Form 8-K EndoChoice Holdings, For: Aug 03

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August 4, 2016 6:10 AM EDT


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
FORM 8-K
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 3, 2016
 
EndoChoice Holdings, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
001-37414
 
90-0886803
(State or other jurisdiction
of incorporation)
 
(Commission
File Number)
 
(I.R.S. Employer
Identification No.)

11405 Old Roswell Road
Alpharetta, Georgia 30009
(Address of principal executive offices) (Zip Code)
(888) 682-3636
(Registrant’s telephone number, including area code)
 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
 
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
 
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
 
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))




ITEM 2.02 — Results of Operations and Financial Condition.
On August 3, 2016, EndoChoice Holdings, Inc. ("EndoChoice") issued a press release announcing its financial results for the quarter ended June 30, 2016. A copy of the press release is furnished herewith as Exhibit 99.1.
The information in this Current Report on Form 8-K, including Exhibit 99.1, shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities under that Section, nor shall it be deemed to be incorporated by reference into any filing of EndoChoice under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.
ITEM 9.01 — Financial Statements and Exhibits.
(d) Exhibits
The following exhibit is furnished with this report on Form 8-K:
99.1    Press release dated August 3, 2016





SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
EndoChoice Holdings, Inc.
 
 
 
 
Date: August 3, 2016
 
 
 
By:
 
/s/ David N. Gill
 
 
 
 
 
 
David N. Gill
 
 
 
 
 
 
President & Chief Financial Officer




EXHIBIT INDEX
Exhibit
Number
  
Description
 
 
99.1
  
Press release dated August 3, 2016.



Exhibit 99.1

EndoChoice Announces Second Quarter 2016 Financial Results
Alpharetta, GA, August 3, 2016 -- EndoChoice Holdings, Inc. (NYSE: GI) announced today financial results for the second quarter 2016.
Highlights
•
Revenue of $19.3 million, up 3.3% year-over-year
•
Pathology revenue up 29% year-over-year, driven by 33% specimen growth
•
Gross margins improve 9% sequentially
•
Launched Generation 3 Fuse® system in May ahead of schedule
•
Lumos™ Adaptive Matrix Imaging received FDA clearance on August 2, 2016
•
Shipped 25 Fuse® Systems
•
Non-cash intangible asset impairment of $12.6 million
•
Updated full year 2016 financial guidance
Mark Gilreath, Founder and Chief Executive Officer of EndoChoice, said: “We remain highly optimistic about the long-term outlook of our business as we continue to provide the most innovative and robust product portfolio to the GI specialist. Our base business of single use products and pathology produced steady growth as well as gross margin improvement driven by a significant volume increase in pathology and new product introductions, particularly among Fuse customers. Second quarter Fuse placements were below our expectations as there was weakness in certain European markets and some domestic customers paused their purchase decisions to evaluate the new Gen 3 product. Our win rates remain strong against market leading competitors and physician feedback on the Gen 3’s new ergonomic design has been incredibly positive. It may take until the end of the third quarter to fully equip our salesforce with the new Gen 3 product, and this delay could impact our Fuse sales in the second half of the year. As a result, we have lowered our full year 2016 guidance, however, we remain confident in our ability to leverage our increasingly tenured sales force and new product launches to achieve our long-term growth objectives”.
Second Quarter 2016 Financial Review
Total revenue for the second quarter 2016 was $19.3 million, compared to $18.6 million in the second quarter 2015, an increase of 3.3%. Second quarter 2016 revenue growth was driven by growth in the pathology business as well as single use products which offset the weaker than expected Fuse® system placements. Second quarter 2016 total revenue consisted of $5.5 million in Imaging, $9.4 million in Single-Use Products, and $4.3 million in Pathology. This compares to second quarter 2015 total revenue, which consisted of $6.1 million in Imaging, $9.2 million in Single-Use Products, and $3.4 million in Pathology.
During the second quarter 2016, the Company shipped 25 Fuse systems, including 15 domestically, 7 to international end-users, and 3 international demo units. This compares to the shipment of 27 Fuse systems in the second quarter 2015, including 15 domestic, 10 to international end-users, and 2 international demo units.
Gross profit was $6.4 million, or 33.4% of revenue, for the second quarter 2016, compared to gross profit of $6.5 million, or 35.0% of revenue, for the second quarter 2015. Second quarter 2016 gross margin was negatively impacted by a $0.5 million obsolescence charge for older versions of Fuse parts which will no longer be used in the Gen 3 Fuse system.
During the second quarter of 2016 and as a result of revised estimates of future performance, an analysis was performed on the recoverability of the intangible assets arising from the 2013 acquisitions of Peer Medical Ltd and RMS Endoskopie-Technik Stephan

