Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.01 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ☐ No ☒
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days: Yes ☒ No ☐
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files): Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act): ☐ Yes ☒ No
The aggregate market value of the registrants common stock, in the form of CHESS Depositary Interests, or CDIs, held by non-affiliates of
the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate), computed by reference to the price at which the CDIs were last sold on June 30, 2016, the last business day of the
registrants most recently completed second fiscal quarter, as reported on the Australian Securities Exchange, was $8,475,047 (A$11,412,668).
As of March 15, 2017 there were 11,157,489 shares of common stock outstanding.
Portions of the definitive proxy statement for our 2017 Annual Meeting of Stockholders are incorporated by reference into
Part III of this report.
As a company with less than $1.0 billion in revenue during our most recently completed fiscal year, we qualify as an
emerging growth company as defined in Section 2(a) of the Securities Act of 1933, as amended, which we refer to as the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging
growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable, in general, to public companies that are not emerging growth companies. These provisions include:
We may take advantage of these exemptions for up to five years or such earlier time that we
are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenues as of the end of a fiscal year, if we are deemed to be a large-accelerated filer under the rules of
the Securities and Exchange Commission, or the SEC, or if we issue more than $1.0 billion of
non-convertible
debt over a three-year-period.
The JOBS Act permits an emerging growth company to take advantage of an extended transition period to comply with new or
revised accounting standards applicable to public companies. We are choosing to opt out of this provision.
In some cases, you can identify forward-looking statements by terms such as may, will,
should, could, would, expects, plans, anticipates, believes, estimates, projects, predicts, aims,
assumes, goal, intends, objective, potential, positioned, target, continue, seek and similar expressions intended to identify forward-looking
statements.
These forward-looking statements are based on current expectations, estimates, forecasts and projections about
our business and the industry in which we operate and our managements beliefs and assumptions. These forward-looking statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and
other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Annual Report on Form
10-K
may later become inaccurate. We may not actually achieve
the plans, intentions or expectations disclosed in our forward-looking statements, and actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included
important factors in the cautionary statements included in this Annual Report on Form
10-K,
particularly in the Risk Factors section, that could cause actual results or events to differ materially
from the forward-looking statements that we make.
You are urged to consider these factors carefully in evaluating the forward-looking
statements and are cautioned not to place undue reliance on the forward-looking statements. You should read this Annual Report on
Form 10-K
and the documents that we have filed as exhibits to our Form
10-K
completely and with the understanding that our actual future results may be materially different from what we expect. These forward-looking statements speak only as at the date of this Annual Report on Form
10-K.
Unless required by law, we do not intend to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. You should, however, review the factors and risks
we describe in the reports we will file from time to time with the SEC after the date of this Annual Report on Form
10-K.
Unless the context requires otherwise, references in this Annual Report on Form
10-K
to GI Dynamics,
the Company, we, us and our refer to GI Dynamics, Inc. and its consolidated direct and indirect subsidiaries.
Overview
GI Dynamics
®
is a medical device company focused on the development
and commercialization of EndoBarrier, a medical device indicated for treatment of patients with type 2 diabetes and obesity.
Diabetes mellitus type 2 (also known as type 2 diabetes) is a long-term progressive metabolic disorder characterized by high
blood sugar, insulin resistance, and reduced insulin production. People with type 2 diabetes represent 90% of the worldwide diabetes population, whereas 10% of this population is diagnosed with type 1 diabetes (a form of diabetes mellitus in which
not enough insulin is produced).
Being overweight is a condition where the patients body mass index (BMI) is greater
than 25 (kg/m
2
); obesity is a condition where the patients BMI is greater than 30. Obesity and its comorbidities contribute to the progression of type 2 diabetes. Many experts believe
obesity contributes to higher levels of insulin resistance, which creates a feedback loop that increases the severity of type 2 diabetes.
When considering treatment for type 2 diabetes, it is optimal to address obesity concurrently with diabetes.
EndoBarrier
®
is the only medical device approved for the
treatment of both type 2 diabetes and obesity.
The current treatment paradigm for type 2 diabetes is
pharmacological, whereby treating clinicians prescribe a treatment regimen of one to four concurrent medications that could include insulin for patients with higher levels of blood sugar. Insulin carries a significant risk of increased mortality and
directly contributes to weight gain, which in turn leads to higher levels of insulin resistance and diabetes. In other words, the primary drug used to treat severe type 2 diabetes raises risk significantly and increases the downstream progression of
the disease by increasing obesity. Fewer than 50% of patients treated pharmacologically for type 2 diabetes are adequately managed, meaning that medication does not halt the progressive nature of diabetes.
The current pharmacological treatment algorithms for type 2 diabetes fall short of ideal, creating a large and unfilled
treatment gap.
Our vision is to make EndoBarrier
the
essential nonpharmacological and non anatomy-altering treatment for patients with type 2 diabetes and obesity. We intend to achieve this vision by providing a safe and effective device, focusing on optimal patient care, supporting treating
clinicians, adding to the extensive body of clinical evidence around EndoBarrier, gaining appropriate regulatory approvals, continuing to improve our products and systems, operating the company in a lean fashion, and maximizing shareholder value.
EndoBarrier is the only proven, incision-free,
non-anatomy-altering
medical device
designed to specifically mimic the mechanism of action of duodenal-jejunal exclusion created by gastric bypass surgery. EndoBarrier has three label indications outside the United States:
|
|
|
Type 2 diabetes with BMI
³
30 kg/m
2
|
|
|
|
Obese patients with BMI
³
30 kg/m
2
with
³
1
co-morbidities
|
|
|
|
Obese patients with BMI > 35 kg/m
2
|
6
The EndoBarrier system consists of three primary components:
|
|
|
EndoBarrier
The EndoBarrier gastrointestinal liner is a
60-cm-long
implant consisting of a thin, flexible, impermeable fluoropolymer sleeve coupled to a proprietary nitinol anchor assembly. A gastroenterologist (GI clinician)
or bariatric or metabolic surgeon implants EndoBarrier into the patients duodenum in a minimally invasive manner using the EndoBarrier Delivery System. EndoBarrier is placed via endoscopy (through the mouth and esophagus and into the stomach
without cutting tissue) during a procedure that typically takes less than twenty minutes. Once properly positioned in the patients upper intestine just below the stomach, the EndoBarrier Delivery System is removed and EndoBarrier remains, held
in place by a proprietary anchoring mechanism. EndoBarrier remains in the body for a maximum intended duration of twelve months until removal, again via a minimally invasive endoscopic procedure using the EndoBarrier Removal System. The effect of
EndoBarrier begins promptly after device placement.
|
|
|
|
EndoBarrier Delivery System
EndoBarrier is delivered using our proprietary
single-use
delivery system. This includes a sterile custom-made catheter 300 cm in length that is sufficiently flexible to be passed through the patients mouth, through the stomach, and into the intestine.
EndoBarrier is provided prepacked in the EndoBarrier Delivery System inside a capsule at the distal end of the delivery catheter. EndoBarrier is deployed by the clinician using the delivery system controls at the proximal end of the system. The
delivery procedure is brief, typically taking less than twenty minutes, during which the patient is either anaesthetized or semisedated.
|
|
|
|
EndoBarrier Removal System
EndoBarrier is removed at the end of the treatment period
via a minimally invasive endoscopic procedure using our proprietary grasper which passes through a standard gastroscope. The grasper is used to pull one of two drawstrings that connect to the EndoBarrier anchor assembly to collapse the anchor
inward. As the drawstring is pulled, EndoBarrier collapses inward and the anchor system disengages from the wall of the duodenum. The retrieval hood, placed on the end of a gastroscope, allows the EndoBarrier anchor assembly to be pulled and
collapsed into the hood and positioned to cover the anchor. The implant is then safely removed through the patients stomach, esophagus, and mouth. The EndoBarrier device is usually retrieved in a brief procedure typically taking less than
twenty minutes, during which the patient is either anaesthetized or semisedated.
|
EndoBarrier has been
shown in multiple company-sponsored and independent clinical studies to lower blood sugar levels (hemoglobin A1c or HbA1c), reduce excess body weight, and positively affect other health metrics and comorbidities.
EndoBarrier is approved and commercially available in multiple countries outside the United States, including in Europe, the
Middle East, and South America.
7
In the United States, we must seek agreement from the FDA to conduct a clinical
study under an investigational device exemption (IDE). To gain regulatory approval to commercialize EndoBarrier in the United States, we must submit a
pre-market
authorization (PMA) application for review and
approval by the FDA.
Operations
We began selling EndoBarrier in Europe and South America in 2010 and in Australia in 2011. To date, we have distributed over
3,500 EndoBarriers and generated a total of $7.8 million in revenue. We have incurred net losses in each year since our inception.
We were incorporated in Delaware in 2003. We have raised net proceeds of approximately $232.6 million through sales of our
equity. We generated $75.7 million in proceeds, net of expenses, through the sale of convertible preferred stock to a number of US venture capital firms, two global medical device manufacturers, and individuals prior to going public. In June
2011, we issued convertible term promissory notes to several of our shareholders totaling $6.0 million, which were repaid concurrently with the closing of our IPO in September 2011 with the associated gross proceeds. In September 2011, we
raised approximately $72.5 million, net of expenses, and repaid $6.0 million of convertible term promissory notes in our IPO in Australia and simultaneous private placement of Chess Depository Interests (CDIs) to accredited investors in
the United States. In connection with the IPO, all our existing shares of preferred stock were converted into common stock.
In July and August 2013, we raised approximately $52.5 million, net of expenses, in an offering of our CDIs to
sophisticated, professional, and accredited investors in Australia, the United States, and certain other jurisdictions. In May 2014, we raised approximately $30.8 million, net of expenses, in an offering of our CDIs to sophisticated,
professional, and accredited investors in Australia, Hong Kong, the United Kingdom, and certain other jurisdictions.
In
December 2016, we raised approximately $1.0 million, net of expenses, in an offering of our CDIs to sophisticated and professional investors in Australia and certain other jurisdictions. In January 2017, we raised approximately
$0.2 million, net of expenses, in an offering of our CDIs to eligible shareholders under a Security Purchase Plan (SPP) available to security holders with registered addresses in Australia or New Zealand.
We will continue to seek additional capital to fund the companys operations as the situation dictates. Future financing
may take the form of a number of different options as the management team seeks the best solutions for our corporate needs, clinical support of EndoBarrier, and our shareholders.
We are headquartered in Boston, Massachusetts, where the majority of the companys employees work. We have employees and
subsidiaries in the Netherlands, Germany, and Australia.
We are in the process of validating a contract manufacturer who
will manufacture EndoBarrier. This is a result of eighteen months of joint effort with a world-class contract manufacturer in Mansfield, Massachusetts.
The rights of our shareholders are governed by Delaware general corporation law. We have five subsidiaries: GI Dynamics
Securities Corporation, a Massachusetts-incorporated nontrading entity; GID Europe Holding B.V., a Netherlands-incorporated nontrading holding company; GID Europe B.V., a Netherlands-incorporated company that conducts certain of our European
business operations; GID Germany GmbH, a German-incorporated company that conducts certain of our European business operations; and GI Dynamics Australia Pty Ltd, an Australia-incorporated company that conducts our Australian business operations.
We will need to raise additional capital in 2017.
For the year ended December 31, 2016, we had revenue of approximately $0.5 million, and our net loss was
approximately $13.1 million. Our accumulated deficit as of December 31, 2016, was approximately $248.2 million. As of December 31, 2016, we had approximately $8.3 million of cash and cash equivalents. See Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources for further information regarding our funding requirements.
8
Market Opportunity
Unmet Clinical Needs in the Treatment of Type 2 Diabetes and Obesity
The International Diabetes Federation (2015) estimates there are 415 million adults with diabetes worldwide, with
~90% diagnosed with type 2 diabetes. Diabetes is the leading cause of cardiovascular disease, kidney failure, blindness, and lower-limb amputation in almost all high-income countries.
Three years after initial diagnosis, over half of patients with type 2 diabetes require multiple drug therapies; studies show
that less than 50% of the type 2 diabetes population is adequately managed pharmacologically. At ten years postdiagnosis, most patients, despite insulin use in many, struggle to reach their hemoglobin A1c (HbA1c) treatment goals. HbA1c is a
glycosylated hemoglobin molecule found in the bloodstream that is formed when red blood cells are exposed to blood glucose. HbA1c has become the generally accepted gold standard biomarker for measuring levels of diabetes control in clinical practice
and in human trials.
Many patients and health care systems struggle to meet the financial burden imposed by the numerous
concurrent medications required to attempt to control the progressive nature of type 2 diabetes.
According to the World
Health Organization (2014), more than 1.9 billion adults 18 and older were overweight. Of these, 600 million people worldwide were considered obese (BMI
³
30 kg/m
2
), a condition often leading to serious health consequences such as cardiovascular disease, diabetes, musculoskeletal disorders, and some cancers.
Those suffering from both type 2 diabetes and obesity total more than 169 million worldwide, representing one of the
largest health care market issues and opportunities in the world. We believe that the unchecked worldwide rate of growth of the type 2 diabetes and obesity patient population presents one of the greatest unmanaged health risks in all of health care.
We believe EndoBarrier is the only new treatment with a proven clinical profile that can treat patients with type 2
diabetes and obesity in a safe, effective, nonpharmacological, and nonpermanent procedural manner.
The Treatment Gap
Our intent in developing, seeking regulatory approval, and marketing EndoBarrier is to help clinicians deliver a unique
treatment option in a disease state that sorely lacks innovative new treatment options: the type 2 diabetes and obesity clinical space.
9
We and our scientific advisors feel there must be a seismic shift in how the
medical establishment currently treats patients suffering from type 2 diabetes and obesity. We believe current treatment options fall well short of treating the disease. The number of patients progressing to later stages of type 2 diabetes and
obesity continues to grow at an alarming rate. Yet less than half of all type 2 diabetes patients are adequately managed by pharmacotherapy, and insulin carries serious risks and contributes to further progression of obesity. At the extreme end of
the treatment spectrum, the treatment options are limited to different types of bariatric or metabolic surgery, which are highly invasive procedures. Less than 2% of patients who are eligible for bariatric or metabolic surgery opt to undergo the
procedure.
The graphic above illustrates the multiple treatment options along the course of progression
of type 2 diabetes:
|
|
|
Risk associated with treatment increases from left to right.
|
|
|
|
Progression of diabetes and obesity increases on a vertical axis from left to right.
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|
Lifestyle, diet, and exercise are the first line of defense against the progression of type 2 diabetes and
obesity.
|
|
¡
|
|
Oral monotherapy is next, often with metformin as the first line of treatment.
|
|
¡
|
|
Multiple combinations may then be administered, as recommended by the American Diabetes Association.
|
|
¡
|
|
Ultimately, as disease progression continues, injected insulin may be prescribed.
|
10
|
|
|
Bariatric or metabolic gastric bypass surgery represents the final option.
|
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|
A significant and rapidly growing patient population falls into the treatment gap, where the patient is
inadequately managed by medication yet unwilling to undergo gastric bypass.
|
The type 2 diabetes
and obesity treatment gap is widening at an alarming rate.
We believe that neither pharmacotherapy nor
gastric bypass surgery adequately treat the disease.
More alarming is that for many patients who elect to undergo
bariatric or metabolic surgery, the clinical gains are not permanent, but the exposure to risk associated with the procedure is. The fastest growing area of bariatric and metabolic surgery is revisional bariatric/metabolic intervention (RBMI)
surgery, which carries an even higher rate of complications and risk.
We believe a solution is desperately needed to fill
this treatment gap.
EndoBarrier Value Proposition
Our intent in developing EndoBarrier is to offer an alternative to pharmacotherapy, especially insulin, and an alternative to
bariatric or metabolic surgery.
Obesity exacerbates insulin resistance and worsens type 2 diabetes. In situations where
lifestyle modification and pharmacotherapy have failed and surgery is not an option or is considered a therapy of last resort, EndoBarrier is a proven solution intended to break the pathogenic relationship between type 2 diabetes and obesity. In
clinical trials in both the United States and outside of the United States (OUS), EndoBarrier has been shown to:
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Significantly improve glucose levels
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Significantly lower body weight
|
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Lower cardiovascular-related risks
|
EndoBarrier accomplishes this by affecting key hormones involved in insulin sensitivity, glucose metabolism, satiety, and food
intake. (See section The EndoBarrier Mechanism of Action.)
11
Our intent in positioning EndoBarrier to fill the treatment gap is to help
patients and clinicians avoid the initiation of insulin therapy by helping patients maintain lower HbA1c levels and slowing the progression of type 2 diabetes. Furthermore, for those patients whose type 2 diabetes has progressed to the point where
insulin therapy is necessary, we hope EndoBarrier will reduce HbA1c levels to the point where insulin is no longer needed. Finally, if the progression of type 2 diabetes is severe enough to warrant gastric bypass surgery, we hope that EndoBarrier
may serve as an opportunity to control type 2 diabetes so that surgery may not be needed, or at least better prepare the patient for bariatric surgery by lowering weight and helping control other comorbidities prior to surgery.
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Our goal:
|
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EndoBarrier Value Proposition:
|
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One solution
With EndoBarrier, patients with type 2 diabetes and
obesity may control their glucose levels and weight with one procedure.
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Incision-free procedure, does not alter anatomy
Brief, minimally invasive implantation
and removal procedures that do not involve the cutting of any tissue or permanent anatomical alterations are far less invasive than bariatric or metabolic procedures and therefore may be more acceptable to patients.
|
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Reduces and helps control HbA1c
Multiple studies have shown that EndoBarrier reduces
HbA1c in a clinically meaningful manner.
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Reduces and helps control body weight
Multiple studies have shown that EndoBarrier
reduces weight in a clinically meaningful manner.
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Simple procedure
The procedure is minimally invasive and fully reversible, usually
takes less than twenty minutes, and may be conducted under general anesthesia or conscious sedation.
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EndoBarrier is safe
EndoBarrier is currently the only treatment for type 2 diabetes
without an established mortality rate.
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Economically viable
An EndoBarrier procedure may significantly reduce costs associated
with pharmacotherapy and costs of treating comorbidities. EndoBarrier is significantly less expensive than a single gastric bypass procedure, which becomes more expensive considering the revision rate and cost associated with RBMIs.
|
We and our scientific advisory board (SAB) are dedicated to furthering the scientific and clinical
understanding of EndoBarrier, associated mechanisms of action, and the target disease states.
How EndoBarrier Works: EndoBarrier Mechanism of Action
EndoBarriers mechanism of action is widely accepted based on its functional similarities to
Roux-en-Y
gastric bypass surgery (RYGB). Clinical data suggest that once the EndoBarrier is implanted into the duodenum and proximal jejunum, ingested food passing through the
EndoBarrier during the normal digestive process is prevented from interacting with the epithelium, microbiota, mucosal layer, or biliopancreatic secretions within the duodenum and proximal jejunum. The EndoBarrier acts as a physical barrier that
prevents the interaction of food with pancreatic enzymes and bile. Pancreatic enzymes and bile pass outside EndoBarrier and mix with the food at the distal end of the liner, where absorption ultimately takes place in the intestine. Thus, EndoBarrier
creates a functional but reversible bypass of the upper intestine. Unlike
Roux-en-Y
gastric bypass surgery,
12
EndoBarrier does not require an invasive and permanent surgical procedure or permanent physical modification of the stomach and exclusion of the distal stomach from the alimentary flow.
Our scientific team and advisors have postulated the following EndoBarrier mechanisms of action:
|
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Decreased caloric intake
Studies have demonstrated that patients with EndoBarrier,
aided by increased satiety from
GLP-1,
eat less and feel full longer, leading to a decrease in caloric intake.
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Exclusion of the duodenum
This may offset an abnormality of gastrointestinal
physiology responsible for insulin resistance and type 2 diabetes.
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Increased nutrient delivery to the distal small bowel
Additional findings suggest that
the exclusion of the proximal intestine (foregut theory) and increase in nutrient delivery to the distal small bowel (hindgut theory) created by EndoBarrier likely induce neuro-hormonal changes and nutrient sensing that affect energy balance and
glucose homeostasis.
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Secretion of
GLP-1
Partially digested
nutrients reach the distal ileum, which stimulates the secretion of
GLP-1
by
L-cells
located in this area.
GLP-1
is known to
regulate insulin secretion and action.
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Increase in gut hormones
This contributes to the restoration of energy and glucose
homeostasis.
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Elevated
GLP-1
and PYY levels
Both levels are
elevated as quickly as one week post-implantation. Both hormones may play a role in satiety and body weight control.
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Increased levels of bile acids
This stimulates thermogenesis and gut hormone
secretions.
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Improved islet function
Data suggest that pancreatic islet function is improved,
affecting both insulin and glucagon secretion, positively affecting blood glucose levels. This shift to more favorable pancreatic islet function may be explained in part by the increase in the incretin hormone
GLP-1
(as noted above) because this beneficial effect is well documented (i.e., a fundamental mechanism of both DPP4 inhibitor and
GLP-1
receptor agonist
pharmacologies).
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Intestinal flora
EndoBarrier may positively alter intestinal flora.
|
There is no known evidence of significant malabsorption of ingested calories with the EndoBarrier
device. EndoBarrier covers only 60 cm of duodenal and proximal jejunal mucosa, which represents less than 15% of the length of the small intestine and leaves almost the entire jejunum and ileum for digestion and absorption.
2016 in Review
For
us, 2016 was a year focused on stabilizing the Company and rebooting operations by significantly reducing cash burn, making wholesale changes to management and the employee base, addressing difficult legacy issues across multiple areas, supporting
OUS commercial goals, and
re-engaging
with the FDA.
The company appointed three
new executives to help stabilize and rebuild. The new team consists of a chief executive officer, chief financial officer, and chief compliance officer who have significant experience in corporate turnarounds and revitalizing distressed assets. They
in turn have recruited highly experienced professionals who have been engaged since of the second quarter of 2016 with the sole purpose of rebuilding GI Dynamics and continuing to support EndoBarrier as a critical treatment option for clinicians and
patients in the markets we serve.
The new team has conducted a thorough review of all available EndoBarrier safety and
efficacy data as a first priority to ensure the device is safe and effective. This included hiring an independent consulting team with significant risk management, biostatistical, and quality management system experience to evaluate all major risks
of EndoBarrier as well as the EndoBarrier efficacy profile. In addition, multiple new analyses of EndoBarrier were conducted, including a process optimization effort aimed at documenting the best practices from the most successful high-volume
clinicians around the world and DNA analysis of explanted EndoBarriers.
13
We have retained numerous experienced clinicians who have served as clinical
experts to provide feedback with regard to any instructions for use (IFU) or label changes to EndoBarrier, including modifications to recommended medication, patient selection, and patient monitoring.
Given this comprehensive review, the team has concluded that EndoBarrier is a safe and effective device. We will continue to
analyze and work to more fully understand the benefit: risk profile of EndoBarrier and how best to optimally utilize the device.
We believe EndoBarrier to be a safe and effective device that fills a growing treatment gap in a unique manner.
The new leadership team undertook a comprehensive restructuring of every expense and major contract with the goal
of reducing burn as rapidly as possible. The company restructured or replaced contracts with all major service providers and closed out all activities related to the pivotal trial in the United States, the ENDO clinical trial. The company ended its
lease and moved out of its Lexington, Massachusetts, facility to a new facility in Boston, Massachusetts, which is significantly less expensive and offers a greater opportunity to attract new hires.
The changes to the leadership, employee base, and systems of the company are evidence of a comprehensive cultural change at GI
Dynamics that will continue to evolve through 2017 and beyond. The company is operating with a high level of focus on accountability. When the new leadership team joined GI Dynamics at the end of Q1 2016, the following areas of focus were
communicated. The results of the new teams focus on these areas are captured here.
Corporate priorities for 2016, communicated on Q1 2016
shareholder call on 12 May 2016 (AEST):
|
1.
|
Modify cost structure.
|
|
3.
|
Develop clinical data and core science.
|
|
4.
|
Focus revenue efforts.
|
|
5.
|
Improve regulatory relationships.
|
By the end of 2016, the following results
were achieved:
|
1.
|
Modify cost structure.
|
Decreased cash used in operations from 2015 by
over 60%.
Reduced quarterly burn from approximately $4.8 million in Q4 of 2015 to approximately $2.5 million in
Q4 of 2016.
Analyze every line item of spending on a monthly basis. Replaced every large vendor with a less expensive and
more appropriate service provider.
New leadership team.
Completely reworked team; hired new experienced professionals. Retained core team where appropriate.
|
3.
|
Develop clinical data and core science.
|
Multiple clinical studies
announced data in 2016.
Conducted thorough analysis of clinical data and risk and safety data.
|
4.
|
Focus revenue efforts.
|
Redoubled efforts supporting reimbursement in
the United Kingdom and Germany.
Retained key accounts during reduction in commercial expense.
14
|
5.
|
Improve regulatory relationships.
|
Re-engaged
with FDA.
