NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share and per unit data, 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 located in Irvine, California and production facilities located in Irvine, California and Santa Rosa, California. The Company develops, manufactures, markets and sells innovative medical devices for the treatment of aortic disorders. The Company’s products are intended for the minimally-invasive endovascular treatment of abdominal aortic aneurysms (“AAA”). The Company’s AAA products are built on one of two platforms: (i) traditional minimally-invasive endovascular aneurysm repair (“EVAR”); or (ii) endovascular aneurysm sealing (“EVAS”), the Company’s innovative solution for sealing the aneurysm sac while maintaining blood flow. The Company’s current EVAR products include the AFX® Endovascular AAA System, the VELA® Proximal Endograft and the Ovation® Abdominal Stent Graft System. The Company’s current EVAS product is the Nellix® Endovascular Aneurysm Sealing System (the “Nellix EVAS System”). The Company derives all of its reported revenue from sales of its EVAR and EVAS products (including extensions and accessories) to hospitals and third party distributors.
(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 (“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 the years ended December 31, 2019, 2018 and 2017, there were no related party transactions.
(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, 2019, 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.
(d) Reverse Stock Split
At a special meeting of stockholders held on February 22, 2019, the Company’s stockholders approved a proposal to amend the Amended and Restated Certificate of Incorporation, as amended, to effect a reverse stock split of the Company’s issued and outstanding common stock at a ratio not less than 1-for-5 and not greater than 1-for-10 (inclusive), with the exact ratio to be set as a whole number within that range at the discretion of the board of directors (the “Board”) before February 22, 2020 without further approval or authorization of our stockholders. On February 26, 2019, the Board approved the reverse stock split at a ratio of 1-for-10. On March 5, 2019, the Company filed a Certificate of Amendment of Amended and Restated Certificate of Incorporation, as Amended, with the Secretary of State of the State of Delaware to effect the reverse stock split. Unless stated otherwise, all share and per share amounts in this Annual Report on Form 10-K have been retroactively adjusted to reflect the reverse stock split.
2. Summary of Significant Accounting Policies
(i) Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. Management evaluates its estimates on an ongoing basis, 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 the value of contingent liabilities; and (vi) the 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.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
(ii) Cash and Cash Equivalents
The Company considers all highly liquid investments that are readily convertible into cash and have a maturity of 3 months or less at the time of purchase to be cash equivalents. The cost of these investments approximates fair value.
(iii) Restricted Cash
The Company entered into a corporate credit card agreement whereby the Company was required to maintain a $1.2 million deposit in favor of the credit card issuer. The deposit account related to these credit cards was presented as restricted cash on the Company’s Consolidated Balance Sheets.
(iv) 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. These estimates are based on our review of the aging of customer balances, correspondence with the customer, and the customer’s payment history. Account balances are charged off against the allowance after appropriate collection efforts are exhausted.
(v) Inventories
The Company values its inventory at the lower of the actual cost to purchase or manufacture the inventory or net realizable value for such inventory. Cost is determined using 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.
(vi) 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
|
|
7 years
|
Computer hardware
|
|
3 years
|
Computer software
|
|
3-8 years
|
Production equipment and molds
|
|
3-7 years
|
Leasehold improvements
|
|
Shorter of expected useful life or remaining term of lease
|
Upon the sale or disposition of property and equipment, any gain or loss is included in the Consolidated Statements of Operations and Comprehensive Loss. Property and equipment are tested for impairment only when impairment indicators are present.
(vii) Goodwill and Intangible Assets
Goodwill and intangible assets often represent a significant portion of the assets acquired in a business combination. The Company recognize the fair value of an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other legal rights, or when it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Intangible assets consist primarily of technology, customer relationships, trade name and trademarks acquired in business combinations, and in-process research and development (“IPR&D”). The Company generally assess the estimated fair values of acquired intangible assets using a combination of valuation techniques. To estimate fair value, the Company is required to make certain estimates and assumptions, including future economic and market conditions, revenue growth, market share, operating costs and margins, and risk-adjusted discount rates. The Company’s estimates require significant judgment and are based on historical data, various internal estimates and external sources. The Company’s assessment of IPR&D also includes consideration of the risk that the projects may not achieve technological feasibility.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
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.
In-process research and development is amortized over its useful life upon commencement of commercial sales.
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. The evaluation of indefinite-lived intangible assets for impairment allows for a qualitative assessment to be performed. In performing its qualitative assessment, the Company considers 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 market capitalization.
The Company completed its annual test for impairment of goodwill as of June 30, 2019, under the quantitative assessment, with no resulting impairment, as the Company’s market capitalization was in substantial excess of the value of its total stockholders’s equity (The Company have one reporting unit for purposes of its goodwill impairment test).
In the fourth quarter of the year ended December 31, 2019, the Company determined that there was a sufficient indicator to trigger an additional interim goodwill impairment test due to a significant decrease in the the Company’s market capitalization during the fourth quarter of 2019. The interim goodwill impairment test was prepared as of December 31, 2019 using a quantitative assessment to determine if the fair value of the Company’s single reporting unit was less than its carrying value as of the test date. Based on the results of the quantitative interim goodwill impairment test, the fair value of the Company’s single reporting unit substantially exceeded its carrying value and therefore, no impairment charge was recognized as of December 31, 2019.
In performing quantitative goodwill assessment the Company estimated the reporting unit's fair value based on its enterprise value plus an assumed control premium as evidence of fair value. The estimates used to determine the fair value of the reporting unit may change based on results of operations, macroeconomic conditions stock price fluctuations or other factors. Changes in these estimates could materially affect the estimate of the fair value of the reporting unit and the resulting conclusion as to any goodwill impairment for the reporting unit.
If the recent negative volatility of the Company’s market capitalization is sustained, the Company may perform impairment tests more frequently and it is possible that the Company’s goodwill could become impaired, which could result in a material charge and adversely affect the Company’s results of operations.
Long-lived assets, including finite-lived intangible assets, are tested for impairment whenever events or changes in circumstances indicate that the carrying value of finite-lived intangible asset or asset group may not be recoverable. The first step in the impairment testing involves a comparison of the sum of the undiscounted future cash flows of the asset or asset group to its carrying amount. If the sum of the undiscounted future cash flows exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the sum of the undiscounted future cash flows, then a second step is performed to determine the amount of impairment, if any, to be recognized. An impairment loss is recognized to the extent that the carrying amount of the asset or asset group exceeds its fair value. The fair value of the asset or asset group is based on estimated discounted future cash flows of the asset or asset group using a discount rate commensurate with the related risk. The estimate of future cash flows requires management to make assumptions and to apply judgment, including forecasting future sales and expenses and estimating useful lives of the assets. These estimates can be affected by a number of factors, including, among others, future results, demand and economic conditions, many of which can be difficult to predict.
For reasons similar to those described above related to goodwill, during the fourth quarter of 2019, the Company performed the first step of the impairment analysis over the Company’s asset groups as of December 31, 2019. The results of the first step of the impairment analysis test indicated that the sums of the undiscounted future cash flows of the asset groups exceeded their carrying amounts. Accordingly, no impairment charge was recognized as of December 31, 2019.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
(viii) Fair Value Measurements
When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance. The Company uses the following three levels of inputs in determining the fair value of the Company’s assets and liabilities, focusing on the most observable inputs when available:
|
|
•
|
Level 1 — Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 — Observable inputs other than Level 1 prices such as: quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
•
|
Level 3 — Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or 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 fair value measurement.
(ix) Contingent Consideration for Business Acquisition
The Company determined the fair value of contingently issuable common stock on the date of the Nellix, Inc. (“Nellix”) acquisition (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 the contingently issuable common stock are determined at each period end and are recorded in the other income (expense), net line item of the Consolidated Statements of Operations and Comprehensive Loss, and the current and non-current liabilities line items of the Consolidated Balance Sheets.
(x) Litigation Accruals
From time to time the Company is involved in various claims and legal proceedings of a nature considered normal and incidental to its business. These matters may include product liability, intellectual property, employment and other general claims. The Company accrues 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.
(xi) Debt and Derivative Liabilities
The Company accounted for the refinance of its debt in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 470-50, Debt Modifications and Extinguishment. The Company accounted for refinancing of debt as an extinguishment if terms of the new debt and original debt are substantially different (i.e. the present value of the cash flows under the terms of the new debt is at least 10% different from the present value of the remaining cash flows under the terms of the original debt). The original debt is derecognized and the new debt is recorded at fair value, with the difference recorded as extinguishment gain or loss line item of the Consolidated Statements of Operations and Comprehensive Loss. If the terms of the new debt and original debt are not substantially different, the debt refinancing is accounted for as debt modification where no gain or loss is recognized.
The Company incurred debt issuance costs in connection with the issuance and refinance of its convertible notes and term loan facility, which are presented as a direct deduction against the carrying amount of the debt and is amortized to interest expense using the effective interest method.
The Company’s debt includes conversion feature that meets the definition of embedded derivative under ASC 815. Consequently, the embedded derivative was bifurcated and accounted for separately at fair value. Changes in the fair value of the derivative liabilities are determined at each period end and are recorded in the change in fair value of derivative liabilities line item of the Consolidated Statements of Operations and Comprehensive Loss and the non-current liabilities line items of the Consolidated Balance Sheets.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
(xii) Revenue Recognition
The Company measures revenue based on consideration specified in contracts with customers: hospitals and distributors. The Company excludes any amounts related to taxes assessed by governmental authorities from this revenue measurement and reduces revenue by any sales incentives offered by the Company to its customers. The Company recognizes revenue when it satisfies a performance obligation by transferring control of products to customers.
Specifically, the Company recognizes revenue when all of the following criteria are met:
|
|
•
|
A contract has been identified with the customer;
|
|
|
•
|
The performance obligations have been identified;
|
|
|
•
|
The transaction price has been determined and allocated to the respective performance obligations; and
|
|
|
•
|
The performance obligations have been satisfied.
|
Respective performance obligations are satisfied at a point in time for sales made to both hospitals and distributors. Payment terms with customers range from 30 to 180 days which reflects days from the date the Company satisfies the performance obligations.
For implant-based sales, the Company recognizes revenue when the AAA products are utilized in a procedure or implanted in a patient. For shipment-based sales, the Company recognizes revenue when control over a product has transferred to the customer, which is typically at the time of shipment, without a right of return.
The Company provides certain sales incentives to customers for meeting certain purchase thresholds and, accordingly, the transaction price is reduced by the Company’s best estimate of this variable consideration. The Company estimates this variable consideration through the most-likely amount method.
(xiii) Stock-based Compensation
The Company values stock-based awards, including stock options, restricted stock awards (“RSAs”) and restricted stock units (“RSUs”), as of the date of grant. The fair value of stock options is estimated at the date of grant using the Black-Scholes option-pricing model. The fair value of RSAs and RSUs is based on the closing market price of the Company’s common stock on the grant date.
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.
The Company uses the Black-Scholes option-pricing model, in combination with the discounted employee price, in determining the value of expense related to its Amended and Restated 2006 Employee Stock Purchase Plan, as amended (the “ESPP”) to be recognized during each offering period.
(xiv) Shipping Costs
Shipping and handling costs billed to customers are reported within revenue, with the corresponding costs within cost of goods sold. In addition, any shipping and handling costs related to outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in cost of goods sold.
(xv) Foreign Currency Transactions
The assets and liabilities of the Company’s foreign subsidiaries are translated using the exchange rates at the balance sheet date. The income and expense items of these subsidiaries are translated using average monthly exchange rates. 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. Foreign currency translation adjustments between the respective entity’s functional currency and the United States dollar are included in accumulated other comprehensive income (loss). There were no items reclassified out of accumulated other comprehensive income (loss) in the years ended December 31, 2019, 2018 and 2017.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
(xvi) Income Taxes
The Company records the estimated future tax effects of temporary differences between the tax bases 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 of the deferred tax assets will not be realized. If the Company was 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 was assessed interest and/or penalties from taxing authorities, such amounts would be included in income tax benefit (expense) in the period the notice of such interest and/or penalties was received.
