TriVascular Merger

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



Cash consideration	$	84,634
Common stock consideration	100,812
Fair value of assumed TriVascular stock warrants	44
Total purchase consideration	$	185,490

Common stock consideration consisted of 13,586,503 shares of Endologix common stock, worth $100.8 million based on the market value of $7.42 per share as of the effective date of the Merger on February 3, 2016.

In connection with the Merger, the Company assumed stock warrants, originally issued by TriVascular, and converted them to Endologix stock warrants. The fair value of the stock warrants represents a component of the total consideration for the Merger. Stock warrants assumed were valued using the Black-Scholes option pricing model as of the effective date of the Merger.

The acquisition was recorded by allocating the costs of the net assets acquired based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. The fair values were based on management’s analysis, including work performed by third-party valuation specialists. The following presents the preliminary allocation of the purchase consideration to the assets acquired and liabilities assumed on February 3, 2016 (in thousands):



Cash and cash equivalents	$	24,012
Short-term investments	3,008
Accounts receivable	5,563
Inventories	17,808
Prepaid expenses and other current assets	1,895
Property and equipment	3,152
Intangible assets	46,200
Other assets	317
Accounts payable	(2,214		)
Accrued liabilities and other	(6,175		)
Notes payable	(61		)
Net assets acquired	$	93,505
Goodwill	$	91,985
Total preliminary purchase consideration	$	185,490

Any changes in the estimated fair values of the net assets recorded for this business combination upon the finalization of more detailed analyses of the facts and circumstances that existed at the date of the transaction will change the allocation of the purchase price. Any subsequent changes to the purchase allocation during the measurement period that are material will be recorded in the reporting period in which the adjustment amounts are determined in accordance with ASU 2015-16.

The goodwill is primarily attributable to strategic opportunities that arose from the acquisition of TriVascular, such as broadening the product portfolio for the treatment of AAA and leveraging the combined company’s technology and commercial capabilities. The goodwill is not expected to be deductible for tax purposes. The changes in the carrying amount of goodwill for the six months ended June 30, 2016 are as follows (in thousands):



Balance at January 1, 2016	28,685
Goodwill acquired from the Merger	91,985
Foreign currency translation adjustment	23
Balance at June 30, 2016	$	120,693

During the quarter ended June 30, 2016, the Company revised the opening net assets acquired and goodwill by $26,996 thousand, which comprised of the following: an increase in inventories of $262 thousand; an increase in prepaid expenses and other current assets of $77 thousand; and an increase in accrued liabilities and other of $364 thousand as a result of gathering additional information during the measurement period. The Company also revised the initial values of intangible assets by decreasing them $26,971 thousand as a result of switching from utilizing publicly available benchmarking information to determine the fair value of the intangible assets to primarily utilizing an income method based on forecasts of expected future cash flows. During the three months ended June 30, 2016, the Company recorded an adjustment to the amortization of intangible assets of $266 thousand, comprising of a $217 thousand and $49 thousand decrease within cost of goods sold and marketing and sales expense, respectively, in the Condensed Consolidated Statement of Operations and Comprehensive Loss, that would have been recorded during the three months ended March 31, 2016, if the adjustment to the intangible assets had been recognized as of the date of the Merger.

Trade receivables and payables, as well as other current and non-current assets and liabilities, were valued at the existing carrying values as they represented the fair value of those items at the acquisition date, based on management’s judgments and estimates. Trade receivables included gross contractual amounts of $5.9 million and our best estimate of $0.3 million which represents contractual cash flows not expected to be collected at the acquisition date.

The fair value of property, plant and equipment utilized a combination of the cost and market approaches, depending on the characteristics of the asset classification. Of the $46.2 million of acquired intangible assets, $7.5 million was assigned to customer relationships (10 year life), $27.5 million was assigned to developed technology (11 year life), and $11.2 million was assigned to in-process research and development.

Due to the fact that the TriVascular acquisition has just recently occurred in the current interim period, the magnitude of the transaction, and the significant information to be obtained and analyzed, some of which resides in foreign jurisdictions, the Company’s fair value estimates for the purchase price allocation are preliminary and may change during the allowable measurement period, which is up to the point the Company obtains and analyzes the information that existed as of the date of the acquisition necessary to determine the fair values of the assets acquired and liabilities assumed, but in no case to exceed more than one year from the date of acquisition. As of June 30, 2016, the Company had not finalized the determination of fair values allocated to property, plant and equipment, identifiable intangible assets, inventory, other assets, deferred taxes, goodwill, tax uncertainties, income taxes payable, and other liabilities. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in material adjustments to goodwill.

Pro Forma Condensed Combined Financial Information (Unaudited)

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



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
Pro forma net sales	$	50,974		$	49,211		$	96,011		$	93,907
Pro forma net loss from continuing operations	(63,054		)	(28,794		)	(112,085		)	(57,417		)
Pro forma basic and diluted net loss per share	$	(0.77	)	$	(0.35	)	$	(1.37	)	$	(0.71	)

Included in the Condensed Consolidated Statement of Operations and Comprehensive Loss are net sales from products acquired as part of the TriVascular merger of $11.4 million and $17.2 million for the three and six months ended June 30, 2016, respectively. Net losses included in the Condensed Consolidated Statement of Operations and Comprehensive Loss from the TriVascular operations for the three and six months ended June 30, 2016 have not been reported as it is impracticable to do so given the integration and other efficiency and cost saving measures in process during the six months ended June 30, 2016.