Improved relationships with the regulatory bodies we work with.
Was unable to solve historical compliance issue within allotted time in Australia, which resulted in Therapeutic Goods
Administration (TGA) cancellation.
Although we were able to achieve most of the objectives first communicated by the new
leadership team in 2016, we were not able to achieve all our stated objectives.
Most notably, we were not able to solve
historical compliance issues with the TGA dating back to early 2015. The result was the delisting of EndoBarrier from the Australian Register of Therapeutic Goods (ARTG). Despite this, all patients with an implanted EndoBarrier in Australia will be
allowed to proceed to their scheduled therapy duration and removal at the time of the treating clinicians choosing; there was no recall associated with this regulatory decision. In addition, an investigator-initiated and
-led
clinical trial focused on nonalcoholic fatty liver disease (NAFLD) and type 2 diabetes continues to enroll participants in Australia.
We and our new quality and regulatory teams have built significantly stronger relationships with regulatory agencies in
multiple countries and have enhanced surveillance, complaint handling, and reporting systems. This has resulted in a significantly improved dialogue between the company and the regulatory agencies governing EndoBarrier use in Europe and the Middle
East.
In addition, we achieved the following notable items:
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Presented ENDO preliminary clinical data trial at ADA
|
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Appointed Dan Moore as non-executive chairman of the board
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Presented ABCD REVISE clinical study data at ADA
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Presented NAFLD data at ADA
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Presented The Effect of 1-Years Endoscopic Proximal Intestinal Exclusion Using EndoBarrier on
10-Year Cardiovascular Risk in Type 2 Diabetes at ADA
|
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German hospitals won reimbursement arbitration court cases supporting EndoBarrier reimbursement under NUB-1
|
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Released German registry data on over 235 patients at EASD
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Closed financing of 15% shelf registration, raising ~USD $1.1 million
|
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Association of British Clinical Diabetologists initiated Worldwide EndoBarrier Registry
|
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FDA Accepted ENDO clinical study report
|
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U.S. Patent Office and the European Patent Office granted 8 patent allowances
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Closed Lexington Massachusetts office, terminated lease, moved into new facility in Boston Innovation District
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EndoBarrier remains ahead of known competition; we have not lost our first-mover advantage. In fact,
given that the unmet clinical need continues to grow every day, coupled with the fact that significant new data emerge regularly from clinicians who independently continue to reinforce the unique safety and efficacy profile of EndoBarrier, the
future for EndoBarrier is bright.
Our team and many clinicians around the world firmly believe EndoBarrier represents a
vital treatment option that fills a significant gap in current options in the type 2 diabetes and obesity disease state. We are universally committed to making EndoBarrier safe, effective, and available to clinicians around the world.
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The new team has rapidly learned from the past, understands the issues, and
is focused on delivering on the clinical promise of EndoBarrier and the strategic promise of GI Dynamics in 2017 and beyond
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Strategic
Focus in 2017: The Path Forward
We are focused on the following initiatives in 2017, which are described in
greater detail below:
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1.
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Continue to rebuild GI Dynamics from the ground up.
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Build the new team and evolve the culture
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Complete systems overhaul
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Continue implementing lean operating environment and spending controls
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2.
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Focus on commercial outcomes in targeted geographies.
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Continue to focus efforts on reimbursement in the United Kingdom and Germany.
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Focus on commercial activity, primarily in the United Kingdom and Germany, with additional focus on other
European countries and the Middle East.
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Revitalize and revamp corporate and product branding.
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Retain core commercial team.
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Optimize commercial model and sales force effectiveness.
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3.
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Continue to develop additional clinical data regarding EndoBarriers safety and efficacy.
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Remain focused on additional clinical data being generated around the world.
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Build and leverage a world-class scientific advisory board.
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4.
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Move toward US IDE plan and clinical study.
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Seek agreement with FDA to commence IDE trial to gain U.S. regulatory approval for EndoBarrier.
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5.
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Adequately capitalize the company and continue to operate in a lean fashion.
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1. Continue to rebuild GI
Dynamics from the ground up:
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Build the new team and evolve the culture
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Complete systems overhaul
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Continue implementing lean operating environment and spending controls
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Building the new team and evolve the culture
The new management team continues to evolve our operations and attract talented new employees. We have added and will continue
to add full-time employees and key consultants with significant domain expertise to provide work product at a high level.
The new culture at GI Dynamics is focused on accountability, teamwork, and open communications, and has a strong focus on
patient safety and supporting EndoBarrier patients, clinicians, and provider organizations.
Complete systems overhaul
Our quality management system (QMS) has undergone a comprehensive review, undergone multiple SOP revisions and process
improvement resulting in a measurable improvement to quality metrics. In addition, the company is close to validating its external contract manufacturer, a milestone that is the result of eighteen months of concerted effort.
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Given the historical compliance issues at GI Dynamics, there remains risk of
regulatory compliance issues moving forward. We are working to reduce that risk.
Update risk management
Each clinical risk associated with EndoBarrier has been reviewed by an external team of risk management experts and clinicians.
Continue implementing lean operating environment and spend controls
On a cost-management basis, we have cut our costs significantly from $4.8 million cash used in operations in Q4 2015 to
$2.5 million cash used in operations in Q4 2016 by renegotiating with or replacing every one of our largest or most expensive service providers. In addition, we moved our headquarters from Lexington, Massachusetts, to Boston, Massachusetts, and
ended the lease for the larger Lexington facility in favor of a significantly smaller and less expensive Boston facility. The growth of the company from this point forward will be carried out only in a highly accountable and lean fashion.
2. Focus on commercial outcomes in targeted geographies:
We have continued to focus on building the foundation upon which revenue can be maximized in the following ways:
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Continue to focus efforts on reimbursement in the United Kingdom and Germany.
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Focus on commercial activity, primarily in the United Kingdom and Germany, with additional focus on the Middle
East and additional EU geographies.
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Revitalize and revamp corporate and product branding.
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Retain core commercial team.
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Optimize commercial model and sales force effectiveness.
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Continue to focus efforts on reimbursement in the United Kingdom and Germany
We have dedicated significant time and effort towards gaining reimbursement in the United Kingdom and Germany. Management
anticipates this focus will start to show results in 2017 and 2018. We expect early signs of these successes in 2017; we look forward to releasing information as it becomes available. Attaining reimbursement for new technologies is often a lengthy
but necessary effort on the way to full commercialization.
German reimbursement
The German system of reimbursement is defined by a diagnostic related group (DRG) system similar to the DRG system in the
United States. To proceed to an ideal level of full reimbursement, the German system provides for new technology payments within the Neue Untersuchungs- und Behandlungsmethoden (NUB system).
NUB-1
is the
highest level of new technology payment support in the system, and is designed to require payments that cover the gap between the full cost of a procedure including all supplies (including EndoBarrier) and the existing DRG. EndoBarrier was renewed
at NUB-1 level in early 2017.
We have been working to support the increase of the base DRG to more appropriate levels by
supporting EndoBarrier procedures within calculation hospitals. If, at the end of any calendar year, an adequate number of procedures have been conducted in calculation hospitals and supported by
NUB-1
payments, a process may be initiated by the Institute for the Hospital Remuneration System (InEK) that may recalculate a new and higher DRG payment. This process occurs independently of involvement by us other than support by us for each procedure.
The financial information from those procedures has been submitted independently of us to the German InEK to support a calculation for a potentially increased DRG that could take effect in either Q1 2018 or Q1 2019.
UK reimbursement
In the
United Kingdom, we are following a
two-pronged
approach focused on a technical review process with the National Institute for Health and Care Excellence (NICE) and reimbursement support of individual clinical
commissioning groups (CCGs).
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We are continuing the engagement with NICE that was started in 2012 by refining
the materials submitted and adding additional relevant clinical data to further support the NICE new technology evaluation process.
We support clinicians and hospital executives in their independent efforts to gain reimbursement from their local CCGs. There
are 209 CCGs in the United Kingdom covering an average of 250,000 patient lives each. The executive leadership of each CCG is charged with optimizing the health of all patients within their CCG territory within their budget. We provide clinical and
economic data to clinicians and hospital executives with the intent of assisting them in their work with their local CCG.
Although this activity is out of our direct control, we expect that the numerous clinicians who are aware of the growing
untreated patient population, and the ability of EndoBarrier to help them treat said population, will follow the example of CCGs that have implemented an EndoBarrier payment plan and follow suit.
We are pursuing numerous awareness and advocacy activities to increase the awareness of EndoBarrier and its treatment effects.
Revitalize and revamp corporate and product branding
We are creating a new approach to messaging with a highly patient-centric message. This approach will manifest itself in
refined messaging, updated and upgraded graphics, a new corporate website (
www.gidynamics.com
), and upgraded sales support tools.
Retention of core commercial team
We have focused on retaining our most experienced executives, sales professionals, clinical engineers, and distributors. We
will continue to focus on attracting, training, and retaining the most effective sales professionals.
Optimize commercial model and sales force
effectiveness
We employ a number of different sales force deployment strategies that range from 100% direct to 100%
distributor, along with hybrid approaches combining both. These sales force deployment models will be evaluated for effectiveness and optimized on a real-time basis as the situation dictates. We are also focused on constantly improving the sales
force effectiveness of our field teams through sales process optimization, individual and team development, and advanced analytical and sales operations support. Our management and sales leadership teams have significant experience in sales force
deployment and optimization.
3. Continue to develop additional EndoBarrier safety and efficacy clinical data:
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Remain focused on additional clinical data being generated around the world.
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Build a world-class scientific advisory board.
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Investigator-initiated clinical trials
EndoBarrier is the subject of multiple investigator-initiated trials and two independent registries. We and the independent
investigators have maintained arms-length relationships with limited or no financial support to ensure the financial independence of these trials and to maintain the scientific credibility of the clinicians and the study results.
Two independent registries are currently enrolling.
German registry
The
German registry is lead by: Professor Seufert, MD, from Freiburg University and Dr. Aberle, MD, from UKE Hamburg University. The German registry released clinical data on 234 patients at the European Association for the Study of Diabetes (EASD)
in Munich in September 2016. This registry now has over 300 patients enrolled.
ABCD global registry
ABCD registry is a global registry run by the ABCD and financially supported by the UK National Health Service. More than 60
patients have been entered into the ABCD global registry.
Build and leverage a world-class SAB
As disclosed in the third quarter of 2016, a focus area of ours going forward will be to recruit a formal scientific advisory
board. The SAB will be composed of a multidisciplinary and highly selective group of clinicians who share the belief that EndoBarrier is a critical part of their current treatment plans and are dedicated to helping us build on the scientific
understanding and safety and efficacy profile of EndoBarrier.
The SAB will focus on expanding clinical support for both
the safety and efficacy of EndoBarrier through analysis of current clinical data as well as helping to guide future clinical study plans. In addition, the SAB will lead efforts to understand and communicate mechanisms of action associated with
different disease states, EndoBarrier function, and mechanisms associated with potential areas of risk for EndoBarrier. The SAB will also play a critical role in evaluating modifications to the labeling of EndoBarrier, optimizing the recommended
medication protocol for treatment, and optimizing the comprehensive patient care plan supporting EndoBarrier among other material contributions.
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4. Move toward US regulatory clearance:
Seek approval from FDA to gain US regulatory approval for EndoBarrier
GI Dynamics is working toward an IDE trial design that will be acceptable to the FDA. The purpose of this new trial is to prove
the safety and efficacy of EndoBarrier in patients suffering from unmanaged type 2 diabetes and obesity. Management hopes to share further information with regards to the IDE study design in 2017.
5. Adequately capitalize the company and continue to operate in a lean fashion:
We will require additional capital to fund our operations, expand commercial efforts, primarily in the United Kingdom and
Germany, continue to support revenue-generating operations in the Middle East, South America, and other select European countries, and fund an EndoBarrier clinical trial in the United States.
We will constantly evaluate multiple financing options with a focus on continuing to deliver a safe and effective treatment in
EndoBarrier, continuing operations in a lean fashion, achieving the most impactful milestones, and maximizing shareholder value.
We will need to secure financing no later than the third quarter of 2017 to continue operations.
Finally, we have implemented numerous financial and operating systems and increased management oversight to ensure that as the
company grows in the future, it will do so in a highly lean fashion.
Intellectual Property
We rely on a combination of patents, together with nondisclosure and confidentiality agreements, to establish and protect the
proprietary rights to our technologies. Seedling Enterprises, LLC, initially conceived and developed our technology. In 2003, Seedling Enterprises, LLC, incorporated as GI Dynamics, Inc., and transferred all of its intellectual property relating to
EndoBarrier to us with no further claims or royalties in exchange for shares of our common stock, par value $0.01 per share, or common stock.
On December 31, 2016, our current patent portfolio was composed of 155 issued and pending US and
non-US
patents. We have been issued 43 US patents and maintain 17 pending US patent applications. We have also sought intellectual property protection outside the US and have been issued 72 patents across Australia,
Canada, China, the European Patent Convention region (including Austria, Belgium, France, Germany, Ireland, Italy, the Netherlands, Spain, Sweden, Switzerland, Turkey, and the United Kingdom), Hong Kong, and Japan, and we have 2 pending PCT
applications and 21 pending foreign patent applications. We believe our patents and patent applications cover, but are not limited to, the following areas:
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The gastrointestinal liner and anchor;
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Delivery and removal systems;
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Placement of the device;
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Treatment alternatives; and
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Our current issued patents expire between 2023 and 2031. We also actively monitor our intellectual property by regularly
reviewing new developments to identify extensions to our patent portfolio.
We entered into a patent license agreement with
Crabb Co., LLC, or Crabb, in 2003, which was amended in 2005, for the
in-license
of certain intellectual property related to the anchoring of an intestinal liner, which is anchored in the pylorus. This license
was obtained early in our history, and though we are not currently using this intellectual property, it may be useful in future implant designs. The royalty obligation begins with US commercial sales of products covered by the Crabb intellectual
property. The royalty percentage may vary on products covered by the license, but, in any case, the royalties are not considered significant. We will cease paying royalties, if any, when the patent covered by the license expires in 2017.
We employ external patent attorneys to assist us in managing our intellectual property portfolio.
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In 2013, we settled litigation with the supplier of the liner material used to
manufacture EndoBarrier, W. L. Gore & Associates, Inc., or Gore. Under the settlement, we retain exclusive ownership and control of our patent portfolio, and we and Gore have dismissed all claims against each other. We also granted Gore a
nonexclusive, royalty-free license to use our patents, restricted to the vascular system. Gore is not licensed to use our patents for any applications in the gastrointestinal tract. Neither we nor Gore are required to make any cash payments to the
other, nor will any royalties be due.
21
Item 1A. RISK FACTORS
Our business faces many risks. We believe the risks described below are the material risks that we face. However, the risks described below
may not be the only risks that we face. Additional unknown risks or risks that we currently consider immaterial, may also impair our business operations. If any of the events or circumstances described below actually occur, our business, financial
condition or results of operations could suffer, and the trading price of our CDIs could decline significantly. You should consider the specific risk factors discussed below together with the cautionary statements under the caption
Forward-Looking Statements and the other information and documents that we file from time to time with the Securities and Exchange Commission, or SEC.
Risks Related to Our Business
We will need substantial additional funding and may be unable to raise capital when needed, which could force us to delay, reduce, or
eliminate planned activities or result in our inability to operate as a going concern.
As we have limited
commercialization of our products, we are generating a small amount of revenue and are not cash flow positive or profitable. Our net revenue from product sales was approximately $0.5 million for the year ended December 31, 2016 and, as of
December 31, 2016, we had cash and cash equivalents of approximately $8.3 million. Our existing capital is insufficient to meet our requirements (including the costs of commercializing our products, conducting clinical trials, obtaining
regulatory approvals and partnering with third-party manufacturers) and cover any losses, so we will need to raise additional funds through financings or borrowings prior to September 30, 2017. Failure to raise additional funds could delay,
reduce, or halt our commercialization and clinical trial efforts and would impact our ability to continue as a going concern.
We have no committed sources of capital funding and there is no assurance that additional funding will be available to us in
the future or be secured on acceptable terms. These factors raise substantial doubt about our ability to continue as a going concern. If adequate funding is not available, we may no longer be a going concern and may be forced to curtail operations,
including our commercial activities and research and development programs, or cease operations altogether, file for bankruptcy, or undertake any combination of the foregoing. In such event, our stockholders may lose their entire investment in our
company.
In addition, if we do not meet our payment obligations to third parties as they become due, we may be subject to
litigation claims and our credit worthiness would be adversely affected. Even if we are successful in defending against these claims, litigation could result in substantial costs and would be a distraction to management, and may have other
unfavorable results that could further adversely impact our financial condition.
We have a history of net losses and we may never
achieve or maintain profitability.
We are a medical device company with a limited history of operations and have
limited commercial experience with our product. We have incurred net losses since our inception, including net losses of approximately $48.2 million, $35.2 million and $13.1 million for the fiscal years ended December 31, 2014,
2015 and 2016, respectively. As of December 31, 2016, our accumulated deficit was approximately $248.2 million. Although we have started to generate revenues from sales in select markets outside the U.S., we expect to continue to incur
significant operating losses for the foreseeable future as we incur costs, including those associated with commercializing our products, conducting clinical trials to test our products, attempting to secure regulatory approvals for our products (in
the U.S. and other countries) and increased costs associated with being a public company in the U.S. with equity securities listed on the Australian Securities Exchange, or ASX.
We cannot predict the extent of our future operating losses and accumulated deficit and we may never generate sufficient
revenues to achieve or sustain profitability.
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In order to commercialize our products in the U.S. and certain other countries, we will
need to obtain regulatory and other approvals. If we are unable to achieve or are delayed in achieving such approvals, this could have a significant effect on the time it takes to commercialize our technology in the U.S. and certain other countries.
At present, our only product that is approved for marketing and sale is EndoBarrier, which has received CE Mark
approval in the E.U. In October 2016, we received final cancellation notification from the Australian Therapeutic Goods Administration, or TGA, for the listing of EndoBarrier on the Australian Register of Therapeutic Goods, or ARTG. As a result, we
are not permitted to supply the EndoBarrier device in Australia for use outside of approved trials. There is no guarantee that we will maintain the CE Mark, be reapproved for inclusion on the ARTG, or obtain additional approvals from regulatory
bodies, including the FDA in the U.S., to commercialize EndoBarrier or any of our other products. In the U.S., we stopped our pivotal trial of EndoBarrier. Accordingly, we will not be able to obtain FDA approval to commercialize EndoBarrier in the
U.S. without a new clinical trial which may be lengthy and expensive. The regulatory authorities in other countries may also require additional clinical trials. Necessary regulatory approvals could also be delayed, which could significantly impact
our ability to commercialize our technology in the U.S. and other countries.
We depend heavily on the success of our product,
EndoBarrier, which is commercialized in select markets outside the U.S.
Assuming that we can obtain the required
regulatory approvals in the U.S. and certain other countries, we expect to derive substantially all of our revenue from sales of our product, EndoBarrier, which is currently commercialized in the E.U. and the Middle East. Accordingly, our ability to
generate revenues in the future relies on our ability to market and sell this product.
The degree of market acceptance
for EndoBarrier will depend on a number of factors, including:
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the efficacy, ease of use and perceived advantages and disadvantages of EndoBarrier over other available
treatments and technologies for managing type 2 diabetes and obesity;
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the prevalence and severity of any adverse events or side effects of EndoBarrier;
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the extent to which physicians adopt EndoBarrier (which may be influenced by our ability to provide additional
clinical data regarding the potential long-term benefits provided by EndoBarrier and the strength of our sales and marketing initiatives); and
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the price of EndoBarrier and the third-party coverage and reimbursement for procedures using EndoBarrier.
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the extent to which reimbursement may be secured for each country in which EndoBarrier is commercialized.
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our ability to attract and retain professional sales personnel to drive EndoBarrier revenue
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We cannot predict the outcome and timing of our current and future human clinical trials of EndoBarrier products.
The results of current and future human clinical trials, whether investigator initiated or Company sponsored,
cannot be predicted. If EndoBarrier or new products that we develop and test in the future cause serious adverse events in future human clinical trials, these trials may need to be delayed or stopped. In addition, these clinical trials may not
produce positive safety or efficacy results, or may produce results that are not as favorable as those seen in previous clinical trials.
23
Negative safety or efficacy results of our U.S. pivotal trial or any other
current or future human clinical trials could require that we attempt to modify the EndoBarrier device or the treatment guidelines to address these issues and there is no guarantee that any potential modifications would be successfully developed.
If current or future human clinical trials of EndoBarrier products do not meet the required clinical specifications or
cause serious adverse or unexpected events, such as those experienced in our U.S. pivotal trial, then these results could also materially impact product sales and reimbursement where we are currently selling our product and could affect regulatory
approvals and adoption in countries where our product is being or has been introduced or regulatory approvals to seek to expand the use of EndoBarrier. If we are not able to adequately address any adverse or unexpected events through training,
education, changes in product design or product claims, this may significantly impair the commercial prospects for EndoBarrier.
Doctors may not accept EndoBarrier as a treatment option.
The commercial success of EndoBarrier will require acceptance by physicians, who may be slow to adopt our product for the
following reasons (among others):
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lack of long-term clinical data supporting patient benefits or cost savings over existing alternative
treatments;
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lack of experience with EndoBarrier and training time required before it can be used driving preferences for
other products or procedures;
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lack of adequate payment to the physician for implanting the device or caring for the patient (driven by
availability of adequate coverage and reimbursement for hospitals and implanting physicians); and
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perceived strength of products, procedures or pharmacotherapies as alternatives to EndoBarrier
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perceived liability risks associated generally with the use of new products and procedures.
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Although we have developed relationships with physicians who are key opinion leaders in certain
countries, it cannot be assured that these existing relationships and arrangements can be maintained or that new relationships will be established in support of our products. If physicians do not consider our products to be adequate for the
treatment of type 2 diabetes and obesity or if a sufficient number of physicians recommend and use competing products or pharmacotherapies, it could harm our business and future revenues.
We have limited sales, marketing and distribution experience.
There can be no guarantee that we will be able to effectively commercialize our products. Developing direct sales,
distribution and marketing capabilities will require the devotion of significant resources and require us to ensure compliance with all legal and regulatory requirements for sales, marketing and distribution. Failure to develop these capabilities
and meet these requirements could jeopardize our ability to market our products or could subject us to substantial liability. In addition, for those countries where we commercialize our products through distributors or other third parties, we will
rely heavily on the ability of our partners to effectively market and sell our products to physicians and other end users in those countries.
We compete against companies that have longer operating histories, more established or approved products, and greater resources than we
do, which may prevent us from achieving market penetration with our products.
Competition in the medical device
industry is intense and EndoBarrier will compete in part against more established procedures and products for the treatment of type 2 diabetes and obesity. Bariatric surgery, including
24
gastric bypass surgery and the gastric band, have been used for many years with extensive publication histories on clinical effectiveness. Large multinational medical device companies sell
supplies for these procedures and are formidable competitors to us. In addition, certain drugs have been approved, and are used, for the treatment of type 2 diabetes and obesity. Pharmaceutical companies with significantly greater resources than us
market these drugs, and we may be unable to compete effectively against these companies.
Many of our competitors have
significantly greater sales, marketing, financial and manufacturing capabilities than us and have established reputations and/or significantly greater name recognition. Accordingly, there is no assurance that we will be able to win market share from
these competitors or that these competitors will not succeed in developing products that are more effective or economic.
Additionally, we are likely to compete with companies offering new technologies in the future. We may also face competition
from other medical therapies, which may focus on our target market as well as competition from manufacturers of pharmaceutical and other devices that have not yet been developed. Competition from these companies could adversely affect our business.
We do not have data regarding the long-term benefits of EndoBarrier.
An important factor that may be relevant to market acceptance of EndoBarrier is whether it improves or maintains glycemic
control and maintains weight loss over extended periods of time after removal of the device. While we have tested and evaluated our technology in several clinical trials with hundreds of patients which in aggregate have shown that EndoBarrier is an
effective treatment for type 2 diabetes and obesity, we do not yet have sufficient data to demonstrate any longer-term benefits of our product in the treatment of type 2 diabetes and obesity following removal of the device from the patient.
We are continuing to monitor some patients who were implanted in our clinical trials after device removal to determine
the ongoing effects and longevity of results, however, we do not currently have long-term data that supports the safety and efficacy of EndoBarrier. Accordingly, we cannot provide assurance that the long-term data, once obtained, will prove lower
HbA1c levels compared to alternative treatment options for type 2 diabetes. If the results obtained from our clinical trials indicate that EndoBarrier is not as safe or effective as other treatment options or as effective as our current short-term
data would suggest, EndoBarrier may not be approved, or its adoption may suffer and our business would be harmed.
If we fail to
obtain and maintain adequate levels of reimbursement for our products by health insurers and other third-party payers, there may be no commercially viable markets for our products or the markets may be much smaller than expected.