(xvii) Net Loss Per Share
Net loss per common share is computed using the weighted average number of common shares outstanding during the periods presented.
(xviii) Research and Development Costs
Research and development costs are expensed as incurred.
(xix) Product Warranty
Within 6 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 a physician’s use of its EVAR or EVAS products. Historically, the Company has not experienced a significant amount of costs associated with its warranty policy.
(xx) Reclassifications
Certain amounts in prior periods have been reclassified to conform to current period presentation. See the “Recent Accounting Pronouncements” section below for details.
(xxi) Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, which amends the FASB Accounting Standards Codification and creates Topic 842, “Leases.” The new topic supersedes Topic 840, “Leases,” and increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosures of key information about leasing arrangements. In July 2018, the FASB made targeted improvements to ASU No. 2016-02, including providing an additional and optional modified retrospective transition method. Under this method, an entity initially applies the standard at the adoption date, including the election of certain transition reliefs and recognizes a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Effective January 1, 2019, the Company adopted this new accounting standard using the modified retrospective approach with no restatement of prior periods or cumulative adjustment to retained earnings. The Company elected certain practical expedients permitted under the transition guidance, including the election to carry forward historical lease classification. The Company also elected the short-term lease practical expedient, which allowed it to not recognize leases with a term of less than twelve months on our consolidated balance sheets. Upon adoption of the new lease accounting standard the Company recognized an operating lease right-of-use asset of $5.8 million and a corresponding operating lease liability of $13.7 million, respectively as of January 1, 2019. The operating lease liability was determined based on the present value of the remaining minimum rental payments and the operating lease asset was determined based on the value of the lease liability, adjusted for the deferred rent balances of $7.9 million. The adoption of the new lease accounting standard did not have an impact on our consolidated statements of operations and comprehensive loss and consolidated statements of cash flows. See Note 8(a) of the Notes to the Consolidated Financial Statements for further discussion.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the SEC did not have a material effect on our consolidated financial statements.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
3. Balance Sheet Account Detail
(a) Property and Equipment
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Production equipment, molds and office furniture
|
$
|
10,844
|
|
|
$
|
11,854
|
|
Computer hardware and software
|
7,897
|
|
|
8,235
|
|
Leasehold improvements
|
15,594
|
|
|
15,535
|
|
Construction in progress (software and related implementation, production equipment and leasehold improvements)
|
795
|
|
|
993
|
|
Property and equipment, at cost
|
35,130
|
|
|
36,617
|
|
Accumulated depreciation
|
(21,978
|
)
|
|
(20,584
|
)
|
Property and equipment, net
|
$
|
13,152
|
|
|
$
|
16,033
|
|
Depreciation expense for property and equipment for the years ended December 31, 2019, 2018 and 2017 was $3.3 million, $3.7 million, and $5.0 million, respectively.
(b) Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Raw materials
|
$
|
5,362
|
|
|
$
|
4,636
|
|
Work-in-process
|
4,132
|
|
|
6,401
|
|
Finished goods
|
16,911
|
|
|
19,362
|
|
Total Inventories
|
$
|
26,405
|
|
|
$
|
30,399
|
|
(c) Goodwill and Other Intangible Assets
The change in the carrying amount of goodwill for the year ended December 31, 2019 was as follows:
|
|
|
|
|
Balance at December 31, 2018
|
$
|
120,848
|
|
Foreign currency translation adjustment
|
(34
|
)
|
Balance at December 31, 2019
|
120,814
|
|
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
Other intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Estimated Useful Life
(in years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
N/A
|
|
$
|
2,708
|
|
|
N/A
|
|
$
|
2,708
|
|
|
$
|
2,708
|
|
|
N/A
|
|
$
|
2,708
|
|
In-process research and development
|
N/A
|
|
11,200
|
|
|
N/A
|
|
11,200
|
|
|
11,200
|
|
|
N/A
|
|
11,200
|
|
Total indefinite-lived intangible assets
|
|
|
13,908
|
|
|
|
|
13,908
|
|
|
13,908
|
|
|
|
|
13,908
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
11-24
|
|
67,600
|
|
|
$
|
(13,467
|
)
|
|
54,133
|
|
|
67,600
|
|
|
$
|
(10,657
|
)
|
|
56,943
|
|
Customer relationships
|
10
|
|
7,500
|
|
|
(2,938
|
)
|
|
4,562
|
|
|
7,500
|
|
|
(2,188
|
)
|
|
5,312
|
|
Total finite-lived intangible assets
|
|
|
75,100
|
|
|
(16,405
|
)
|
|
58,695
|
|
|
75,100
|
|
|
(12,845
|
)
|
|
62,255
|
|
Other intangible assets, net
|
|
|
$
|
89,008
|
|
|
$
|
(16,405
|
)
|
|
$
|
72,603
|
|
|
$
|
89,008
|
|
|
$
|
(12,845
|
)
|
|
$
|
76,163
|
|
Amortization expense for intangible assets for the years ended December 31, 2019, 2018 and 2017 was $3.6 million, $4.2 million and $4.1 million, respectively.
Estimated amortization expense for the 5 succeeding years and thereafter is as follows:
|
|
|
|
|
2020
|
$
|
3,185
|
|
2021
|
3,276
|
|
2022
|
3,319
|
|
2023
|
3,378
|
|
2024
|
3,497
|
|
Thereafter
|
42,040
|
|
Total
|
$
|
58,695
|
|
(d) 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, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingently issuable common stock
|
(a)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,200
|
|
|
$
|
2,200
|
|
Derivative liabilities
|
(b)
|
—
|
|
|
—
|
|
|
940
|
|
|
940
|
|
|
—
|
|
|
—
|
|
|
4,012
|
|
|
4,012
|
|
Total financial liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,440
|
|
|
$
|
1,440
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,212
|
|
|
$
|
6,212
|
|
|
|
(a)
|
Included in other liabilities in the Consolidated Balance Sheets. See Note 9 for additional details.
|
|
|
(b)
|
See Note 6 for additional details.
|
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
Changes in the fair value of the Company’s Level 3 liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
Contingently issuable common stock
(a)
|
|
Derivative liabilities
(b)
|
Balance at December 31, 2018
|
$
|
2,200
|
|
|
$
|
4,012
|
|
Additions
|
—
|
|
|
14,641
|
|
Fair value adjustment
|
(1,700
|
)
|
|
(17,713
|
)
|
Balance at December 31, 2019
|
$
|
500
|
|
|
$
|
940
|
|
|
|
(a)
|
See Note 9 for additional details.
|
|
|
(b)
|
See Note 6 for additional details.
|
There were no transfers of financial assets or liabilities into or out of Level 3 in the years ended December 31, 2018 and 2017.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
The table below summarizes the carrying and fair values of the Company’s long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Carrying value
|
|
Fair value
|
|
Carrying value
|
|
Fair value
|
Term loan facility
|
$
|
141,273
|
|
|
$
|
131,892
|
|
|
$
|
117,880
|
|
|
$
|
116,916
|
|
Convertible notes
|
26,506
|
|
|
24,548
|
|
|
75,917
|
|
|
50,489
|
|
Other debt
|
4,281
|
|
|
1,416
|
|
|
4,281
|
|
|
1,221
|
|
|
$
|
172,060
|
|
|
$
|
157,856
|
|
|
$
|
198,078
|
|
|
$
|
168,626
|
|
The fair values of the Company’s long-term debt are determined using Level 3 inputs, with the exception of the 3.25% Senior Notes, which are determined using Level 2 inputs. See Note 6 for further details. The carrying value of the Company’s Revolving loan facility approximates fair value.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
4. Stock-Based Compensation
2015 Stock Incentive Plan
Under the Company’s stock-based compensation plan which is governed by its Amended and Restated 2015 Stock Incentive Plan, as amended (the “2015 Plan”), the Company may grant incentive stock options, non-qualified stock options, RSAs, RSUs and stock appreciation rights. The maximum number of shares of the Company’s common stock available for issuance under the 2015 Plan is 4,130,000 shares. As of December 31, 2019, 1,100,992 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 2015 Plan must be shares of authorized new unissued shares.
Stock-based awards are governed by agreements between the Company and the recipients. Incentive stock options and non-qualified 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 date of approval of the grant. The Company’s standard stock-based awards vest as to 1/3 of the shares underlying the award on the 1st anniversary of the date of grant, or for new hires, the 1st anniversary of their initial date of employment with the Company. Awards vest monthly thereafter on a straight-line basis over 2 years. All stock options have 10-year terms.
2017 Inducement Stock Incentive Plan
On October 27, 2017, the Company adopted the 2017 Inducement Stock Incentive Plan, as amended (the “2017 Inducement Plan”). The 2017 Inducement Plan provides for the grant of equity-based awards in the form of non-qualified stock options, RSAs, RSUs, 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 a member of the Board, or an employee or member of the Board 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 maximum number of shares of the Company’s common stock available for issuance under the 2017 Inducement Plan is 900,000 shares. As of December 31, 2019, 497,059 shares were available for grant.
Employee Stock Purchase Plan
Under the terms of the ESPP, eligible employees can purchase common stock, through payroll deductions, at a purchase price 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. As of December 31, 2019, 434,542 shares were available for grant.
The table below summarizes the stock-based compensation expense, common stock purchased by Company employees and the average purchase price per share under the ESPP in the years ended December 31, 2019, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Stock-based compensation expense
|
$
|
131
|
|
|
$
|
1,033
|
|
|
$
|
850
|
|
Common stock purchased by Company employees
|
103,981
|
|
|
60,695
|
|
|
44,649
|
|
Average purchase price per share
|
$
|
3.33
|
|
|
$
|
22.16
|
|
|
$
|
56.43
|
|
Stock-based Compensation Expense Summary
The table below summarizes the impact of recording stock-based compensation expense in the Consolidated Statements of Operations and Comprehensive Loss in the years ended December 31, 2019, 2018 and 2017:
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Cost of goods sold
|
$
|
829
|
|
|
$
|
830
|
|
|
$
|
828
|
|
Operating expenses:
|
|
|
|
|
|
Research and development
|
1,346
|
|
|
1,132
|
|
|
1,259
|
|
Clinical and regulatory affairs
|
790
|
|
|
483
|
|
|
770
|
|
Marketing and sales
|
3,100
|
|
|
3,468
|
|
|
3,796
|
|
General and administrative
|
4,784
|
|
|
5,117
|
|
|
4,991
|
|
Total operating expenses
|
10,020
|
|
|
10,200
|
|
|
10,816
|
|
Total stock-based compensation expense
|
$
|
10,849
|
|
|
$
|
11,030
|
|
|
$
|
11,644
|
|
In addition, the Company had $0.5 million, $0.3 million and $0.4 million of stock-based compensation expense capitalized in inventory as of December 31, 2019, 2018 and 2017, respectively.
