04
conversion price of the
2.25%
Senior Notes. If, however, the market price per share of the Company’s common stock, as measured under the terms of the Capped Call Transactions, exceeds the initial cap price of
$29.02
, there would nevertheless be dilution and/or there would not be an offset of such potential cash payments, in each case, to the extent that such market price exceeds the cap price of the Capped Call Transactions.
The Company will not be required to make any cash payments to Bank of America, N.A. or any of its affiliates upon the exercise of the options that are a part of the Capped Call Transactions, but will be entitled to receive from Bank of America, N.A. (or an affiliate thereof) a number of shares of the Company’s common stock and/or an amount of cash generally based on the amount by which the market price per share of the Company’s common stock, as measured under the terms of the Capped Call Transactions, is greater than the strike price of the Capped Call Transactions during the relevant valuation period under the Capped Call Transactions. However, if the market price of the Company’s common stock, as measured under the terms of the Capped Call Transactions, exceeds the cap price of the Capped Call Transactions during such valuation period under the Capped Call Transactions, the number of shares of common stock and/or the amount of cash the Company expects to receive upon exercise of the Capped Call Transactions will be capped based on the amount by which the cap price exceeds the strike price of the Capped Call Transactions.
For any conversions of
2.25%
Senior Notes prior to the close of business on the 55th scheduled trading day immediately preceding the stated maturity date of the
2.25%
Senior Notes, including without limitation upon an acquisition of the Company or similar business combination, a corresponding portion of the Capped Call Transactions will be terminated. Upon such termination, the portion of the Capped Call Transactions being terminated will be settled at fair value (subject to certain limitations), as determined by Bank of America, N.A., in its capacity as calculation agent under the Capped Call Transactions, which the Company expects to receive from Bank of America, N.A., and no payments will be due Bank of America, N.A. The capped call expires on December 13, 2018.
In connection with the Company’s repurchase of approximately
$68 million
aggregate principal amount of outstanding 2.25% Senior Notes in April 2017, the Company and Bank of America, N.A. unwound the portion of the Capped Call Transactions relating to the repurchased 2.25% Senior Notes. These Capped Call Transactions were originally classified in stockholders’ equity and continued to meet the criteria for classification thereof while outstanding, and therefore were not subsequently measured at fair value. The Company did not pay or receive any compensation related to the unwind of the Capped Call Transactions. Therefore, the Company accounted for the unwind of the Capped Call Transactions by removing these options at their carrying value in additional paid-in capital and recording an offsetting entry to additional paid-in capital. As a result, the Company did not recognize any gain or loss, and the unwind had no net impact on additional paid-in capital.
3.25% Convertible Senior Notes due 2020
On November 2, 2015, the Company issued
$125.0 million
aggregate principal amount of
3.25%
Senior Convertible Notes due 2020 (the “
3.25%
Senior Notes”). The
3.25%
Senior Notes are governed by the Base Indenture, as amended and supplemented by the second supplemental indenture relating to the
3.25%
Senior Notes (the “Second Supplemental Indenture,” and together with the Base Indenture, the “
3.25%
Senior Notes Indenture”), dated as of November 2, 2015, by and between the Company and the Trustee.
The
3.25%
Senior Notes are senior unsecured obligations and are: senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the
3.25%
Senior Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated, including the
2.25%
Senior Notes; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries.
The
3.25%
Senior Notes accrue interest at a rate of
3.25%
per year, payable semi-annually in arrears on May 1 and November 1 of each year, commencing May 1, 2016. The
3.25%
Senior Notes mature on November 1, 2020, unless earlier purchased, redeemed or converted into shares of common stock in accordance with the terms of the
3.25%
Senior Notes Indenture.
The Company may not redeem the
3.25%
Senior Notes prior to November 1, 2018. On or after November 1, 2018, the Company may redeem for cash all or any portion of the
3.25%
Senior Notes, at its option, but only if the closing sale price of the Company’s common stock for at least
20
trading days (whether or not consecutive) during any
30
consecutive trading day period ending on, and including, the second trading day immediately preceding the date on which the Company provides notice of redemption, exceeds
130%
of the conversion price on each applicable trading day. The redemption date can be no sooner than 30 trading days from the date on which notice of redemption is provided to the holders, during which time, up until two trading days prior to the redemption, the holders may elect to convert all or a portion of the
3.25%
Senior Notes into shares of the Company’s common stock. The redemption price will equal
100%
of the principal amount of the
3.25%
Senior Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the
3.25%
Senior Notes.
The
3.25%
Senior Notes are convertible at the option of the holders: (1) in the calendar quarter following any quarter in which, for at least
20
out of the
30
consecutive trading days (whether or not consecutive) ending on the last day of the quarter, the closing price of the Company’s common stock is more than
130%
of the then-current conversion price of the
3.25%
Senior Notes; (2) in the
five
business days following any
five
day period in which the trading price per
$1,000
note was less than
98%
of the product of the closing sale price of the Company’s common stock and the current conversion rate; (3) in the event that the Company has provided notice of redemption, but no later than two trading days prior to Company’s proposed redemption date; or (4) upon the occurrence of specified corporate events. On or after August 1, 2020 until the close of business on the second scheduled trading day immediately preceding the stated maturity date, holders may surrender their
3.25%
Senior Notes for conversion at any time, regardless of the foregoing circumstances.
The initial conversion rate of the
3.25%
Senior Notes is
89.4314
shares of the Company’s common stock per $1,000 principal amount of the
3.25%
Senior Notes, which is equivalent to an initial conversion price of approximately
$11.18
per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events. Upon conversion, the Company will at its election pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock.
If a fundamental change (as defined in the
3.25%
Senior Notes Indenture) occurs prior to the stated maturity date, holders may require the Company to purchase for cash all or any portion of their
3.25%
Senior Notes at a fundamental change purchase price equal to
100%
of the principal amount of the
3.25%
Senior Notes to be purchased, plus accrued and unpaid interest.
The
3.25%
Senior Notes Indenture contains customary terms and covenants and events of default with respect to the
3.25%
Senior Notes. If an event of default (as defined in the
3.25%
Senior Notes Indenture) occurs and is continuing, either the Trustee or the holders of at least 25% in aggregate principal amount of the outstanding
3.25%
Senior Notes may declare the principal amount of the
3.25%
Senior Notes to be due and payable immediately by notice to the Company (with a copy to the Trustee). If an event of default arising out of certain events of bankruptcy, insolvency or reorganization involving the Company or a significant subsidiary (as set forth in the
3.25%
Senior Notes Indenture) occurs with respect to us, the principal amount of the
3.25%
Senior Notes and accrued and unpaid interest, if any, will automatically become immediately due and payable.