Health care providers, including hospitals and physicians that purchase our products, generally rely on third-party payers,
particularly government-sponsored health care and private health insurance providers, to pay for all or a portion of the costs of the procedures, including the cost of the products used in such procedures. Reimbursement and health care payment
systems vary significantly by country. Third-party payers may attempt to limit coverage and the level of reimbursement of new therapeutic products.
If we fail to obtain and maintain adequate levels of reimbursement for our products by health insurers and other third-party
payers, there may be few commercially viable markets for our products or the markets may be much smaller than expected. Third-party payers may demand additional clinical data requiring new clinical trials or economic models showing the cost savings
of using our product, each of which would consume resources and may delay the decision on reimbursement. If the results of such studies are not satisfactory to third-party payers, then reimbursement may not be received in an acceptable amount or at
all. In addition, the efficacy, safety, performance and cost-effectiveness of our products in comparison to any competing products or therapies may determine the availability and level of reimbursement.
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We believe that future reimbursement may be subject to increased restrictions
both in the U.S. and in international markets. Future legislation, regulation or reimbursement policies of health insurers or third-party payers may adversely affect the demand for our current and future products or limit our ability to sell these
products on a profitable basis.
Our products are subject to extensive, dynamic and ongoing regulation in the E.U. and the other
areas and countries where we sell EndoBarrier, which may impede or hinder the approval or sale of our products and, in some cases, may ultimately result in our inability to obtain approval of certain products or may result in the recall or seizure
of previously approved products.
The medical device industry is regulated extensively by governmental
authorities, principally the FDA and corresponding state and foreign regulatory agencies and authorities, such as the E.U., legislative bodies and the European Economic Area, or EEA, Member State Competent Authorities. Before we can market our
products in the E.U., and in many other parts of the world, we must obtain and maintain CE Mark certification, which indicates that a product meets the essential requirements of applicable E.U. Directives and has been subject to the appropriate
conformity assessment route. This conformity assessment procedure is often done through a self-certification, but depending on the type of product, may also require verification by an independent certification body, called a Notified
Body. Notified Bodies will also periodically audit us to ensure that we remain in compliance with the applicable requirements. The CE Mark allows free movement of products in the E.U., the EEA and Switzerland although any of the member
countries may require medical devices to be registered and also impose requirements relating to the language of the device information. Many
non-European
countries also recognize and accept the CE Mark. If we
cannot support our performance claims and demonstrate continued compliance with the applicable E.U. requirements, we could lose our right to affix the CE Mark to our products, which would prevent us from selling our products within the territory and
in other countries that recognize the CE Mark.
In addition, even after we receive regulatory approval of our products in
existing markets, we are subject to ongoing regulatory requirements relating to our existing products in those markets. These include the requirement to timely file various reports with regulatory authorities in the countries in which we market our
products, including reports of adverse events such as those experienced in our U.S. pivotal trial, including events that may have caused or contributed to a death or serious injury and malfunctions that would likely cause or contribute to a death or
serious injury if the malfunction were to recur. If these reports are not timely filed, regulators may impose sanctions, including temporarily suspending our market authorizations or CE Mark, and sales of EndoBarrier may suffer. In that case, we may
be subject to product liability or regulatory enforcement actions, all of which could harm our business. Our failure to comply with EEA or other foreign regulations applicable in the countries where we operate could lead to the issuance of warning
letters or untitled letters, the imposition of injunctions, suspensions or loss of regulatory clearance or approvals, product recalls, termination of distribution, product seizures or civil penalties. In the most extreme cases, criminal sanctions or
closure of our manufacturing facilities are possible.
In addition, numerous new regulatory changes in the E.U. came into
effect in 2016. The company may not be able to comply with the new regulations and standards, despite compliance with prior regulations and standards
In addition, the company has evidenced a historical issue with compliance, leading to quality system issues that led to a 2014
shipping hold for E.U., multiple observations by the TGA in Australia regarding the companys failure to comply with Essential Principals of the TGA and compliance issues which led to the TGAs cancellation of the EndoBarriers
listing on the ARTG. Given the history of
non-compliance
on a quality system basis, a substantial risk exists of future compliance issues, until such time as the company has had adequate time and resources to
address the historical issues.
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In some countries, we rely on our foreign distributors and agents to assist us in
complying with foreign regulatory requirements, and we cannot be sure that they will always do so. If we or any of our suppliers, third-party manufacturers, distributors, agents or customers fail to comply with applicable requirements, we may face:
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investigations by governmental authorities;
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fines and prosecutions;
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inability to raise capital;
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inability to attract and retain sales professionals;
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inability to attract and agree to terms with business partners;
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increased difficulty in obtaining required approvals;
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losses of approvals already granted;
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delays in purchasing decisions by customers or cancellation of existing orders; and
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the inability to sell our products in or to import our products into such countries.
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Regulatory requirements affecting the development, manufacture and sale of medical devices are evolving and subject to future
change. We cannot predict what impact, if any, those changes might have on our business. Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. Later
discovery of previously unknown problems with a product or manufacturer could result in fines, delays or suspensions of regulatory approvals. The failure to receive product approval on a timely basis, or the withdrawal of product approval by
regulatory agencies, such as the TGAs cancellation of the EndoBarriers listing on the ARTG, could have a material adverse effect on our business, financial condition or results of operations.
Claims that our current or future products infringe or misappropriate the proprietary rights of others could adversely affect our
ability to sell those products and cause us to incur additional costs.
If any third-party intellectual property
claim against us is successful, we could be prevented from commercializing EndoBarrier or our other products.
There are
numerous issued patents and pending patent applications in the U.S. and internationally that are owned by third parties and that contain patent claims in areas that are the focus of our product development efforts. We are aware of patents owned by
third parties, to which we do not have licenses, that relate to, among other things, liner materials and anchoring. We have also employed individuals who were previously employed at other medical device companies, including competitors or potential
competitors which may result in claims from third parties that we have inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information of former employers of our employees.
In addition, because patent applications can take many years to issue, there may be currently-pending applications, unknown to
us, which may later result in issued patents that pose a material risk to us.
We expect that we could be subject to
third-party infringement claims if our product sales increase, the number of competitors grows and the functionality of products and technology in different industry segments overlap. Third parties may currently have, or may eventually be issued,
patents on which our current or future technologies may infringe.
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If we are unable to obtain, maintain and enforce intellectual property protection covering
our products, others may be able to make, use, or sell products substantially the same as ours, which could adversely affect our ability to compete in the market.
Our commercial success is dependent in part on obtaining, maintaining and enforcing intellectual property rights, including
patents, covering EndoBarrier and our future products. If we are unable to obtain, maintain and enforce intellectual property protection covering our products, others may be able to make, use or sell products that are substantially the same as ours
without incurring the sizeable development costs that we have incurred, which would adversely affect our ability to compete in the market.
Even if our patents are determined by a court to be valid and enforceable, they may not be sufficiently broad or enforceable
to prevent others from marketing products similar to ours or designing around our patents, despite our patent rights. Our products may also nor may also not have freedom to operate unimpeded by the patent rights of others.
In addition to patented technology, we rely on a combination of
non-patented
proprietary technology, trade secrets, processes, procedures, technical knowledge and
know-how
accumulated or acquired since inception. Any of our intellectual property rights could be challenged, invalidated,
circumvented or misappropriated. In order to preserve and enforce our patent and other intellectual property rights, we may need to make claims or file lawsuits against third parties. This can entail significant costs and divert managements
attention from developing and commercializing EndoBarrier.
We rely on suppliers for certain key components in the manufacture of
the EndoBarrier system.
We rely on suppliers for several key components of EndoBarrier, in particular the
material used to manufacture the sleeve used in EndoBarrier. We do not presently have active supply agreements with any of these suppliers. Our reliance on third-party suppliers subjects us to risks that could harm our business, particularly with
respect to the supply of key components or processes. Although we believe that alternative suppliers are available, the process of identifying and qualifying new suppliers who can produce the components to our specifications could cause delays in
the commercialization of our products.
In addition, we are in the process of validating a contract manufacturer for our
product. We do not have experience with the manufacturer, and the manufacturer may fail to manufacture our products in a validated manner or to acceptable levels of quality.
The use, misuse or
off-label
use of our products by physicians may harm our image in the
marketplace or result in injuries that lead to product liability.
We cannot prevent a physician from using
EndoBarrier for purposes outside of its approved and intended use, which is known as
off-label
use. If physicians attempt to use our products
off-label,
there may be an
increased risk of adverse events. Further, the use of our products for uses other than those uses for which our products have been approved may not effectively treat such conditions, which could harm our reputation in the marketplace among
physicians and patients.
Physicians may also misuse our products or use improper techniques if they are not adequately
trained, potentially leading to injury and an increased risk of product liability for us. Physicians may also treat patients from other countries where the product is not approved and the physician is then unable to properly monitor the
patients progress. If we are deemed to have engaged in the promotion of any of our products for
off-label
use, we could be subject to action by regulatory authorities and the imposition of sanctions,
which could also affect our reputation and position within the industry.
Patients may not follow instructions from their
physicians. Patients who ignore training and ignore their clinicians request to remove EndoBarrier at the end of the 12 month indication for treatment may be exposed to greater clinical risk.
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Product liability claims could damage our reputation or adversely affect our business or
financial position.
We may be exposed to the risk of product liability claims, which are inherent in the design,
manufacturing, marketing and use of medical devices and, in particular, implantable medical devices. We hold product liability insurance; however, adequate product liability insurance may not continue to be available on commercially-acceptable
terms. Product liability claims may damage our reputation and, if our insurance coverage proves inadequate, may harm or destroy our business. Defending a suit, regardless of its merits, could be costly and could divert our managements
attention from our core business activities.
We rely on a third-party manufacturer for our products and this manufacturer is
required to comply with regulatory requirements.
Completion of our current and future clinical trials and
commercialization of our products require access to manufacturing facilities that meet applicable regulatory standards to manufacture a sufficient supply of our products. We will rely on a third-party manufacturer to meet the applicable regulatory
requirements. To date, we have been working to complete the transfer of our technology and manufacturing processes to a designated third-party manufacturer. That process is not complete and we have not executed a separate manufacturing supply
agreement. We anticipate completing such an agreement in the near term. Any disruption to manufacturing by this third-party manufacturer would adversely affect our business.
Suppliers of components and products used to manufacture our products and our third-party manufacturer must also comply with
applicable regulatory requirements. These often require significant time, resources, record-keeping and quality assurance efforts and subject us, our suppliers and third-party manufacturer to potential regulatory inspections and stoppages.
Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored by regulatory authorities. Failure by us, our third-party manufacturer or suppliers to comply with regulatory requirements or failure to
take satisfactory corrective action in response to an adverse inspection could result in enforcement actions that could disrupt manufacturing or sales of EndoBarrier.
In order to manufacture EndoBarrier in the quantities that we anticipate will be required to meet our clinical trial needs and
market demand, we will need to increase production capacity and efficiency over current levels, and our third-party manufacturer must therefore be able to provide us with sufficient quantities of our product in compliance with regulatory
requirements, in accordance with agreed upon specifications, at acceptable cost and on a timely basis. Our potential future growth could strain the ability of our third-party manufacturer to deliver our product and obtain materials and components in
sufficient quantities. Third-party manufacturers often experience difficulties in scaling up production, including problems with production yields and quality control and assurance. If we are unable to obtain a sufficient or consistent supply of
EndoBarrier or any other product we are developing, or if we cannot do so efficiently, our revenue, business and financial prospects would be adversely affected.
Following our reduction of headcount in August 2015 and the second and third quarters of 2016, we may be unable to retain our remaining
employees and therefore we may not be able to sustain our business.
Since we began our efforts to restructure our
business and expenses (the Restructuring) in August 2015, our workforce has been reduced by 40 people, leaving 15 employees as of February 28, 2017.
As a result of the Restructuring, we are heavily dependent upon our ability to retain our remaining employees. The loss of the
service of any of our remaining employees may have an adverse effect on our business. Given the magnitude of our reduction in force since August 2015, the morale of our remaining employees may be lower, employees may be distracted and any one of our
remaining employees could terminate his or her employment with us at any time. A departing employees expertise would be difficult to replace and the failure to do so on a timely basis could have a material adverse effect on our ability to
achieve our business
29
goals. There can be no assurance that we will have the financial resources or otherwise to be successful in retaining our remaining personnel and our failure to do so could have a material
adverse effect on our business, financial condition and results of operations. In addition, the Restructuring may prove to be more disruptive to our operations than we anticipated. For example, cost savings measures may distract management from our
core business, harm our reputation, yield unanticipated consequences, such as attrition beyond the planned Restructuring, increased reliance on consultants, or increased difficulties in our
day-to-day
operations.
If we are unable to retain or hire key personnel, we may not be
able to sustain or grow our business.
Our ability to operate successfully and manage our potential future growth
depends significantly upon our ability to attract, retain and motivate highly-skilled and qualified research, technical, clinical, regulatory, sales, marketing, managerial and financial personnel. The competition for qualified employees in the
medical device industry is intense and there are a limited number of persons with the necessary skills and experience.
Our performance is substantially dependent on our senior management and key technical staff to continue to develop and manage
our operations. The loss or the inability to recruit and retain high-caliber staff could have a material adverse effect on us. We also rely on the technical and management abilities of certain key directors, key members of our executive team and
employees, consultants and scientific advisers. The loss of any of these directors, members of the executive team, employees, consultants or scientific advisers could have an adverse effect on our business. In March 2016, our prior chief executive
officer left the Company.
We may be unable to effectively manage our anticipated growth.
To manage our anticipated growth and to commercialize our products, we will need to expand our operations (research and
development, product development, quality, regulatory, manufacturing, sales, marketing and administrative). This expansion will place a significant strain on our management, infrastructure and operational and financial resources, particularly in
light of the Restructuring. Specifically, we will need to manage relationships with various persons and entities participating in our clinical trials, quality systems, manufacturers, suppliers and other organizations, including various regulatory
bodies in the U.S. and other jurisdictions. We may not be able to implement the required improvements in an efficient and timely manner and may discover deficiencies in existing systems and controls. The failure to accomplish any of these tasks
could materially harm our business and our ability to commercialize EndoBarrier. As a result, our revenue, business and financial prospects would be adversely affected.
We incur increased costs as a result of being a public company in the U.S. whose equity securities are listed on the Australian
Securities Exchange.
As of December 31, 2013, we became subject to the periodic reporting requirements of
the Securities Exchange Act of 1934, as amended (the Exchange Act). Although the existing listing of our Chess Depositary Interests, or CDIs, on the ASX requires us to file financial information and make certain other filings with the
ASX, our status as a reporting company under the Exchange Act causes us to incur additional legal, accounting and other expenses, including costs related to compliance with the requirements of the Sarbanes-Oxley Act of 2002, insurance costs related
to being an exchange act reporting company and other administrative costs. We also expect all of these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be
required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board or as
executive officers. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
Our shares of our Common Stock are publicly traded on the ASX in the form of CDIs. As a result, we must comply with the ASX
Listing Rules. We have policies and procedures that we believe are designed to provide reasonable assurance of our compliance with the ASX Listing Rules. If, however, we do not follow those
30
procedures and policies, or they are not sufficient to prevent
non-compliance,
we could be subject to liability, fines and lawsuits. These laws,
regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with
evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of managements time and attention from revenue-generating activities to compliance activities. If,
notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
Investors could lose confidence in our financial reports, and the value of our CDIs and Common Stock may be adversely affected, if our
internal controls over financial reporting are found not to be effective by management or by an independent registered public accounting firm or if we make disclosure of existing or potential significant deficiencies or material weaknesses in those
controls.
As a public company in the U.S., we are required, pursuant to Section 404 of the Sarbanes-Oxley
Act of 2002, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting as of the end of the fiscal year. Our first report on compliance with Section 404 was
furnished in connection with our financial statements for the year ended December 31, 2014. Additionally, our independent registered public accounting firm will be required to issue a report on managements assessment of our internal
control over financial reporting and a report on their evaluation of the operating effectiveness of our internal control over financial reporting. Our auditors first report on our compliance with Section 404 is expected to be in
connection with our annual report on Form
10-K
following the date on which we are no longer an emerging growth company. The controls and other procedures are designed to ensure that information required to be
disclosed by us in the reports that we file with the SEC, is disclosed accurately and is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. We continue to update, document and evaluate our internal
control over financial reporting to the requirements of Section 404. Despite our efforts, there is a risk that we will not be able to conclude, from time to time, that our internal control over financial reporting is effective as required by
Section 404.
We continue to evaluate our existing internal controls over financial reporting against the standards
adopted by the Public Company Accounting Oversight Board. During the course of our ongoing evaluation of the internal controls, we may identify areas requiring improvement, and may have to design enhanced processes and controls to address issues
identified through this review. Remediating any deficiencies, significant deficiencies or material weaknesses that we or our independent registered public accounting firm may identify may require us to incur significant costs and expend significant
time and management resources. We cannot assure you that any of the measures we implement to remedy any such deficiencies will effectively mitigate or remedy such deficiencies. The existence of one or more material weaknesses could affect the
accuracy and timing of our financial reporting. Investors could lose confidence in our financial reports, and the value of our CDIs and Common Stock may be adversely affected, if our internal controls over financial reporting are found not to be
effective by management or by an independent registered public accounting firm or if we make disclosure of existing or potential significant deficiencies or material weaknesses in those controls.
Fluctuations in foreign currency exchange rates could adversely affect our financial results.
As our activities produce revenues and incur expenses in a variety of different currencies, we are exposed to exchange rate
risk which may affect our financial performance and position. Furthermore, some of our funds may be held in euros, Australian dollars or other currencies, while our functional currency is U.S. dollars. We are not currently hedging against exchange
rate fluctuations, and consequently we will be at the risk of any adverse movement in the U.S. dollar exchange rate if we exchange funds held in one currency into another currency.
Our shares of Common Stock, in the form of CDIs, are listed on the ASX and priced in Australian dollars. However, our
reporting currency is U.S. dollars. As a result, movements in foreign exchange rates may
31
cause the price of our securities to fluctuate for reasons unrelated to our financial condition or performance and may result in a discrepancy between our actual results of operations and
investors expectations of returns on our securities expressed in Australian dollars.
Risks Related to Our Industry
The medical device industry is subject to rapid technology change, which may result in obsolescence of our products.
The medical device industry is subject to rapid technology change. In order for us to remain competitive and to retain and
build market share, we must continually develop new products as well as improve our existing ones. Accordingly, we must devote substantial resources to research, development and commercialization activities.
There can be no assurance that we will be successful in developing competitive new products and/or improving existing products
so that such products remain competitive and avoid obsolescence. There can also be no assurance that any or all of our research and development projects for new products will demonstrate safety and efficacy and result in commercial products, or that
if such products are successfully designed and launched, they will be profitable.
Health care reform legislation could adversely
affect our future revenue and financial condition.
In recent years, there have been numerous initiatives by
governments throughout the world for comprehensive reforms affecting the delivery of and payment for health care. We cannot predict the changes that will be made and the effect such changes will have on the use of EndoBarrier. Decisions to increase
or decrease reimbursement or coverage for treatments for type 2 diabetes and/or obesity could have a material impact on our business and results of operations.
New legislation in the U.S. has also been enacted that imposes additional reporting requirements, penalties and taxes on the
medical device industry. While we have adopted comprehensive compliance programs to attempt to comply with these regulations, it is possible that some of our business activities could be subject to challenge under one or more of such laws. If our
past or present operations, or those of our independent sales agents and distributors, are found to be in violation of any of such laws or any other applicable governmental regulations, we may be subject to penalties, including civil and criminal
penalties, damages, fines or exclusion from health care reimbursement.
Pricing pressures in the health care industry could lead to
further demands for price concessions, which could have an adverse effect on our business, financial condition or results of operations.
Due to the significant rise in health care costs over the past decade, numerous initiatives and reforms initiated by
governments and third-party payers to curb these costs have resulted in difficulties in maintaining or raising the number and price of procedures. The increase in pricing pressure is driven by the competitive environment in the medical device
industry as many larger companies cut prices as they struggle to retain market share.
The type 2 diabetes and obesity
market has seen increasing resistance from payers with regard to local and national reimbursement coverage. We expect that market demand, government regulation, third-party reimbursement policies and societal pressures will continue to exert
downward pressure on the prices of our products and may adversely impact our business, financial condition or results of operations.
International operations subject us to certain operating risks, which could adversely impact our net revenues, results of operations and
financial condition.
While our products are manufactured in the U.S., sales of our products are currently only
made in select markets outside the U.S. As we seek to expand into the U.S. and additional foreign markets, we will be subject to
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new business risks, including failure to fulfill regulatory requirements on a timely basis, or at all, to market EndoBarrier or other future products; difficulties in managing foreign
relationships and operations, including relationships we establish with foreign partners, distributors, or sales or marketing agents; adapting to the differing laws and regulations, business and clinical practices, and patient preferences in various
countries; difficulty in collecting accounts receivable and longer collection periods; costs of enforcing contractual obligations in foreign jurisdictions; recessions in relevant foreign countries; political instability and unexpected changes in
diplomatic and trade relationships, currency exchange fluctuations and potentially adverse tax consequences.
The sale and
shipment of our products across international borders, as well as the purchase of components and products from international sources, could subject us to extensive U.S. and other governmental trade, import and export, and custom regulations and
laws. Compliance with these regulations is costly and exposes us to penalties for
non-compliance.
Other laws and regulations that can significantly impact us include various anti-bribery laws, including the U.S. Foreign
Corrupt Practices Act, anti-boycott, anti-kickback, false claims and fraud laws, as well as laws protecting the confidentiality of patient health information. Any failure to comply with applicable legal and regulatory obligations could impact us in
a variety of ways, including, but not limited to, civil and administrative penalties, denial of export privileges, seizure of shipments and restrictions on certain business activities.
Manufacturing facilities for medical devices must comply with applicable regulatory requirements.
Completion of our current and future clinical trials and commercialization of our products requires access to manufacturing
facilities that meet applicable regulatory standards to manufacture a sufficient supply of our products. The third-party manufacturer and suppliers of components and parts that we intend to use to manufacture our products must also comply with
applicable regulatory requirements, which often require significant time, money, resources and record-keeping and quality assurance efforts and subject us, our third-party manufacturer and our suppliers to potential regulatory inspections and
stoppages.
Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored
through periodic inspections by regulatory authorities. Failure by us, our third-party manufacturer or our suppliers to comply with regulatory requirements or failure to take satisfactory corrective action in response to an adverse inspection could
result in enforcement actions, including a public warning letter, a shutdown of, or restrictions on, our ability to obtain sufficient quantities of our products, delays in approving or clearing a product, refusal to permit the import or export of
our products or other enforcement action.
Risks Related to Our CDIs and Our Common Stock
There is no current trading market for our Common Stock in the U.S. and no such market may develop.
Although our CDIs are currently listed on the ASX in Australia, there is not any current trading market for our CDIs or the
underlying shares of Common Stock in the U.S. As a result, no trading market for our Common Stock may develop in the U.S. and you may not be able to transfer or resell your CDIs at their fair value, or at all.
We are eligible to be treated as an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012,
and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Common Stock and CDIs less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act. For as long as we continue to be an emerging growth
company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (1) not being required to
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comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, (2) reduced disclosure obligations regarding executive compensation in our periodic
reports and proxy statements and (3) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging
growth company until the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective Securities Act registration statement, although circumstances could cause us
to lose that status earlier, including if the market value of our Common Stock and CDIs held by
non-affiliates
exceeds $700.0 million as of any June 30 before that time or if we have total annual
gross revenue of $1.0 billion or more during any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in
non-convertible
debt during any three-year period before that time, we would cease to be an emerging growth company immediately. We cannot predict if investors will find our Common Stock or CDIs less attractive
because we may rely on these exemptions. If some investors find our Common Stock or CDIs less attractive as a result, there may be a less active trading market for our Common Stock or CDIs and our stock price may be more volatile.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as
those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public
companies that are not emerging growth companies.
Changes in economic conditions may adversely affect our business.
Changes in the general economic climate in which we operate may adversely affect our financial performance and the value of
our assets. Factors that contribute to that general economic climate include:
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contractions in the world economy or increases in the rate of inflation;
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international currency fluctuations;
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changes in interest rates;
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new or increased government taxes or duties or changes in taxation laws; or
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changes in government regulatory policy.
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Stock market fluctuations may adversely affect the price of our CDIs and Common Stock.
There are a number of risks associated with any stock market investment. Our CDIs have been traded on the ASX since
September 7, 2011. The price of our CDIs has been, and is likely to continue to be, volatile, which means that it could decline substantially within a short period of time. The value of the CDIs will be determined by the stock market and will
be subject to a range of factors beyond our control. These factors include movements in local and international stock exchanges, local interest rates and exchange rates, domestic and international economic and political conditions, government
taxation, market supply, competition and demand and other legal, regulatory or policy changes.
The trading volume of our CDIs is
relatively low, which may result in reduced liquidity for our shareholders.