1
Exhibit 99.1

Wieth e.K, which created the current Fuse® imaging business. Based on this assessment, the financial results for the quarter ended June 30, 2016 include a pre-tax impairment charge of $12.6 million, resulting in full impairment of the intangible assets remaining net book value as of June 30, 2016.
Operating expenses for the second quarter 2016 were $33.1 million, which includes the $12.6 million of intangible asset impairment. Net of the impairment charge, operating expenses for the second quarter 2016 were $20.5 million, compared to $21.4 million for the second quarter 2015. The decrease was driven by lower general and administrative and research and development expenses, partially offset by higher sales and marketing expenses in response to the increase in the number of Territory Managers and Account Managers in our domestic sales force.
Net loss for the second quarter 2016 was $24.7 million, or ($.99) per share, compared to a net loss of $19.5 million for the second quarter 2015, or ($1.01) per share. Weighted average basic and diluted shares outstanding were 25.0 million for the second quarter 2016.
On a non-GAAP basis, the Company reported an Adjusted EBITDA loss of $10.5 million, or (54.7%) of revenue, for the second quarter 2016, compared to an Adjusted EBITDA loss of $9.6 million, or (51.5%) of revenue, for the second quarter 2015.
Fuse® Generation 3 Launch
On May 19, 2016, EndoChoice announced the full market release of its Generation 3 Full Spectrum Endoscopy® (Fuse®) system. Fuse Generation 3 includes an ergonomically advanced control body, incorporating over 50 system enhancements and a novel Adaptive Matrix Imaging technology called Lumos™ that enables physicians to see more with enhanced clarity.
Financial Guidance
EndoChoice is lowering its financial guidance for the full year 2016:
•
Total revenue in the range of $80.0 million to $82.0 million;
•
Gross margin of 32-33%;
•
Operating expenses, including the impairment charge, in the range of $91.0 million to $92.5 million;
•
Net loss after the $12.6 million of impairment charges, in the range of ($65.0) million to ($66.5) million, or to ($2.59) to ($2.65) per share, assuming 25,100,000 weighted average shares outstanding for the year;
•
Adjusted EBITDA loss in the range of ($38.0) million to ($39.5) million; and
•
Free Cash Flow in the range of ($43.0) million to ($45.0) million and capital expenditures of $7.0 million.
Additional information regarding EndoChoice's results can be found by visiting the Investor Relations section of EndoChoice's website at http://investor.endochoice.com.
Conference Call
EndoChoice will hold a conference call on Wednesday, August 3, 2016 at 4:30 p.m. ET to discuss the results. The dial-in numbers are (877) 328-5344 for domestic callers and (412) 317-5469 for international callers. A live webcast of the conference call will be available on the investor relations section of the Company's website at http://investor.endochoice.com.
A replay of the call will be available starting on August 3, 2016 through August 10, 2016. To access the replay, dial (877) 344-7529 for domestic callers and (412) 317-0088 for international callers, with the replay access code 10083795. The webcast replay will be available in the investor relations section of the Company’s website for 90 days following the completion of the call and a transcript will be posted to the investor relations website.