Valuation Assumptions
The following assumptions were used to determine fair value for the stock options granted in the applicable year:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Expected life (in years)
|
5.7
|
|
5.6
|
|
5.6
|
Volatility
|
62.9%
|
|
56.5%
|
|
51.3%
|
Risk-free interest rate
|
2.3%
|
|
2.7%
|
|
1.9%
|
Dividend yield
|
—
|
|
—
|
|
—
|
Weighted average grant date fair value per share
|
$6.48
|
|
$10.66
|
|
$25.13
|
Stock Option Activity
Stock option activity in the year ended December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual Life
(in years)
|
|
Aggregate Intrinsic Value (a)
|
Outstanding balance at December 31, 2018
|
1,315,360
|
|
|
$
|
54.20
|
|
|
|
|
|
Granted
|
2,039,387
|
|
|
6.48
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited
|
(508,630
|
)
|
|
38.86
|
|
|
|
|
|
Expired
|
(504,591
|
)
|
|
81.28
|
|
|
|
|
|
Outstanding balance at December 31, 2019
|
2,341,526
|
|
|
$
|
10.12
|
|
|
8.6
|
|
$
|
—
|
|
Vested and expected to vest balance at December 31, 2019
|
2,081,243
|
|
|
$
|
10.53
|
|
|
8.6
|
|
$
|
—
|
|
Exercisable balance at December 31, 2019
|
482,446
|
|
|
$
|
21.65
|
|
|
8.1
|
|
$
|
—
|
|
|
|
(a)
|
The aggregate intrinsic value of stock options as of December 31, 2019 is calculated based on the difference between the Company’s closing stock price on the last trading day of the period reported and the stock option exercise price.
|
In the year ended December 31, 2019, no stock options were exercised. In the years ended December 31, 2018 and 2017, the aggregate intrinsic value of stock options exercised was $1.3 million and $0.2 million, respectively.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
As of December 31, 2019, the aggregate unrecognized compensation expense related to stock options of $8.7 million is expected to be recognized over an estimated weighted average period of 2.6 years.
The following table summarizes information regarding outstanding and exercisable stock options as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
Range of Exercise Prices
|
|
Number of Shares
|
|
Weighted
Average
Remaining
Contractual
Term (in years)
|
|
Weighted
Average
Exercise
Price
|
|
Number of Shares
|
|
Weighted
Average
Remaining
Contractual
Term (in years)
|
|
Weighted
Average
Exercise
Price
|
$
|
2.30
|
|
—
|
$
|
6.35
|
|
|
317,162
|
|
|
6.4
|
|
$
|
5.12
|
|
|
—
|
|
|
0.0
|
|
$
|
—
|
|
6.67
|
|
—
|
6.67
|
|
|
1,450,075
|
|
|
9.3
|
|
6.67
|
|
|
146,982
|
|
|
9.0
|
|
6.67
|
|
6.76
|
|
—
|
7.45
|
|
|
290,484
|
|
|
9.0
|
|
7.29
|
|
|
214,631
|
|
|
9.0
|
|
7.43
|
|
7.53
|
|
—
|
75.30
|
|
|
265,773
|
|
|
7.2
|
|
31.02
|
|
|
103,021
|
|
|
5.8
|
|
56.95
|
|
77.60
|
|
—
|
175.80
|
|
|
18,032
|
|
|
2.2
|
|
112.55
|
|
|
17,812
|
|
|
2.1
|
|
112.52
|
|
$
|
2.30
|
|
—
|
$
|
175.80
|
|
|
2,341,526
|
|
|
8.6
|
|
$
|
10.12
|
|
|
482,446
|
|
|
8.1
|
|
$
|
21.65
|
|
RSU Activity
The following table summarizes the activity for RSUs:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Date Fair
Value
|
Unvested as of December 31, 2018
|
422,720
|
|
|
$
|
26.15
|
|
Granted (1)
|
745,498
|
|
|
6.51
|
|
Forfeited
|
(41,363
|
)
|
|
31.50
|
|
Vested
|
(255,873
|
)
|
|
16.69
|
|
Unvested as of December 31, 2019
|
870,982
|
|
|
$
|
11.88
|
|
|
|
(1)
|
Shares granted in 2019 include 470,886 performance stock units that require certain performance conditions to be achieved in order to vest.
|
In the years ended December 31, 2019, 2018 and 2017, the weighted average grant date fair value of RSUs granted was $6.51, $15.02 and $50.10, respectively.
In the years ended December 31, 2019, 2018 and 2017, the total fair value of RSUs vested was $0.9 million, $2.1 million and $1.8 million, respectively.
As of December 31, 2019, the aggregate unrecognized compensation expense related to RSUs of $4.3 million is expected to be recognized over an estimated weighted average period of 1.54 years.
Award Modifications
There were no award modifications in the year ended December 31, 2019. In the year ended December 31, 2018, there were award modifications affecting 2 individuals, a former executive and a former director of the Company, in connection with their departures. The employees were provided with accelerated vesting and extended exercisability for certain awards outstanding which included stock options, RSUs and performance stock units. The total incremental stock-based compensation expense recognized in the years ended 2019, 2018 and 2017 related to award modifications was $0 million, $1.8 million and $0.3 million, respectively.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
5. Net Loss Per Share
Because of the net losses in the years ended December 31, 2019, 2018 and 2017, the following outstanding Company securities, using the treasury stock method, were excluded from the calculations of net loss per share because the effect would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Common stock options
|
62
|
|
|
11,276
|
|
|
52,029
|
|
Restricted stock awards
|
3,501
|
|
|
11,616
|
|
|
11,898
|
|
Restricted stock units
|
70,472
|
|
|
21,974
|
|
|
25,005
|
|
Warrants
|
1,522,002
|
|
|
—
|
|
|
—
|
|
Total
|
1,596,037
|
|
|
44,866
|
|
|
88,932
|
|
For purposes of calculating the maximum dilutive impact, it is presumed that the convertible notes will be settled in common stock and all conversion features within the term loan facility will be exercised 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 convertible senior notes and term loan facility is excluded from the calculation of diluted loss per share because the impact of these securities would be anti-dilutive.
The potential dilutive effect of these securities is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Convertible notes
|
8,211,088
|
|
|
755,695
|
|
|
1,193,938
|
|
Conversion features under term loan facility
|
10,486,604
|
|
|
1,522,002
|
|
|
647,001
|
|
The effect of the contingently issuable common stock (see Note 9) is excluded from the calculation of basic net loss per share until all necessary conditions for issuance have been satisfied.
6. Credit Facilities
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2019
|
|
2018
|
Term loan facility
|
$
|
167,858
|
|
|
$
|
161,622
|
|
Convertible notes
|
73,165
|
|
|
84,500
|
|
Other debt
|
4,281
|
|
|
4,281
|
|
Debt discounts and deferred financing costs
|
(62,638
|
)
|
|
(52,325
|
)
|
Long-term debt, including current portion
|
182,666
|
|
|
198,078
|
|
Less current portion
|
(10,606
|
)
|
|
—
|
|
Long-term debt
|
$
|
172,060
|
|
|
$
|
198,078
|
|
Deerfield Facility Agreement, as Amended
On April 3, 2017 (the “Original Agreement Date”), the Company entered into a 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 (the “Term Loan”), subject to the terms and conditions set forth in the facility agreement (the “Original Facility Agreement”). The Company drew the entire principal amount of the Term Loan on the Original Agreement Date.
On August 9, 2018 (the “Restated Agreement Date”), the Company entered into an amended and restated facility agreement (the “Restated Facility Agreement”) with Deerfield, pursuant to which Deerfield and the Company canceled and
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
extinguished the $40.5 million principal amount of 3.25% Convertible Senior Notes due 2020 (the “3.25% Senior Notes”) held by Deerfield in exchange for an additional $40.5 million of indebtedness under the Restated Facility Agreement (as a last-out waterfall tranche under the Restated Facility Agreement). The Company entered into the Restated Facility Agreement with Deerfield to, among other things, allow for the Company’s entry into the Restated Credit Agreement (as defined in the “Deerfield Revolver” section below) and the transactions contemplated therein. The Restated Facility Agreement amended and restated in its entirety the Company’s Original Facility Agreement with Deerfield.
On November 18, 2018, the Company and Deerfield amended the Restated Facility Agreement pursuant to that certain First Amendment to Amended and Restated Facility Agreement, dated November 20, 2018 (the “First Facility Amendment”), which amendment permitted the Company to incur debt pursuant to its subordinated promissory note (the “JLL Note”) with Japan Lifeline Co., Ltd. (“JLL”), subject to certain conditions.
On March 31, 2019, the Company and Deerfield entered into a Second Amendment to Amended and Restated Facility Agreement (the “Second Facility Amendment” and collectively with the Restated Facility Agreement and First Facility Amendment, the “Deerfield Facility Agreements”). On April 3, 2019, the terms of the Second Facility Amendment became effective.
The Second Facility Amendment provides for, among other things, the reduction in the Company’s global excess liquidity covenant from $22.5 million to $17.5 million and the reduction of the Company’s minimum net revenue financial covenants. In addition, the percentage of the $120.0 million of first out waterfall loans (the “First Out Waterfall Loans”) due on April 2, 2021 decreased from 33.33% to 16.67% of the First Out Waterfall Loans outstanding on such date, while the percentage of the remainder of the First Out Waterfall Loans due on April 2, 2022 remained at 50% of the First Out Waterfall Loans outstanding on such date.
The Deerfield Facility Agreements provide for the exchange of the existing notes representing the First Out Waterfall Loans for amended notes (the “First Out Waterfall Notes”) that provide that in the event that, in any calendar month beginning April 1, 2019 and ending June 30, 2020 (the “Mandatory Conversion Period”), if (A)(i) the arithmetic mean of the volume weighted average prices of the Company’s common stock (the “VWAP”) on the five (5) consecutive trading days ending on the 15th calendar day (or, if not a trading day, the first trading day thereafter) (the “Mandatory Conversion Measurement Date”) and (ii) the closing price for the Company’s common stock on the Mandatory Conversion Measurement Date, both exceed $6.625 (as may be adjusted to reflect certain events) (the “Fixed Conversion Price”) and (B)(i) the VWAP on the five (5) consecutive trading days ending on (and including) the third (3rd) trading day immediately prior to the Mandatory Conversion Measurement Date (the “Initial Mandatory Conversion Measurement Date”) and (ii) the closing price for the Company’s common stock on the Initial Mandatory Conversion Measurement Date both exceed the Fixed Conversion Price, Deerfield shall be obligated to convert $1,666,666 of the principal amount of the loan into shares of common stock at the Fixed Conversion Price (each, a “Deerfield Mandatory Conversion”), up to a maximum aggregate amount of $25.0 million over the Mandatory Conversion Period.
Deerfield also has the option to convert up to an additional $50.0 million of the Company’s outstanding debt (the “Voluntary Conversion Amount”) at the greater of the Fixed Conversion Price and 85% of the arithmetic average of the VWAP of the Company’s common stock on each of the fifteen (15) consecutive trading days prior to the conversion date (the “15 Day VWAP”). The Company has the option to require conversion of the Voluntary Conversion Amount (less the amount of prior voluntary conversions) if the Company’s 15 Day VWAP is greater than 175% of the Fixed Conversion Price (each of the foregoing conversions, a “Deerfield Voluntary Conversion”). The First Out Waterfall Notes also provide that in no event may Deerfield convert any note amounts, whether voluntarily or mandatorily, into shares of common stock if such conversion would result in Deerfield beneficially owning more that 4.985% of the Company’s outstanding common stock. The First Out Waterfall Notes also revises Deerfield’s existing right to convert a portion of the outstanding principal amount of the First-Out Waterfall Loan into a maximum of 1,430,001 shares of the Company’s common stock from the current conversion price of 96% of the arithmetic average of the VWAP of the Company’s common stock on each of the three (3) consecutive trading days prior to the conversion date (the “96% VWAP Price”) to the greater of (i) $6.625 (subject to certain adjustments) or (ii) the 96% VWAP Price (a “Deerfield Elective Conversion”).