Upon issuance and through December 31, 2015, the Company was not required to separate the conversion option from the
3.25%
Senior Notes under ASC 815, "Derivatives and Hedging". However, because the Company has the ability to settle the
3.25%
Senior Notes in cash, common stock or a combination of cash and common stock, the Company applied the cash conversion guidance contained in ASC 470-20, "Debt With Conversion and other Options", and accounted for the
3.25%
Senior Notes by allocating the issuance proceeds between the liability-classified debt component and a separate equity component attributable to the conversion option. The equity component is classified in stockholders’ equity and the resulting discount on the liability component is accreted such that interest expense equals the Company’s borrowing rate for nonconvertible loan products of similar duration. The separation was performed by first determining the fair value of a similar debt that does not have an associated equity component. That amount was then deducted from the initial proceeds of the
3.25%
Senior Notes as a whole to arrive at a residual amount, which was allocated to the conversion feature that is classified as equity. The initial fair value of the indebtedness was
$97.8 million
resulting in a
$27.2 million
allocation to the embedded conversion option. The embedded conversion option was recorded in stockholders’ equity and as a debt discount, to be subsequently accreted to interest
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
expense over the term of the
3.25%
Senior Notes. Underwriting discounts and commissions and offering expenses totaled
$3.7 million
and were allocated between the liability and the equity component in proportion to the allocation of proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. As a result,
$2.9 million
attributable to the indebtedness was recorded as deferred financing costs in other assets, to be subsequently amortized as interest expense over the term of the
3.25%
Senior Notes, and
$0.8 million
attributable to the equity component was recorded as a reduction to additional paid-in-capital in stockholders’ equity. During the three months ended March 31, 2016, the company adopted ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs", utilizing retrospective application as permitted. As a result, the Company reclassified
$2.9 million
of debt issuance costs from current and non-current other assets to reduce the
3.25%
Senior Notes as of December 31, 2015.
As of
December 31, 2017
, the Company had outstanding borrowings of
$108.1 million
, and deferred financing costs of
$1.8 million
, related to the
3.25%
Senior Notes. There are no principal payments due during the term. Annual interest expense on these
3.25%
Senior Notes will range from
$9.1 million
to
$10.7 million
through maturity.
In connection with its merger with TriVascular in February 2016, the Company issued
13.6 million
shares of common stock as consideration to the former stockholders. As a result of the Company's issuance of such shares in the merger, the quantity of authorized common shares available for future issuance was reduced to a level insufficient to honor all of the potential common shares underlying instruments then outstanding. Such instruments include the conversion options related to the
3.25%
Senior Notes and
2.25%
Senior Notes, employee stock options, restricted stock units, contingently issuable common stock relating to the prior Nellix acquisition, and stock warrants. The creation of this authorized share deficiency in February 2016 required the Company, during the first quarter of 2016, to separate as a stand-alone derivative the
3.25%
Senior Notes conversion option and a portion of the
2.25%
Senior Notes conversion option for which no authorized shares are available to effect share settlement in the event of a conversion. Accordingly, in February 2016 the Company re-classed
$24.8 million
of the conversion features originally recorded in stockholder’s equity of the Senior Notes to derivative liabilities which will be marked to market each period until the Company authorizes sufficient new common shares to alleviate the deficiency.
On June 2, 2016, the Company amended their Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from
100,000,000
to
135,000,000
, which is currently at a level sufficient to alleviate the share deficiency. Accordingly, on June 2, 2016, the Company re-classed
$68.6 million
of the conversion features of the Senior Notes from derivative liabilities to additional paid-in capital.
For the
year ended December 31, 2016
, the Company recorded
$43.8 million
as a fair value adjustment of derivative liabilities. The primary factor causing the change in the fair value of the derivative liability was during the period February 3, 2016 through June 2, 2016 when the Company's stock price increased. Adjustments to the fair value of the derivative liabilities are recognized within other income (expense) in the Consolidated Statements of Operations and Comprehensive Loss.
The value of the derivative liabilities were estimated using a “with” and “without” approach utilizing observable and unobservable inputs causing this to be a Level 3 measurement. In the “with” scenario, the value of the Senior Notes were estimated in a binomial lattice model that considers all terms of the Senior Notes, including the conversion features, with a range of probabilities and assumptions related to the timing and likelihood of the conversion features being exercised by either the Company or the holders of the Senior Notes. In the “without” scenario the value of the Senior Notes absent the conversion options were estimated. The difference between the values estimated in the “with” and “without” scenarios represents the value of the derivative liabilities. Changes in the value of the derivative liabilities were driven by changes in the Company’s stock price, expected volatility, credit spreads, and market yields.
Bank of America Line of Credit
On July 21, 2015, the Company entered into a revolving credit facility with Bank of America, N.A. (“BOA”), whereby the Company could borrow up to
$20.0 million
(the “BOA Credit Facility”). All amounts owing under the BOA Credit Facility would become due and payable upon its expiration on July 21, 2017. A sub-feature in the line of credit allowed for the issuance of up to
$10.0 million
in letters of credit. The BOA Credit Facility was collateralized by all of the Company's assets, except its intellectual property. The BOA Credit Facility could be terminated at any time during the
two
year term by the Company upon
three
business days’ notice. The BOA Credit Facility usage was priced at a spread over the one-, two-, three- and six-month LIBOR rates, and was subject to a covenant related to timely providing publicly reported information and a liquidity covenant tied to Unencumbered Liquid Assets ("ULA") of not less than
$30.0 million
. If not in default, the Company had the ability to reduce the ULA covenant requirement by reducing the BOA Credit Facility, with the ULA maintained at
1.5
times the BOA Credit Facility.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
The Company terminated the BOA Credit Facility on July 29, 2016 concurrent with its entry into a credit and security agreement with MidCap.
MidCap Credit Facility
On July 29, 2016, the Company entered into a credit and security agreement with MidCap Financial Trust ("MidCap"), as agent for the lenders party thereto and as a lender, whereby the Company may borrow up to the lesser of
$50.0 million
or its applicable borrowing base of asset-based revolving loans (the “MidCap Credit Facility”). All amounts owing under the MidCap Credit Facility shall accrue interest at a rate equal to the LIBOR Rate plus four and one tenth percent (
4.10%
). For purposes of the MidCap Credit Facility, LIBOR Rate means a per annum rate of interest equal to the greater of (a) one half of one percent (
0.50%
) and (b) the rate determined by MidCap by dividing (i) the Base LIBOR Rate, meaning the base London interbank offer rate for the applicable interest period, by (ii) the sum of one minus the daily average during such interest period of the aggregate maximum reserve requirement then imposed under Regulation D of the Board of Governors of the Federal Reserve System for Eurocurrency Liabilities (as defined therein).