2
Exhibit 99.1

Forward-Looking Statement
This press release contains “forward-looking statements” as defined under U.S. federal securities laws, including, among other things, statements about our operations and financial performance. Examples of forward-looking statements include, but are not limited to, our projected total revenue, gross margin, operating expense, net loss, Adjusted EBITDA and cash flow for the full year 2016.
Forward-looking statements include all statements that are not historical facts. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on any forward-looking statements in this press release. Factors that could affect these statements include, but are not limited to, our ability to achieve or sustain profitability; general economic, market, or business conditions; the opportunities that may be presented to and pursued by the Company; conditions in the medical technology industry; the ability to generate sufficient cash flow or otherwise obtain funds to repay new or outstanding indebtedness; the ability to successfully commercialize our products, including Fuse®; competition from new or existing competitors; and other risks described from time to time in EndoChoice's filings with the Securities and Exchange Commission ("SEC") (including our Form 10-K for the year ended December 31, 2015 and the prospectus filed by EndoChoice with the SEC on June 5, 2015). The discussion of these risks is specifically incorporated by reference into this press release.
Forward-looking statements are based on currently available information and our current assumptions, expectations and projections about future events. You should not rely on our forward-looking statements. These statements are not guarantees of future performance and are subject to future events, risks and uncertainties - many of which are beyond our control or are currently unknown to us - as well as potentially inaccurate assumptions that could cause actual results to differ materially from our expectations and projections. Except as required by law, we disclaim any obligation to update any forward-looking statements for any reason after the date of this press release.
Use of Non-GAAP Financial Measures
The Company has supplemented its GAAP net loss with a non-GAAP measure of Adjusted EBITDA. Management believes that this non-GAAP financial measure provides useful supplemental information to management and investors regarding the performance of EndoChoice, and provides an additional meaningful comparison of results for current periods with previous operating results, and assists management in analyzing future trends, making strategic and business decisions and establishing internal budgets and forecasts. A reconciliation of the GAAP net loss to EBITDA and Adjusted EBITDA is provided in the schedule below.
There are limitations in using this non-GAAP financial measure because it is not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. This non-GAAP financial measure should not be considered in isolation or as a substitute for GAAP financial measures. Investors and potential investors should consider non-GAAP financial measures only in conjunction with EndoChoice's consolidated financial statements prepared in accordance with GAAP and the reconciliation of the non-GAAP financial measure provided in the schedule below.


3
Exhibit 99.1

About EndoChoice:
Based near Atlanta, EndoChoice (NYSE: GI) is a medtech company focused on the manufacturing and commercialization of platform technologies including endoscopic imaging systems, devices and infection control products and pathology services for specialists treating a wide range of gastrointestinal conditions, including colon cancer. EndoChoice leverages its direct sales organization to serve more than 2,500 customers in the United States and works with distribution partners in 30 countries. The Company was founded in 2008 and has rapidly developed a broad and innovative product portfolio, which includes the Full Spectrum Endoscopy System (Fuse®). EndoChoice, Fuse, and Full Spectrum Endoscopy are registered trademarks of EndoChoice Holdings, Inc.
Company Contact:
David Gill, President & Chief Financial Officer
678-585-1040
Investor Contacts:
Nick Laudico or Zack Kubow
The Ruth Group
646-536-7030 / 7020

4
Exhibit 99.1

EndoChoice Holdings, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
in thousands (except share and per share data)
 
June 30,
2016
 
December 31,
2015
Assets:
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
14,458

 
$
34,033

Short-term marketable securities(1)
 
42,488

 
33,872

Receivables, net
 
10,706

 
9,880

Inventories
 
15,773

 
17,473

Prepaid expenses and other current assets
 
3,240

 
3,108

Total current assets
 
86,665

 
98,366

Long-term marketable securities(1)
 
—

 
19,748

Property and equipment, net
 
12,613

 
11,523

Intangible assets, net
 
—

 
13,819

Goodwill
 
20,323

 
20,105

Deferred income taxes
 
354

 
—

Deposits and other long-term assets
 
768

 
777

Total assets
 
$
120,723

 
$
164,338

Liabilities and Stockholders' Equity:
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
5,956

 
$
8,434

Accrued expenses and other current liabilities
 
8,551

 
9,203

Current portion of deferred rent
 
128

 
85

Deferred revenue
 
768

 
812

Total current liabilities
 
15,403

 
18,534

Long-term debt, net of discount
 
42,696

 
42,643

Deferred rent, less current portion
 
733

 
761

Deferred income taxes
 
—

 
2,493

Other long-term liabilities
 
806

 
614

Total liabilities
 
59,638

 
65,045

Commitments and contingencies
 
 
 