Further, the Second Facility Amendment also provided for an increase of $5.0 million, from $6.1 million to $11.1 million, in the amounts payable to Deerfield as a fee upon termination (or reduction, or required reduction of the outstanding amounts under the First Out Waterfall Notes to less than $10,000,000) of the Deerfield Facility Agreements and to reimburse Deerfield for all expenses incurred by Deerfield in connection with the negotiation and documentation of the Second Facility Amendment.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
The terms of the Second Facility Amendment became effective on April 3, 2019 upon satisfaction of certain conditions precedent, including consummation of the purchase and sale of an aggregate of 7,889,552 shares of the Company’s common stock (the “Equity Shares”) to select institutional investors and certain other parties (“Investors”) at a price per share of $6.61 (the “Equity Offering Price”), for an aggregate cash purchase price of approximately $52.15 million. The Company has issued the Deerfield Warrants and the First Out Waterfall Notes contemplated by the Second Facility Amendment.
The Company evaluated the accounting for Second Facility Amendment transaction and determined it represented an extinguishment of the previously issued First Out Waterfall Loans under the Restated Facility Agreement, primarily due to the addition and significance of the conversion features as described above. During the twelve months ended December 31, 2019, the Company recorded a loss on debt extinguishment of $29.3 million, which includes the change in fair value of the Deerfield Warrants of $4.8 million, offset by the removal of $5.9 million of derivative liabilities associated with the debt prior to the transaction.
Any outstanding principal under the Deerfield Facility Agreements will accrue interest at a rate equal to 5.00% payable in cash and 4.75% payable in kind. The Deerfield Facility Agreements contain the same operating covenants applicable to First Credit Amendment. The Company’s prior right to satisfy interest payments on the First Out Waterfall Loans with up to 250,000 shares of its common stock was eliminated in connection with entry into the Second Facility Amendment.
On February 24, 2020, the Company entered into a February 2020 Exchange Agreement and Fourth Amendment to Amended and Restated Facility Agreement and Amendment to First Out Waterfall Notes (the “Fourth Facility Amendment”). The Fourth Facility Amendment provides for, among other things, the conversion of certain portions of the outstanding convertible debt upon the achievement of certain milestones. In addition, 8.333% (or approximately $10.7 million as of February 24, 2020) of the First Out Waterfall Loans currently due on April 2, 2021 (the “First Amortization Payment”) will be extended to July 1, 2021. Further, the Fourth Facility Amendment provides that the interest payment date due April 1, 2020 will be payable in paid-in-kind interest by increasing the principal amount of the loans by an amount equal to the interest that has accrued. For more information regarding the Fourth Facility Amendment see Note 14 for further details.
The Company’s obligations under the Deerfield Facility Agreements 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 to Deerfield pursuant to the Restated Credit Agreement.
During the twelve months ended December 31, 2019, the Company converted $1.7 million of principal, or $1.3 million carrying value, of the First Out Waterfall Notes into 251,571 shares of common stock pursuant to Deerfield Mandatory Conversions.
As of December 31, 2019, the Company had a carrying amount of $141.3 million, inclusive of deferred financing costs of $2.6 million, related to the Term Loan. As of December 31, 2019, annual interest expense on the Term Loan will range from $4.5 million to $29.6 million from the effectiveness of the second Facility Amendment date through maturity.
Upon a change of control of the Company, if the acquirer satisfies certain conditions set forth in the Deerfield Facility Agreements, such acquirer may assume the outstanding principal amount under the Deerfield Facility Agreements without penalty. If such acquirer does not satisfy the conditions set forth in the Deerfield Facility Agreements, 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 April 2, 2021 (the “First Amortization Date”), the Company has the right to prepay any amounts owed under the Deerfield Facility Agreements 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 First Amortization 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 Deerfield Facility Agreements may become immediately due and payable upon customary events of default, as defined in the Deerfield Facility Agreements, or the consummation of certain change of control transactions, as described above.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
Deerfield Warrants
In connection with the execution of the Original Facility Agreement and the Restated Facility Agreement, the Company issued warrants to Deerfield (the “Original 2017 Deerfield Warrants” and the “Original 2018 Deerfield Warrants,” respectively). In connection with entry into the Second Facility Amendment, the Company amended the Original 2017 Deerfield Warrants and the Original 2018 Deerfield Warrants in order to reduce the exercise price (as amended, the “2017 Deerfield Warrants” and the “2018 Deerfield Warrants”; collectively, the “Deerfield Warrants”) as summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares of common stock
|
|
Previous Exercise Price
|
|
Amended Exercise price
|
2017 Deerfield Warrants
|
647,001
|
|
|
$
|
92.30
|
|
|
$
|
6.61
|
|
2018 Deerfield Warrants
|
875,001
|
|
|
$
|
47.10
|
|
|
$
|
6.61
|
|
All other material terms and conditions of the Deerfield Warrants remain the same.
The number of shares of common stock of the Company into which the Deerfield Warrants are exercisable and the exercise price of the Deerfield 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 2017 Deerfield Warrants expire on the 7th anniversary of the Agreement Date. Subject to certain exceptions, the 2017 Deerfield Warrants contain limitations such that the Company may not issue shares of common stock of the Company to Deerfield upon the exercise of the 2017 Deerfield 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 2017 Deerfield Warrants may exercise the 2017 Deerfield 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 2017 Deerfield 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 2017 Deerfield Warrants, as defined therein, and in the case of other major transactions, the holders may have the right to exercise the 2017 Deerfield 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 2017 Deerfield Warrants.
The 2018 Deerfield Warrants expire on the 7th anniversary of the Restated Agreement Date. The holders of the 2018 Deerfield Warrants may exercise the 2018 Deerfield Warrants for cash, on a cashless basis, or by reduction of the principal owed to Deerfield pursuant to the Restated Facility Agreement.
As a result of the amendment to the Deerfield Warrants in connection with entry into the Second Facility Amendment, the change in fair value in the 2017 and 2018 Deerfield Warrants was $2.1 million and $2.7 million, respectively. The foregoing was charged to loss on debt extinguishment.
Derivative Liabilities
In accordance with Accounting Standards Codification (“ASC”) 815, “Derivatives and Hedging”, and ASC 470, “Debt”, the Company assessed whether any provisions within the Second Facility Amendment constitute embedded derivatives requiring bifurcation from the host instrument, and assessed the fair values of any such features. The Company determined that the Deerfield Voluntary Conversion, when converted at 85% of 15 Day VWAP, effectively provided the holders with an embedded put option derivative meeting the definition of an “embedded derivative” pursuant to ASC 815. Consequently, the embedded derivative was bifurcated and accounted for separately. The Second Facility Amendment retained a provision that, upon a change of control of the Company, Deerfield may declare the outstanding principal of the loans to be immediately due and payable in full, together with any accrued and unpaid interest, a “Change of Control” fee, and a specified make-whole amount (prior to prior to the First Amortization Date). This feature remained substantively the same as outlined under the previous Restated Facility Agreement. The Company concluded that this provision meets the definition of a derivative and requires bifurcation and separate accounting pursuant to ASC 815. As of April 3, 2019, the Company measured the fair value of the above embedded derivatives at $20.4 million and recorded the amount in derivative liabilities in the Consolidated Balance Sheet.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
For the years ended December 31, 2019 and 2018, the Company recorded income of $17.7 million and $12.1 million, respectively, as a fair value adjustment of the derivative liabilities. Adjustments to the fair value of the derivative liabilities are recognized within other income (expense), net in the Consolidated Statements of Operations and Comprehensive Loss.
Deerfield Revolver
On the Agreement Date, the Company entered into a Credit and Security Agreement (the “Credit Agreement”) with Deerfield ELGX Revolver, LLC (“Deerfield Revolver”) pursuant to which the Company could borrow up to the lesser of $50.0 million or its applicable borrowing base (the “Previous Revolver”). The Company recorded $1.2 million in deferred financing costs related to the Previous Revolver and presented these costs as a deferred asset and amortized as interest expense over the term of the Previous Revolver on the Company’s Consolidated Balance Sheets.
Effective January 12, 2018, the Company terminated its Credit Agreement with Deerfield Revolver and paid $1.3 million in termination fees. Additionally, the Company wrote off $1.0 million in unamortized deferred financing costs as of the termination date. The total of $2.3 million was charged to loss on debt extinguishment on the Company’s Consolidated Statements of Operations and Comprehensive Loss.
On the Restated Agreement Date, the Company entered into a Credit Agreement (the “Restated Credit Agreement”) with Deerfield Revolver, pursuant to which the Company may borrow up to the lesser of $50.0 million or its applicable borrowing base from time to time prior to April 2, 2022 (the “ABL Facility”).
On March 31, 2019, the Company entered into a Second Amendment to Credit Agreement and First Amendment to Guaranty and Security Agreement (the “Second Credit Amendment” and collectively with the Restated Credit Agreement and First Credit Amendment, the “Deerfield Credit Agreements”). The Second Credit Amendment includes conforming revisions to reflect the changes in the Second Facility Amendment. In addition, the Second Credit Amendment extends the maturity date of the Deerfield Credit Agreements to the earlier of (i) April 2, 2023 or (ii) the date the loans pursuant to the Deerfield Facility Agreements have been repaid in full.
The borrowing base consists of eligible accounts, eligible inventory and eligible equipment. On the Restated Agreement Date, availability under the ABL Facility was $24.0 million. Any outstanding principal under the ABL Facility will accrue interest at a rate equal to the London Interbank Offered Rate (LIBOR) (with a 1% floor) plus 5.50%, payable in cash. The interest rate will accrue on a minimum amount of $9.75 million, whether or not such amount is drawn (which amount in excess of the revolver usage accruing interest will not be subject to the unused line fee). The Company is subject to other fees in addition to interest on the outstanding principal amount under the ABL Facility, including a commitment fee of $0.5 million ($0.2 million payable upon closing, $0.2 million payable on the 1st anniversary of the closing and $0.1 million payable on the 2nd anniversary of the closing), a $1.0 million fee upon the expiration of the ABL Facility, and an early commitment termination or reduction fee of 2.5% in the 1st year, 1.5% in the 2nd year, 0.5% in the 3rd year and 0% thereafter. The Company recorded $0.6 million in deferred financing costs, including the commitment fee, related to the ABL Facility and presented these costs as a deferred asset, to be subsequently amortized as interest expense over the term of the ABL Facility, on the Company’s Consolidated Balance Sheets. In conjunction with entering in the Second Credit Amendment, the Company recorded as additional $0.4 million in deferred financing costs.
The Deerfield Credit Agreements have a $17.5 million minimum global liquidity requirement, net revenue tests, fixed charge coverage, capital expenditure limitations and operating expense tests. No event of default with respect the Company’s financial covenants had been declared as of December 31, 2019. The Deerfield Credit Agreements also 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.
The Company’s obligations under the Deerfield Credit Agreements 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 to Deerfield pursuant to the Company’s Deerfield Facility Agreements (as described above).
As of December 31, 2019, the Company had no outstanding borrowings and $0.8 million in deferred financing costs relating to the ABL Facility. The remaining borrowings available was $18.5 million.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
3.25% Convertible Senior Notes Due 2020
On November 2, 2015, the Company issued $125.0 million aggregate principal amount of 3.25% Senior Notes in an underwritten public offering. The 3.25% Senior Notes are governed by a base indenture (“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 (as defined therein).
The 3.25% Senior Notes are senior unsecured obligations and are: senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the 3.25% Senior Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated, including the 2.25% Senior Notes; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries.
The 3.25% Senior Notes accrue interest at a rate of 3.25% per year, payable semi-annually. 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.