The MidCap Credit Facility was secured by substantially all of the Company's assets, excluding its intellectual property (“Collateral”), and placed customary limitations on indebtedness, liens, distributions, acquisitions, investments, and other activities of the Company in a manner designed to protect the Collateral.
Deferred financing costs directly related to the MidCap Credit Facility such as legal, origination, and professional services fees totaled
$0.9 million
. In conjunction with the Company’s adoption of ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs” during the first quarter of 2016, the Company also adopted an update thereof or ASU 2015-15 “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of Credit Arrangements.” As a result,
$0.9 million
attributable to the MidCap Credit Facility was recorded as deferred financing costs in other assets, to be subsequently amortized as interest expense over the term of the MidCap Credit Facility. The MidCap Credit Facility also contained a lockbox arrangement clause requiring the Company to maintain a lockbox bank account in favor of the MidCap Credit Facility; Company cash receipts remitted to the lockbox bank account were swept on a regular basis to reduce outstanding borrowings related to the MidCap Credit Facility.
In conjunction with the Company’s termination of the BOA Credit Facility and concurrent entry into a credit and security agreement with MidCap in July 2016, the Company entered into a corporate credit card agreement whereby the Company is required to maintain a
$2.0 million
deposit in favor of the credit card issuer. The deposit account related to these credit cards will be presented as restricted cash on the Company’s Consolidated Balance Sheets.
On April 3, 2017, the Company replaced the MidCap Credit Facility with a new revolving line of credit with Deerfield ELGX Revolver, LLC. As a result, the Company wrote off approximately
$0.8 million
in deferred financing costs and was required to pay a $2.5 million termination fee to Midcap; the foregoing were charged to loss on debt extinguishment on the Company’s Consolidated Statements of Operations and Comprehensive Loss.
Deerfield Facility Agreement
On April 3, 2017 (“the Agreement Date”), the Company entered into a Facility Agreement (the “Facility Agreement”) with affiliates of Deerfield Management Company, L.P. (collectively, “Deerfield”), pursuant to which Deerfield agreed to loan to the Company up to
$120.0 million
, subject to the terms and conditions set forth in the Facility Agreement (the “Term Loan”). The Company drew the entire principal amount of the Term Loan on the Agreement Date. The Company agreed to pay Deerfield a yield enhancement fee equal to 2.25% of the principal amount of the funds disbursed on the Agreement Date. The Company also agreed to reimburse Deerfield for all reasonable out-of-pocket expenses incurred by Deerfield in connection with the negotiation and documentation of the Facility Agreement up to a capped amount. Accordingly, deferred financing costs of
$5.1 million
was recorded on the Company’s Consolidated Balance Sheets as a direct reduction of the Term Loan, to be subsequently amortized as interest expense over the effective period of the Term Loan. Concurrently with entering into the Facility Agreement, the Company entered into a Guaranty and Security Agreement with Deerfield (the “Security Agreement”), pursuant to which, as security for the repayment of the Company’s obligations under the Facility Agreement, the Company granted to Deerfield a first priority security interest in substantially all of the Company’s assets including intellectual property, with the priority of such security interest being pari passu with the security interest granted pursuant to the Facility Agreement.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
Any amounts drawn under the Facility Agreement accrue interest at a rate of
6.87%
per annum, payable quarterly in arrears beginning on July 1, 2017 and on the first business day of each calendar quarter thereafter and on the Maturity Date, unless repaid earlier. The Company will be required to pay Deerfield on each of April 2, 2021, April 2, 2022 and April 2, 2023 (the “Maturity Date”), an amortization payment equal to
$40 million
(or, if on the Maturity Date, the remaining outstanding principal amount of the Term Loan).
Upon a change of control of the Company, if the acquirer satisfies certain conditions set forth in the Facility Agreement, such acquirer may assume the outstanding principal amount under the Facility Agreement without penalty. If such acquirer does not satisfy the conditions set forth in the Facility Agreement, Deerfield may, at its option, require the Company to repay the outstanding principal balance under the Facility Agreement plus, depending on the timing of the change of control transaction, the Company may be required to pay a make-whole premium and will be required to pay a change of control fee.
At any time on or after the fourth anniversary of the Agreement Date, the Company has the right to prepay any amounts owed under the Facility Agreement without premium or penalty, unless such prepayment occurs in connection with a change of control of the Company, in which case the Company must pay Deerfield a change of control fee unless such change of control occurs beyond a certain period after the Maturity Date. At any time prior to the fourth anniversary of the Agreement Date, any prepayment made by the Company will be subject to a make-whole premium and, if such prepayment occurs in connection with a change of control of the Company, a change of control fee.
Any amounts drawn under the Facility Agreement may become immediately due and payable upon customary events of default, as defined in the Facility Agreement, or the consummation of certain change of control transactions, as described above.
The Facility Agreement contains various representations and warranties, events of default, and affirmative and negative covenants, customary for financings of this type, including reporting requirements, requirements that the Company maintain timely reporting with the SEC and restrictions on the ability of the Company and its subsidiaries to incur additional liens on their assets, incur additional indebtedness and acquire and dispose of assets outside the ordinary course of business.
As of
December 31, 2017
, the Company had outstanding borrowings of
$106.5 million
, and deferred financing costs of
$4.5 million
, related to the Term Loan. Annual interest expense on these notes will range from
$1.5 million
to
$12.7 million
through maturity.
Warrants
In connection with the execution of the Facility Agreement, the Company issued to Deerfield warrants to purchase an aggregate of
6,470,000
shares of common stock of the Company at an exercise price of
$9.23
per share (the “Deerfield Warrants”). The number of shares of common stock of the Company into which the Warrants are exercisable and the exercise price of the Warrants will be adjusted to reflect any stock splits, recapitalizations or similar adjustments in the number of outstanding shares of common stock of the Company.
The Warrants expire on the
seven
th anniversary of the Agreement Date. Subject to certain exceptions, the Warrants contain limitations such that the Company may not issue shares of common stock of the Company to Deerfield upon the exercise of the Warrants if such issuance would result in Deerfield beneficially owning in excess of
4.985%
of the total number of shares of common stock of the Company then issued and outstanding.
The holders of the Warrants may exercise the Warrants for cash, on a cashless basis or through a reduction of an amount of principal outstanding under the Term Loan. In connection with certain major transactions, the holders may have the option to convert the Warrants, in whole or in part, into the right to receive the transaction consideration payable upon consummation of such major transaction in respect of a number of shares of common stock of the Company equal to the Black-Scholes value of the Warrants, as defined therein, and in the case of other major transactions, the holders may have the right to exercise the Warrants, in whole or in part, for a number of shares of common stock of the Company equal to the Black-Scholes value of the Warrants.