Our CDIs are only listed on the ASX
and are not listed for trading on any other securities exchanges in Australia, the U.S. or elsewhere. As such, there can be no guarantee that an active market in the CDIs will develop or continue, or that the market price of the CDIs will increase.
If a market does not develop or is not sustained, it may be difficult for investors to sell their CDIs. Furthermore, the market price for the CDIs may fall or be made more volatile because of the relatively low volume of trading in our securities.
When trading volume is low, significant price movement can be caused by trading in a relatively small number of shares.
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Sales of a substantial number of CDIs, or the perception that these sales may
occur, could cause the market price of our CDIs to decline. Sales by our current shareholders of a substantial number of CDIs, or the expectation that such sales may occur, could significantly reduce the market price of our CDIs. We may also offer
additional CDIs in subsequent offerings, which may adversely affect the market price for the CDIs.
Some of our current shareholders
can exert control over us and may not make decisions that are in the best interests of all shareholders.
As of
March 15, 2017, 4 shareholders and their affiliated entities owned approximately 57.7% of our outstanding shares of Common Stock, or CDIs representing Common Stock, in the aggregate. As a result, these shareholders, if they act together, would
be able to exert a significant degree of influence over our management and affairs and over matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. This concentration of
ownership may harm the market price of the CDIs by delaying or preventing a change in control, even if a change is in the best interests of our other shareholders.
Provisions of our Certificate of Incorporation, our Bylaws and Delaware law could make an acquisition of us more difficult.
Certain provisions of our Certificate of Incorporation and Bylaws could discourage, delay or prevent a merger, acquisition or
other change of control that our shareholders may consider favorable, including transactions in which our shareholders might otherwise receive a premium for their CDIs. These provisions could also limit the price that investors might be willing to
pay in the future for the CDIs, thereby depressing the market price of the CDIs. Shareholders who wish to participate in these transactions may not have the opportunity to do so. A summary of these provisions is set out in our Registration Statement
on Form 10, filed with the SEC on April 30, 2014. In addition, we are incorporated in the State of Delaware and, as such, are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may, unless certain
criteria are met, prohibit large shareholders, in particular those owning 15% or more of the voting rights on our Common Stock, from merging or combining with us for a prescribed period of time.
We do not intend to pay cash dividends on our Common Stock in the foreseeable future.
We have never declared or paid any cash dividends on our shares, and we currently do not anticipate paying any cash dividends
in the foreseeable future. We intend to retain any earnings to finance the development and expansion of our products and business. Accordingly, our shareholders will not realize a return on their investment unless the trading price of our CDIs
appreciates.
We may be subject to arbitrage risks.
Investors may seek to profit by exploiting the difference, if any, in the price of our CDIs on the ASX and the price of our
Common Stock available for sale in the U.S., whether such sales would take place on a U.S. securities exchange or in the
over-the-counter
market or otherwise. Such
arbitrage activities could cause our share price in the market with the higher value to decrease to the price set by the market with the lower value.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
Our ability to utilize our federal net operating losses and federal tax credits may be limited under Sections 382 and 383 of
the Internal Revenue Code. The limitations apply if an ownership change, as defined by Section 382, occurs. Generally, an ownership change occurs when certain shareholders increase their aggregated ownership by more than 50 percentage points
over their lowest ownership percentage in a testing period (typically three years). We may already be subject to Section 382 limitations due to previous ownership changes. In addition, future changes in stock ownership may also trigger an
ownership change and, consequently, a Section 382 limitation. Due to the significant complexity and cost associated with a change in control study, and
35
the expectation of continuing to incur losses whereby the net operating losses and federal tax credits are not anticipated to be used in the foreseeable future, we have not assessed whether there
have been changes in control since our formation. If we have experienced changes in control at any time since our formation, utilization of our net operating losses or research and development credit carryforwards would be subject to annual
limitations under Section 382. Any limitation may result in expiration of a portion of the net operating loss or research and development credit carryforwards before utilization, which would reduce our gross deferred tax assets and
corresponding valuation allowance. As a result, if we earn net taxable income, our ability to use our
pre-change
net operating loss carryforwards to offset U.S. federal taxable income may be subject to
limitations, which could potentially result in increased future tax liability to us.
Other general risks.
Our future viability and profitability is also dependent on a number of other factors that affect the performance of all
industries and not just the medical device industry, including (but not limited to) the following:
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financial failure or default by a party to any contract to which we are, or may become, a party;
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insolvency or other managerial failure by any of the contractors that we use;
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acts of terrorism or an outbreak of international hostilities.
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Item 1B. UNRESOLVED STAFF COMMENTS
None.
On May 23, 2013, we entered
into a Sublease Agreement with Cambridge Technology, Inc., as
sub-landlord
for the sublease of the premises located at 25 Hartwell Avenue, Lexington, Massachusetts. The subleased premises were approximately
33,339 square feet. The sublease expired on December 31, 2016.
In June 2016, we entered into a
non-cancelable
agreement to lease approximately 4,200 square feet of office and laboratory space in Boston, Massachusetts. The lease commenced in June 2016 and expires in April 2018. There are no extension options.
In the event that the lease is terminated early, and provided there is sufficient notice, we believe we could find suitable alternative premises with no interruption in operations. If the lease is terminated without notice or the premises are
severely damaged, there could be an impact on our operations while we relocate to new premises. We believe that these premises are suitable and adequate for our needs now and for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The other information required by this Item 10 related to our directors is incorporated by reference to the applicable information in our
proxy statement for our 2017 Annual Meeting of Stockholders to be filed with the SEC.
Information regarding our executive officers
required by this Item 10 is incorporated by reference to the applicable information in our proxy statement for our 2017 Annual Meeting of Stockholders to be filed with the SEC.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics applicable to our directors, executive officers and all other employees. A copy of that
code is available on our corporate website at http://www.gidynamics.com. Any amendments to the code of business conduct and ethics, and any waivers thereto involving our executive officers, also will be available on our corporate website. A printed
copy of these documents will be made available upon request. The content on our website is not incorporated by reference into this Annual Report on Form
10-K.
Directors of the Registrant
The following table sets forth the name, age and position of each of our directors as of March 15, 2017:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
Daniel J. Moore
|
|
|
56
|
|
|
Non-executive
Chairman of the Board
|
Timothy J. Barberich
1,2
|
|
|
69
|
|
|
Non-executive
Director
|
Graham J. Bradley, AM
1
|
|
|
68
|
|
|
Non-executive
Director
|
Michael A. Carusi
2, 3
|
|
|
51
|
|
|
Non-executive
Director
|
Anne J. Keating
1, 2, 3
|
|
|
63
|
|
|
Non-executive
Director
|
Oern R. Stuge, M.D.
3
|
|
|
62
|
|
|
Non-executive
Director
|
1. Member of the audit committee.
2. Member of compensation committee.
3. Member of nominating and corporate governance committee.
Daniel J. Moore
has served as a director of the Company since 2014, as our vice-chairman from March 2015 to April 2016 and our
chairman since May 2016. Mr. Moores extensive experience in domestic and international sales, operations and executive management in global medical device manufacturers and years of service on other boards makes him qualified to serve on
our board of directors.
Mr. Moore has served as president, chief executive officer and director of Cyberonics, Inc., a medical
technology company with core expertise in neuromodulation, from 2007 to October 2015. From 1989 to 2007, Mr. Moore held positions in sales, marketing, and senior management in the U.S. and in Europe at Boston Scientific Corporation, a
diverse maker of minimally invasive medical products. His last position at Boston Scientific was President, International Distributor Management. Prior to that role, he held the position of President, Inter-Continental, the fourth largest business
unit of Boston Scientific, with more than 1,000 global employees and revenues exceeding $700 million. Mr. Moore previously held senior management positions at several Boston Scientific U.S. and international divisions.
Mr. Moore currently serves as the chairman of LivaNova PLC (the company resulting from the merger of Sorin S.p.A. and Cyberonics, Inc.), a
member of the board of directors for the Epilepsy Foundation of
58
America, and as a member of the boards or advisory boards for BioHouston, Inc. and the Weldon School of Biomedical Engineering at Purdue University. He currently serves on the board of
privately-held BrainScope Company, Inc., a medical technology company focused on traumatic brain injury, where he serves as Chairman. Past board positions include Smiling Kids, Inc., the Epilepsy Foundation of Texas (past-Chair), the Epilepsy
Foundation of Texas Houston (past-President), the Medical Device Manufacturers Association (past-Chair), Topera, Inc. (acquired by Abbott) and TriVascular Technologies, Inc. (acquired by Endologix).
Mr. Moore holds a B.A. from Harvard University and earned an MBA from Boston University.
Timothy J. Barberich
has been a director of the Company since June 2011. Mr. Barberich has nearly 40 years experience
in pharmaceutical and medical device companies, in technical, sales, marketing and management positions, including as chief executive officer and chairman of the board. Mr. Barberich is the founder and former president, chief executive officer
and chairman of Sepracor, Inc., a NASDAQ-listed-pharmaceutical company based in Massachusetts, which was acquired by Dainippon Sumitomo Pharma Co., Ltd. in 2009. Mr. Barberich founded Sepracor in 1984 and served as its chief executive officer
from 1984 to 2007 and chairman of the board from 1990 to 2007. From 2007 to 2008, Mr. Barberich served as executive chairman of Sepracor and then chairman of the board from 2008 to 2009. Mr. Barberich led Sepracor through its early-stage
research and development, product approvals, commercialization, private financings and initial public offering, partnerships with major companies, several successful spin-outs and achievement of revenues in excess of $1 billion. Through his
work at Sepracor, Mr. Barberich brings to our board invaluable knowledge and experience of leading a company in the health care industry through every stage of its life cycle. Prior to founding Sepracor, Mr. Barberich spent 10 years as a
senior executive at Millipore Corporation, a company that provides separations products to the life science research, pharmaceutical, biotechnology and electronic markets. Mr. Barberich brings to our board the knowledge and experience of
leading a company in the health care industry through every stage of its life cycle. We believe this experience and familiarity with the types of risks we may face, together with his broad medical device and pharmaceutical industry experience, makes
Mr. Barberich uniquely suited to serve on our board.
Mr. Barberich is currently chairman and CEO of BioNevia Pharmaceuticals,
Inc. and is a director of Verastem, Inc., a NASDAQ-listed biotechnology company, and Inotek Pharmaceuticals, Inc., a NASDAQ-listed biopharmaceutical company. Mr. Barberich also serves on the board of several private companies including
Neurovance, Inc. and Frequency Therapeutics. Mr. Barberich was formerly a director of HeartWare International, Inc., a NASDAQ-listed medical device company, Tokai Pharmaceuticals, Inc., a NASDAQ-listed biopharmaceutical company, MirImmune Inc.,
which was acquired in 2016, BioSphere Medical, Inc., a NASDAQ-listed biotechnology company and Gemin X Biotechnologies, Inc. and Resolvyx Pharmaceuticals, which were acquired in 2011 and 2010, respectively.
Mr. Barberich holds a Bachelor of Science degree in Chemistry from Kings College in Pennsylvania and has taken graduate courses from the
School of Chemistry at Rutgers University.
Graham J. Bradley
has served as a director of the Company since June 2011.
Mr. Bradley has had an extensive career spanning a range of industries across the Australian economy including banking and finance, residential and commercial property, insurance, telecommunications, mining services, minerals and energy,
medical research and the arts. From 1995 to 2003, Mr. Bradley was managing director of leading listed investment management and financial services group Perpetual Limited and during his eight-year tenure, Perpetual became one of
Australias leading listed funds management and financial services groups. Mr. Bradleys strong financial background provides financial expertise to our board, including an understanding of financial statements, corporate finance,
accounting and capital markets.
Mr. Bradley is currently chairman of HSBC Bank Australia Limited and Virgin Australia International
Holdings Limited, a council member of the European Australian Business Council; the chairman and director of Energy Australia Holdings Limited, the chairman of Infrastructure New South Wales and is a director and chairman-elect of GrainCorp Limited.
From 2009 to 2011, Mr. Bradley served as the president of the Business Council of Australia, the preeminent business leadership organization in Australia representing some 120 of the largest businesses and employers. Mr. Bradley was a
director of the Garvan Institute for Medical Research, a
59
leading Australian medical research organization, which includes a leading diabetes research group, for 10 years from 1999 to 2009 and also chaired the Garvan Foundation during this time.
Mr. Bradley has held former roles including as chairman of Stockland Corporation Limited, Po Valley Energy Limited, Boart Longyear Limited and Proteome Systems Limited; as chairman of the advisory board for Anglo American Australian Limited and
as a director of Singapore Telecommunications Limited, Queensland Investment Corporation and MBF Australia Limited. Prior to his role at Perpetual, Mr. Bradley was managing partner of the law firm Blake Dawson Waldron and a partner of
McKinsey & Company.
Mr. Bradley holds a Bachelor of Arts and a Bachelor of Law with first class honours from the University
of Sydney and a Masters of Law from Harvard University. Mr. Bradley is also a Fellow of the Australian Institute of Company Directors and was recognized as a Member of the Order of Australia in July 2009 for his services to business, the arts
and medical research.
Michael A. Carusi
has served as a director of the Company since 2003. Mr. Carusi has over 20
years experience in the life sciences and health care industry in business development, management consulting and venture capital roles. As a result of this experience, Mr. Carusi provides us financial and management experience. Since
2012, Mr. Carusi has been a general partner of Lightstone Ventures which is a venture capital firm focused on investments in the life sciences industry. Since October 1998, Mr. Carusi has been a general partner of Advanced Technology
Ventures, or ATV, which is a venture capital firm focused on investments in the life sciences and technology sectors. In 2003, Mr. Carusi led the ATV investment in the Company.
Mr. Carusi is a director of private medical companies in which ATV and Lightstone has invested, including EndoGastric Solutions, Inc.,
PowerVision, Inc., Holaira, Inc., Second Genome, Inc., and Gynesonics, Inc. He is also a former director of ATV investee companies where he was responsible for investments and successful exits, including Altura Medical, Inc., which was acquired by
Lombard Medical, Inc., Ardian, Inc., which was acquired by Medtronic, Inc., Plexxikon, Inc., which was acquired by Daiichi Sankyo Co, Ltd, and MicroVention, which was acquired by Terumo Medical Corporation, and TranS1 (BAXS) which went public on
NASDAQ in 2007.
Prior to joining ATV, Mr. Carusi served as the director of business development for Inhale Therapeutic Systems, Inc.,
a pulmonary drug delivery company that listed on NASDAQ in 1994, where he led partnering activities in the US, Europe and Japan. Mr. Carusi was formerly a principal at The Wilkerson Group, a management consulting firm focused exclusively on
health care. Mr. Carusi also serves as a lecturer at the Amos Tuck School of Business Administration at Dartmouth College where he also sits on the Tuck MBA Advisory Board. In addition, Mike is a Director on the National Venture Capital
Association (NVCA) Board of Directors where he is active in helping to shape policy affecting both innovation and healthcare. Lastly, Mike has been heavily involved with several programs at Stanford University including the Stanford Biodesign
Program and, more recently, the Stanford Center for Clinical and Translational Research and Education (Spectrum) where he currently serves as a Member of the Oversight Committee.
Mr. Carusi holds a Masters of Business Administration from the Amos Tuck School of Business Administration at Dartmouth College and a
Bachelor of Science in mechanical engineering from Lehigh University.
Anne J. Keating
has served as a director of the
Company since June 2011. Ms. Keating has had an extensive career in management and as a director of Australian companies, divisions of US companies and
not-for-profit
organizations. Her extensive business and governance experience makes her qualified to serve on our board of directors.
Ms. Keating is currently a director of a number of
ASX-listed
companies in a range
of different industries, including REVA Medical, Inc., a
US-based
medical device company developing and commercializing bioresorbable stents for the treatment of coronary artery disease, and Goodman Group
Limited, a global property development and management company. Ms. Keating is Chairman of Houlihan Lokey Australia, an investment bank.
Ms. Keating is also a director of the Garvan Institute of Medical Research (a leading research institute which studies diabetes and
obesity among other diseases) and an Inaugural Governor for the Cerebral Palsy Alliance Research Foundation. From 1993 to 2001, Ms. Keating held the position of general manager, Australia
60
for United Airlines and from 1993 to 1998 she was also a governor for the American Chamber of Commerce. She was also a delegate to the Australian/American Leadership Dialogue for 14 years.
Ms. Keating was an inaugural board member of the Victor Chang Cardiac Research Institute for 10 years and also served on the board of NRMA Pty Ltd, Insurance Australia Group (IAG) for 9 years and STW Ltd for 16 years. She has also held former
directorships with Ardent Leisure Management Limited, Spencer Street Station Redevelopment Holdings Limited, Easy FM China Pty Ltd, Radio 2CH Pty Ltd and Workcover Authority of New South Wales.
Oern R. Stuge, M.D.
has served as a director of the Company since his appointment in January 2017. Dr. Stuges
extensive experience in domestic and international sales, management and operations in a global medical device manufacturer makes him qualified to serve on our board of directors.
Dr. Stuge has served as an executive in various medical device, health care and life sciences companies over the last thirty years. Since
January 2011, Dr. Stuge has been Chairman of Orsco Lifesciences AG, a management firm that specializes in medical technology through which he supports several companies. Prior to that, Dr. Stuge served in various positions, including as
Senior Vice-President, at Medtronic Inc., from May 1998 to December 2009. Dr. Stuge is currently Chairman of Mainstay Medical Limited, a Euronext Paris-listed and Irish Stock Exchange-listed medical devices company and Luminas Limited, formerly
a NASDAQ-listed medical company. Dr. Stuge also serves on the board of several private companies including Balt Extrusion SAS, Vision Ophthalmology Group Gmbh, Pulmonx International SA, Phagenesis Limited and Aleva Neurotherapeutics SA.
Furthermore, until December 2016, Dr. Stuge served on the board of Bonesupport AB, a private medical technology company.
Dr. Stuge received an M.D. from the University of Oslo, Norway, an M.B.A. from IMD and an INSEAD Certification in Corporate Governance.
Australian Disclosure Requirements
Because we are listed on the Australian Securities Exchange, or ASX, we are required to comply with various disclosure requirements as set out
in the ASX Listing Rules. The following information is provided to comply with the ASX Listing Rules and is not intended to fulfill SEC information required by Part III of this Annual Report on Form
10-K.
Overview
Our securities are listed for
quotation in the form of CHESS Depositary Interests, or CDIs, on the ASX and trade under the symbol GID. Each share of our Common Stock is equivalent to fifty CDIs. The shareholder information below was applicable as at March 15,
2017.
Our share capital was as follows:
|
|
|
|
|
|
|
|
|
Type of Security
|
|
Number of Securities
|
|
|
Equivalent in CDIs
|
|
Common Stock
|
|
|
97,809
|
|
|
|
4,890,450
|
|
CDIs
|
|
|
552,983,980
|
|
|
|
552,983,980
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
557,874,430
|
|
|
|
|
Options
1
|
|
|
1,071,390
|
|
|
|
53,569,500
|
|
Restricted stock units
1
|
|
|
403,501
|
|
|
|
20,175,050
|
|
Warrants
|
|
|
28,532
|
|
|
|
1,426,600
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
633,045,580
|
|
|
|
|
|
|
|
|
|
|
|
1.
|
As at March 15, 2017, an additional 1,157,915 shares of Common Stock were available for grant under our
2011 Employee, Director and Consultant Equity Incentive Plan.
|
Substantial Holders
The number of CDIs held by our substantial shareholders (being shareholders who, together with their associates, have a relevant interest in
at least 5% of our voting shares) assuming the conversion of Common
61
Stock held by those shareholders into CDIs and based on the information in the substantial holder notices we received as of March 15, 2017, was as follows:
|
|
|
|
|
|
|
|
|
Name of Holder
|
|
Number of CDIs Held
|
|
|
% of Total CDIs
|
|
Crystal Amber Fund Limited
|
|
|
221,810,862
|
|
|
|
39.76
|
%
|
Medtronic, Inc.
|
|
|
39,115,442
|
|
|
|
7.01
|
%
|
Advanced Technology Ventures and Affiliated Entities
|
|
|
32,651,037
|
|
|
|
5.85
|
%
|
Johnson & Johnson Innovation JJDC, Inc.
|
|
|
28,278,460
|
|
|
|
5.07
|
%
|
Distribution of Equity Security Holders
There were a total of 11,157,489 shares of Common Stock on issue, 11,059,680 of which were held as CDIs (being 552,983,980 CDIs in total). The
table below presents the number of shares of Common Stock and the number of CDIs on issue, as well as the number of options, restricted stock units and warrants on issue by size of holding as of March 15, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
(unlisted)
|
|
|
CDIs
|
|
|
Options
(unlisted)
|
|
|
Restricted Stock
Units
(unlisted)
|
|
|
Warrants
(unlisted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Holders
|
|
|
Number
of
Shares
|
|
|
Number
of
Holders
|
|
|
Number of
CDIs
|
|
|
Number
of
Holders
|
|
|
Number
of Shares
|
|
|
Number
of
Holders
|
|
|
Number
of Shares
|
|
|
Number
of
Holders
|
|
|
Number
of
Shares
|
|
1 1,000
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
46,929
|
|
|
|
1
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,001 5,000
|
|
|
1
|
|
|
|
28
|
|
|
|
264
|
|
|
|
735,844
|
|
|
|
6
|
|
|
|
23,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,001 10,000
|
|
|
1
|
|
|
|
105
|
|
|
|
157
|
|
|
|
1,318,843
|
|
|
|
8
|
|
|
|
61,294
|
|
|
|
1
|
|
|
|
10,842
|
|
|
|
|
|
|
|
|
|
10,001 100,000
|
|
|
9
|
|
|
|
8,526
|
|
|
|
331
|
|
|
|
12,708,213
|
|
|
|
11
|
|
|
|
234,488
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
28,532
|
|
100,001 and over
|
|
|
8
|
|
|
|
89,150
|
|
|
|
166
|
|
|
|
538,174,151
|
|
|
|
3
|
|
|
|
751,876
|
|
|
|
2
|
|
|
|
392,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19
|
|
|
|
97,809
|
|
|
|
1,043
|
|
|
|
552,983,980
|
|
|
|
29
|
|
|
|
1,071,390
|
|
|
|
3
|
|
|
|
403,501
|
|
|
|
1
|
|
|
|
28,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unmarketable Parcels
As of March 15, 2017, the number of shareholders holding less than a marketable parcel (for the purposes of the ASX Listing Rules) was
547, based on the closing market price as at March 15, 2017.
62
Top 20 Holders
Holders of CDIs Only
The table below provides a list of the top 20 holders of our CDIs. Related but separate legal entities are not aggregated.
|
|
|
|
|
|
|
No.
|
|
Name of Holder
|
|
Number of CDIs Held
|
|
% of Total CDIs
|
1
|
|
J P MORGAN NOMINEES AUSTRALIA LIMITED
|
|
246,546,930
|
|
44.58%
|
2
|
|
CITICORP NOMINEES PTY LIMITED
|
|
42,096,206
|
|
7.61%
|
3
|
|
MEDTRONIC INC
|
|
39,115,442
|
|
7.07%
|
4
|
|
ADVANCED TECHNOLOGY VENTURES VII LP
|
|
27,048,390
|
|
4.89%
|
5
|
|
MR PAUL COZZI
|
|
21,711,608
|
|
3.93%
|
6
|
|
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
|
|
18,575,829
|
|
3.36%
|
7
|
|
POLARIS VENTURE PARTNERS IV LP
|
|
17,198,468
|
|
3.11%
|
8
|
|
MOORE FAMILY NOMINEE PTY LTD
|
|
13,695,660
|
|
2.48%
|
9
|
|
BRISPOT NOMINEES PTY LTD
|
|
11,500,000
|
|
2.08%
|
10
|
|
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED-GSCO ECA
|
|
5,285,858
|
|
0.96%
|
11
|
|
BNP PARIBAS NOMS PTY LTD
|
|
5,166,559
|
|
0.93%
|
12
|
|
MR PAUL JOSEPH COZZI
|
|
4,600,000
|
|
0.83%
|
13
|
|
ADVANCED TECHNOLOGY VENTURES VI LP
|
|
4,517,209
|
|
0.82%
|
14
|
|
BURLEIGH HEADS HOLDINGS PTY LTD
|
|
4,000,000
|
|
0.72%
|
15
|
|
LGL TRUSTEES LIMITED
|
|
3,299,363
|
|
0.60%
|
16
|
|
MERRILL LYNCH (AUSTRALIA) NOMINEES PTY LIMITED
|
|
3,068,682
|
|
0.55%
|
17
|
|
NATIONAL NOMINEES LIMITED
|
|
3,043,901
|
|
0.55%
|
18
|
|
WARMAN INVESTMENTS PTY LTD
|
|
2,698,300
|
|
0.49%
|
19
|
|
MR JAMES HOCHROTH & MRS YVONNE HOCHROTH
|
|
2,681,800
|
|
0.48%
|
20
|
|
NAUDE SUPER PTY LTD
|
|
2,631,800
|
|
0.48%
|
|
|
|
|
|
|
|
Total CDIs held by top 20 CDI holders
|
|
478,482,005
|
|
86.53%
|
Total CDIs held by all other CDI holders
|
|
74,501,975
|
|
13.47%
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
552,983,980
|
|
|
|
|
|
|
|
|
|
63
Holders of CDIs and Common Stock Combined
The table below provides a list of the top 20 holders of our securities taking into account securities held in the form of both Common Stock
and CDIs. Information presented below is prepared on the assumption that all shares of Common Stock on issue are held as CDIs. Related but separate legal entities are not aggregated.