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 2 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 until, 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: (i) 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; (ii) in the 5 business days following any 5-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; (iii) in the event that the Company has provided notice of redemption, but no later than 2 trading days prior to the Company’s proposed redemption date; or (iv) 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 8.9431 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 $111.82 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 the Company, the principal amount of the 3.25% Senior Notes and accrued and unpaid interest, if any, will automatically become immediately due and payable.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
Upon issuance, the Company was not required to separate the conversion option from the 3.25% Senior Notes under ASC 815, “Derivatives and Hedging”. However, because the Company has the ability to settle the 3.25% Senior Notes in cash, common stock or a combination of cash and common stock, the Company applied the cash conversion guidance contained in ASC 470-20, “Debt With Conversion and other Options”, and accounted for the 3.25% Senior Notes by allocating the issuance proceeds between the liability-classified debt component and a separate equity component attributable to the conversion option. The equity component is classified in stockholders’ equity and the resulting discount on the liability component is accreted such that interest expense equals the Company’s borrowing rate for nonconvertible loan products of similar duration. The separation was performed by first determining the fair value of a similar debt that does not have an associated equity component. That amount was then deducted from the initial proceeds of the 3.25% Senior Notes as a whole to arrive at a residual amount, which was allocated to the conversion feature that is classified as equity. The initial fair value of the indebtedness was $97.8 million resulting in a $27.2 million allocation to the embedded conversion option. The embedded conversion option was recorded in stockholders’ equity and as a debt discount, to be subsequently accreted to interest expense over the term of the 3.25% Senior Notes. Underwriting discounts and commissions and offering expenses totaled $3.7 million and were allocated between the liability and the equity components 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, 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.
On August 9, 2018, the Company entered into the Restated Facility Agreement with Deerfield, pursuant to which Deerfield and the Company canceled and extinguished the $40.5 million principal amount of the 3.25% Senior Notes held by Deerfield in exchange for an additional $40.5 million of indebtedness under the Restated Facility Agreement (as a last-out waterfall tranche under the Restated Facility Agreement).
On March 31, 2019, the Company and two investors holding $73.4 million of the principal amount of the 3.25% Senior Notes entered into an Exchange Agreement (the “2019 Exchange Agreement”) providing for the exchange of the holders’ 3.25% Senior Notes for new 5.00% Voluntary Convertible Senior Notes due 2024 (the “2019 5.00% Voluntary Notes”) and new 5.00% Mandatory Convertible Senior Notes due 2024 (the “5.00% Mandatory Notes”, and together with the 2019 5.00% Voluntary Notes, the “5.00% Notes”) which was completed on April 3, 2019.
The Company evaluated the accounting for the 2019 Exchange Agreement transaction and determined it represented an extinguishment of the previously issued 3.25% Senior Notes, primarily due to the addition and significance of the conversion features as described above. During the twelve months ended December 31, 2019, the Company recorded a gain on debt extinguishment of $17.5 million relating to the exchange of debt instruments. Additionally, the embedded conversion option of the 3.25% Senior Notes, which was originally recorded in additional paid-in capital, was reduced by $16.9 million.
As of December 31, 2019, the Company had outstanding borrowings of $10.7 million and deferred financing costs of $0.1 million, related to the 3.25% Senior Notes. There were no principal payments due during the term. Annual interest expense on the 3.25% Senior Notes will range from $0.7 million to $0.8 million through maturity.
5.00% Convertible Senior Notes due 2024
On April 3, 2019, the Company completed the transactions contemplated by the 2019 Exchange Agreement, issuing $25.0 million of principal amount of the 5.00% Mandatory Notes and $42.0 million of principal amount of the 2019 5.00% Voluntary Notes to the holders. The exchanging holders received $900 principal amount of 5.00% Notes for every $1,000 principal amount of 3.25% Senior Notes plus accrued interest.
The 2019 5.00% Voluntary Notes and 5.00% Mandatory Notes are governed by separate Indentures (respectively, the “2019 5.00% Voluntary Notes Indenture” and “5.00% Mandatory Notes Indenture”, and collectively, the “Indentures”), each dated April 3, 2019, by and between the Company and Wilmington Trust, National Association (“Wilmington”), as trustee. The 5.00% Notes will accrue interest at a rate of 5.00% per year, payable semi-annually in arrears on April 1 and October 1 of each year, commencing October 1, 2019. Such interest amount shall be paid, at the Company’s option, either in cash or, if certain terms are met in accordance with the Indentures, shares of common stock or paid in kind. The 5.00% Notes mature on April 3, 2024, unless earlier purchased, redeemed or converted in accordance with the terms of the Indentures. The Indentures governing the 5.00% Notes contain customary terms and covenants and events of default.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
The 5.00% Voluntary Notes are convertible at the option of each holder into shares of common stock at any time on or after July 1, 2020, but prior to the close of business on the business day immediately preceding January 1, 2024, provided that, except if the Company undergoes a fundamental change (as defined in the 2019 5.00% Voluntary Notes Indenture) and for certain other customary circumstances of conversion, each holder may not convert more than 30% the initial aggregate principal amount of his or her outstanding 2019 5.00% Voluntary Notes per calendar quarter (a “2019 5.00% Voluntary Conversion”). Thereafter, until the close of business on the business day immediately preceding the maturity date, the 2019 5.00% Voluntary Notes will be convertible at the option of the holder at any time regardless of the conditions described in this paragraph. The initial conversion rate of the 2019 5.00% Voluntary Notes in a 2019 5.00% Voluntary Conversion is 0.12103 shares of the Company’s common stock per $1.00 principal amount of the 2019 5.00% Notes, which is equivalent to an initial conversion price per share equal to $8.2624 (the “2019 5.00% Voluntary Conversion Price”). The conversion rate is subject to adjustment upon the occurrence of certain specified events. Except if the Company undergoes a fundamental change (as defined in the 2019 5.00% Voluntary Notes Indenture) and for certain other customary circumstances of conversion, in no event prior to the close of business on the business day immediately preceding January 1, 2024 may the 2019 5.00% Voluntary Notes be converted in a calendar quarter unless the closing sale price of the Company’s common stock for at least twenty (20) trading days during the period of thirty (30) consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 7.271 (subject to adjustment upon the occurrence of certain specified events) (the “2019 5.00% Voluntary Conversion Threshold”).
The 5.00% Mandatory Notes provide for the mandatory conversion (a “5.00% Mandatory Conversion”) of $1,666,666 of the aggregate principal amount each calendar month for fifteen (15) consecutive months beginning on the calendar month beginning with April 3, 2019, if and only if at the end of the prior calendar month the trailing average VWAP of the last five (5) trading days of the prior calendar month is greater than $6.61. In the event of a 5.00% Mandatory Conversion, $1,666,666 of the 5.00% Mandatory Notes would mandatorily convert at a conversion rate of 0.15129 shares of the Company’s common stock per $1.00 principal amount of the 5.00% Notes, which is equivalent to a price per share equal to $6.61. The 5.00% Mandatory Notes will be convertible at the option of each holder into shares of common stock at the 5.00% Voluntary Conversion Price at any time prior to the close of business on the business day immediately preceding January 1, 2024, provided that, except if the Company undergoes a fundamental change (as defined in the 5.00% Mandatory Notes Indenture) and for certain other customary circumstances of conversion, each holder may not convert more than 30% of the initial aggregate principal amount of his or her outstanding New Mandatory Note per calendar quarter, and provided further, that (i) voluntary conversions may be effected only if the 5.00% Voluntary Conversion Threshold has been achieved and (ii) a voluntary conversion may not take place in the same calendar quarter as a 5.00% Mandatory Conversion. Thereafter, until the close of business on the business day immediately preceding the maturity date, the 5.00% Mandatory Notes will be convertible at the option of the holder at any time regardless of the conditions described in this paragraph.
The Indentures provide that in no event may a holder convert, whether in a 2019 5.00% Voluntarily Conversion or a 5.00% Mandatory Conversion or otherwise, into shares of common stock if such conversion would result in the holder beneficially owning more that 9.5% of the Company’s outstanding common stock.
Upon issuance, the Company was not required to separate the conversion options from the 5.00% Notes under ASC 815, “Derivatives and Hedging”. However, because the Company has the ability to settle the 5.00% 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 5.00% Notes by allocating the issuance proceeds between the liability-classified debt component and a separate equity component attributable to the conversion options. 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 5.00% 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 $67.2 million resulting in a $41.2 million allocation to the embedded conversion option. The embedded conversion option was recorded in stockholders’ equity and as a debt discount, to be subsequently accreted to interest expense over the term of the 5.00% Notes. Debt issuance costs totaled $1.2 million and were allocated between the liability and the equity components in proportion to the allocation of proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. As a result, $0.5 million attributable to the indebtedness was recorded as deferred financing costs, to be subsequently amortized as interest expense over the term of the 5.00% Notes, and $0.7 million attributable to the equity component was recorded as a reduction to additional paid-in-capital in stockholders’ equity.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
During the twelve months ended December 31, 2019, the Company converted $5.0 million of principal, or carrying value of $2.0 million, of the 5.00% Mandatory Notes, together with $67 thousand of accrued and unpaid interest into 766,652 shares of common stock pursuant to 5.00% Mandatory Conversions.
As of December 31, 2019, the Company had a carrying amount of $26.5 million, inclusive of deferred financing costs of $0.4 million, related to the 5.00% Notes. Annual interest expense on these 5.0% Notes will range from $4.4 million to $14.7 million through maturity.
Japan Lifeline Co., Ltd. Subordinated Promissory Note
On November 20, 2018, the Company issued the JLL Note to JLL, the Company’s Japanese distributor, pursuant to which the Company converted a $4.3 million refund payable to a note payable. The amount owing under the JLL Note accrues interest at a rate of 2.5% per annum and, subject to the terms of the subordination agreement among the Company, JLL and certain Deerfield entities entered into on November 20, 2018, would become due and payable on the earlier of: (i) December 31, 2023; or (ii) the date the JLL Note is declared due and payable by JLL upon the occurrence of certain events of default.
Principal Maturities of Long-term Debt
The aggregate principal maturities of long-term debt as of December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan facility
|
|
Convertible notes
|
|
Other debt
|
|
Total
|
Year ending December 31:
|
|
|
|
|
|
|
|
2020
|
$
|
—
|
|
|
$
|
11,145
|
|
|
$
|
—
|
|
|
$
|
11,145
|
|
2021
|
20,846
|
|
|
—
|
|
|
—
|
|
|
20,846
|
|
2022
|
73,506
|
|
|
—
|
|
|
—
|
|
|
73,506
|
|
2023
|
73,506
|
|
|
—
|
|
|
4,281
|
|
|
77,787
|
|
2024
|
—
|
|
|
62,019
|
|
|
—
|
|
|
62,019
|
|
|
$
|
167,858
|
|
|
$
|
73,164
|
|
|
$
|
4,281
|
|
|
$
|
245,303
|
|
7. Revenue Disaggregation
The Company disaggregated revenue in accordance with the new revenue standard to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. These economic factors are primarily attributable to different geographic regions and the timing of transfer of control of products to customers. Accordingly, sales in which control of the product has passed to the customer at the time of procedure or implant into a patient or at the time of shipment have been bifurcated as “Implant-based” and “Shipment-based” revenue, respectively. The table below includes a reconciliation of disaggregated revenue with the Company’s reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
|
Implant-based
|
|
Shipment-based
|
|
Total
|
|
Implant-based
|
|
Shipment-based
|
|
Total
|
|
Implant-based
|
|
Shipment-based
|
|
Total
|
United States
|
$
|
92,071
|
|
|
$
|
3,245
|
|
|
$
|
95,316
|
|
|
$
|
106,014
|
|
|
$
|
3,079
|
|
|
$
|
109,093
|
|
|
$
|
120,572
|
|
|
$
|
2,637
|
|
|
$
|
123,209
|
|
International
|
13,745
|
|
|
34,309
|
|
|
48,054
|
|
|
21,097
|
|
|
26,283
|
|
|
47,380
|
|
|
23,246
|
|
|
34,702
|
|
|
57,948
|
|
Total Revenue
|
$
|
105,816
|
|
|
$
|
37,554
|
|
|
$
|
143,370
|
|
|
$
|
127,111
|
|
|
$
|
29,362
|
|
|
$
|
156,473
|
|
|
$
|
143,818
|
|
|
$
|
37,339
|
|
|
$
|
181,157
|
|
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
8. Commitments and Contingencies
(a) Leases
The Company determines whether an arrangement is a lease at inception. The Company leases facilities located in Irvine, California and Santa Rosa, California and an office located in 's-Hertogenbosch, the Netherlands. These facility lease agreements require the Company to pay variable operating costs, including property taxes, insurance and maintenance based on costs incurred or actual usage. The Company’s facility leases do not contain any residual value guarantees. In addition, the Company has certain equipment and automobiles under long-term agreements that were not material for the twelve months ended December 31, 2019.