The Company measured the initial fair value of the
6,470,000
shares underlying the Deerfield Warrants at
$14.3 million
, net of issuance costs of
$0.4 million
, and recorded the amount in additional paid-in-capital and as a direct reduction of the Term Loan, to be subsequently amortized as interest expense over the effective period of the Term Loan.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
Registration Rights Agreement
In connection with the Term Loan and the issuance of the Warrants, the Company entered into a Registration Rights Agreement with Deerfield (the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, the Company agreed to file a registration statement on Form S-3 with the SEC on or prior to the 30th day following the Agreement Date, to register for resale the shares of common stock of the Company issuable upon the exercise of the Warrants. The registration statement was filed on Form S-3 on May 2, 2017.
Credit and Security Agreement
On April 3, 2017, the Company entered into a Credit and Security Agreement (the “Credit Agreement”) with Deerfield ELGX Revolver, LLC (“Deerfield Revolver”), pursuant to which the Company could borrow up to the lesser of
$50 million
or its applicable borrowing base from time to time prior to March 31, 2020 (the “Revolver”). Any outstanding principal under the Revolver will accrue interest at a rate equal to 3-month LIBOR (with a
1%
floor) plus
4.60%
, payable monthly in arrears on the first business day of the immediately succeeding calendar month and on the maturity date. The Company is subject to other fees in addition to interest on the outstanding principal amount under the Revolver, including in connection with an early termination of the Revolver.
As described above, the Revolver replaces the Company’s
$50.0 million
asset-based revolving line of credit with MidCap Financial Trust. In conjunction with the Company’s adoption of ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs” during the first quarter of 2016, the Company also adopted an update thereof or ASU 2015-15 “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of Credit Arrangements.” As a result, the Company recorded
$1.2 million
in deferred financing costs related to the Revolver and presents these costs as a deferred asset, to be subsequently amortized as interest expense over the term of the Revolver, on the Company’s Consolidated Balance Sheets. The Company’s obligations under the Credit Agreement are secured by a first priority security interest in substantially all of the Company’s assets including intellectual property, with the priority of such security interest being pari passu with the security interest granted pursuant to the Term Loan. As of December 31, 2017, the Company had outstanding borrowings of
$21 thousand
under, and deferred financing costs of
$1.0 million
related to, the Revolver.
In conjunction with the Company’s entry into the Credit Agreement, the Company entered into a corporate credit card agreement whereby the Company is required to maintain a
$2.0 million
deposit in favor of the credit card issuer. The deposit account related to these credit cards will be presented as restricted cash on the Company’s Consolidated Balance Sheets.
As of
December 31, 2017
, the Company was not in compliance with the required minimum net revenue threshold set forth in the Credit Agreement. On January 5, 2018, the Company delivered a notice of termination to Deerfield for the Deerfield Revolver under the Credit and Security Agreement (the “Credit Agreement”), dated as of April 3, 2017. The termination of the Deerfield Revolver was effective on January 12, 2018 (the “Termination Date”) and required the Company to pay
$1.3 million
in termination fees.
7. Revenue by Geographic Region
The Company's revenue by geographic region was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
United States
|
$123,209
|
|
68.0%
|
|
$136,111
|
|
70.6%
|
|
$107,228
|
|
69.8%
|
Total International
|
57,948
|
|
32.0%
|
|
56,814
|
|
29.4%
|
|
46,384
|
|
30.2%
|
Revenue
|
$181,157
|
|
100%
|
|
$192,925
|
|
100%
|
|
$153,612
|
|
100%
|
8. Commitments and Contingencies
(a) Leases
The Company leases its administrative, research, and manufacturing facilities located in Irvine and Santa Rosa, California and an administrative office located in Rosmalen, The Netherlands. These facility lease agreements require the Company to pay
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
operating costs, including property taxes, insurance, and maintenance. In addition, the Company has certain equipment and automobile under long-term agreements that are accounted for as operating leases.
Future minimum payments by year under non-cancelable leases with initial terms in excess of one year were as follows as of
December 31, 2017
:
|
|
|
|
|
2018
|
$
|
3,450
|
|
2019
|
3,567
|
|
2020
|
3,735
|
|
2021
|
3,692
|
|
2022
|
3,800
|
|
2023 and thereafter
|
18,021
|
|
Total
|
$
|
36,265
|
|
Facilities rent expense in 2017, 2016 and 2015 was
$3.4 million
,
$3.3 million
, and
$2.3 million
, respectively.
On June 12, 2013, the Company entered into a lease agreement for
two
adjacent office, research and development, and manufacturing facilities in Irvine, California. The premises consist of approximately
129,000
combined square feet. The lease has a
15
-year term beginning January 1, 2014 and provides for
one
optional
5
year extension. The initial base rent under the lease is
$1.9 million
per year, payable in monthly installments, and escalates by
3%
per year for years 2015 through 2019, and
4%
per year for years 2020 and beyond. The Company received a rent abatement for the first
nine
months of the lease. These premises replaced the Company's previous Irvine facilities. The terms of this lease agreement provide for
$6.8 million
of landlord-funded improvements (and certain other allowances) to this facility, in order to best suit the Company's requirements.
The Company's Rosmalen facility is an administrative office of approximately
2,900
square feet and in August 2015, the Company extended the lease term for the Rosmalen facility until December 2020.
In conjunction with the TriVascular merger, the Company assumed the lease for TriVascular's facility in Santa Rosa, California. The facility is being used for manufacturing, research & development, and administrative purposes and consists of
110,000
square feet under an operating lease scheduled to expire in February 2023, which may be renewed for an additional
five
years.
(b) Employment Agreements and Retention Plan
On February 1, 2014, the Company entered into new employment agreements with certain of its executive officers under which payment and benefits would become payable in the event of termination by the Company for any reason other than cause, death or disability or termination by the employee for good reason (collectively, an “Involuntary Termination”) prior to, upon or following a change in control of the Company. The severance payment will generally be in a range of
six
to
eighteen
months of the employee’s then current salary for an Involuntary Termination prior to a change in control of the Company, and will generally be in a range of
eighteen
to
twenty-four
months of the employee’s then current salary for an Involuntary Termination upon or following a change in control of the Company.
(c) Legal Matters
We are from time to time involved in various claims and legal proceedings of a nature we believe is normal and incidental to a medical device business. These matters may include product liability, intellectual property, employment, and other general claims. Such cases and claims may raise complex factual and legal issues and are subject to many uncertainties, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. We accrue for contingent liabilities when it is probable that a liability has been incurred and the amount can be reasonably estimated. The accruals are adjusted periodically as assessments change or as additional information becomes available.
LifePort Sciences LLC v. Endologix, Inc.