 
Stockholders’ equity:
 
 
 
 
Preferred stock, $0.001 par value per share; 50,000,000 shares authorized; no shares issued and outstanding at June 30, 2016 and December 31, 2015
 
—

 
—

Common stock, $0.001 par value; 150,000,000 shares authorized; 25,173,551 shares issued and outstanding at June 30, 2016; 24,886,516 shares issued and outstanding at December 31, 2015
 
26

 
26

Additional paid-in capital
 
260,493

 
257,384

Accumulated deficit
 
(198,296
)
 
(156,549
)
Accumulated other comprehensive loss
 
(1,138
)
 
(1,568
)
Total stockholders’ equity
 
61,085

 
99,293

Total liabilities and stockholders’ equity
 
$
120,723

 
$
164,338

(1) Marketable securities are comprised of U.S. Treasury, U.S. government agency, commercial paper, and investment-grade corporate debt securities. Short-term marketable securities have a remaining maturity of less than one year, and long-term marketable securities have a remaining maturity of less than two years.


5
Exhibit 99.1

EndoChoice Holdings, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
in thousands (except share and per share data)
 
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
 
 
GI equipment and supplies
 
 
$
14,930

 
$
15,285

 
$
29,344

 
$
29,080

GI pathology services
 
 
4,322

 
3,357

 
8,370

 
6,310

Net revenues
 
 
19,252

 
18,642

 
37,714

 
35,390

Cost of revenues:
 
 
 
 
 
 
 
 
 
GI equipment and supplies
 
 
11,233

 
10,952

 
23,630

 
20,978

GI pathology services
 
 
1,570

 
1,157

 
3,106

 
2,300

Cost of revenues
 
 
12,803

 
12,109

 
26,736

 
23,278

Gross profit
 
 
6,449

 
6,533

 
10,978

 
12,112

Operating expenses:
 
 
 
 
 
 
 
 
 
Research and development
 
 
4,971

 
5,166

 
8,994

 
9,849

Sales and marketing
 
 
8,670

 
7,557

 
18,279

 
15,800

General and administrative
 
 
6,196

 
7,944

 
12,520

 
12,361

Amortization of intangible assets
 
 
699

 
690

 
1,381

 
1,377

Impairment of intangible assets
 
 
12,589

 
—

 
12,589

 
—

Operating expenses
 
 
33,125

 
21,357

 
53,763

 
39,387

Operating loss
 
 
(26,676
)
 
(14,824
)
 
(42,785
)
 
(27,275
)
Other income (expense):
 
 
 
 
 
 
 
 
 
Other income (expense)
 
 
130

 
(598
)
 
294

 
(1,631
)
Interest expense
 
 
(1,150
)
 
(1,503
)
 
(2,297
)
 
(3,094
)
Loss on early retirement of debt
 
 
—

 
(2,282
)
 
—

 
(2,282
)
Total other expense
 
 
(1,020
)
 
(4,383
)
 
(2,003
)
 
(7,007
)
Net loss before income taxes
 
 
(27,696
)
 
(19,207
)
 
(44,788
)
 
(34,282
)
Income tax benefit (expense)
 
 
3,011

 
(280
)
 
3,041

 
(479
)
Net loss
 
 
(24,685
)
 
(19,487
)
 
(41,747
)
 
(34,761
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
(1,081
)
 
1,796

 
301

 
1,056

Change in fair value of available-for-sale securities
 
14

 
—

 
129

 
—

Other comprehensive income (loss)
 
 
(1,067
)
 
1,796

 
430

 
1,056

Comprehensive loss
 
 
$
(25,752
)
 
$
(17,691
)
 
$
(41,317
)
 
$
(33,705
)
Net loss per share attributable to common stockholders, basic and diluted
 
$
(0.99
)
 
$
(1.01
)
 
$
(1.67
)
 
$
(2.01
)
Weighted-average shares of common stock used to compute net loss per share attributable to common stockholders, basic and diluted
25,030,906

 
19,300,197

 
24,993,954

 
17,320,472



6
Exhibit 99.1

EndoChoice Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended
June 30,
in thousands
2016
 
2015
Cash flows from operating activities:
 
 
 