All facility leases are accounted for as operating leases. A right-of-use asset, representing the underlying asset during the lease term, and a lease liability, representing the payment obligation arising from the lease, are recognized on the balance sheet at lease commencement based on the present value of the payment obligation. For operating leases, expense is recognized on a straight-line basis over the lease term. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet.
The Company primarily uses its incremental borrowing rate in determining the present value of lease payments as the Company's facility leases generally do not provide an implicit rate.
The Company’s facility leases have remaining lease terms ranging from less than 3 years to 9 years, some of which include options to extend the lease term for up to five years.
For the year ended December 31, 2019, components of facility lease costs consist of $3.4 million in operating lease expense and $0.9 million in variable lease costs.
Maturities of facility lease liabilities by fiscal year for the Company’s operating leases are as follows as of December 31, 2019:
|
|
|
|
|
2020
|
$
|
3,584
|
|
2021
|
3,753
|
|
2022
|
3,861
|
|
2023
|
2,950
|
|
2024
|
2,849
|
|
2025 and thereafter
|
12,338
|
|
Total lease payments
|
$
|
29,335
|
|
Less: Imputed Interest
|
(15,877
|
)
|
Present value of operating lease liabilities
|
$
|
13,458
|
|
As of December 31, 2019, the current portion of the Company’s operating lease liabilities was $1.8 million and is classified within accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheets.
As of December 31, 2019, the weighted-average remaining lease term was 7.8 years and weighted-average discount rate was 22.1%.
Disclosures related to periods prior to adopting the new lease guidance
Future minimum payments by year under non-cancelable leases with initial terms in excess of 1 year were as follows as of December 31, 2018:
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
|
|
|
|
|
2020
|
3,791
|
|
2021
|
3,819
|
|
2022
|
3,871
|
|
2023
|
2,889
|
|
2024
|
2,794
|
|
2025 and thereafter
|
12,338
|
|
Total lease payments
|
$
|
29,502
|
|
Facilities rent expense in the years ended December 31, 2019, 2018 and 2017 was $3.4 million, $3.4 million and $3.4 million, respectively.
(b) Employment Agreements and Retention Plan
The Company has employment agreements with certain of its executive officers under which payment and benefits would become payable in the event of termination by the Company for any reason other than cause, death or disability or termination by the employee for good reason (collectively, an “Involuntary Termination”) prior to, upon or following a change in control of the Company. The severance payment will generally be in a range of 6 to 18 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 18 to 24 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
The Company is from time to time involved in various claims and legal proceedings of a nature it believes 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. The Company accrues 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.
Stockholder Securities Litigation
On January 3, 2017 and January 9, 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 “District Court”). 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 United States Food and Drug Administration (the “FDA”) pre-market 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.) (“Nguyen”), 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 and on March 12, 2018, the Company filed its Motion to Dismiss lead plaintiff’s Second Amended Complaint with prejudice. On September 6, 2018, the District Court dismissed the Second Amended Complaint with prejudice and, on October 5, 2018, lead plaintiff filed a notice of appeal and on March 15, 2019, lead plaintiff filed its opening brief with the appellate court. In April 2019, the Company filed its response brief to plaintiff’s appeal. The Appellate Court’s hearing on the appeal occurred in February 2020, and the Company expects the Appellate Court’s decision to be rendered later in 2020. The Company believes these lawsuits are without merit and continues to defend itself vigorously.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
Stockholder Derivative Litigation
As of June 11, 2017, four stockholders have filed derivative lawsuits seeking unspecified monetary damages 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 continues 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. On February 5, 2019, the Company received notification that the SEC staff had concluded its investigation and did not intend to recommend an enforcement action.
(d) Product Withdrawal
Voluntary Recall of the Nellix EVAS System
On January 4, 2019, the Company announced that in order to ensure optimal outcomes for patients, the Nellix EVAS System will, for the foreseeable future, only be available for use at approved centers in a clinical investigation setting with pre-screened patients that adhere to the current indications outside of the United States. All cases will be pre-screened by a physician panel and supported by the Company’s clinical specialists to ensure adherence to protocol and use in accordance with current product indications. Compassionate use requests will be reviewed in accordance with the process established by the Company and associated national competent authorities. The existing inventory has been voluntarily recalled.
In January 2019, the Company announced that the CE Mark for the Nellix EVAS System had been suspended by its Notified Body following a voluntary recall and field safety notification issued by the Company on January 4, 2019. Suspension of the CE Mark means that the Company may not affix the CE Mark and sell the Nellix EVAS System in the European Union (“EU”) during the term of the suspension.
In June 2019, the Company announced that the CE Mark for the Nellix EVAS System had been been reinstated by its Notified Body, which reinstatement was accompanied by certain limitations on clinical use of Nellix. The reinstatement followed an assessment of clinical evidence.
(e) Concentrations of Risk and Major Customer
For the year ended and as of December 31, 2019, there was one customer that represented 10% or more of consolidated revenue and consolidated accounts receivable. For the year ended and as of December 31, 2018, there was no single customer that represented 10% or more of consolidated revenue and/or consolidated accounts receivable.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
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, Nellix, Inc. (“Nellix”), certain of Nellix’s stockholders named therein and Essex Woodlands Health Ventures, Inc., as representative of the former Nellix stockholders. On December 10, 2010 (the “Nellix Closing Date”), the Company completed its acquisition of Nellix. The purchase price consisted of shares of the Company’s common stock issuable as of the Nellix Closing Date. Additional payments, solely in the form of shares of the Company’s common stock 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 contingently issuable common stock would be determined on the date that each Nellix Milestone is achieved. The number of issuable shares would be established using an applicable per share price, which is subject to a ceiling and/or floor, resulting at the closing of the merger in a potential maximum of approximately 1,020,000 shares issuable upon the achievement of the Nellix Milestones. As of the Closing Date, the fair value of the contingently issuable common stock was estimated to be $28.2 million.
The Merger Agreement provides that, in addition to the shares of common stock of the Company issued to the former Nellix stockholders at the Nellix Closing Date, if the Company receives approval from the FDA to sell one of Nellix’s products in the United States (the “PMA Milestone”), the Company will issue additional shares of its common stock to the former stockholders of Nellix. The dollar value of the shares of the Company’s 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 Company’s common stock to be issued upon achievement of the PMA Milestone is subject to a stock price floor of $45.00 per share but not subject to a stock price ceiling.
The value of the contingently issuable common stock 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 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 contingently issuable common stock in periods subsequent to the Nellix Closing Date.
The fair value of the contingently issuable common stock 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 Merger Agreement. Adjustments to the fair value of the contingently issuable common stock are recognized within other income (expense), net in the Consolidated Statements of Operations and Comprehensive Loss. See the “Fair Value Measurements” section of Note 3 for further details. As of December 31, 2019, the fair value of the contingently issuable common stock was presented in non-current liabilities.
At December 31, 2019, the Company’s stock price closed at $1.58 per share. Thus, had the PMA Milestone been achieved on December 31, 2019, the contingently issuable common stock would have comprised approximately 333,149 shares (based on the 30-day average closing stock price ending 5 days prior to the announcement, subjected to the stock price floor of $45.00 per share), representing a value of $0.5 million.
10. Income Taxes
Net loss before income taxes attributable to United States and international operations, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
(64,076
|
)
|
|
$
|
(70,176
|
)
|
|
$
|
(56,178
|
)
|
Foreign
|
(5,406
|
)
|
|
(9,254
|
)
|
|
(10,681
|
)
|
Net loss before income taxes
|
$
|
(69,482
|
)
|
|
$
|
(79,430
|
)
|
|
$
|
(66,859
|
)
|
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
Income tax expense (benefit) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(102
|
)
|
State
|
53
|
|
|
81
|
|
|
102
|
|
Foreign
|
172
|
|
|
260
|
|
|
237
|
|
Total current
|
225
|
|
|
341
|
|
|
237
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(4,133
|
)
|
|
(27
|
)
|
|
(699
|
)
|
State
|
(819
|
)
|
|
(19
|
)
|
|
—
|
|
Foreign
|
2
|
|
|
(11
|
)
|
|
3
|
|
Total deferred
|
(4,950
|
)
|
|
(57
|
)
|
|
(696
|
)
|
Total:
|
|
|
|
|
|
Federal
|
(4,133
|
)
|
|
(27
|
)
|
|
(801
|
)
|
State
|
(766
|
)
|
|
62
|
|
|
102
|
|
Foreign
|
174
|
|
|
249
|
|
|
240
|
|
Income tax expense (benefit)
|
$
|
(4,725
|
)
|
|
$
|
284
|
|
|
$
|
(459
|
)
|
Income tax expense (benefit) was computed by applying the United States federal statutory rate to net loss before income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Income tax benefit at federal statutory rate
|
$
|
(14,591
|
)
|
|
$
|
(16,680
|
)
|
|
$
|
(22,732
|
)
|
State income tax benefit, net of federal benefit
|
(1,160
|
)
|
|
(1,756
|
)
|
|
(1,114
|
)
|
Meals and entertainment
|
178
|
|
|
230
|
|
|
454
|
|
Research and development credits
|
(931
|
)
|
|
(1,211
|
)
|
|
(913
|
)
|
Stock-based compensation
|
1,825
|
|
|
2,016
|
|
|
3,203
|
|
163(l) limited interest expense
|
4,391
|
|
|
994
|
|
|
—
|
|
Contingent consideration
|
(357
|
)
|
|
(1,491
|
)
|
|
(986
|
)
|
Foreign tax rate differential
|
(269
|
)
|
|
(405
|
)
|
|
692
|
|
Net change in valuation allowance
|
2,899
|
|
|
16,360
|
|
|
(24,976
|
)
|
Return to provision
|
2,387
|
|
|
1,612
|
|
|
5,719
|
|
Unrecognized tax benefits
|
466
|
|
|
605
|
|
|
457
|
|
Federal tax rate change
|
—
|
|
|
—
|
|
|
39,807
|
|
NOL expiration and other, net
|
437
|
|
|
10
|
|
|
(70
|
)
|
Income tax expense (benefit)
|
$
|
(4,725
|
)
|
|
$
|
284
|
|
|
$
|
(459
|
)
|
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
Significant components of the Company’s deferred tax assets (liabilities) were as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
|
|
Net operating loss carryforwards
|
$
|
114,124
|
|
|
$
|
110,130
|
|
Accrued expenses
|
3,647
|
|
|
3,757
|
|
Tax credits
|
13,054
|
|
|
12,540
|
|
Bad debt
|
240
|
|
|
104
|
|
Inventory
|
4,056
|
|
|
4,821
|
|
Capitalized research and development
|
20,161
|
|
|
17,931
|
|
Equity compensation
|
2,965
|
|
|
2,669
|
|
Operating lease liabilities
|
3,239
|
|
|
—
|
|
Interest expense
|
8,418
|
|
|
3,718
|
|
Other
|
873
|
|
|
1,174
|
|
Deferred tax asset
|
170,777
|
|
|
156,844
|
|
Valuation allowance
|
(139,855
|
)
|
|
(135,216
|
)
|
Total deferred tax assets
|
30,922
|
|
|
21,628
|
|
Deferred tax liabilities:
|
|
|
|
Developed technology and trademark
|
(8,842
|
)
|
|
(8,830
|
)
|
Trademarks and trade names
|
(826
|
)
|
|
(765
|
)
|
Depreciation and amortization
|
(6,924
|
)
|
|
(8,034
|
)
|
Convertible debt
|
(12,878
|
)
|
|
(4,149
|
)
|
Operating lease right-of-use assets
|
(1,372
|
)
|
|
—
|
|
Other
|
(230
|
)
|
|
—
|
|
Total deferred tax liabilities
|
(31,072
|
)
|
|
(21,778
|
)
|
Net deferred tax liability
|
$
|
(150
|
)
|
|
$
|
(150
|
)
|
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 deferred tax assets will not be realized. Due to such uncertainties surrounding the realization of the domestic and foreign deferred tax assets, the Company maintained a valuation allowance of $139.9 million against a substantial portion of its deferred tax assets as of December 31, 2019. For the year ended December 31, 2019, the total change in valuation allowance was $4.6 million, of which $2.9 million was recorded as a tax expense through the income statement and $1.7 million was due to state net operating loss not taking federal benefit on deferred balances. 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, 2019, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $350.8 million and $217.1 million, respectively. As a result of the Tax Cuts and Jobs Act (“TCJA”), the federal net operating losses generated in 2018 and 2019 will be carried forward indefinitely and are limited to an 80% deduction of taxable income. The 80% limitation is not applicable to net operating losses generated before 2018.