On December 28, 2012, LifePort Sciences, LLC (“LifePort”) filed a complaint against the Company in the United States District Court, District of Delaware, alleging that certain of the Company's products infringe United States Patent Nos. 5,489,295, 5,676,696, 5,993,481, 6,117,167, 6,302,906, and 8,192,482, which were alleged to be owned by LifePort. On March 17, 2016, the Company entered into a Settlement and Patent License Agreement with LifePort (the “Settlement Agreement”) whereby LifePort granted the Company license rights to patents in exchange for a settlement of
$4.7 million
. The Settlement
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
Agreement resolves this litigation and fully and finally releases the Company and LifePort from any claims arising out of or in connection with the litigation or the subject patents. The Settlement Agreement also contained a covenant not to sue for other patents owned by LifePort. However, since the subject patents were all expired and the Company was not currently using and has no plans to use the other patents owned by LifePort in products that could reach technological feasibility during the covenant not to sue period, there is no alternative future use and the full amount was recorded as settlement costs in the accompanying Consolidated Statements of Operations and Comprehensive Loss.
Steven M. Ortiz v. Endologix, Inc.
On September 9, 2016, former employee Steven M. Ortiz filed a class action lawsuit against the Company in Orange County Superior Court, claiming the Company’s failure to pay all overtime wages owing; failure to provide meal periods and failure to pay meal period premiums; failure to pay all wages owed at time of termination seeking waiting time penalties under Labor Code section 203; failure to provide accurate wage statements; and violations of Business and Professions Code section 17200 and alleging claims for penalties under the Private Attorneys General Act of 2004. While the Company contests the allegations asserted in the litigation, a mediation was held on February 24, 2017 at which time the parties agreed to settle the case for $750,000. The court has given final approval to the settlement agreement and the settlement funds have been deposited with the class administrator. It is anticipated that the court will enter final judgment in this case in March 2018, which will officially conclude this litigation
.
Stockholder Securities Litigation
In January 2017, two stockholders purporting to represent a class of persons who purchased the Company’s securities between August 2, 2016 and November 16, 2016, filed lawsuits against the Company and certain of its officers in the United States District Court for the Central District of California. The lawsuits allege that the Company made materially false and misleading statements and failed to disclose material adverse facts about its business, operational and financial performance, in violation of federal securities laws, relating to U.S. Food and Drug Administration Premarket Approval for the Company’s Nellix EVAS System. On May 26, 2017, the plaintiffs filed an amended complaint extending the class period to include persons who purchased the Company’s securities between May 5, 2016 and May 18, 2017 and adding certain factual assertions and allegations regarding the Nellix EVAS System. The plaintiffs sought unspecified monetary damages on behalf of the alleged class, interest, and attorney’s fees and costs of litigation. The first lawsuit, Nguyen v. Endologix, Inc. et al., Case No. 2:17-cv-0017 AB (PLAx) (C.D. Cal.), was consolidated with the second lawsuit, Ahmed v. Endologix, Inc. et al, Case No. 8:17-cv-00061 AB (PLAx) (C.D. Cal.), and lead Nguyen plaintiff filed a consolidated First Amended Complaint. On December 5, 2017, the District Court granted Endologix’s motion to dismiss lead plaintiff’s First Amended Complaint, with leave to amend. On January 9, 2018, lead plaintiff filed a Second Amended Complaint. The Company believes these lawsuits are without merit and intends to defend itself vigorously.
Stockholder Derivative Litigation
Four shareholders have filed derivative lawsuits on behalf of Endologix, the nominal plaintiff, based on allegations substantially similar to those alleged by lead plaintiff in Nguyen. Those actions consist of: Sindlinger v. McDermott et al., Case No. BC662280 (Los Angeles Superior Court); Abraham v. McDermott et al., Case No. 30-2018-00968971-CU-BT-CSC (Orange County Superior Court); and Green v. McDermott et al., Case No. 8:17-cv-01155-AB (PLAx), which has been consolidated with Cocco v. McDermott et al., Case No. 8:17-cv-01183-AB (PLAx) (C.D. Cal.). The Company believes these lawsuits are without merit and intends to defend itself vigorously.
SEC Investigation
In July 2017, the Company learned that the SEC issued a Formal Order of Investigation to investigate, among other things, events surrounding the Nellix EVAS System and the prospect of its FDA pre-market approval. The Company is fully cooperating with the investigation, but cannot predict its outcome or the timing of the investigation’s conclusion.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
(d) Contract Termination
In the
year ended December 31, 2016
, the Company sent notices of termination to certain of its distributors providing for the termination of the respective distribution agreements. In accordance with ASC No. 420 “Exit or Disposal Cost Obligations”, the Company expensed distributor termination costs in the period in which the written notification of termination occurred. As a result, the Company incurred termination costs of
$2.5 million
for the
year ended December 31, 2016
. Such termination costs were included in contract termination and business acquisition expenses for the
year ended December 31, 2016
.
9. Contingently Issuable Common Stock
On October 27, 2010, the Company, entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Nepal Acquisition Corporation, a wholly-owned subsidiary of the Company (“Merger Sub”), Nellix, Inc., certain of Nellix’s stockholders named therein and Essex Woodlands Health Ventures, Inc., as representative of the former Nellix stockholders. On December 10, 2010 (the “Nellix Closing Date”), the Company completed its acquisition of Nellix, Inc., a pre-revenue, AAA medical device company. The purchase price consisted of
3.2 million
of the Company's common shares, issuable to the former Nellix stockholders as of the Nellix Closing Date, then representing a value of $
19.4 million
. Additional payments, solely in the form of the Company's common shares (the “Contingent Payment”), will be made upon the achievement of a revenue milestone and a regulatory approval milestone (collectively, the “Nellix Milestones”).
Under the Merger Agreement, the ultimate value of the Contingent Payment would be determined on the date that each Nellix Milestone is achieved. The number of issuable shares would be established using an applicable per share price, which is subject to a ceiling and/or floor, resulting at the closing of the merger in a potential in a maximum of
10.2 million
shares issuable upon the achievement of the Nellix Milestones. As of the Closing Date, the fair value of the Contingent Payment was estimated to be $
28.2 million
.
The Merger Agreement provides that, in addition to the shares of common stock of the Company (the “Common Stock”) issued to the former Nellix stockholders at the closing of the Merger, if the Company receives approval from the FDA to sell the Nellix Product in the United States (the “PMA Milestone”), the Company will issue additional shares of the Common Stock to the former stockholders of Nellix. The dollar value of the shares of the Common Stock to be issued upon achievement of the PMA Milestone will be equal to
$15.0 million
(less the dollar value of certain cash payments and other deductions). The price per share of the shares of the Common Stock to be issued upon achievement of the PMA Milestone is subject to a stock price floor of
$4.50
per share, but not subject to a stock price ceiling.