Shares of Common Stock (not listed on ASX)
|
|
|
|
|
|
|
No.
|
|
Name of Holder
|
|
Number of CDIs Held
|
|
% of Total CDIs
|
1
|
|
J P MORGAN NOMINEES AUSTRALIA LIMITED
|
|
246,546,930
|
|
44.19%
|
2
|
|
CITICORP NOMINEES PTY LIMITED
|
|
42,096,206
|
|
7.55%
|
3
|
|
MEDTRONIC INC
|
|
39,115,442
|
|
7.01%
|
4
|
|
ADVANCED TECHNOLOGY VENTURES VII LP
|
|
27,048,390
|
|
4.85%
|
5
|
|
MR PAUL COZZI
|
|
21,711,608
|
|
3.89%
|
6
|
|
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
|
|
18,575,829
|
|
3.33%
|
7
|
|
POLARIS VENTURE PARTNERS IV LP
|
|
17,198,468
|
|
3.08%
|
8
|
|
MOORE FAMILY NOMINEE PTY LTD
|
|
13,695,660
|
|
2.45%
|
9
|
|
BRISPOT NOMINEES PTY LTD
|
|
11,500,000
|
|
2.06%
|
10
|
|
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED-GSCO ECA
|
|
5,285,858
|
|
0.95%
|
11
|
|
BNP PARIBAS NOMS PTY LTD
|
|
5,166,559
|
|
0.93%
|
12
|
|
MR PAUL JOSEPH COZZI
|
|
4,600,000
|
|
0.82%
|
13
|
|
ADVANCED TECHNOLOGY VENTURES VI LP
|
|
4,517,209
|
|
0.81%
|
14
|
|
BURLEIGH HEADS HOLDINGS PTY LTD
|
|
4,000,000
|
|
0.72%
|
15
|
|
LGL TRUSTEES LIMITED
|
|
3,299,363
|
|
0.59%
|
16
|
|
MERRILL LYNCH (AUSTRALIA) NOMINEES PTY LIMITED
|
|
3,068,682
|
|
0.55%
|
17
|
|
NATIONAL NOMINEES LIMITED
|
|
3,043,901
|
|
0.55%
|
18
|
|
WARMAN INVESTMENTS PTY LTD
|
|
2,698,300
|
|
0.48%
|
19
|
|
MR JAMES HOCHROTH & MRS YVONNE HOCHROTH
|
|
2,681,800
|
|
0.48%
|
20
|
|
NAUDE SUPER PTY LTD
|
|
2,631,800
|
|
0.47%
|
|
|
|
|
|
|
|
Total securities held by top 20 securities holders
|
|
478,482,005
|
|
85.77%
|
Total securities held by all other securities holders
|
|
79,392,425
|
|
14.23%
|
|
|
|
|
|
|
|
|
|
|
|
557,874,430
|
|
|
|
|
|
|
|
|
|
Options (not listed on ASX)
There were 1,071,390 options on issue to purchase shares of Common Stock under the 2011 Employee, Director and Consultant Equity Incentive Plan
and the 2003 Omnibus Stock Plan with varying exercise prices. These options are held by 29 individuals.
Restricted Stock Units (not listed on ASX)
There were 403,501 restricted stock units on issue for 403,501 shares of Common Stock under the 2011 Employee, Director and Consultant
Equity Incentive Plan. These restricted stock units are held by 3 individuals.
Warrants (not listed on ASX)
There was one warrant on issue to subscribe for in aggregate 28,532 shares of Common Stock at an exercise price of $0.64 per share.
64
Restricted Securities
There were no restricted securities on issue.
Voting Rights
Our bylaws provide that
each shareholder has one vote for every share of Common Stock entitled to vote held of record by such shareholder and a proportionate vote for each fractional share of Common Stock entitled to vote so held, unless otherwise provided by Delaware
General Corporation Law or in the certificate of incorporation.
Holders of CDIs have one vote for every fifty CDIs held
of record by such shareholder. If holders of CDIs wish to attend our general meetings, they will be able to do so. Under the ASX Listing Rules, the Company, as an issuer of CDIs, must allow CDI holders to attend any meeting of the holders of the
underlying securities unless relevant U.S. law at the time of the meeting prevents CDI holders from attending those meetings.
In order to vote at such meetings, CDI holders have the following options:
|
a)
|
Instructing CDN, as the legal owner, to vote the shares of Common Stock underlying their CDIs in a particular manner. The instruction form must be completed and returned to our share registry prior to the meeting;
|
|
b)
|
Informing us that they wish to nominate themselves or another person to be appointed as CDNs proxy for the purposes of attending and voting at the general meeting; and
|
|
c)
|
Converting their CDIs into a holding of shares of Common Stock and voting these at the meeting (however, if thereafter the former CDI holder wishes to sell their investment on the ASX, it would be necessary to convert
the shares of Common Stock back to CDIs). This must be done prior to the record date for the meeting.
|
As
holders of CDIs will not appear on our share register as the legal holders of shares of Common Stock, they will not be entitled to vote at our shareholder meetings unless one of the above steps is undertaken.
Proxy forms and details of these alternatives will be included in each notice of meeting we send to CDI holders.
Holders of restricted stock units, issued but unexercised options and warrants are not entitled to vote.
Required Statements
GI Dynamics, Inc.
makes the following disclosures:
|
a)
|
There is no current
on-market
buy-back
of our securities.
|
|
b)
|
GI Dynamics, Inc. is incorporated in the state of Delaware in the United States of America.
|
|
c)
|
GI Dynamics, Inc. is not subject to Chapters 6, 6A, 6B or 6C of the
Corporations Act
2001 (Cth), or Corporations Act, dealing with the acquisitions of shares (including substantial shareholdings and takeovers).
|
|
d)
|
Under the Delaware General Corporation Law, shares are generally freely transferable subject to restrictions
imposed by U.S. federal or state securities laws, by our certificate of incorporation or bylaws, or by an agreement signed with the holders of the shares at issue. Our amended and restated certificate of incorporation and bylaws do not impose any
specific restrictions on transfer. Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested shareholder for a period of
three years following the time the person became an interested shareholder, unless the business combination or
|
65
|
acquisition of shares that resulted in a shareholder becoming an interested shareholder is approved in a prescribed manner. A business combination can include a merger, asset or share
sale, or other transaction resulting in a financial benefit to an interested shareholder. Generally, an interested shareholder is a person who, together with its affiliates and associates, owns (or within three years prior to the determination of
interested shareholder status did own) 15% or more of a corporations voting shares. The existence of this provision would be expected to have an anti-takeover effect with respect to transactions not approved in advance by the board of
directors, including discouraging attempts that might result in a premium over the market price for the shares of Common Stock held by shareholders. As a general matter, Section 203 applies solely to corporations with a class of voting stock
listed on a national securities exchange in the U.S. or held of record by 2,000 or more stockholders, neither of which currently apply to us, but may at any time in the future.
|
|
e)
|
We have used the cash (and assets in a form readily convertible to cash) that we had at the time of admission to the ASX in a manner consistent with our stated business objectives (as described in the Australian
prospectus lodged with the Australian Securities and Investments Commission with respect to our IPO) from the time of our admission to the ASX through to December 31, 2016.
|
|
f)
|
The securities of GI Dynamics, Inc. are not quoted on any exchange other than the ASX.
|
|
g)
|
The name of our Secretary is James Murphy.
|
|
h)
|
The address and telephone number of our principal registered office in Australia is:
|
KPMG
Tower Three
International Towers Sydney
300 Barangaroo Avenue
Sydney NSW 2000 Australia
Telephone: +61 2 9335 8054
|
i)
|
Registers of securities are held as follows:
|
|
1.
|
for CDIs in Australia at:
|
Link Market Services Limited
Level 12, 680 George Street
Sydney NSW 2000
Telephone: +61 1300 554 474
|
2.
|
for Common Stock in the United States at:
|
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn New York 11219
Telephone: +1 718 921 8124
Australian Corporate Governance Statement
The Companys board of directors, or Board, and employees are committed to developing, promoting and maintaining a strong culture of good
corporate governance and ethical conduct.
The Board is pleased to confirm that the Companys corporate governance framework is
generally consistent with the ASX Corporate Governance Councils Corporate Governance Principles and Recommendations 3rd Edition (ASX Governance Recommendations), other than as set out below. To this end, the Company
provides below a review of its corporate governance framework using the same numbering as adopted for the principles as set out in the ASX Governance Recommendations.
This corporate governance statement relates to the financial year ended December 31, 2016, and has been approved by the Board.
66
Copies of the Companys codes and policies may be downloaded from the corporate governance
section of the Companys website at
www.gidynamics.com
.
Principle 1 Lay solid foundations for
management and oversight
Recommendation 1.1 A listed entity should disclose:
|
a)
|
the respective roles and responsibilities of its board and management; and
|
|
b)
|
those matters expressly reserved to the board and those delegated to management.
|
The
Boards responsibilities are recognized and documented by the charter of the Board (Board Charter), a copy of which is available on the Companys website at
www.gidynamics.com
, and there is a clear delineation between
the Boards responsibility for the Companys strategy and activities, and the
day-to-day
management of operations conferred upon the Companys officers.
The Board Charter provides that the role of the Board, as the body ultimately responsible for the corporate governance of the Company,
includes the following major functions:
|
|
|
providing input into and final approval of managements development of corporate strategy and performance objectives;
|
|
|
|
reviewing, ratifying and monitoring systems of risk management and internal control, codes of conduct, and legal compliance;
|
|
|
|
ensuring appropriate resources are available to senior executives;
|
|
|
|
approving and monitoring the progress of major capital expenditure, capital management and acquisitions and divestments;
|
|
|
|
approving and monitoring financial and other reporting;
|
|
|
|
evaluating the overall effectiveness of the Board and its committees; and
|
|
|
|
evaluating, selecting and recommending an appropriate slate of candidates for election as directors.
|
Management is responsible for implementing the strategic objectives set by the Board, carrying out the
day-to-day
operations of the Company, and making accurate, timely, and clear reports to the Board.
Recommendation 1.2 A listed entity should:
|
a)
|
undertake the appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a director; and
|
|
b)
|
provide security holders with all material information in its possession relevant to a decision on whether or not to elect or
re-elect
a director.
|
The nominating and corporate governance committee of the Company is responsible for reviewing, with the Board from time to time, the
appropriate skills and characteristics required of Board members in the context of the current
make-up
of the Board and the Companys business needs. When considering Board appointments, the committee
ensures that appropriate checks are undertaken on the candidates character, education, qualifications, criminal record and bankruptcy history and that sufficient information is provided to security holders when a candidate is standing for
election or
re-election
as a director to enable them to make an informed decision on whether or not to elect or
re-elect
the candidate. Information regarding the
directors who were
re-appointed
at the Companys 2016 annual general meeting was provided in the notice of meeting disclosed to the ASX and shareholders on May 2, 2016.
Recommendation 1.3 A listed entity should have a written agreement with each director and senior executive setting out the terms of their
appointment.
The terms of Board membership are set forth in the Companys Board Charter and the remuneration paid to Board
members is provided in accordance with shareholder approval (where required) following the
67
compensation committees recommendation. While the Company does not have a separate written agreement with each of its Board members, it believes these guidelines are adequate to provide a
clear understanding of the roles and responsibilities of Board members. In the case of senior executives, the Company has provided a letter or contract of employment to each executive detailing the terms of employment and has developed job
descriptions setting forth the position, duties, and reporting structure. Where there are any agreed entitlements upon termination, such agreed items are set forth in the employment letters or contracts. In January 2017, the Company amended the
employment agreements with Scott Schorer, President and Chief Executive Officer and Brian Callahan, Chief Compliance Officer. The amendments concerned provisions of the agreement upon the termination of these two executives under certain
circumstances See Form 8K filed with the Securities and Exchange Commission January 30, 2017.
Recommendation 1.4 The company
secretary of a listed entity should be accountable directly to the board, through the chair, on all matters to do with the proper functioning of the board:
The role and responsibilities of the Companys secretary are set forth in the Companys bylaws. The Board is responsible for
electing or appointing the secretary and for prescribing the duties and powers of the secretary. Each director is able to communicate freely and directly with the secretary and vice versa. The secretary is accountable to the Board, through the
chairman of the Board, for all matters to do with the proper functioning of the Board, including:
|
|
|
monitoring the Companys compliance in respect of all corporate governance matters;
|
|
|
|
drafting and circulating the minutes of meetings of the Board and all committees for approval at the next meeting; and
|
|
|
|
monitoring the Companys compliance with all disclosure obligations and regularly reviewing Company policies and procedures relating to compliance with such disclosure obligations.
|
Recommendation 1.5 A listed entity should:
|
a)
|
have a diversity policy which includes requirements for the board or a relevant committee of the board to set measurable objectives for achieving gender diversity and to assess annually both the objectives and the
entitys progress in achieving them;
|
|
b)
|
disclose that policy or a summary of it; and
|
|
c)
|
disclose as at the end of each reporting period the measurable objectives for achieving gender diversity set by the board or a relevant committee of the board in accordance with the entitys diversity policy and
its progress towards achieving them, and either:
|
|
i.
|
the respective proportions of men and women on the board, in senior executive positions and across the whole organization (including how the entity has defined senior executive for these purposes); or
|
|
ii.
|
if the entity is a relevant employer under the Workplace Gender Equality Act, the entitys most recent Gender Equality Indicators, as defined in and published under that Act.
|
The Company has adopted a Diversity Policy, a copy of which is available on the corporate governance section of the
Companys website. The Companys Diversity Policy includes requirements for the Board to establish measurable objectives to assist the Company in achieving diversity.
The Board continued to evaluate the gender diversity of the Companys employees, its senior executives, and the Board during 2016. During
2016, the Board, in considering measurable objectives to set for achieving gender diversity, concluded that, because of the current stage of the Companys development and the ongoing restructuring efforts, the Company should continue to recruit
employees from a diverse pool of talented candidates without regard to gender while continuing to focus on the necessary skills and experience required to achieve the Companys performance objectives. As a result, the Company did not set
measurable objectives for
68
achieving gender diversity in 2016 but used 2015 data as a baseline to measure gender diversity among its employees, senior executives and Board for 2016.
At December 31, 2016, the proportion of women in the Company as a percentage of its total employees decreased from 44% (16 out of 36 in
2015) to 40% (6 out of 15 in 2016) based on data maintained by the Companys human resources organization. In senior executive positions (vice president and above), the proportion of women remained the same at 0% (none out of 4 in 2016 and
2015). The proportion of women on the Board increased from 14% (1 out of 7 in 2015) to 17% (1 out of 6 in 2016).
Recommendation 1.6 A
listed entity should:
|
a)
|
have and disclose a process for periodically evaluating the performance of the board, its committees and individual directors; and
|
|
b)
|
disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period in accordance with that process.
|
In accordance with the Companys agreed evaluation process, during the reporting period ended December 31, 2016, the Board and each
committee performed a self-evaluation. Each director provided their assessments of the effectiveness of the Board and the committees on which they serve to the nominating and corporate governance committee. The individual assessments were summarized
by the nominating and corporate governance committee and reported for discussion to the full Board and the committees. The nominating and corporate governance committee completed its assessment of the Boards compliance with the principles set
forth in the Board Charter and did not identify any areas in which the Board or committees needed to improve performance and has reviewed and approved disclosures relating to any departures from the ASX Governance Recommendations. During the
reporting period ended December 31, 2016, the nominating and corporate governance committee also evaluated individual directors in accordance with the criteria set by the nominating and corporate governance committee and the Board from time to
time. Based on such assessments, the nominating and corporate governance committee has determined that the Board, its committees and each director were effective.
Recommendation 1.7 A listed entity should:
|
a)
|
have and disclose a process for periodically evaluating the performance of its senior executives; and
|
|
b)
|
disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period in accordance with that process.
|
Under the Board Charter, the directors of the Company are ultimately responsible for monitoring the performance of the senior management team
and the compensation committee, in accordance with its charter, reviews and approves corporate and personal performance goals and objectives relevant to the compensation of all executive officers. At the end of each calendar year, the chief
executive officer presents to the compensation committee his assessment of the performance during the year of each executive officer (other than himself) against
pre-established
performance objectives. The
compensation committee considers this assessment and determines each executive officers (including the chief executive officers) compensation, including but not limited to salary, bonus, incentive compensation and equity awards based on
such an evaluation. In addition, the compensation committee is responsible for regularly reviewing the Companys compensation, recruitment, retention and termination policies for senior executives.
In January 2016, a performance evaluation of the Companys executive officers for the year ended December 31, 2015 was undertaken.
In January 2017, a performance evaluation of the Companys executive officers for the year ended December 31, 2016 was undertaken. Following each performance evaluation, the Companys compensation committee reviewed and approved
changes to the compensation of the Companys executive officers based on the individual levels of achievement against
pre-established
performance objectives.
69
Further information regarding executive compensation for the year ended
December 31, 2016, as required by Item 11 of this Annual Report on Form
10-K,
is incorporated by reference to the applicable information in our proxy statement for our 2017 Annual Meeting of
Stockholders, to be filed with the SEC and the ASX within 120 days of December 31, 2016. Such information is incorporated herein by reference.
Principle 2 Structure the board to add value
Recommendation 2.1 The board of a listed entity should:
|
a)
|
have a nomination committee which:
|
|
i.
|
has at least three members, a majority of whom are independent directors; and
|
|
ii.
|
is chaired by an independent director;
|
and disclose:
|
iii.
|
the charter of the committee;
|
|
iv.
|
the members of the committee; and
|
|
v.
|
as at the end of each reporting period the number of times the committee met throughout the period and the individual attendances of the members at those meetings.
|
As of December 31, 2016 the members of the nominating and corporate governance committee were Michael A. Carusi, Anne J. Keating (Chair)
and Jack E. Meyer. Ms. Keating and Mr. Meyer are considered independent directors for ASX, NASDAQ and SEC purposes and Mr. Carusi is not considered to be independent for ASX purposes, but is considered to be independent for NASDAQ and
SEC purposes. Mr. Meyer resigned from the Board effective January 4, 2017 and Oern Stuge, M.D., joined the Board and the nominating and corporate governance committee. Mr. Stuge is considered to be an independent director for ASX,
NASDAQ and SEC purposes. A copy of the nominating and corporate governance committee charter is available on the corporate governance section of the Companys website. The nominating and corporate governance committee met twice during 2016 with
all committee members in attendance at each meeting.
Recommendation 2.2 A listed entity should have and disclose a board skills matrix
setting out the mix of skills and diversity that the board currently has or is looking to achieve in its membership.
The nominating
and corporate governance committee is responsible for reviewing with the Board from time to time the appropriate skills and characteristics required of Board members in the context of the current
make-up
of
the Board and the Companys business needs. This assessment includes, among other things, an individuals business experience and skills (including skills in core areas such as operations, management, technology, medical device industry
knowledge, accounting and finance, marketing, leadership, strategic planning and international markets), independence, judgment, integrity and ability to commit sufficient time and attention to the activities of the Board, as well as the absence of
any potential conflicts with the Companys interests. The nominating and corporate governance committee considers these criteria in the context of an assessment of the perceived needs of the Board as a whole and seeks to achieve diversity of
occupational and personal backgrounds on the Board.
Information regarding the skills, experience and expertise relevant to each director
is set out in the section titled Directors of the Registrant in this Item 10, with the exception of Jack E. Meyer, who resigned from the Board effective January 4, 2017. Mr. Meyer served as a director of the Company since
2003 and as our chairman from June 2011 to April 2016. Mr. Meyer has nearly 40 years experience in the medical device, health care and medical technology industries including roles as chief executive officer and in sales and marketing,
and has expertise in new medical technologies, commercialization, market expansion and corporate divestment. Mr. Meyer was formerly the president and chief executive officer of Urologix, Inc., a NASDAQ-listed medical
70
device company, from 1994 to 1998, where he was responsible for developing the company, entering into international distribution arrangements and completing several private and public financings.
Mr. Meyer was also president and chief executive officer of Fiberoptic Sensor Technologies, Inc., which was acquired by C.R. Bard, from 1993 to 1994; president & chief executive officer of Carelink Corporation, which was acquired by
Tokos Medical Corporation, from 1992 to 1993; executive vice president and chief operating officer of Quest Medical, Inc. from 1982 to 1991, and vice president sales and marketing of IVAC Corporation, which was acquired by Eli Lilly. Mr. Meyer
also has served on the board of a number of private medical device companies and currently serves on the board of Minnetronix, Inc. Mr. Meyer holds a Bachelor of Science and a Masters of Business Administration, each from Drake University.
While the Board did not disclose the Board skills matrix for the reporting period the Board believes that its members possess the mix of
skills and diversity that the Company needs at this stage of its development. The Board continues to evolve a board skills matrix setting out the mix of skills and diversity that the Board currently has or is looking to achieve in its membership.
Recommendation 2.3 A listed entity should disclose:
|
a)
|
the names of the directors considered by the board to be independent directors;
|
|
b)
|
if a director has an interest, position, association or relationship of the type described in this recommendation but the board is of the opinion that it does not compromise the independence of the director, the
nature of the interest, position, association or relationship in question and an explanation of why the board is of that opinion; and
|
|
c)
|
the length of service of each director.
|
The Company considers that a director is an
independent director where that director is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the directors decisions relating to the Company or with the
directors ability to act in the best interests of the Company. The Company also assesses the independence of its directors regarding the requirements for independence set out under ASX Governance Recommendation 2.3.
The composition and tenure of the Board as of December 31, 2016, as well as each members independence status during 2016, was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Committees
|
Director
|
|
Director Position
|
|
Tenure
1
|
|
Independent
|
|
Audit
|
|
Compensation
|
|
Nominating
and
Corporate
Governance
|
|
|
|
|
|
|
|
Daniel J. Moore
3
|
|
Non-executive Chairman
|
|
2.3 years
|
|
Yes
|
|
|
|
|
|
|
Timothy J. Barberich
3
|
|
Non-executive
Director
|
|
5.6 years
|
|
Yes
|
|
X
|
|
Chair
|
|
|
Graham J. Bradley, AM
|
|
Non-executive
Director
|
|
5.6 years
|
|
Yes
|
|
Chair
|
|
|
|
|
Michael A. Carusi
4
|
|
Non-executive
Director
|
|
13.8 years
|
|
No
|
|
|
|
X
|
|
X
|
Anne J. Keating
3
|
|
Non-executive
Director
|
|
5.6 years
|
|
Yes
|
|
X
|
|
X
|
|
Chair
|
Jack E. Meyer
2
|
|
Non-executive
Director
|
|
13.5 years
|
|
Yes
|
|
|
|
|
|
X
|
1.
|
Calculated as of December 31, 2016.
|
2.
|
Effective January 4, 2017, Mr. Meyer resigned from the Board, Dr. Stuge joined the board and the
nominating and corporate governance committee.
|
3. On January 19, 2016, Mr. Barberich resigned from the
compensation committee, Ms. Keating joined the compensation committee and Mr. Moore was elected chairman of the compensation committee. On May 22, 2016, Mr. Moore resigned from the compensation committee and Mr. Barberich
joined the compensation committee and was elected chairman.
4.
|
Independent director under the rules of NASDAQ and the SEC but not considered independent under the ASX Rules.
|
71
The number of directors meetings (including meetings of committees) and number of meetings
attended by each of the directors during the reporting period are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Committee Meetings
|
|
|
|
Directors Meetings
|
|
|
Audit Committee
|
|
|
Nominating and
Corporate Governance
|
|
|
Compensation
Committee
|
|
Director
|
|
A
|
|
|
B
|
|
|
A
|
|
|
B
|
|
|
A
|
|
|
B
|
|
|
A
|
|
|
B
|
|
Jack E. Meyer
|
|
|
16
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Timothy J. Barberich
|
|
|
11
|
|
|
|
16
|
|
|
|
3
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Graham J. Bradley, AM
|
|
|
14
|
|
|
|
16
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael A. Carusi
|
|
|
12
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
Anne J. Keating
|
|
|
16
|
|
|
|
16
|
|
|
|
6
|
|
|
|
6
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Daniel J. Moore
|
|
|
16
|
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16
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1
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1
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Michael D. Dale
1
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4
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7
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1. Effective March 15, 2016, Mr. Dale resigned as president and CEO and as a director of the Company.
A Number of meetings attended.