Federal and state net operating loss carryforwards began expiring in 2020 and will continue to expire through 2038. The federal net operating loss carryforwards generated after December 31, 2017 do not expire but are limited to 80% taxable income in the year of utilization. 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 $10.2 million and $15.9 million, respectively, which will begin to expire in 2021. 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 the Company’s 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
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
change in ownership of the Company of more than 50% within a 3-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’s net operating loss carryforwards and research and development credits are limited due to a change in ownership. The Company concluded that TriVascular 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:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2018
|
Balance at January 1
|
$
|
12,888
|
|
|
$
|
12,207
|
|
Additions for tax positions related to prior periods
|
—
|
|
|
—
|
|
Decreases related to prior year tax positions
|
(26
|
)
|
|
(17
|
)
|
Lapse of statute of limitations
|
—
|
|
|
—
|
|
Additions for tax positions related to current period
|
538
|
|
|
698
|
|
Balance at December 31
|
$
|
13,400
|
|
|
$
|
12,888
|
|
The Company’s gross unrecognized tax benefits presented above would not reduce its annual effective tax rate if they were to be recognized because the Company has recorded a full valuation allowance on the deferred tax assets. The Company does not foresee any material changes to our gross unrecognized tax benefits within the next 12 months. The Company recognizes interests and/or penalties related to income tax matters in income tax expense. The Company did not recognize any accrued interest and penalties related to gross unrecognized tax benefits related to the year ended December 31, 2019.
The undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested. Accordingly, no provisions for United States federal and state income taxes or foreign withholding taxes have been provided on such undistributed earnings. As of December 31, 2019, the cumulative amount of earnings with respect to which United States income taxes have not been provided is approximately $0.1 million. Determination of the potential amount of unrecognized deferred United States 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 United States liability.
In general, the Company is no longer subject to United States federal, state, local, or foreign examinations by taxing authorities for years before 2015, 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 year ended December 31, 2019, the Company’s provision for income taxes was $4.7 million benefit and its effective tax rate was (6.8)%. The tax benefit recorded in continuing operations was due to the application of the exception to the tax intraperiod allocation rules. The exchange of 3.25% convertible notes for new 5.00% convertible notes in April 2019 resulted in an increase to the temporary difference between the carrying amount and tax basis of the convertible notes. The increase in the taxable temporary difference resulted in the recognition of a $5.0 million deferred tax liability (net of debt converted to equity), which was recorded as an offset to additional paid-in-capital. In accordance with ASC 740-20, Intraperiod Tax Allocation, the increase in the deferred tax liability provided an additional source of income to realize the benefit from the current year loss from continuing operations, which resulted in the recognition of a $5.0 million income tax benefit during the year ended December 31, 2019. This exception was eliminated in the recently issued ASU 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes in 2019 which is required to be adopted by public business entities in 2021 and interim period within that year. Although early adoption is permitted, the Company did not early adopt during year ended 2019.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
In the year ended December 31, 2019, The Company had legal entities operating in the United States, Italy, New Zealand, Singapore, Poland, Germany, Switzerland, South Korea and the Netherlands, as well as registered sales branches of the Company’s Dutch entity in certain countries in Europe.
In addition, the Company has federal alternative minimum tax credit carryforwards of $0.1 million that will be refundable in future years due to the TCJA.
While the TCJA provides for a territorial tax system, beginning in 2018, it includes two new United States tax base erosion provisions, the global intangible low-taxed income (“GILTI”) provisions and the base-erosion and anti-abuse tax provisions.
The GILTI provisions require the Company to include in its United States 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.
11. Quarterly Results of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
Gross profit
|
|
Operating expenses
|
|
Net loss
|
|
Basic and diluted loss per share
|
Three Months Ended:
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
$
|
35,751
|
|
|
$
|
21,829
|
|
|
$
|
31,687
|
|
|
$
|
(7,830
|
)
|
|
$
|
(0.40
|
)
|
September 30, 2019
|
35,775
|
|
|
23,074
|
|
|
33,904
|
|
|
(7,765
|
)
|
|
(0.40
|
)
|
June 30, 2019
|
36,238
|
|
|
22,984
|
|
|
32,851
|
|
|
(27,134
|
)
|
|
(1.50
|
)
|
March 31, 2019
|
35,606
|
|
|
23,199
|
|
|
35,193
|
|
|
(22,028
|
)
|
|
(2.12
|
)
|
Three Months Ended:
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
$
|
34,693
|
|
|
$
|
11,366
|
|
|
$
|
35,062
|
|
|
$
|
(25,955
|
)
|
|
$
|
(2.67
|
)
|
September 30, 2018
|
34,756
|
|
|
22,627
|
|
|
38,546
|
|
|
(10,116
|
)
|
|
(1.20
|
)
|
June 30, 2018
|
44,740
|
|
|
29,604
|
|
|
45,110
|
|
|
(23,876
|
)
|
|
(2.80
|
)
|
March 31, 2018
|
42,284
|
|
|
28,326
|
|
|
41,397
|
|
|
(19,767
|
)
|
|
(2.40
|
)
|
12. Restructuring Charges
In the years ended December 31, 2019, 2018 and 2017, the Company recorded $0.8 million, $3.3 million and $1.5 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 with TriVascular in 2016. The targeted reductions and other restructuring activities were initiated to improve efficiencies and re-align resources as well as to allow for continued investment in strategic areas and to drive growth.
In August 2018, the Company continued its restructuring activities including: restructuring certain aspects of its business and operations to re-prioritize its sales and marketing efforts; rationalizing its international presence and related expenses; streamlining its workforce and taking other measures to increase efficiencies; decreasing its cash consumption and decreasing its cost to serve; and refocusing its business on strong execution of its core strategies. The Company determined to streamline and restructure certain of its operations and implement certain management changes. These plans have resulted in significant changes in the composition of the senior management team.
As of December 31, 2019, the Company estimates that it will incur a total of $16.7 million in restructuring charges upon the completion of the plan, of which $16.7 million has already been incurred since the first quarter of 2016.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
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 reductions of its 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, 2019:
|
|
|
|
|
|
One-time termination benefits
|
Accrual balance as of December 31, 2018
|
$
|
562
|
|
Restructuring charges
|
838
|
|
Utilization
|
(1,310
|
)
|
Accrual balance as of December 31, 2019
|
$
|
90
|
|
The accrual balance as of December 31, 2019 is classified within accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheets.
13. Equity Financing
On March 31, 2019, the Company entered into a Purchase Agreement (the “Purchase Agreement”) with Investors, whereby the Company agreed to issue and sell to the Investors, and the Investors agreed to purchase the Equity Shares at the Equity Offering Price for an aggregate cash purchase price of $52.2 million. For any Investor whose purchase of the Equity Shares resulted in such Investor beneficially owning in excess of 19.99% of the shares (the excess shares, the “Blocked Shares”) of common stock outstanding immediately after giving effect to the issuance, in lieu of issuing the Blocked Shares which such Investor would have received, the Company issued to such Investor pre-paid warrants to purchase 1,467,494 shares of common stock equal to the number of Blocked Shares that would have been received (the “Pre-Paid Warrants”) for the Equity Offering Price per share. Each Pre-Paid Warrant will be exercisable upon issuance, provided that such exercise does not result in the issuance of Blocked Shares, and will expire ten years from the date of issuance. The Pre-Paid Warrants were included in shares used to compute basic and diluted loss per shares during the twelve months ended December 31, 2019.
On April 3, 2019, the Company closed the transactions contemplated by the Purchase Agreement. The Company recorded proceeds of $52.0 million, net of offering costs of $0.2 million as additional paid-in capital.
14. Subsequent Events
Convertible Note Exchange
On February 24, 2020, the Company and three investors holding approximately $11.0 million of the principal amount of the Company’s 3.25% Senior Notes due 2020 (the “Holders”) entered into an Exchange Agreement (the “2020 Exchange Agreement”) providing for the exchange of the Holders’ existing notes (the “Existing Notes”) for new 5.00% Voluntary Convertible Senior Notes due 2024 (the “2020 5.00% Voluntary Notes”). Pursuant to the 2020 Exchange Agreement, on February 24, 2020, the exchanging Holders are exchanging all outstanding principal plus accrued and unpaid interest under the Existing Notes into the same amount of principal of 2020 5.00% Voluntary Notes pursuant to the 2020 Exchange Agreement. The 2020 5.00% Voluntary Notes are being issued in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) by virtue of Section 4(a)(2) of the Securities Act and Rule 506 thereunder.
The 2020 5.00% Voluntary Notes will be governed by an Indenture (the “New Indenture”), by and between the Company and Wilmington, as trustee. The 2020 5.00% Voluntary Notes will accrue interest at a rate of 5.00% per year, payable semi-annually in arrears on April 1 and October 1 of each year, commencing April 1, 2020. The 2020 5.00% Voluntary Notes will mature on April 2, 2024, unless earlier purchased, redeemed or converted in accordance with the terms of the New Indenture. The New Indenture governing the 2020 5.00% Voluntary Notes will contain customary terms and covenants and events of default.
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
The 2020 5.00% Voluntary Notes will be convertible at the option of each Holder into shares of common stock at any time prior to the close of business on the business day immediately preceding January 1, 2024; provided that, except if the Company undergoes a fundamental change (as defined in the New Indenture) and for certain other customary circumstances of conversion, each Holder may not convert more than 30% the initial aggregate principal amount of its outstanding 2020 5.00% Voluntary Notes per calendar quarter (a “Voluntary Conversion”). Beginning January 1, 2024, until the close of business on the business day immediately preceding the maturity date, the 2020 5.00% Voluntary Notes will be convertible at the option of the holder at any time regardless of the conditions described in this paragraph. The initial conversion rate of the 2020 5.00% Voluntary Notes in a Voluntary Conversion is 0.4445 shares of the Company’s common stock per $1.00 principal amount of the 2020 5.00% Voluntary Notes, which is equivalent to an initial conversion price per share equal to $2.25 (the “Conversion Price”). The conversion rate is subject to adjustment upon the occurrence of certain specified events. Except if the Company undergoes a fundamental change (as defined in the New Indenture) and for certain other customary circumstances of conversion, in no event prior to the close of business on the business day immediately preceding January 1, 2024 may the 2020 5.00% Voluntary Notes be converted in a calendar quarter unless the closing sale price of the Company’s common stock for at least twenty (20) trading days during the period of thirty (30) consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 110% of the Conversion Price (subject to adjustment upon the occurrence of certain specified events) (the “Voluntary Conversion Threshold”).