At
December 31, 2017
, the Company's stock price closed at
$5.35
per share. Thus, had the PMA Milestone been achieved on
December 31, 2017
, the Contingent Payment would have comprised
2.9 million
shares (based on the 30-day average closing stock price ending 5 days prior to the announcement, subjected to the stock price floor of
$4.50
), representing a value of
$15.2 million
.
The value of the Contingent Payment is derived using a discounted income approach model, with a range of probabilities and assumptions related to the timing and likelihood of achievement of the PMA Milestone (which include Level 3 inputs - see Note 3(e) and the Company's stock price (Level 1 input) as of the balance sheet date). These varying probabilities and assumptions and changes in the Company's stock price have required fair value adjustments of the Contingent Payment in periods subsequent to the Nellix Closing Date.
The Contingent Payment fair value will continue to be evaluated on a quarterly basis until milestone achievement occurs, or until the expiration of the "earn-out period," as defined within the Nellix purchase agreement. Adjustments to the fair value of the Contingent Payment are recognized within other income (expense) in the Consolidated Statements of Operations and Comprehensive Loss.
|
|
|
|
|
|
Fair Value of Contingently Issuable Common Stock
|
December 31, 2016
|
$
|
12,200
|
|
Fair value adjustment of Contingent Payment for year ended December 31, 2017
|
(2,900
|
)
|
December 31, 2017
|
$
|
9,300
|
|
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
As of
December 31, 2017
,
$9.3 million
was presented in non-current liabilities due to the expected achievement of the PMA milestone in the fourth quarter of 2020.
10. Income Tax Expense
Net loss before income tax benefit attributable to United States and international operations, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
United States
|
$
|
(56,178
|
)
|
|
$
|
(135,925
|
)
|
|
$
|
(44,114
|
)
|
Foreign
|
(10,681
|
)
|
|
(18,254
|
)
|
|
(15,647
|
)
|
Net loss before income tax
|
$
|
(66,859
|
)
|
|
$
|
(154,179
|
)
|
|
$
|
(59,761
|
)
|
Income tax (benefit) expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
(102
|
)
|
|
$
|
(50
|
)
|
|
$
|
50
|
|
State
|
102
|
|
|
90
|
|
|
100
|
|
Foreign
|
237
|
|
|
458
|
|
|
148
|
|
Total current
|
$
|
237
|
|
|
$
|
498
|
|
|
$
|
298
|
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
(699
|
)
|
|
$
|
—
|
|
|
$
|
(8,621
|
)
|
State
|
—
|
|
|
—
|
|
|
(1,008
|
)
|
Foreign
|
3
|
|
|
—
|
|
|
(6
|
)
|
Total deferred
|
$
|
(696
|
)
|
|
$
|
—
|
|
|
$
|
(9,635
|
)
|
Total:
|
|
|
|
|
|
Federal
|
$
|
(801
|
)
|
|
$
|
(50
|
)
|
|
$
|
(8,571
|
)
|
State
|
102
|
|
|
90
|
|
|
(908
|
)
|
Foreign
|
240
|
|
|
458
|
|
|
142
|
|
Income tax expense (benefit)
|
$
|
(459
|
)
|
|
$
|
498
|
|
|
$
|
(9,337
|
)
|
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
Income tax benefit was computed by applying the United States federal statutory rate of
34%
to net loss before taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Income tax benefit at federal statutory rate
|
$
|
(22,732
|
)
|
|
$
|
(52,418
|
)
|
|
$
|
(20,315
|
)
|
State income tax benefit, net of federal benefit
|
(1,114
|
)
|
|
(2,323
|
)
|
|
(937
|
)
|
Meals and entertainment
|
454
|
|
|
445
|
|
|
328
|
|
Research and development credits
|
(913
|
)
|
|
(2,041
|
)
|
|
(1,756
|
)
|
Stock-based compensation
|
3,203
|
|
|
2,604
|
|
|
1,633
|
|
Derivative loss
|
—
|
|
|
14,903
|
|
|
—
|
|
Contingent consideration
|
(986
|
)
|
|
(850
|
)
|
|
34
|
|
Foreign tax rate differential
|
692
|
|
|
1,394
|
|
|
1,013
|
|
Net change in valuation allowance
|
(24,976
|
)
|
|
35,678
|
|
|
10,052
|
|
Return to provision true-up
|
5,719
|
|
|
1,981
|
|
|
583
|
|
Unrecognized tax benefits
|
457
|
|
|
971
|
|
|
928
|
|
Federal tax rate change
|
39,807
|
|
|
—
|
|
|
—
|
|
Other, net
|
(70
|
)
|
|
154
|
|
|
(900
|
)
|
Income tax benefit
|
$
|
(459
|
)
|
|
$
|
498
|
|
|
$
|
(9,337
|
)
|
Significant components of the Company’s deferred tax assets and (liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
|
Net operating loss carryforwards
|
$
|
101,423
|
|
|
$
|
124,881
|
|
Accrued expenses
|
5,617
|
|
|
6,582
|
|
Tax credits
|
11,826
|
|
|
11,314
|
|
Bad debt
|
78
|
|
|
91
|
|
Inventory
|
2,160
|
|
|
4,424
|
|
Capitalized research and development
|
16,079
|
|
|
21,374
|
|
Deferred compensation
|
2,535
|
|
|
3,596
|
|
Other
|
1,099
|
|
|
964
|
|
Deferred tax asset
|
140,817
|
|
|
173,226
|
|
Valuation allowance
|
(118,551
|
)
|
|
(133,784
|
)
|
Total deferred tax assets
|
22,266
|
|
|
39,442
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Developed technology and trademark
|
(9,033
|
)
|
|
(14,218
|
)
|
Trademarks and tradenames
|
(733
|
)
|
|
(1,027
|
)
|
Depreciation and amortization
|
(8,961
|
)
|
|
(15,316
|
)
|
Convertible debt
|
(3,740
|
)
|
|
(9,760
|
)
|
Other
|
—
|
|
|
—
|
|
Total deferred tax liabilities
|
(22,467
|
)
|
|
(40,321
|
)
|
Net deferred tax liability
|
$
|
(201
|
)
|
|
$
|
(879
|
)
|
The Company has evaluated the available evidence supporting the realization of its gross deferred tax assets, including the amount and timing of future taxable income, and has determined that it is more likely than not that the domestic and foreign
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
deferred tax assets will not be realized. Due to such uncertainties surrounding the realization of the domestic and foreign deferred tax assets, the Company maintains a valuation allowance of
$118.6 million
against a substantial portion of its deferred tax assets as of
December 31, 2017
. For the year ended
December 31, 2017
, the total change in valuation allowance was
$(15.2) million
, of which
$(25.0) million
was recorded as a tax benefit through the income statement and
$9.8 million
was recorded to equity mainly in connection with the Company's adoption of ASU 2016-09. Realization of the deferred tax assets will be primarily dependent upon the Company's ability to generate sufficient taxable income prior to the expiration of its net operating losses.