Net loss
$
(41,747
)
 
$
(34,761
)
Adjustments to reconcile net loss to net cash used in operations:
 
 
 
Impairment of intangible assets
12,589

 
—

Depreciation and amortization
4,501

 
4,027

Stock-based compensation
2,590

 
3,501

Loss on disposal of property and equipment
30

 
227

Non-cash interest expense and discount amortization
189

 
475

Amortization of premium on marketable securities, net
336

 
—

Change in fair value of warrant liability
—

 
435

Provision for doubtful accounts
705

 
588

Unrealized foreign currency (gain) loss
(288
)
 
952

Deferred income tax (benefit) expense
(2,989
)
 
176

Loss on early retirement of debt
—

 
2,282

Loss on impairment of property and equipment
423

 
912

Changes in certain working capital components and other assets and liabilities:
 
 
 
Accounts receivable
(1,473
)
 
(467
)
Inventories
1,964

 
875

Prepaid expenses and other current assets
(110
)
 
(432
)
Other assets
163

 
299

Accounts payable, accrued expenses, and other liabilities
(3,261
)
 
2,350

Net cash used in operations
(26,378
)
 
(18,561
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(4,604
)
 
(2,555
)
Proceeds from maturities of marketable securities
10,925

 
—

Net cash provided by (used in) investing activities
6,321

 
(2,555
)
Cash flows from financing activities:
 
 
 
Proceeds from term loan
—

 
43,000

Principal payments on term loan
—

 
(40,000
)
Prepayment and end of term fees for early retirement of debt
—

 
(2,306
)
Payments for debt financing fees
—

 
(417
)
Payments of contingent consideration
(50
)
 
—

Proceeds from issuance of member units, net
—

 
31,000

Proceeds from issuance of common stock in initial public offering, net of issuance costs
—

 
94,460

Proceeds from issuance of common stock under ESPP
486

 
—

Proceeds from option exercises
28

 
71

Net cash provided by financing activities
464

 
125,808

Effect of exchange rate changes on cash and cash equivalents
18

 
6

Net (decrease) increase in cash and cash equivalents
(19,575
)
 
104,698

Cash and cash equivalents, beginning of period
34,033

 
13,761

Cash and cash equivalents, end of period
$
14,458

 
$
118,459

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
2,096

 
$
2,824

Income taxes
$
35

 
$
6


7
Exhibit 99.1

EndoChoice Holdings, Inc.
Reconciliation of Net Loss to EBITDA and Adjusted EBITDA
(Unaudited)
 
  
Three Months Ended
June 30,
 
Six Months Ended
June 30,
in thousands
  
2016
 
2015
 
2016
 
2015
Net loss
  
$
(24,685
)
 
$
(19,487
)
 
$
(41,747
)
 
$
(34,761
)
Adjustments to net loss:
  
 
 
 
 
 
 
 
Interest expense
  
1,150

 
1,503

 
2,297

 
3,094

Income tax (benefit) expense
  
(3,011
)
 
280

 
(3,041
)
 
479

Impairment of property and equipment
 
—

 
—

 
423

 
912

Impairment of intangible assets
  
12,589

 
—

 
12,589

 
—

Depreciation and amortization
 
2,168

 
1,926

 
4,501

 
4,027

EBITDA(1)
  
$
(11,789
)
  
$
(15,778
)
 
$
(24,978
)
 
$
(26,249
)
Stock-based compensation expense
 
1,253

 
3,496

 
2,590

 
3,501

Warrant liability mark-to-market adjustment
 
—

 
407

 
—

 
435

Loss on early retirement of debt
 
—

 
2,282

 
—

 
2,282

Adjusted EBITDA(2)
  
$
(10,536
)
  
$
(9,593
)
 
$
(22,388
)
 
$
(20,031
)
(1) We define EBITDA as net loss plus interest expense, income tax expense, impairment of property and equipment, impairment of intangibles, and depreciation and amortization.
(2) We define adjusted EBITDA as net loss plus interest expense, income tax expense, impairment of property and equipment, impairment of intangibles, depreciation and amortization, stock-based compensation expense, warrant liability mark-to-market adjustments, and loss on early retirement of debt.

8

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