The 2020 5.00% Voluntary Notes will be secured by the Company’s assets pursuant to a Junior Lien Security Agreement by and between the Company and Wilmington, as collateral agent (the “JLSA”). The JLSA grants a second lien on the Company’s assets that is second in priority to the security interests granted (i)_to Deerfield, as agent, pursuant to the Amended and Restated Guaranty and Security Agreement, dated August 9, 2018, by and among the Company, its subsidiaries and Deerfield, as agent, as amended to date and (ii) to Deerfield ELGX Revolver, LLC, as agent (“Deerfield ELGX”), pursuant to the Guaranty and Security Agreement, dated as of August 9, 2018, by and among the Company, its subsidiaries and Deerfield ELGX, as agent. as amended to date. In connection with the issuance of the 2020 5.00% Voluntary Notes, the parties entered into Subordination and Intercreditor Agreement, dated as of February 24, 2020, by and among the Company, Deerfield, Deerfield ELGX and Wilmington, as collateral agent (the “Subordination Agreement”). The Subordination Agreement contains customary provisions associated with the subordination of the security interest of the 2020 5.00% Voluntary Notes.
The New Indenture will provide that in no event may a Holder convert into shares of common stock if such conversion would result in the Holder beneficially owning more that 9.5% of the Company’s outstanding common stock.
Exchange Agreement and Fourth Amendment to Facility Agreement
On February 24, 2020, the Company entered into a February 2020 Exchange Agreement and Fourth Amendment to Amended and Restated Facility Agreement and Amendment to First Out Waterfall Notes (the “Fourth Facility Amendment”) with Deerfield, dated August 9, 2018 (as amended to date, the “Fourth Facility Agreement”). The Facility Amendment provides for, among other things, the conversion of certain portions of the outstanding convertible debt upon the achievement of certain milestones. In addition, 8.333% (or approximately $10.7 million as of February 24, 2020) of the First Out Waterfall Notes currently due on the First Amortization Date (the “First Amortization Payment”) will be extended to July 1, 2021. In the event the Company satisfies the Initial Exchange Condition (as defined below) and provided that the Company reports net revenue of at least $142.5 million for the year ended December 31, 2020 and complies with the global excess liquidity requirement (the “Maturity Extension Conditions”), the maturity date shall be extended from April 2, 2023 to December 22, 2023 and the second amortization date shall be extended from April 2, 2022 to April 2, 2023. Further, the Fourth Facility Agreement provides that the interest payment date due April 1, 2020 will be payable in paid-in-kind interest by increasing the principal amount of the loans by an amount equal to the interest that has accrued.
The Fourth Facility Amendment provides for the exchange of the existing notes representing the First Out Waterfall Notes for amended notes (the “Amended First Out Waterfall Notes”). The Amended First Out Waterfall Notes reduced the Fixed Conversion Price under the existing notes from $6.625 to $2.00 (the “New Fixed Conversion Price”); provided that if the Initial Exchange Condition (as defined below) is not met by June 30, 2020, then such price shall revert to $6.625. The Amended First Out Waterfall Notes provide that the Company may require Deerfield to convert up to $40.0 million of principal amount (the “Forced Conversion Cap”) provided that the arithmetic average of the volume weighted average price of the Company’s common stock on each of the fifteen (15) consecutive trading days ending on the conversion date (the “Forced Conversion 15 Day VWAP”), and the closing price on the conversion date, is greater than 200% of the New Fixed Conversion Price into shares of the Company’s newly created Series DF-1 Preferred Stock, par value $0.001 per share (the “Preferred Stock”), at a price per share equal to the product of (i) the Preferred Exchange Rate (as defined below) and (ii) and 85% of the lesser of the closing
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
price of the common stock on such conversion date (the “Closing Price”) and the Forced Conversion 15 Day VWAP, provided that such lesser price is greater than or equal to 170% of the New Fixed Conversion Price and other conditions are met (each such conversion, a “Forced Conversion”). A Forced Conversion may only occur once every 31 calendar days and any individual Forced Conversion may not exceed the lesser of (i) $3.5 million or (ii) the Forced Conversion Cap less any prior Forced Conversions or Discretionary Conversions (as defined below).
Deerfield also has the option to convert up to $60.0 million (less any amounts converted pursuant to Forced Conversions) of the Company’s outstanding debt (any such conversion, a “Discretionary Conversion”) into, at Deerfield’s option and subject to the Ownership Cap, shares of Common Stock at a rate equal to the greater of the New Fixed Conversion Price and 85% of the 15 Day VWAP, provided that such conversion price is not less than the Floor Price (the “Discretionary Common Conversion Rate”) or shares of Preferred Stock at a rate (the “Discretionary Preferred Conversion Rate”) equal to the product of (i) the Preferred Exchange Rate (as defined below) multiplied by (ii) the Discretionary Common Conversion Rate.
The Preferred Stock is convertible into common stock at an initial rate of 100 shares of common stock for each share of Preferred Stock, as may be adjusted pursuant to the Certificate of Designation of Preferences, Rights and Limitations of Series DF-1 Preferred Stock (the “Certificate of Designation”) (the “Preferred Exchange Rate”). Pursuant to the Certificate of Designation, 1,105,000 shares of Preferred Stock have been authorized for issuance. The Preferred Stock does not possess any voting rights. The Preferred Stock is subject to customary adjustments for stock events. The Preferred Stock provides that in no event may Deerfield convert the Preferred Stock into shares of common stock if such conversion would result in Deerfield beneficially owning more that 4.985% of the Company’s outstanding common stock (the “Ownership Cap”).
The Amended First Out Waterfall Notes also revises Deerfield’s existing right to convert a portion of the outstanding principal amount of the first-out waterfall loan into a maximum of 1,430,000 shares of the Company’s common stock at the current conversion price to Deerfield may, at its option, convert into 1,430,000 shares of common stock at the Discretionary Common Conversion Rate, or the equivalent number of shares of Preferred Stock at the Discretionary Preferred Conversion Rate.
The Fourth Facility Amendment provides that, in the event that on or prior to the ninetieth (90th) day following the receipt of regulatory approval to sell the Company’s Ovation Alto Abdominal Stent Graft System (“Alto”) in the United States, but in any event no later than June 30, 2020, net sales of Alto shall be in excess of $1.0 million (the “Initial Exchange Condition”), Deerfield will exchange 8.333% (or approximately $10.7 million as of February 24, 2020) of the principal amount of the First Out Waterfall Notes, including any such principal that has resulted from payment-in-kind (“PIK”) interest payments made on or prior to such date, plus any accrued PIK interest thereon through such exchange date into shares of Preferred Stock (the “Initial Exchange”) at a rate equal to the Preferred Exchange Rate multiplied by $0.8282 (the “Floor Price”). In addition, upon consummation of the Initial Note Exchange, payment of the remaining portion of the First Amortization Payment will be extended until the Second Amortization Date (as defined in the Facility Agreement) and maturity date in accordance with the Facility Agreement.
In addition, in the event that the Initial Exchange has occurred and the Company completes the first submission to the FDA of a full PMA application with respect to the Nellix EVAS System on or prior to September 30, 2021, Deerfield will exchange $2.5 million into shares of Preferred Stock (the “Nellix Submission Exchange”) at a rate (the “Conditional Exchange Rate”) equal to the product of the (i) Preferred Exchange Rate multiplied by (ii) the 85% of the lesser of (x) the Closing Price and (y) the 15 Day VWAP (the “Conditional Price”). In the event that the Initial Exchange and the Nellix Submission Exchange have occurred and the Company receives the PMA from the FDA with respect to the Nellix EVAS System as shall be necessary for the sale of the Nellix EVAS System in the United States on or prior to June 30, 2022 (the “Nellix Approval Exchange Condition”), Deerfield will exchange $7.5 million into shares of Preferred Stock (the “Nellix Approval Exchange”) at the Conditional Exchange Rate. In the event that the Initial Exchange, the Nellix Submission Exchange and the Nellix Approval Exchange have occurred and net sales of the Nellix EVAS System are in excess of $10.0 million within nine months of satisfaction of the Nellix Approval Exchange Condition, Deerfield will exchange $10.0 million into shares of Preferred Stock (the “Nellix Sales Exchange”) at the Conditional Exchange Rate. Notwithstanding the above, none of the foregoing exchanges shall take place if the Conditional Price at the time of such exchange is less than the Floor Price.
The Fourth Facility Amendment provides that if, during the period beginning on the first business day following satisfaction of the Initial Exchange Condition and ending on the date that is three months thereafter, the Company completes an equity financing resulting in net proceeds to the Company of at least $5.0 million and subject to certain other conditions set forth in the Fourth Facility Amendment, then Deerfield will exchange $0.50 of principal of First Out Waterfall Notes for each $1 of net proceeds up to an aggregate of $20 million in net proceeds into shares of Preferred Stock at a rate equal to the Preferred Exchange Rate multiplied by the lowest price per share of common stock purchased in such financing, provided that
ENDOLOGIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(all tabular amounts presented in thousands, except share, per share and per unit data, and number of years)
such price per share is not less than the Floor Price. Deerfield would also receive the number of such other securities, if any, issued with each share of common stock sold in such financing for each as-converted share of Common Stock issued to Deerfield.
Further, the Fourth Facility Amendment also provides, upon signing, the Company shall pay a restructuring fee of $2.0 million in cash or a combination of shares of common stock at the Floor Price and shares of Preferred Stock at a rate equal to the product of the Floor Price multiplied by the Preferred Exchange Rate. The Company elected to satisfy the fee by issuing 950,000 shares of common stock and 14,648.75 shares of Preferred Stock at signing.
The Fourth Facility Amendment provides that, upon the satisfaction of the Initial Exchange Condition, the Company will amend the outstanding 2017 Deerfield Warrants and 2018 Deerfield Warrants to reduce the exercise price of the Warrants to $1.50. All other material terms and conditions of the 2017 Deerfield Warrants and 2018 Deerfield Warrants remain the same.
The Fourth Facility Amendment also provides that, upon completion of the Initial Note Exchange, the remaining interest payments on the First Out Waterfall Notes will be due monthly. For 18 months beginning with the first calendar month following completion of the Initial Note Exchange the Company will, subject to certain conditions precedent, make such interest payments in shares of Preferred Stock at a rate equal to the product of (i) the Preferred Exchange Rate as of the interest payment date multiplied by (ii) ninety percent (90%) of the lesser of (a) the closing price on the date immediately preceding the interest payment date and (b) the 15 Day VWAP immediately preceding the interest payment date.
Fourth Amendment to Credit Agreement
On February 24, 2020, the Company entered into a Fourth Amendment to Credit Agreement (the “Credit Amendment”) with Deerfield Revolver and certain funds managed by Deerfield Management Company, L.P., dated as of August 9, 2018. The Credit Amendment includes conforming revisions to reflect the changes in the Fourth Facility Amendment. In addition, the Credit Amendment provides that if the Company satisfies the Maturity Extension Conditions, the credit agreement maturity date will extend to the earlier of (i) December 22, 2023 or (ii) the date the loans pursuant to the Facility Agreement have been repaid in full.