At
December 31, 2017
, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately
$314.0 million
and
$173.0 million
, respectively.
Federal and state net operating loss carryforwards began expiring in
2017
and will continue to expire through 2037. The majority of the state net operating losses are attributable to California. In addition, the Company had research and development credits for federal and state income tax purposes of approximately
$9.4 million
and
$14.3 million
, respectively, which will begin to expire in 2020. The California research and development credits do not expire.
Under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC”), substantial changes in our ownership may limit the amount of net operating loss and research and development income tax credit carryforwards that could be utilized annually in the future to offset taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Any such annual limitation may significantly reduce the utilization of the net operating loss carryforwards before they expire.
Since the Company's formation, the Company has raised capital through the issuance of capital stock on several occasions which, combined with the purchasing stockholders' subsequent disposition of those shares, may have resulted in such an ownership change, or could result in an ownership change in the future upon subsequent disposition. The Company intends to complete a study in the future to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company's formation.
The Company completed an analysis under IRC Sections 382 and 383 to determine if the acquired TriVascular Technologies, Inc.'s net operating loss carryforwards and research and development credits are limited due to a change in ownership. The Company concluded that TriVascular Technologies, Inc. had an ownership change as of February 3, 2016. As a result of the ownership change, the Company reduced the acquired federal and state net operating loss carryforwards by
$230.3 million
and
$209.4 million
, respectively, and federal research and development credits by
$3.1 million
.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands):
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
Year Ended December 31, 2016
|
Balance at January 1, 2017
|
$
|
11,754
|
|
$
|
8,928
|
|
Additions for tax positions related to prior periods
|
—
|
|
1,654
|
|
Decreases related to prior year tax positions
|
(160
|
)
|
(95
|
)
|
Lapse of statute of limitations
|
—
|
|
—
|
|
Additions for tax positions related to current period
|
613
|
|
1,267
|
|
Balance at December 31, 2017
|
$
|
12,207
|
|
$
|
11,754
|
|
Our unrecognized gross tax benefits presented above would not reduce our annual effective tax rate if recognized because we have recorded a full valuation allowance on the deferred tax assets. We do not foresee any material changes to our gross unrecognized tax benefit within the next twelve months. We recognize interests and/or penalties related to income tax matters in income tax expense. We did not recognize any accrued interest and penalties related to gross unrecognized tax benefits related to the year ended
December 31, 2017
.
The undistributed earnings of the Company's foreign subsidiaries are considered to be indefinitely reinvested. Accordingly, no provision for U.S. federal and state income taxes or foreign withholding taxes have been provided on such undistributed earnings. As of
December 31, 2017
, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately
$0.1 million
. Determination of the potential amount of unrecognized deferred U.S. income tax liability and foreign withholding taxes is not practicable because of the complexities associated with its hypothetical calculation; however, net operating losses and unrecognized foreign tax credits would be available to reduce some portion of the U.S. liability.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
In general, the Company is no longer subject to United States federal, state, local, or foreign examinations by taxing authorities for years before 2013, however, net operating loss and other tax attribute carryforwards utilized in subsequent years continue to be subject to examination by the tax authorities until the year to which the net operating loss and/or other tax attributes are carried forward is no longer subject to examination.
For the twelve months ended
December 31, 2017
, our provision for income taxes was
$0.5 million
benefit and our effective tax rate was (
0.69%
) for the year ended
December 31, 2017
. During the twelve months ended
December 31, 2017
, we had operating legal entities in the United States, Italy, New Zealand, Singapore, Poland, Germany, Switzerland, Korea and the Netherlands (plus registered sales branches of our Dutch entity in certain countries in Europe).
On December 22, 2017, the President of the United States signed into law the Tax Reform Act. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018.
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax liabilities at December 31, 2017 and recognized a
$0.4 million
tax benefit in the Company’s consolidated statement of income for the year ended December 31, 2017.
The Tax Reform Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Company does not have undistributed foreign E&P subject to the deemed mandatory repatriation and therefore has not recognized income tax expense in the Company’s consolidated statement of operations and comprehensive loss for the year ended December 31, 2017.
While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax (“BEAT”) provisions.
The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets beginning in 2018. The Company does not believe that it will be subject to excess tax at this time under this new provision. In the event the Company becomes subject to this provision, it will elect to either account for the additional tax in the period in which it is incurred or to account for it through deferred taxes. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company has recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
11. Quarterly Results of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended:
|
Revenue
|
|
Gross Profit
|
|
Operating expenses
|
|
Net loss
|
|
Basic and Diluted loss per share
|
December 31, 2017
|
$
|
44,003
|
|
|
$
|
31,356
|
|
|
$
|
40,261
|
|
|
$
|
(14,521
|
)
|
|
$
|
(0.17
|
)
|
September 30, 2017
|
45,986
|
|
|
29,107
|
|
|
38,454
|
|
|
(14,273
|
)
|
|
(0.17
|
)
|
June 30, 2017
|
48,556
|
|
|
32,224
|
|
|
40,130
|
|
|
(16,292
|
)
|
|
(0.20
|
)
|
March 31, 2017
|
42,612
|
|
|
28,642
|
|
|
44,304
|
|
|
(21,314
|
)
|
|
(0.26
|
)
|
Three Months Ended:
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
$
|
47,463
|
|
|
$
|
29,461
|
|
|
$
|
51,669
|
|
|
$
|
(24,924
|
)
|
|
$
|
(0.30
|
)
|
September 30, 2016
|
52,122
|
|
|
36,931
|
|
|
48,165
|
|
|
(15,245
|
)
|
|
(0.18
|
)
|
June 30, 2016
|
50,974
|
|
|
29,459
|
|
|
52,687
|
|
|
(66,837
|
)
|
|
(0.81
|
)
|
March 31, 2016
|
42,366
|
|
|
27,941
|
|
|
66,345
|
|
|
(47,671
|
)
|
|
(0.62
|
)
|
12. Restructuring Charges
In the
years ended December 31, 2017 and 2016
, the Company recorded
$1.5 million
and
$11.1 million
, respectively in restructuring costs within operating expenses related to focused reductions of its workforce. The Company began substantially formulating plans around this workforce reduction during the first quarter of 2016 in conjunction with its merger of TriVascular. The targeted reductions and other restructuring activities were initiated to provide efficiencies and realign resources as well as to allow for continued investment in strategic areas and to drive growth.
The Company expects to incur a total of
$12.6 million
in restructuring charges upon the completion of the plan, which represents the Company’s best estimate as of
December 31, 2017
.