B Number of meetings held during the time the director held office during the reporting period.
Independent advice
At the Companys expense, each member of the Board and each member of a committee of the Board is entitled to seek advice from
independent external advisers in relation to any matter that is considered necessary to fulfil their relevant duties and responsibilities.
Recommendation 2.4 A majority of the board of a listed entity should be independent directors.
The Board for the reporting period comprised a majority of independent directors.
Recommendation 2.5 The chair of the board of a listed entity should be an independent director and, in particular, should not be the same person as
the CEO of the entity.
In compliance with the ASX Governance Recommendations, the chairman of the Board is an independent director
and the roles of the chairman and the chief executive officer of the Company are not currently exercised by the same individual. However, the Companys Board Charter does not specifically address whether or not the offices of chairman and chief
executive officer should be vested in the same person or two different people, or whether the chairman should be an employee of the Company or should be elected from among the
non-executive
directors. The
needs of the Company and the individuals available to serve in these roles may dictate different outcomes at different times, and the Board believes that retaining flexibility in these decisions is in the best interest of the Company and its
shareholders.
Recommendation 2.6 A listed entity should have a program for inducting new directors and provide appropriate professional
development opportunities for directors to develop and maintain the skills and knowledge needed to perform their roles as directors effectively.
The nominating and corporate governance committee of the Board continually assesses the needs of the Company and the skills and knowledge
required of its Board members. On appointment, new directors are provided with induction information that generally includes historical information about the Company and its operations, details of the Companys directors and
officers insurance, the Companys corporate governance guidelines, and other Company governance policies. The induction process also involves
one-on-one
discussions
72
with the Chairman and other directors and briefings from senior management to help new directors participate actively in Board decision making at the earliest opportunity. When it is necessary,
resources are provided for the Board as a whole, and for individual Board members as needed, to supplement their skills and knowledge and fill any identified gaps.
Principle 3 Act ethically and responsibly
Recommendation 3.1 A listed entity should:
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a)
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have a code of conduct for its directors, senior executives and employees; and
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b)
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disclose that code or a summary of it.
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The Company has adopted a Code of Business
Conduct and Ethics and an Insider Trading Policy, copies of which are available on the corporate governance section of the Companys website.
Principle 4 Safeguard integrity in corporate reporting
Recommendation 4.1 The board of a listed entity should:
a) have an audit committee which:
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i.
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has at least three members, all of whom are
non-executive
directors and a majority of whom are independent directors; and
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ii.
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is chaired by an independent director, who is not the chair of the board;
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and
disclose:
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iii.
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the charter of the committee;
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iv.
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the relevant qualifications and experience of the members of the committee; and
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v.
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in relation to each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings.
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The Board has established an audit committee to oversee the management of the Companys financial and internal risks and reporting.
As of December 31, 2016, the members of the audit committee were Timothy J. Barberich, Graham J. Bradley (Chair) and Anne J. Keating, all
of whom are independent,
non-executive
directors. The audit committee is chaired by Graham J. Bradley who is an independent director and not chair of the Board.
The members of the audit committee must be financially literate and have familiarity with financial and accounting matters, with at least one
member a qualified accountant or other financial professional with appropriate expertise in financial and accounting matters. The qualifications of those appointed to the audit committee are set out in the section titled Directors of the
Registrant in this Item 10.
The audit committee met six times during 2016, with Mr. Bradley and Ms. Keating
attending on all six occasions and Mr. Barberich attending on three occasions.
The audit committee is governed by the audit
committee charter, a copy of which is available on the corporate governance section of the Companys website.
In its audit committee
charter the Company has disclosed its policy for the selection and appointment of the Companys independent auditor and for the rotation of the lead audit partner having primary responsibility for the audit and the audit partner responsible for
reviewing the audit every five years. The audit committee will regularly report to the Board about committee activities, issues and related recommendations.
73
Recommendation 4.2 The board of a listed entity should, before it approves the entitys financial
statements for a financial period, receive from its CEO and CFO a declaration that, in their opinion, the financial records of the entity have been properly maintained and that the financial statements comply with the appropriate accounting
standards and give a true and fair view of the financial position and performance of the entity and that the opinion has been formed on the basis of a sound system of risk management and internal controls which is operating effectively.
As the Company prepares and files its financial statements under United States accounting practices and laws, management is required to
provide representations to the Board on a wide range of issues, including the effectiveness of the Companys disclosure controls and procedures as well as the design and operation of internal control over financial reporting. However, as the
Company is incorporated in the State of Delaware, United States, it is not required to provide a declaration under section 295A of the Corporations Act. To this end, shareholders attention is drawn to Item 9A of this Annual Report on Form
10-K
and the certifications provided by the principal executive officer and the principal financial officer at the end of the Annual Report on Form
10-K.
As stated
above, Item 9A discloses information regarding the Companys controls and procedures and managements evaluation of the effectiveness of its internal control over financial reporting. During the year ended December 31, 2016,
there were no exceptions contained in the certifications.
Recommendation 4.3 A listed entity that has an annual general meeting should ensure
that its external auditor attends its AGM and is available to answer questions from security holders relevant to the audit.
The
Companys policy is to ensure its external auditor attends the annual general meeting of shareholders, in person, to have an opportunity to make a statement, if desired, and to respond to appropriate questions from security holders regarding
the audit. The Companys auditor for the year ended December 31, 2016 was Moody, Famiglietti & Andronico, LLP, replacing Ernst & Young LLP in this capacity. Ernst & Young LLP attended the annual general meeting
in respect of the financial year ended December 31, 2015.
Principle 5 Make timely and balanced disclosure
Recommendation 5.1 A listed entity should:
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a)
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have a written policy for complying with its continuous disclosure obligations under the Listing Rules; and
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b)
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disclose that policy or a summary of it.
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The Company is committed to providing timely
and balanced disclosure to the market in accordance with its continuous disclosure obligations. In accordance with its commitment to fully comply with its continuous disclosure obligations and to ensure accountability at a senior management level
for that compliance, the Company has adopted a Continuous Disclosure Policy, together with other internal mechanisms and reporting requirements. A copy of the Companys Continuous Disclosure Policy is available on the corporate governance
section of the Companys website. In addition, a copy of all of the Companys ASX announcements, financial reports and related public information are also available on the Companys website.
Principle 6 Respect the rights of security holders
Recommendation 6.1 A listed entity should provide information about itself and its governance to investors via its website.
The Company aims to provide shareholders with comprehensive and timely access to Company documents and releases through its website,
including:
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details of the Companys certificate of incorporation and bylaws, Board and committee charters and key corporate governance policies;
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74
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copies of all material information lodged with ASX and any other applicable securities regulators and securities exchanges;
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copies of material announcements, financial reports, briefings and speeches made to the markets or media;
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a means for the shareholders to submit enquiries directly to the Company;
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the full text of notices of shareholder meetings and explanatory material; and
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advance notice of all open briefings to institutional investors and analysts, including copies of presentation materials.
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Other information may be provided to shareholders via periodic mail-outs. In addition, the Company allows shareholders to elect to receive
email communications where appropriate.
Recommendation 6.2 A listed entity should design and implement an investor relations program to
facilitate effective
two-way
communications with investors.
The Company has adopted a
Shareholder Communications Policy which supports effective
two-way
communication with its shareholders, a copy of which is available on the corporate governance section of the Companys website. The
Company seeks to utilize numerous modes of communication, including electronic communication, to ensure that its communication with shareholders is frequent, clear, and accessible. Shareholders are entitled to and encouraged to participate in
briefing calls and/or contact the Company directly with questions or concerns. Contact information in both Australia and the U.S. is provided in each communication with shareholders, as well as on the Companys website.
Recommendation 6.3 A listed entity should disclose the policies and processes it has in place to facilitate and encourage participation at meetings
of security holders.
All shareholders are invited to attend the Companys annual general meeting either in person or by proxy.
The Board regards the annual general meeting as an excellent forum in which to discuss issues relevant to the Company and accordingly encourages full participation by shareholders. To facilitate attendance, the Company arranges the annual general
meeting to be held in an easily accessed location and announces the date and location of the meeting in advance of the meeting. Shareholders have an opportunity to submit questions to the Board and the Companys auditor. The meeting may also be
audio cast and/or webcast to provide access to those shareholders who are unable to attend the annual general meeting in person.
Recommendation 6.4
A listed entity should give security holders the option to receive communications from, and send communications to, the entity and its security registry electronically.
The Company provides its shareholders with the option to receive communications from, and send communications to, the Company and the
Companys share registry electronically.
Principle 7 Recognize and manage risk
Recommendation 7.1 The board of a listed entity should:
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a)
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have a committee or committees to oversee risk, each of which:
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i.
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has at least three members, a majority of whom are independent directors; and
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ii.
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is chaired by an independent director;
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and disclose:
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iii.
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the charter of the committee;
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iv.
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the members of the committee; and
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75
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v.
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as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings.
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The risks that the Company faces are continually changing in line with the development of the Company. In simple terms, risk is inherent in
all activities undertaken by the Company. Many of these risks are beyond the control of the Company and, as such, it is important that risk be mitigated on a continuous basis, particularly if the Company is to preserve shareholder value.
To ensure appropriate oversight and management of material business risks, the Company has adopted a Risk Management Policy that sets forth
the process to identify, assess, and manage risk in the Companys business operations. A copy of the policy is available on the corporate governance section of the Companys website.
The
day-to-day
oversight and management of the Companys
risk management program has been conferred upon the audit committee. The audit committee is responsible for ensuring that the Company maintains effective risk management and internal control systems and processes, and provides regular reports to the
Board on the effectiveness of the risk management program in identifying and addressing material business risks. Details of the audit committee are set out above in response to ASX Governance Recommendation 4.1.
In addition, the Board is responsible for reviewing and ratifying the risk management structure, processes and guidelines which are developed
and maintained by senior management. The audit committee or management may also refer particular risk management issues to the Board for final consideration and direction.
Recommendation 7.2 The board or a committee of the board should:
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a)
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review the entitys risk management framework at least annually to satisfy itself that it continues to be sound; and
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b)
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disclose, in relation to each reporting period, whether such a review has taken place.
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While the Board does not currently conduct a formal annual review of the material risks to the Company and the methods used to identify and
communicate those risks, the Board continually assesses these matters and believes this current approach is effective. The Board holds regular meetings by teleconference as well as at the Companys facility in Boston, Massachusetts, for the
purposes of discussing and reviewing operational developments and reviewing the effectiveness of the implementation of the Companys risk management systems.
The Risk Management Policy also requires that management report on an
on-going
basis to the Board,
primarily through the audit committee which has the responsibility for
day-to-day
oversight and management of the Companys risk management program, on the status
and effectiveness of the risk management program.
Recommendation 7.3 A listed entity should disclose:
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a)
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if it has an internal audit function, how the function is structured and what role it performs; or
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b)
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if it does not have an internal audit function, that fact and the processes it employs for evaluating and continually improving the effectiveness of its risk management and internal control processes.
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The Company does not currently have an internal audit function. Rather, the Company has implemented the following
processes to evaluate and continually improve the effectiveness of its risk management and internal control processes:
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the Board has conferred responsibility on senior management to develop and maintain a risk management program in light of the
day-to-day
needs of the Company;
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76
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the Board has established three standing committees to provide focused support in key areas; namely the nominating and corporate governance committee, audit committee and compensation committee;
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management provides the Board with frequent updates on the state of the Companys business, including the risks that the Company faces from
time-to-time
allowing the Board to assess the Companys management of its material business risks. These updates include
up-to-date
financial information, operational activity, clinical status and competitor updates. These updates are founded on internal communications that are fostered internally through weekly management
meetings and other internal communications; and
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these processes operate in addition to the Companys system of internal controls over financial reporting, its quality system, complaint handling processes, employee policies and standard operating procedures,
which are all designed to address various forms of risk.
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Recommendation 7.4 A listed entity should disclose whether it has any
material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks.
The economic risks that the Company is subject to and must manage are set out in the Risk Factors section of this Annual Report on
Form
10-K.
In general, the Board considers that the Company is not susceptible to material environmental or social sustainability risks in operating its business.
Principle 8 Remunerate fairly and responsibly
Recommendation 8.1 The board of a listed entity should:
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a)
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have a remuneration committee which:
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i.
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has at least three members, a majority of whom are independent directors; and
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ii.
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is chaired by an independent director;
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iii.
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that charter of the committee;
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iv.
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the members of the committee; and
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v.
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as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings.
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The Board has established a compensation committee to review and assess executive and director compensation. The compensation committee is
governed by the Compensation Committee Charter, a copy of which is available on the corporate governance section of the Companys website.
As of December 31, 2016, the members of the compensation committee were Timothy J. Barberich (Chair), Michael A. Carusi and Anne J.
Keating. In January 2016, Ms. Keating succeeded Mr. Barberich as a member of the compensation committee and Mr. Moore succeeded Mr. Barberich as Chair of the compensation committee. In May 2016, Mr. Moore resigned from the
compensation committee and Mr. Barberich succeeded Mr. Moore as a member and Chair of the compensation committee. Mr. Barberich, Ms. Keating and Mr. Moore are considered independent directors for ASX, NASDAQ and SEC
purposes. Mr. Carusi however, is not considered to be independent for ASX purposes, but is considered to be independent for NASDAQ and SEC purposes. The compensation committee therefore consists of a majority of independent directors and is
also chaired by an independent director. The compensation committee met once during 2016 with Messrs. Barberich, Carusi and Moore attending on all occasions.
While the compensation committee reviews and reports compensation items to the Board for both
non-executive
directors and executive management, including each individuals skills, knowledge, and
77
contributions to the Company, the compensation committee does not provide a separate report of compensation by gender.
Recommendation 8.2 A listed entity should separately disclose its policies and practices regarding the remuneration of
non-executive
directors and the remuneration of executive directors and other senior executives.
In
accordance with the compensation committee charter, the compensation committee is responsible for ensuring that the structure of
non-executive
and executive directors compensation is clearly
distinguished.
The Company has adopted a
non-executive
director compensation policy pursuant to
which
non-executive
directors are compensated for their services to the Board including annual cash fees for serving as a member or the chair of the Board and for serving as a member or the chair of the Board
committees. In addition, the policy provides that our
non-executive
directors may receive grants of a fixed number of options upon their joining the Board and annual grants (which commenced in 2014) of a fixed
number of options and restricted stock units, in each case subject to the terms of the
non-executive
director compensation policy as well as the approval of shareholders. No such grants were made in 2016.
The Company has adopted a separate executive compensation program that consists of base salary, equity-based incentives, performance-based
cash bonuses, severance benefits, and other customary benefits such as health insurance on the same basis as provided to all other employees. None of the Companys
non-executive
directors are entitled to
any retirement benefits.
Further information regarding the compensation committee, as required by Item 10 of this Annual Report on Form
10-K,
is incorporated by reference to the applicable information in our proxy statement for our 2017 Annual Meeting of Stockholders to be filed with the SEC and ASX.
Recommendation 8.3 A listed entity which has an equity-based remuneration scheme should:
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a)
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have a policy on whether participants are permitted to enter into transactions (whether through the use of derivatives or otherwise) which limit the economic risk of participating in the scheme; and
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b)
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disclose that policy or a summary of it.
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The Company provides compensation in the form
of equity-based awards to
non-executive
directors (upon approval by shareholders), senior executives, and employees of the Company. Awards are made under the Companys 2011 Employee, Director and
Consultant Equity Incentive Plan, as amended, which has been approved by shareholders. The Companys Insider Trading Policy, a copy of which is available on the corporate governance section of the Companys website, provides a summary of
the Companys policy on prohibiting entering into transactions in associated products which limit the economic risk of participating in unvested entitlements under any equity-based remuneration schemes. This policy operates to help limit the
economic risk to the Companys securities.
This report is made in accordance with a resolution of the Board.
ITEM
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11. EXECUTIVE COMPENSATION
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The information required by this Item 11 is
incorporated by reference to the applicable information in our proxy statement for our 2017 Annual Meeting of Stockholders to be filed with the SEC and ASX.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information relating to security ownership of certain beneficial owners of our Common Stock and information relating to the security
ownership of our management required by this Item 12 is incorporated by reference to the applicable information in our proxy statement for our 2017 Annual Meeting of Stockholders to be filed with the SEC and ASX.
78
The table below sets forth information with regard to shares authorized for issuance under our
equity compensation plans as of December 31, 2016. As of December 31, 2016, we had two active equity compensation plans, each of which was approved by our stockholders:
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Our 2003 Omnibus Stock Plan; and
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Our 2011 Employee, Director and Consultant Equity Incentive Plan.
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Plan Category
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Number of shares to be issued
upon exercise of outstanding
options or vesting of
restricted stock units
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Weighted-average
exercise price of
outstanding
options
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Number of shares remaining
available for future issuance
under equity compensation
plans
1
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Equity compensation plans approved by security holders
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1,152,072
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$
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8.67
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1,060,920
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Equity compensation plans not approved by security holders
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Total
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1,152,072
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$
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8.67
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1,060,920
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1)
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Our 2011 Employee, Director and Consultant Equity Incentive Plan allows for an annual increase in the number of shares available for issue commencing on the first day of each fiscal year during the period beginning in
fiscal year 2012 and ending in fiscal year 2020. The annual increase in the number of shares shall be equal to the lowest of: (i) 500,000 shares; (ii) 4% of the number of common shares outstanding as of such date; and (iii) an amount determined
by our board of directors or our compensation committee.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is incorporated by reference to the applicable
information in our proxy statement for our 2017 Annual Meeting of Stockholders to be filed with the SEC and ASX.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is incorporated by reference to the applicable
information in our proxy statement for our 2017 Annual Meeting of Stockholders to be filed with the SEC and ASX.
79
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
1. Nature of Business
GI Dynamics, Inc.
(the Company) was incorporated on March 24, 2003, as a Delaware corporation, with operations based in Boston, Massachusetts. The Company is dedicated to restoring health and improving quality of life through the design and application of
device and disease management solutions for treatment of metabolic disease. The Companys near-term goal is to establish EndoBarrier Therapy as a vital treatment option for patients suffering from type 2 diabetes and obesity by restoring more
manageable blood sugar levels and reducing body weight. The Company is the developer of EndoBarrier
®
, the first endoscopically-delivered device therapy approved for the treatment of obese type
2 diabetic patients. EndoBarrier is the only proven, incision-free,
non-anatomy
altering solution designed to specifically mimic the duodenal-jejunal exclusion created by gastric bypass surgery, without the
permanent safety issues associated with gastric bypass. Since incorporation, the Company has devoted substantially all of its efforts to product commercialization, research and development, business planning, recruiting management and technical
staff, acquiring operating assets, and raising capital. The Company currently operates in one reportable business segment which designs, manufactures and markets medical devices.
In 2011, the Company began commercial sales of its product, the EndoBarrier, which is approved and commercially available in multiple
countries outside the U.S.
In the U.S., the Company received approval from the Food and Drug Administration (FDA), to
commence its pivotal trial of EndoBarrier Therapy (the ENDO Trial), which the Company began in 2013. The multi- center, randomized, double-blinded study planned to enroll 500 patients with uncontrolled type 2 diabetes and obesity at 25
sites in the U.S. The primary endpoint was improvement in diabetes control as measured by HbA1c levels. In the second half of fiscal 2015, the Company announced its decision to stop the ENDO Trial.
On August 21, 2015, the Company announced that it was reducing headcount by approximately 46% as part of its efforts to restructure its
business and expenses in response to stopping the ENDO Trial and to ensure sufficient cash remained available for it to establish new priorities, continue limited market development and research, and to evaluate strategic options.
In the second and third quarters of fiscal 2016, the Company took additional actions that it thought necessary to allow the opportunity to
evolve its strategic options. These actions resulted in
non-recurring
charges totaling approximately $1.1 million, including $0.4 million related to restructuring charges in our second quarter,
$0.6 million related to employee departures in both our second and third quarters and $0.1 million related to abandonment of our former headquarters in Lexington, MA.
In October 2016 we received final cancellation notification from the Therapeutic Goods Administration (
TGA
) for the listing of
EndoBarrier on the Australian Register of Therapeutic Goods (
ARTG
). The TGA stated that the Company failed to provide adequate evidence of compliance with certain provisions of the TGA Essential Principles within the required number of
working days.
Currently, the Company is focused on commercialization efforts within select European Union and Middle East countries and
is
re-engaging
with the FDA to explore regulatory approval for EndoBarrier.
The Company has
incurred operating losses since inception and at December 31, 2016, had an accumulated deficit of approximately $248.2 million. GI Dynamics expects to incur significant operating losses for the next several years. At December 31, 2016, the
Company had approximately $8.3 million in cash and cash equivalents and restricted cash. The Company does not expect its current cash balances will be sufficient to enable it to conduct an additional clinical trial for the purpose of seeking
regulatory approval from the FDA and complete development of an improved EndoBarrier for its current use and potential new indications. The Company will
F-8
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Nature of Business (continued)
need to raise additional funding prior to September 30, 2017 in order to continue to pursue its current business objectives as planned and to continue to fund its operations. These factors raise
substantial doubt about the Companys ability to continue as a going concern. The Company may seek to raise additional funds through any combination of collaborative arrangements, strategic alliances, and additional equity and debt financings
or from other sources. There can be no assurance that any such financing opportunities will be available on acceptable terms, if at all. If the Company is unable to raise capital when needed, it could be forced to significantly delay or discontinue
research and development activities and further commercialization of EndoBarrier, which could have a material adverse effect on its business, financial condition and results of operations. In addition, the Company could be required to cease
operations if it is unable to raise capital when needed.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern, which contemplates the realization of assets and liabilities and commitments in the normal course of business. The consolidated financial statements for the year ended December 31, 2016 do not include
any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the Companys ability to continue as a going
concern.
In September 2011, the Company completed its initial public offering (IPO) of common stock in the form of CHESS
Depositary Interests (CDIs) in Australia. As a result of the IPO and simultaneous private placement in the U.S., the Company raised a total of approximately $72.5 million in proceeds, net of expenses and repayment of
$6.0 million of the Companys Convertible Term Promissory Notes. Additionally, in July and August 2013, the Company sold CDIs on the Australian Securities Exchange (ASX) through a private placement and Share Purchase Plan
(SPP), which raised a total of approximately $52.5 million, net of expenses. In May 2014, the Company raised an additional approximately $30.8 million, net of expenses, when it sold CDIs on the ASX through a private placement.
On December 20, 2016 the company completed a private placement sale of 69,865,000 CDIs (1,397,300 shares) for approximately $1.0 million, net of expenses.
2. Summary of Significant Accounting Policies and Basis of Presentation
Principles of Consolidation
The
accompanying consolidated financial statements include the accounts of GI Dynamics, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances are eliminated in consolidation.
The functional currency of GID Europe Holding B.V., GID Europe B.V., GID Germany GmbH and GI Dynamics Australia Pty Ltd is the U.S. dollar.
Consolidated balance sheet accounts of the Companys subsidiaries are translated into U.S. dollars using the exchange rate in effect at the consolidated balance sheet date while expenses are translated using the average exchange rate in effect
during the period. Gains and losses arising from translation of the wholly owned subsidiaries financial statements are included in the determination of net loss.
Use of Estimates
The preparation of
consolidated financial statements in accordance with generally accepted accounting principles in the U.S. requires the Companys management to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues
and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, the Companys management evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, inventory
valuation including reserves for excess and obsolete inventory, impairment of long-lived assets, income taxes including the valuation allowance for deferred
F-9
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies and Basis of Presentation (continued)
tax assets, research and development, contingencies, valuation of warrant liabilities, estimates used to assess its ability to continue as a going concern and stock-based compensation. The
Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results
may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.
Cash and Cash Equivalents
The Company
considers all highly liquid investment instruments with an original maturity when purchased of three months or less to be cash equivalents. Investments qualifying as cash equivalents primarily consist of money market funds and have a carrying amount
that approximates fair value. The amount of cash equivalents included in cash and cash equivalents was approximately $6.3 million and $17.2 million at December 31, 2016 and 2015, respectively.
At December 31, 2016 and 2015, the Company had approximately $0.1 million and $0.2 million, respectively, of cash and cash
equivalents denominated in Australian dollars that is subject to foreign currency gain and loss. At December 31, 2016 and 2015, the Company had approximately $0.2 million and $0.5 million, respectively, of cash and cash equivalents
denominated in euros that is subject to foreign currency gain and loss.
Property and Equipment
Property and equipment, including leasehold improvements, are recorded at cost and are depreciated when placed in service using the
straight-line method based on their estimated useful lives as follows:
|
|
|
|
|
Asset Description
|
|
Estimated Useful Life
(In Years)
|
|
Laboratory and manufacturing equipment
|
|
|
5
|
|
Computer equipment and software
|
|
|
3
|
|
Office furniture and equipment
|
|
|
5
|
|
Included in property and equipment are certain costs of software obtained for internal use. Costs incurred
during the preliminary project stage are expensed as incurred, while costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the software. The Company also capitalizes costs related to
specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Maintenance and training costs related to software obtained for internal use are expensed as incurred.
Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the remaining lease term. Costs for capital
assets not yet placed into service have been capitalized as construction in progress and will be depreciated in accordance with the above guidelines once placed into service. Maintenance and repair costs are expensed as incurred.
Revenue Recognition
The Company
generates all of its revenue from sales of its EndoBarrier to health care providers and third- party distributors who resell the product to health care providers.
The Company considers revenue to be realized or realizable and earned when all of the following criteria are met: persuasive evidence of a
sales arrangement exists, delivery has occurred or services have been rendered, the
F-10
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies and Basis of Presentation (continued)
price is fixed or determinable, and collectability is reasonably assured. Revenue is recognized upon passage of title and risk of loss to customers, unless a consignment arrangement exists and
provided an estimate can be made for sales returns.
With respect to these criteria:
|
|
|
The evidence of an arrangement generally consists of a health care provider or distributor purchase order with the necessary approvals and acceptance by the Company.
|
|
|
|
Transfer of title and risk and rewards of ownership are passed to the health care provider or third-party distributor upon delivery of the products.
|
|
|
|
The selling prices for all sales are fixed and agreed with the health care provider or third-party distributor. Provisions for discounts and rebates to customers are established as a reduction to revenue in the same
period the related sales are recorded.
|
When doubt exists about collectability from specific customers, the Company defers
revenue from sales of products to those customers until payment is received. GI Dynamics, Inc. and Subsidiaries
In certain circumstances
the Company allows customers to return defective or nonconforming products for credit or replacement products. Defective or nonconforming products typically include those products that resulted in an unsuccessful implant procedure. The Company
considers these transactions to be product returns and bases its estimate for sales returns upon historical trends and records the amount as a reduction to revenue upon the initial sale of the product. In the event the Company is unable to
reasonably estimate future returns, it recognizes revenue when the right of return lapses. Prior to the fourth quarter of 2013, the Company did not have sufficient historical experience on which to base an estimate of returns, and therefore
recognized revenue when the right of return lapsed. The Company determined this point to be when the product was implanted or otherwise consumed and payment was received from the customer, which indicated that the Company had no further obligations
to the customer and that the sale was complete. As a result, starting in the fourth quarter of 2013, the Company began to recognize revenue at the time of delivery net of these return estimates. Prospectively, the Company will continue to evaluate
whether it has sufficient data to determine return estimates as it enters new markets.
The Company has certain relationships in which
title to delivered product passes to a buyer, but the substance of the transaction is that of a consignment arrangement. In these cases, the Company recognizes revenue when the product is implanted or otherwise consumed and payment is received from
the customer, which indicates that the Company has no further obligations to the customer and that the sale is complete. For these transactions, revenue recognition is deferred until the sale is complete.
At December 31, 2016 and 2015, the Company had deferred revenue of approximately $11,000.
In addition, the Company has entered into consignment arrangements in which the Company delivers the product to the customer but retains title
to the product until it is implanted or otherwise consumed. In these arrangements, the Company recognizes revenue once it receives proof of third party purchase, usually in the form of a customer purchase order.
Shipping and Handling Costs
Shipping and
handling costs are included in costs of revenue.
F-11
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies and Basis of Presentation (continued)
Research and Development Costs
Research and development costs are expensed when incurred. Research and development costs include costs of all basic research activities as
well as other research, engineering, and technical effort required to develop a new product or service or make significant improvement to an existing product or manufacturing process.
Research and development costs also include
pre-approval
regulatory and clinical trial expenses.
Patent Costs
The Company expenses as
incurred all costs, including legal expenses, associated with obtaining patents until the patented technology becomes feasible. All costs incurred after the patented technology is feasible will be capitalized as an intangible asset. As of December
31, 2016, no such costs had been capitalized since inception of the Company. The Company has expensed approximately $0.4 million, $0.5 million and $0.5 million of patent costs within general and administrative expenses in the
consolidated statements of operations and comprehensive loss for the years ended December 31, 2016, 2015 and 2014, respectively.
Stock-Based
Compensation
The Company accounts for stock-based compensation in accordance with the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 718,
Stock Compensation
(ASC 718), which requires that stock-based compensation be measured and recognized as an expense in the financial statements and that
such expense be measured at the grant date fair value.
For awards that vest based on service conditions, the Company uses the
straight-line method to allocate compensation expense to reporting periods. The grant date fair value of options granted is calculated using the Black-Scholes option pricing model, which requires the use of subjective assumptions including
volatility, expected term and the fair value of the underlying common stock, among others.
The Company periodically issues
performance-based awards. For these awards, vesting will occur upon the achievement of certain milestones. When achievement of the milestone is deemed probable, the Company expenses the compensation of the respective stock award over the implicit
service period.
Stock awards to
non-employees
are accounted for in accordance with ASC
505-50,
Equity-Based Payments to
Non-Employees
(ASC
505-50).
The measurement date for
non-employee
awards is generally the date performance of services required from the
non-employee
is complete. For
non-employee
awards that vest based on service conditions, the Company expenses the value of the awards over the related service period, provided they expect the service condition to be met. The Company records the expense of services rendered by
non-
employees based on the estimated fair value of the stock option using the Black-Scholes option pricing model over the contractual term of the
non-employee.
The fair value
of unvested
non-employee
awards are remeasured at each reporting period and expensed over the vesting term of the underlying stock options on a straight-line basis.
The stock-based compensation plans provide that grantees may have the right to exercise an option prior to vesting. Shares purchased upon the
exercise of unvested options will be subject to the same vesting schedule as the underlying options, and are subject to repurchase at the original exercise price by the Company should the grantee discontinue providing services to the Company for any
reason, prior to becoming fully vested in such shares.
F-12
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies and Basis of Presentation (continued)
Impairment of Long-Lived Assets
The Company regularly reviews the carrying amount of its long-lived assets to determine whether indicators of impairment may exist that warrant
adjustments to carrying values or estimated useful lives. If indications of impairment exist, projected future undiscounted cash flows associated with the asset are compared to the carrying amount to determine whether the assets value is
recoverable. If the carrying value of the asset exceeds such projected undiscounted cash flows, the asset will be written down to its estimated fair value.
Comprehensive Loss
Comprehensive loss is
the change in equity of a company during a period from transactions and other events and circumstances, excluding transactions resulting from investments by owners and distributions to owners. The Company currently does not have any changes in
equity from
non-owner
sources. As a result, comprehensive loss was equal to the net loss for all periods reported.
Loss Contingencies
In accordance with
ASC 450,
Contingencies
, the Company accrues anticipated costs of settlement, damages, and losses for loss contingencies based on historical experience or to the extent specific losses are probable and estimable. Otherwise, the Company
expenses these costs as incurred. If the estimate of a probable loss is a range, and no amount within the range is more likely, the Company accrues the minimum amount of the range.
Income Taxes
The Company provides for
income taxes under the liability method. The Company records deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the Companys financial reporting and the tax bases of assets and
liabilities measured using the enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their
ultimate realization.
The Company accounts for uncertain tax positions recognized in the consolidated financial statements by applying a
more-likely-than-not
threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
Guarantees
The Company has identified
the guarantees described below as disclosable, in accordance with ASC 460,
Guarantees
.
As permitted under Delaware law, the Company
indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Companys request in such capacity. The maximum potential amount of future payments the Company could be required
to make is unlimited; however, the Company has directors and officers insurance coverage that should limit its exposure and enable it to recover a portion of any future amounts paid.
The Company is a party to a number of agreements entered into in the ordinary course of business that contain typical provisions that obligate
the Company to indemnify the other parties to such agreements upon the occurrence of certain events. Such indemnification obligations are usually in effect from the date of execution of the applicable agreement for a period equal to the applicable
statute of limitations. The aggregate maximum potential future liability of the Company under such indemnification provisions is uncertain.
F-13
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies and Basis of Presentation (continued)
As of December 31, 2016 and 2015, the Company had not experienced any material losses related
to these indemnification obligations, and no material claims with respect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations and, consequently, concluded that the fair value of these
obligations is negligible. As a result, no related reserves have been established.
Reverse Stock Split
In November 2014, the Companys stockholders approved a
one-for-ten
reverse stock split of the Companys common stock that was effective April 9, 2015. All share and per share amounts in the consolidated financial
statements and notes thereto have been retroactively adjusted, where necessary, to reflect this reverse stock split. Because the par value of the Companys shares of common stock remain unchanged after the date of the split, the total stated
par value and additional
paid-in
capital changed by offsetting amounts. The stated par value was reduced to
one-tenth
of the amount before the split and the additional
paid-in
capital was increased the same amount.
Subsequent Events
The Company evaluates events occurring after the date of its consolidated balance sheet for potential recognition or disclosure in its
consolidated financial statements. There have been no subsequent events that have occurred through the date the Company issued its consolidated financial statements that require disclosure in or adjustment to its consolidated financial statements.
New Accounting Pronouncements
From
time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the effect of recently
issued standards that are not yet effective will not have a material effect on its consolidated financial position or results of operations upon adoption.
In May 2014, the FASB issued Accounting Standards Update (ASU)
No. 2014-09
(ASU
2014-09),
Revenue from Contracts with Customers
, which supersedes the revenue recognition requirements in ASC Topic 605,
Revenue Recognition
, and most industry-specific guidance. The new
standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU
2014-09
also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments
and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB approved a one year deferral of the effective date of this standard to annual reporting periods, and interim reporting periods within those years,
beginning after December 15, 2017. Early adoption is permitted to the original effective date of December 15, 2016, including interim reporting periods within those years. The Company is currently evaluating the potential impact that ASU
2014-09
may have on its consolidated financial statements.
In August 2014, the FASB issued ASU
No. 2014-15,
Presentation of Financial Statements-Going Concern: Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern
(ASU
2014-15)
.
This new standard gives a companys management the final responsibilities to decide whether there is substantial doubt about the companys ability to continue as a going
concern and to provide related footnote disclosures. The standard provides guidance to management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that companies commonly provide in
their footnotes. Under the new standard, management must decide whether there are conditions or events, considered in the aggregate, that raise
F-14
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies and Basis of Presentation (continued)
substantial doubt about the companys ability to continue as a going concern within one year after the date that the financial statements are issued, or within one year after the date that
the financial statements are available to be issued when applicable. This updated pronouncement was adopted for the annual reporting period ended December 31, 2016 and had no material impact on the Companys financial statements.
In April 2015, the FASB issued ASU
No. 2015-05,
Intangibles
Goodwill and Other
Internal-Use
Software
(ASU
2015-05).
This new standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the
customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the
arrangement as a service contract. ASU
2015-05
will be effective for the Company for reporting periods beginning after December 15, 2015. Early adoption is permitted and a company can elect to adopt ASU
2015-05
either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. Accordingly, the standard is effective for the Company on January
1, 2016. The adoption of this guidance did not have a material impact on the Companys consolidated financial statements.
In July
2015, the FASB issued ASU
No. 2015-11,
Simplifying the Measurement of Inventory
(ASU 2015- 11). ASU
2015-11,
which simplifies the measurement of
inventories valued under most methods, including the Companys inventories valued under FIFO the
first-in,
first-out
cost method. Inventories
valued under LIFO the
last-in,
first-out
method are excluded. Under this new guidance, inventories valued under these methods would be
valued at the lower of cost and net realizable value, with net realizable value defined as the estimated selling price less reasonable costs to sell the inventory. This guidance is effective for annual reporting beginning after December 15, 2016,
including interim periods within the year of adoption, with early application permitted. The adoption of this guidance is not expected to have a significant impact on the Companys consolidated financial statements.
In November 2015, the FASB issued ASU
2015-17,
Income
Taxes
Balance Sheet Reclassification of Deferred Taxes (Topic 740)
(ASU
2015-17).
ASU
2015-17
requires that
deferred tax liabilities and assets, and any related valuation allowances, be classified as noncurrent in a classified statement of financial position. The classification change for all deferred taxes as noncurrent simplifies entities
processes as it eliminates the need to separately identify the net current and net noncurrent deferred tax asset or liability in each jurisdiction and allocate valuation allowances. ASU
2015-17
is effective
for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted and the amendments may be applied either prospectively to all deferred tax liabilities
and assets or retrospectively to all periods presented. The Company early adopted ASU
2015-17
in the fourth quarter of 2015 on a prospective basis and reclassified the current portion of deferred tax assets to
the
non-current
portion of deferred tax assets within its consolidated balance sheets resulting in a reduction of other long-term assets and other current liabilities of approximately $97,000 as of December
31, 2015. The prior period balances were not retrospectively adjusted.
In February 2016, the FASB issued ASU
No. 2016-02,
Leases (Topic 842)
, or ASU
2016-02.
ASU
2016-02
requires that lessees recognize in the statement of financial
position for all leases (with the exception of short-term leases) a lease liability, which is a lessees obligation to make lease payments arising from a lease, measured on a discounted basis, and a
right-of-use
asset, which is an asset representing the lessees right to use the underlying asset for the lease term. ASU
2016-02
is effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Lessees must apply a
F-15
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies and Basis of Presentation (continued)
modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified
retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. The adoption of this guidance is not
expected to have a significant impact on our consolidated financial statements.
In March 2016, the FASB issued ASU
No. 2016-09,
Compensation
Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, or ASU
2016-09.
ASU
2016-09
will simplify the income tax consequences, accounting for forfeitures and classification on the statements of consolidated cash flows. ASU
2016-09
is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. We are currently evaluating the potential impact that
ASU
2016-09
may have on our consolidated financial statements.
In August, 2016, the FASB issued
ASU
No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)
, or ASU
2016-15.
The amendments in
ASU
2016-15
address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under FASB Accounting Standards Codification 230,
Statement of Cash
Flows
. The amendments in ASU
2016-15
are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is
permitted, including adoption during an interim period. We are currently evaluating the impact that ASU
No. 2016-15
may have on our consolidated financial statements.
In November 2016, the FASB issued ASU
No. 2016-18,
Statement of Cash Flows (Topic 230):
Restricted Cash (a consensus of the FASB Emerging Issue Task Force)
, or ASU
2016-18.
This new standard addresses the diversity that exists in the classification and presentation of changes in restricted
cash on the statement of cash flows. The amendments in ASU
2016-18
require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the
beginning-of-period
and
end-of-period
total amounts shown on the statement of cash flows. This
guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within the year of adoption, with early adoption permitted. We do not expect that the adoption of ASU
20116-18
will have a material impact on our consolidated financial statements.
3. Net Loss per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during
the period. Potential common stock equivalents are determined using the treasury stock method. For diluted net loss per share purposes, the Company excludes stock options and other stock-based awards, including shares issued as a result of option
exercises but which are subject to repurchase by the Company, whose effect would be anti-dilutive from the calculation. During each of the years ended December 31, 2016, 2015 and 2014, common stock equivalents were excluded from the calculation of
diluted net loss per common share, as their effect was anti-dilutive due to the net loss incurred. Therefore, basic and diluted net loss per share was the same in all periods presented.
F-16
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Net Loss per Common Share (continued)
The following potentially dilutive securities have been excluded from the computation of
diluted weighted- average shares outstanding as of December 31, 2016, 2015 and 2014, as they would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Warrants to purchase common stock
|
|
|
28,532
|
|
|
|
50,000
|
|
|
|
50,000
|
|
Options to purchase common stock and other stock-based awards
|
|
|
1,152,072
|
|
|
|
1,041,322
|
|
|
|
1,410,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,180,604
|
|
|
|
1,091,322
|
|
|
|
1,460,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Common Stock Warrants
In connection with the Companys IPO in September 2011, the Company issued warrants in an aggregate amount of 50,000 shares of common
stock at an exercise price of A$55.00 per share to the lead manager of the IPO and certain other investors. The warrants expired on the fifth anniversary of their date of grant.
On May 4, 2016, the Company entered into a consulting agreement pursuant to which the consulting firm will provide strategic advisory,
finance, accounting, human resources and administrative functions, including chief financial officer services, to the Company. In connection with the consulting agreement, the Company granted the consulting firm a warrant (Consultant
Warrant, together with the IPO Warrants, the Warrants) to purchase up to 28,532 shares of the Companys common stock at an exercise price per share equal to $0.64. The Consultant Warrant vests on a monthly basis over two years
and has a term of five years. The Company has reserved 28,532 shares of common stock related to the Consultant Warrant. As of December 31, 2016, no Consultant Warrants had been exercised.
The Company accounts for the warrants under ASC 815,
Derivatives and Hedging
(ASC 815). In accordance with the guidance
included in ASC 815, because the Companys functional currency is the U.S. dollar and the exercise price of the warrants is in Australian dollars, the Company is exposed to currency exchange risk related to the warrants. As a result, the
warrants are not considered indexed to the Companys own stock, and therefore, the warrants are classified as a liability and the fair value of the warrants must be remeasured at each reporting period. At the time the warrants were issued, the
Company estimated the fair value of the warrants using the Black-Scholes option pricing model. The Company remeasured the fair value of the warrants at each reporting period using current assumptions and current foreign exchange rates, with changes
in value recorded as other income or expense (Note 5).
5. Fair Value of Financial Instruments
The tables below present information about the Companys assets and liabilities that are measured at fair value on a recurring basis as of
December 31, 2016 and 2015, and indicates the fair value hierarchy of the valuation techniques the Company used to determine such fair value. In general, fair values determined by Level 1 inputs utilize observable inputs such as quoted prices
in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are either directly or indirectly observable, such as quoted prices, interest rates and yield curves. Fair values
determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, requiring the Company to develop its own assumptions for the asset or liability.
F-17
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Fair Value of Financial Instruments (continued)
The following tables present the assets and liabilities the Company has measured at fair
value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
Reporting Date Using
|
|
Description
|
|
December 31,
2016
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (included in cash and cash equivalents)
|
|
$
|
6,344
|
|
|
$
|
6,344
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,344
|
|
|
$
|
6,344
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
17
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
17
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
Reporting Date Using
|
|
Description
|
|
December 31,
2015
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (included in cash and cash equivalents)
|
|
$
|
17,207
|
|
|
$
|
17,207
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,207
|
|
|
$
|
17,207
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assumptions used in the Black-Scholes option pricing model to determine the fair value of the common stock
warrants at December 31, 2016, 2015 and 2014 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Exercise price (A$55.00 at the then current exchange rate)
|
|
$
|
0.64
|
|
|
$
|
40.18
|
|
|
$
|
45.11
|
|
Fair value of common stock
|
|
$
|
0.59
|
|
|
$
|
1.06
|
|
|
$
|
9.84
|
|
Expected volatility
|
|
|
90.5
|
%
|
|
|
165.6
|
%
|
|
|
62.2
|
%
|
Expected term (in years)
|
|
|
4.34
|
|
|
|
0.7
|
|
|
|
1.7
|
|
Risk-free interest rate
|
|
|
1.78
|
%
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
Expected dividend yield
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
F-18
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Fair Value of Financial Instruments (continued)
The following table rolls forward the fair value of the warrants, where fair value is
determined by Level 3 inputs (in thousands):
|
|
|
|
|
Balance at December 31, 2014
|
|
$
|
9
|
|
Decrease in fair value of warrants upon
re-measurement
included in other income (expense)
|
|
|
(9
|
)
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
|
|
|
|
|
|
|
Grant of Consulting warrants May 2016
|
|
$
|
12
|
|
Increase in fair value of warrants upon
re-measurement
included in other expense
|
|
|
5
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
17
|
|
|
|
|
|
|
Cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued
expenses and other current liabilities at December 31, 2016 and 2015 are carried at amounts that approximate fair value due to their short-term maturities and highly liquid nature of these instruments.
6. Concentrations of Credit Risk, Accounts Receivable and Related Valuation Account
Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents and accounts receivable. The
Company maintains its cash and cash equivalent balances with high quality financial institutions, and consequently, the Company believes that such funds are subject to minimal credit risk. The Companys short-term investments potentially
subject the Company to concentrations of credit risk. The Company has adopted an investment policy that limits the amounts the Company may invest in any one type of investment and requires all investments held by the Company to hold at least an A
rating from a recognized credit rating agency, thereby reducing credit risk concentration.
Accounts receivable primarily consist of
amounts due from customers, including distributors and health care providers in different countries. In light of the current economic state of many foreign countries, the Company continues to monitor the creditworthiness of its customers.
At December 31, 2016 one health care provider accounted for approximately 43% of the Companys accounts receivable and another
health care provider accounted for approximately 22% of the Companys accounts receivable.
At December 31, 2015, one health care
provider accounted for approximately 15% of the Companys accounts receivable and two health care providers accounted for approximately 11% each and a fourth health care provider accounted for approximately 10%. No other customer accounted for
greater than 10% of the Companys accounts receivable at December 31, 2016 and 2015.
The Company grants credit to customers in the
normal course of business but generally does not require collateral or any other security to support its receivables. The Company makes judgments as to its ability to collect outstanding receivables and provides an allowance for receivables when
collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices and the overall quality and age of those invoices not individually reviewed. Amounts determined to be uncollectible are written off
against this reserve. The Company recorded write-offs of uncollectible accounts receivable of approximately $48,000 in the year ended December 31, 2016 and approximately $31,000 in 2015 and none in 2014. As of December 31, 2016, the Company believes
its allowance for doubtful accounts of approximately $16,000 is adequate based on its review.
F-19
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Concentrations of Credit Risk, Accounts Receivable and Related Valuation Account (continued)
In certain circumstances the Company allows customers to return defective or nonconforming
products for credit or replacement products. Defective or nonconforming products typically include those products that resulted in an unsuccessful implant procedure. The Company records an estimate for product returns based upon historical trends.
The associated reserve for product returns is recorded as a reduction of the Companys accounts receivable.
The following table
shows the components of the Companys accounts receivable at December 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accounts receivable
|
|
$
|
68
|
|
|
$
|
121
|
|
Less: allowance for doubtful accounts
|
|
|
(16
|
)
|
|
|
(59
|
)
|
Less: allowance for sales returns
|
|
|
(22
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
The following is a roll forward of the Companys allowance for doubtful accounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Beginning balance
|
|
$
|
59
|
|
|
$
|
41
|
|
|
$
|
|
|
Net charges to expenses
|
|
|
5
|
|
|
|
49
|
|
|
|
41
|
|
Utilization of allowances
|
|
|
(48
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
16
|
|
|
$
|
59
|
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Inventory
The Company states inventory at the lower of
first-in,
first-out
cost or market. The Company records a provision for excess, expired, and obsolete inventory based primarily on estimates of forecasted revenues. A significant change in the timing or level of demand
for products as compared to forecasted amounts may result in recording additional provisions for excess, expired, and obsolete inventory in the future. When capitalizing inventory, the Company considers factors such as status of regulatory approval,
alternative use of inventory, and anticipated commercial use of the product.
The determination of obsolete or excess inventory requires
the Company to estimate the future demand for its products within appropriate time horizons. The estimated future demand is compared to inventory levels to determine the amount, if any, of obsolete and excess inventory. The demand forecast includes
the Companys estimates of market growth and various internal estimates, and is based on assumptions that are consistent with the plans and estimates the Company is using to manage its underlying business and short-term manufacturing plans.
Forecasting demand for EndoBarrier in a market in which there are few, if any, comparable approved devices and for which reimbursement from third-party payers is limited has been difficult. To the extent the Companys demand forecast is less
than its inventory
on-hand,
the Company could be required to record additional reserves for excess, expired or obsolete inventory in the future.
In 2015, the Company performed an analysis of its inventory on hand and due to current evidence that the utility of certain amounts of its
inventory as it was expected to be used will be less than its cost recorded an
F-20
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Inventory (continued)
approximately $3.2 million charge for excess, expired and obsolete inventory. Factors contributing to the inventory write-down included: the effect that the ENDO Trial enrollment hold and
subsequent termination had on commercial activity and the Companys inventory levels, the expected timing of third-party payer reimbursement in its commercial markets, its conclusion that certain inventory will not be used for sales inside or
outside the U.S. and the historical accuracy of its demand forecasts. As of December 31, 2016 and 2015, the Company has a reserve totaling approximately $5.0 million of which approximately $3.3 million was for its inventory of sleeve
material. The Company continues to review any evidence that may indicate that the utility of additional amounts of inventory, as it was expected to be used, will be less than cost.
In 2014, the Company determined that its raw material sleeve inventory was in excess of its anticipated commercial demand for future sales.
Accordingly, for the year ended December 31, 2014, the Company recorded a provision for excess inventory of approximately $1.6 million to reduce the carrying value of the raw material sleeve inventory.
Inventory, net of reserves, at December 31, 2016 and 2015 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Finished goods
|
|
$
|
213
|
|
|
$
|
391
|
|
Work-in-process
|
|
|
|
|
|
|
605
|
|
Raw materials
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
213
|
|
|
$
|
1,025
|
|
|
|
|
|
|
|
|
|
|
The Company has entered into consignment arrangements in which the Company delivers product to the customer
but retains title to the product until it is implanted or otherwise consumed. At December 31, 2016 and 2015, approximately 5% and 2% of the finished goods inventory was at customer locations pursuant to these arrangements.