The recognition of restructuring charges requires that the Company make certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned reductions of workforce. At the end of each reporting period, the Company will evaluate the remaining accrued balance to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with developed plans. The following table reflects the movement of activity of the restructuring reserve for the year ended
December 31, 2017
:
|
|
|
|
|
|
One-time Termination Benefits
|
Accrual balance as of December 31, 2016
|
$
|
2,754
|
|
Restructuring charges
|
1,477
|
|
Utilization
|
(3,223
|
)
|
Accrual balance as of December 31, 2017
|
$
|
1,008
|
|
The accrual balance as of
December 31, 2017
is classified within accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheets.
13.
TriVascular Merger
On
February 3, 2016
, the Company completed its merger with TriVascular pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated
October 26, 2015
, by and among Endologix, TriVascular and Teton Merger Sub, Inc., a Delaware corporation and direct wholly-owned subsidiary of Endologix (“Merger Sub”). Pursuant to the terms of the Merger Agreement, Endologix acquired all of TriVascular’s outstanding capital stock through the merger of Merger Sub with and into TriVascular (the “Merger”), with TriVascular surviving the Merger as a wholly-owned subsidiary of Endologix. The Company completed the merger in order to become the innovation leader with broad clinical indications for the treatment of AAA, leverage the combined company’s commercial capabilities, and provide an accelerated path to profitability. The total purchase
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
consideration given related to the acquisition follows:
|
|
|
|
|
Cash consideration
|
$
|
84,634
|
|
Common stock consideration
|
100,812
|
|
Fair value of assumed TriVascular stock warrants
|
44
|
|
Total purchase consideration
|
$
|
185,490
|
|
Common stock consideration consisted of
13,586,503
shares of Endologix common stock, worth
$100.8 million
based on the market value of
$7.42
per share as of the effective date of the Merger on
February 3, 2016
.
In connection with the Merger, the Company assumed stock warrants, originally issued by TriVascular, and converted them to Endologix stock warrants. The fair value of the stock warrants represents a component of the total consideration for the Merger. Stock warrants assumed were valued using the Black-Scholes option pricing model as of the effective date of the Merger.
The acquisition was recorded by allocating the costs of the net assets acquired based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. The fair values were based on management’s analysis, including work performed by third-party valuation specialists. The following presents the allocation of the purchase consideration to the assets acquired and liabilities assumed on
February 3, 2016
(in thousands):
|
|
|
|
|
Cash and cash equivalents
|
$
|
24,012
|
|
Short-term investments
|
3,008
|
|
Accounts receivable
|
5,780
|
|
Inventories
|
17,765
|
|
Prepaid expenses and other current assets
|
1,895
|
|
Property and equipment
|
3,152
|
|
Intangible assets
|
46,200
|
|
Other assets
|
317
|
|
Accounts payable
|
(2,214
|
)
|
Accrued liabilities and other
|
(6,450
|
)
|
Notes payable
|
(61
|
)
|
Net assets acquired
|
$
|
93,404
|
|
Goodwill
|
$
|
92,086
|
|
Total purchase consideration
|
$
|
185,490
|
|
The goodwill is primarily attributable to strategic opportunities that arose from the acquisition of TriVascular, such as broadening the product portfolio for the treatment of AAA and leveraging the combined company’s technology and commercial capabilities. The goodwill is not expected to be deductible for tax purposes.
During the year ended December 31, 2016, the Company revised the opening net assets acquired and goodwill by
$27.1 million
, which was comprised of the following: an increase in inventories of
$0.2 million
; an increase in prepaid expenses and
other current assets of
$0.1 million
; an increase in accounts receivable of
$0.2 million
; and an increase in accrued liabilities
and other of
$0.6 million
as a result of gathering additional information during the measurement period. The Company also
revised the initial values of intangible assets by decreasing them
$27.0 million
as a result of switching from utilizing
publicly available benchmarking information to determine the fair value of the intangible assets to primarily utilizing an income
method based on forecasts of expected future cash flows. During the three months ended June 30, 2016, the Company recorded
an adjustment to the amortization of intangible assets of
$0.3 million
, comprising of a
$0.2 million
and
$49 thousand
decrease within cost of goods sold and marketing and sales expense, respectively, in the Consolidated Statement of Operations and Comprehensive Loss, that would have been recorded during the three months ended
March 31, 2016
, if the adjustment to the intangible assets had been recognized as of the date of the Merger.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
Trade payables, as well as other current and non-current assets and liabilities, were valued at the existing carrying values as they represented the fair value of those items at the acquisition date, based on management’s judgments and estimates. Trade receivables included gross contractual amounts of
$5.8 million
and the Company's best estimate of a nominal amount of contractual cash flows not expected to be collected at the acquisition date.
The fair value of property, plant and equipment utilized a combination of the cost and market approaches, depending on the characteristics of the asset classification. Of the
$46.2 million
of acquired intangible assets,
$7.5 million
was assigned to customer relationships (
10
year life),
$27.5 million
was assigned to developed technology (
11
year life), and
$11.2 million
was assigned to in-process research and development.
Pro Forma Combined Financial Information (Unaudited)
The following unaudited pro forma financial information summarizes the results of operations for the periods indicated as if the TriVascular merger had been completed as of
January 1, 2015
. Pro forma information reflects adjustments that are expected to have a continuing impact on our results of operations and are directly attributable to the merger. The unaudited pro forma results include adjustments to reflect the amortization of the inventory step-up, direct transaction costs relating to the acquisition, the incremental intangible asset amortization to be incurred based on the values of each identifiable intangible asset, and to eliminate interest expense related to legacy TriVascular's former loans, which was repaid upon completion of the TriVascular merger. The pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the merger had occurred as of
January 1, 2015
or that may be obtained in the future, and do not reflect future synergies, integration costs, or other such costs or savings.
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
December 31,
|
|
2016
|
|
2015
|
Combined net sales
|
$
|
195,596
|
|
|
$
|
195,605
|
|
Combined net loss from continuing operations
|
(150,054
|
)
|
|
(113,534
|
)
|
Combined basic and diluted net loss per share
|
$
|
(1.82
|
)
|
|
$
|
(1.40
|
)
|
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except per share, per unit, and number of years)
14. Subsequent Event
Transition of Chief Executive Officer
On February 21, 2018, the Company announced that Mr. John McDermott, its Chief Executive Officer, will step down effective as of a date no later than June 30, 2018. The Company currently anticipates that Mr. Dermott will continue to serve as the Company’s Chief Executive Officer through the completion of the recruitment and transition process to a new Chief Executive Officer and will remain available to the Company as necessary to facilitate a smooth leadership transition. The Board of Directors has commenced a search for a new Chief Executive Officer to replace Mr. Dermott.