8. Property and Equipment
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Laboratory and manufacturing equipment
|
|
$
|
591
|
|
|
$
|
457
|
|
Computer equipment and software
|
|
|
1,174
|
|
|
|
1,118
|
|
Office furniture and equipment
|
|
|
183
|
|
|
|
229
|
|
Leasehold improvements
|
|
|
21
|
|
|
|
848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,969
|
|
|
|
2,652
|
|
Less accumulated depreciation and amortization
|
|
|
(1,820
|
)
|
|
|
(2,251
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
149
|
|
|
$
|
401
|
|
|
|
|
|
|
|
|
|
|
F-21
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Property and Equipment (continued)
As part of the
Companys restructuring in 2015 and then in 2016 in connection with the abandonment of its Company headquarters in Lexington, Massachusetts, the Company recognized a charge for impaired fixed assets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cost of revenue
|
|
$
|
24
|
|
|
$
|
265
|
|
|
$
|
|
|
Research and development
|
|
|
79
|
|
|
|
100
|
|
|
|
|
|
Sales and marketing
|
|
|
|
|
|
|
5
|
|
|
|
|
|
General and administrative
|
|
|
42
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
145
|
|
|
$
|
389
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In January 2015, the Company entered into a capital lease for certain office equipment. The company disposed
of the certain office equipment during the 4
th
quarter in 2016. At December 31, 2016, the Company had no assets under capital lease.
Depreciation and amortization expense of property and equipment, including equipment recorded under capital leases, totaled approximately
$0.2 million, $0.5 million and $0.7 million for the years ended December 31, 2016, 2015, and 2014, respectively.
9. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Clinical trials
|
|
$
|
16
|
|
|
$
|
1,809
|
|
Payroll and related liabilities
|
|
|
430
|
|
|
|
501
|
|
Professional fees
|
|
|
617
|
|
|
|
454
|
|
Deferred rent, current portion
|
|
|
|
|
|
|
168
|
|
Other
|
|
|
97
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,160
|
|
|
$
|
3,068
|
|
|
|
|
|
|
|
|
|
|
In both 2016 and 2015, the Company recorded approximately $0.6 million of separation related expenses of
which approximately none and $0.1 million is included in payroll and related liabilities at December 31, 2016 and 2015, respectively.
10.
Short-Term Notes Payable
GI Dynamics, Inc. entered into a short-term loan agreement with First Insurance Funding Corp to borrow
$306,380 to be used to purchase insurance. The agreement calls for ten monthly payments of $30,638 which includes principal and interest. The annual interest rate on the borrowing is 1.95%. The outstanding balance at December 31, 2016 was
$214,466 and has been included in other current liabilities in the accompanying balance sheet.
F-22
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Commitments and Contingencies
Lease Commitments
In June 2016, the
Company entered into a
non-cancelable
agreement to lease approximately 4,200 square feet of office and laboratory space in Boston, Massachusetts. The lease commenced in June 2016 and expires in April 2018.
Rent during the term is $11,900 per month.
Future minimum lease payments under all
non-cancelable
lease arrangements at December 31, 2016, are as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2017
|
|
$
|
143
|
|
2018
|
|
|
48
|
|
2019
|
|
|
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
191
|
|
|
|
|
|
|
Rent expense on
non-cancelable
operating leases was approximately
$0.5 million, $0.5 million and $0.5 million for the years ended December 31, 2016, 2015 and 2014, respectively.
License Agreement
In 2003, the Company entered into a license agreement (License Agreement) for certain intellectual property. The License
Agreement required the Company to pay $75,000 at execution, make payments of $12,500 in 2004, and $25,000 each year thereafter, until the date of first commercial sale of the product, as defined in the License Agreement. In 2011, the Company began
commercial sales of the product as defined in the License Agreement and as a result ceased making the yearly payments. The royalty obligation begins with U.S. commercial sales of products as defined in the License Agreement, if any. The royalty
percentage may vary on products covered by the License Agreement, but in any case, the royalties are not considered significant. The Company will cease paying royalties, if any, at the time the patent covered by the License Agreement expires in
2017.
12. Stockholders Equity
On April 9, 2015, the Company amended its certificate of incorporation to reflect the
one-for-ten
reverse stock split approved by its shareholders. After giving effect to the reverse stock split, the authorized capital stock of the Company now consists of 14,500,000 shares, of which 13,000,000
shares are designated as common stock, 1,000,000 shares are designated as Class B common stock, and 500,000 shares are designated as preferred stock.
The Company has raised net proceeds of approximately $232.6 million through sales of its equity from inception.
Common Stock
The Company authorized
Class B common stock in order to meet the Listing Rules of the ASX so far as they apply to escrowed securities. In the event that holders of common stock, who were subject to
ASX-imposed
escrow, breached
the terms of their escrow agreement or the Listing Rules as they apply to escrowed securities, their common stock would have been automatically converted into Class B common stock until the earlier to occur of the expiration of the escrow
period or the breach being rectified. The Class B common stock is identical to and ranks equally with the common stock except that Class B common stock has no voting rights and is not entitled to any dividends. No shares of common stock
are currently subject to such an escrow.
F-23
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Stockholders Equity (continued)
In December 2016, GI Dynamics raised approximately $1.0 million, net of expenses, in an
offering of 1,397,300 shares of common stock (69,865,000 CDIs) to sophisticated and professional investors in Australia and certain other jurisdictions.
13. Stock Plans
The Company has two
stock-based compensation plans. The Board of Directors adopted the 2003 Omnibus Stock Plan (the 2003 Plan), which provides for the grant of qualified incentive stock options and nonqualified stock options or other awards to the
Companys employees, officers, directors, advisors, and outside consultants to purchase up to an aggregate of 922,086 shares of the Companys common stock.
In August 2011, the Board of Directors adopted the 2011 Employee, Director and Consultant Equity Incentive Plan (the 2011 Plan,
together with the 2003 Plan, the Plans) as the successor to the 2003 Plan. Under the 2011 Plan, the Company may grant incentive stock options, nonqualified stock options, restricted and unrestricted stock awards and other stock-based
awards. The Company had initially reserved 450,000 shares of its common stock for issue under the 2011 Plan. Awards that are returned to the Companys 2003 Plan as a result of their forfeiture, expiration or cancellation without delivery of
common stock shares or that result in the forfeiture of shares back to the Company on or after August 1, 2011, the date the 2011 Plan became effective, are automatically made available for issuance under the 2011 Plan. At August 1, 2011,
80,235 shares available for grant under the 2003 Plan were transferred to the 2011 Plan. At December 31, 2016, 1,060,920 shares were available for grant under the 2011 Plan.
In addition, the 2011 Plan allows for an annual increase in the number of shares available for issue under the 2011 Plan commencing on the
first day of each fiscal year during the period beginning in fiscal year 2012 and ending in fiscal year 2020. The annual increase in the number of shares shall be equal to the lowest of:
|
|
|
4% of the number of common shares outstanding as of such date; and
|
|
|
|
an amount determined by the Board of Directors or the Companys compensation committee. Accordingly, during 2016, 380,222 shares were added to the 2011 Plan.
|
Stock-Based Compensation
Stock-based
compensation is reflected in the consolidated statements of operations and comprehensive loss as follows for the years ended December 31, 2016, 2015 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cost of revenue
|
|
$
|
34
|
|
|
$
|
89
|
|
|
$
|
126
|
|
Research and development
|
|
|
56
|
|
|
|
456
|
|
|
|
1,179
|
|
Sales and marketing
|
|
|
159
|
|
|
|
425
|
|
|
|
1,367
|
|
General and administrative
|
|
|
418
|
|
|
|
2,191
|
|
|
|
1,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
667
|
|
|
$
|
3,161
|
|
|
$
|
4,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The stock options granted under the Plans generally vest over a four-year period and expire ten years from the
date of grant. From time to time, the Company grants stock options to purchase common stock subject to
F-24
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stock Plans (continued)
performance-based milestones. The vesting of these stock options will occur upon the achievement of certain milestones. When achievement of the milestone is deemed probable, the Company expenses
the compensation of the respective stock option over the implicit service period.
At December 31, 2014, the Company had options for the
purchase of 20,000 shares of common stock subject to performance-based milestone vesting. During the years ended December 31, 2016, 2015 and 2014, the Company did not recognize any expense associated with options subject to performance-based
milestones as the vesting of the underlying awards was not deemed probable. At December 31, 2015, there were no options subject to performance-based milestone vesting outstanding.
During the year ended December 31, 2015, the Company modified the post-employment exercise period of stock awards previously granted to the
Companys former chief financial officer in relation to his separation from the Company. The modification extended the exercise period to December 8, 2015. The modification resulted in an approximately $19,000 increase in stock-based
compensation in 2015. The Company accounted for the modification of these stock awards in accordance with the provisions of ASC 718.
In
calculating stock-based compensation costs, the Company estimates the fair value of stock options using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived,
exchange-traded options that have no vesting restrictions and are fully transferable. The Company estimates the number of awards that will be forfeited in calculating compensation costs. Such costs are then recognized over the requisite service
period of the awards on a straight-line basis.
Determining the fair value of stock-based awards using the Black-Scholes option-pricing
model requires the use of highly subjective assumptions, including the expected term of the award and expected stock price volatility. The weighted-average assumptions used to estimate the fair value of employee stock options using the Black-Scholes
option-pricing model were as follows for the years ended December 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Expected volatility
|
|
|
75.8
|
%
|
|
|
56.8
|
%
|
|
|
61.6
|
%
|
Expected term (in years)
|
|
|
6.05
|
|
|
|
6.04
|
|
|
|
6.05
|
|
Risk-free interest rate
|
|
|
2.1
|
%
|
|
|
1.6
|
%
|
|
|
2.1
|
%
|
Expected dividend yield
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
Expected Volatility
Volatility measures the amount that a stock price has fluctuated or is expected to fluctuate during a period. As the Company was not publicly
traded prior to September 2011 and therefore had no trading history, stock price volatility was estimated based on an analysis of historical and implied volatility of comparable public companies.
Expected Term
The Company has limited
historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock option grants. As a result, for stock option grants made during the years ended December 31,
2016, 2015 and 2014, the expected term was estimated
F-25
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stock Plans (continued)
using the simplified method. The simplified method is based on the average of the contractual term of the option and the weighted-average vesting period of the option. For options
granted to
non-employees,
the Company used the remaining contractual life to estimate the expected term of
non-employee
awards for the years ended December 31, 2016,
2015 and 2014.
Risk-Free Interest Rate
The risk-free interest rate used for each grant is based on a
zero-coupon
U.S. Treasury instrument with
a remaining term similar to the expected term of the stock-based award.
Expected Dividend Yield
The Company has not paid and does not anticipate paying cash dividends on its shares of common stock in the foreseeable future; therefore, the
expected dividend yield is assumed to be zero.
Forfeitures
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from the
Companys estimates. Subsequent changes in estimated forfeitures are recognized through a cumulative adjustment in the period of change and will also impact the amount of stock-based compensation expense in future periods. The Company uses
historical data to estimate forfeiture rates. The Companys estimated forfeiture rates were 15.0%, 15.0% and 5.0% as of December 31, 2016, 2015 and 2014, respectively.
Stock Options
The following table
summarizes share-based activity under the Companys stock option plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
Common
Stock
Attributable
to Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
(in thousands)
|
|
Outstanding at December 31, 2015
|
|
|
779,028
|
|
|
$
|
23.92
|
|
|
|
7.64
|
|
|
|
|
|
Granted
|
|
|
575,106
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(605,563
|
)
|
|
$
|
20.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
748,571
|
|
|
$
|
8.67
|
|
|
|
8.38
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2016
|
|
|
660,760
|
|
|
$
|
9.63
|
|
|
|
8.25
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
|
|
163,156
|
|
|
$
|
34.39
|
|
|
|
4.88
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016, there was approximately $0.4 million of unrecognized stock-based compensation,
net of estimated forfeitures, related to unvested stock option grants having service-based vesting under the Plans which is expected to be recognized over a weighted-average period of 2.67 years. The total unrecognized stock- based compensation cost
will be adjusted for future changes in estimated forfeitures.
F-26
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stock Plans (continued)
The weighted-average grant date fair value of options granted during the years ended December
31, 2016, 2015 and 2014 was $1.00, $2.91 and $15.22, respectively. The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was approximately none, $10,000 and $4.4 million, respectively. The
intrinsic value represents the difference between the fair value of the Companys common stock on the date of exercise and the exercise price of the stock option. Cash received from option exercises during the years ended December 31, 2016,
2015 and 2014 was approximately none, $1,500 and $0.6 million respectively. No tax benefits were realized from options and other stock-based payment arrangements during these periods.
The stock-based compensation plans provide that grantees may have the right to exercise an option prior to vesting. Shares purchased upon the
exercise of unvested options will be subject to the same vesting schedule as the underlying options, and are subject to repurchase at the original exercise price by the Company should the grantee discontinue providing services to the Company for any
reason, prior to becoming fully vested in such shares. At December 31, 2016 and 2015, there were none and 168 shares of common stock, respectively, issued pursuant to the exercise of unvested options that remain unvested and subject to repurchase by
the Company. The exercise of these shares is not substantive and as a result, the cash paid for the exercise price is considered a deposit or prepayment of the exercise price and is recorded as a liability. The liability related to these shares was
approximately none and $4,000, respectively, at December 31, 2016 and 2015. Additionally, while the shares of common stock subject to repurchase are included in the legally issued shares, they are excluded from the calculation of outstanding shares.
Restricted Stock Units
Each
restricted stock unit (RSU) represents a contingent right to receive one share of the Companys common stock. There is no consideration payable on the vesting of RSUs issued under the Plans. Upon vesting, the RSUs are exercised
automatically and settled in shares of the Companys common stock. During the years ended December 31, 2016 and 2015, the Company awarded a total of 392,659 and 143,506 RSUs to employees and directors of the Company, respectively.
The following table summarizes information related to the RSUs and activity during the year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Units
|
|
|
Weighted-
Average
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
(in years)
|
|
|
(in thousands)
|
|
Outstanding at December 31, 2015
|
|
|
262,126
|
|
|
|
4.30
|
|
|
$
|
278
|
|
Granted
|
|
|
392,659
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(246,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
403,501
|
|
|
|
9.11
|
|
|
$
|
365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value at December 31, 2016 and 2015 noted in the table above represents the closing
price of the Companys common stock multiplied by the number of RSUs outstanding.
The fair value of each RSU award equals the
closing price of the Companys common stock on the date of grant. The weighted average grant date fair value per share of RSUs granted in the years ended December 31, 2016 and 2015 was $0.75 and $5.39, respectively.
F-27
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stock Plans (continued)
At December 31, 2016, 403,501 of the RSUs outstanding are subject to performance-based
vesting criteria. For these awards, the vesting will occur upon the achievement of certain product revenue, regulatory and reimbursement milestones. When achievement of the milestone is deemed probable, the Company expenses the compensation of the
respective stock award over the implicit service period.
During the year ended December 31, 2015, the Company determined that a milestone
previously deemed probable was now not probable of being achieved prior to the expiration of the award. This change in estimate was recognized through a cumulative adjustment in 2015, resulting in a reduction of stock-based compensation of
approximately $0.3 million, all of which was previously recognized in the year ended December 31, 2014.
During the years ended
December 31, 2016 and 2015, the Company recognized stock-based compensation related to RSUs having service-based vesting of approximately $(0.1) million and $0.5 million, respectively.
As of December 31, 2016, there was approximately $0.1 million of unrecognized stock-based compensation expense, net of estimated
forfeitures, related to
non-vested
RSU awards that have service-based vesting.
Non-employee
awards
The Company accounts for
non-employee
awards in accordance with ASC
505-50.
Stock-based compensation expense related to stock options granted to
non-employees
is recognized as services are rendered, generally on a straight-line basis.
The Company believes that the fair value of the stock options is more reliably measurable than the fair value of the services rendered. The fair value of the stock options granted is remeasured at each reporting date using the Black-Scholes option
pricing model as prescribed by ASC 718. During the year ended December 31, 2013, the Company granted options to purchase 30,000 shares of common stock to
non-
employees with an aggregate fair value of
approximately $0.6 million. In 2016 the Company granted 50,000 stock options to purchase 50,000 shares of common stock to
non-employees.
During the year ended December 31, 2015 the Company did not grant
any options for shares of common stock to
non-employees.
During the years ended December 31, 2014
and 2013, the Company modified the terms of stock awards previously granted to certain employees upon their change in status from employee to
non-employee.
The modifications included an extension of the
exercise period after the status change with respect to certain of the awards and the extension of the vesting of certain options through the end of the respective expected service to the Company. These modifications resulted in increases in
stock-based compensation of an immaterial amount in the year ended December 31, 2014. The Company accounted for the modifications of stock awards in accordance with the provisions of ASC 718. Stock awards that are modified and continue to vest when
an employee has a change in employment status are subject to periodic revaluation over their vesting terms.
The Company has recorded
non-employee
stock-based compensation expense in accordance with ASC
505-50
of approximately $0.5 million, $6,000 and $0.2 million during the years ended
December 31, 2016, 2015 and 2014, respectively, which is included in the total stock-based compensation expense.
14. Segment Reporting
Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the
Companys chief operating decision-maker in deciding how to allocate
F-28
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Segment Reporting (continued)
resources and in assessing performance. The Company has one reportable segment which designs, develops, manufactures and markets medical devices for
non-surgical
approaches to treating type 2 diabetes and obesity.
Geographic Reporting
All the Companys revenue is attributable to customers outside the U.S. The Company is dependent on favorable economic and regulatory
environments for its products. Products are sold to customers located in Europe, the Middle East, the Asia Pacific region and South America and sales are attributed to a country or region based on the location of the customer to whom the products
are sold.
At December 31, 2016, long-lived assets, comprised of property and equipment, of approximately $0.1 million are all held
in the U.S.
Product sales by geographic location for the years ended December 31, 2016, 2015 and 2014 are listed in the table below (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Europe
|
|
$
|
309
|
|
|
$
|
1,007
|
|
|
$
|
1,687
|
|
Middle East
|
|
|
154
|
|
|
|
146
|
|
|
|
247
|
|
South America
|
|
|
0
|
|
|
|
41
|
|
|
|
466
|
|
Asia Pacific
|
|
|
82
|
|
|
|
122
|
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
545
|
|
|
$
|
1,316
|
|
|
$
|
2,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany is a significant component of revenue in Europe for the year ended December 31, 2016. Germany and the
United Kingdom comprised a significant component of revenue in Europe for the year ended December 31, 2015. Germany, Chile and Australia comprised a significant component of revenue in their respective regions for the year ended December 31, 2014.
Major Customers
For the year ended
December 31, 2016, one distributor accounted for approximately 24% of the Companys revenue. For the year ended December 31, 2015, one distributor accounted for approximately 15% of the Companys revenue. For the year ended December 31,
2014, one distributor accounted for approximately 16% of the Companys revenue. No other customer accounted for greater than 10% of the Companys revenue during the years ended December 31, 2016, 2015 and 2014.
15. Retirement Plans
The Company has a
401(k) retirement and savings plan (401(k) Plan) covering all qualified U.S. employees. The 401(k) Plan is a defined contribution plan and allows each participant to contribute up to 100% of the participants base wages up to an
amount not to exceed an annual statutory maximum. The Company has made discretionary contributions to the 401(k) Plan and recorded expenses of approximately $0.1 million, $0.2 million and $0.3 million for the years ended December 31,
2016, 2015 and 2014, respectively.
The Company maintains a defined contribution plan for certain international employees. The Company
contributes 100% of the cost of the defined contribution. The Company recorded expenses of approximately
F-29
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Retirement Plans (continued)
$7,000, $21,000 and $30,000 for the years ended December 31, 2016, 2015 and 2014,
respectively, under this plan.
16. Income Taxes
Loss before provision for income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Domestic
|
|
$
|
(13,124
|
)
|
|
$
|
(35,190
|
)
|
|
$
|
(48,298
|
)
|
Foreign
|
|
|
41
|
|
|
|
113
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(13,083
|
)
|
|
$
|
(35,077
|
)
|
|
$
|
(48,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes in the accompanying consolidated statements of operations and comprehensive
loss consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current Provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
17
|
|
|
|
2
|
|
|
|
3
|
|
Foreign
|
|
|
16
|
|
|
|
59
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
33
|
|
|
|
61
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
23
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
23
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
$
|
33
|
|
|
$
|
84
|
|
|
$
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of income taxes from operations computed using the U.S. federal statutory
rate of 34% to that reflected in operations follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Income tax benefit using U.S. federal statutory rate
|
|
$
|
(4,449
|
)
|
|
$
|
(11,926
|
)
|
|
$
|
(16,366
|
)
|
Permanent differences
|
|
|
16
|
|
|
|
23
|
|
|
|
(60
|
)
|
State income taxes, net of federal benefit
|
|
|
(661
|
)
|
|
|
(383
|
)
|
|
|
(2,254
|
)
|
Stock compensation
|
|
|
1,218
|
|
|
|
556
|
|
|
|
900
|
|
Tax credits
|
|
|
(42
|
)
|
|
|
(459
|
)
|
|
|
(626
|
)
|
Foreign tax rate differential
|
|
|
1
|
|
|
|
(2
|
)
|
|
|
(11
|
)
|
Change in the valuation allowance
|
|
|
1,303
|
|
|
|
12,234
|
|
|
|
18,500
|
|
Unrealized gain
|
|
|
2,673
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(26
|
)
|
|
|
41
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33
|
|
|
$
|
84
|
|
|
$
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Income Taxes (continued)
Components of the Companys deferred tax assets and liabilities are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
79,648
|
|
|
$
|
73,260
|
|
Research and development credit carryforwards
|
|
|
3,713
|
|
|
|
3,655
|
|
Capitalized research and development costs
|
|
|
1,366
|
|
|
|
2,196
|
|
Capitalized
start-up
expenses
|
|
|
4,594
|
|
|
|
5,105
|
|
Depreciation and other
|
|
|
3,081
|
|
|
|
6,883
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
92,402
|
|
|
|
91,099
|
|
Valuation allowance
|
|
|
(92,402
|
)
|
|
|
(91,099
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with ASU
No. 2015-17,
at December 31, 2015, the
Company reclassified its net current deferred tax asset to the net
non-current
deferred tax asset in our consolidated balance sheet. No prior periods were retrospectively adjusted.
Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of the Companys deferred tax
assets and determined that it is more likely than not that the Company will not recognize the benefits of the deferred tax assets related to the U.S. As a result, a valuation allowance of approximately $92.4 million and $91.1 million was
established at December 31, 2016 and 2015, respectively. The valuation allowance increased by approximately $1.3 million during the year ended December 31, 2016, primarily due to the increase in the Companys net operating loss
carryforwards.
At December 31, 2016, the Company had federal and state net operating loss carryforwards (excluding ASC 718 additional
paid-in
capital net operating losses) of approximately $208.5 million and $198.9 million, respectively. These operating loss carryforwards will expire at various times beginning in 2024 through 2036 for
federal purposes and begin to expire in 2030 and will continue to expire through 2036 for state purposes. The Company has also recorded approximately $1.5 million as a reduction to net operating losses carryforward that is attributable to excess
stock option deductions as of December 31, 2016.
In addition, at December 31, 2016, the Company also has federal and state research and
development tax credit carryforwards (excluding ASC 740,
Income Taxes
(ASC 740), reserve) of approximately $2.7 million and $1.0 million, respectively, to offset future income taxes. These tax credit carryforwards will
expire at various times beginning in 2023 through 2036 for federal purposes and will expire at various times beginning in 2018 through 2031 for state purposes.
Utilization of net operating loss carryforwards and research and development credit carryforwards may be subject to a substantial annual
limitation due to ownership change limitations that have occurred previously or that could occur in the future in accordance with Section 382 of the Internal Revenue Code of 1986 (IRC Section 382) and with Section 383 of
the Internal Revenue Code of 1986, as well as similar state provisions. These ownership changes may limit the amount of net operating loss carryforwards and research and development credit carryforwards that can be utilized annually to offset future
taxable income and taxes, respectively. In general, an ownership change, as defined by IRC Section 382, results from transactions
F-31
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Income Taxes (continued)
increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. The Company has completed several
financings since its inception, which may have resulted in a change in control as defined by IRC Section 382 or could result in a change in control in the future. As of December 31, 2016, the Company has not, as yet, conducted an IRC
Section 382 study, which could impact its ability to utilize net operating loss and tax credit carryforwards annually in the future to offset the Companys taxable income, if any.
The Company applies ASC
740-10,
which provides guidance on the accounting for uncertainty in income
taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. When uncertain tax positions exist,
the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of
the tax position as well as consideration of the available facts and circumstances. At December 31, 2016 and 2015, the Company had unrecognized tax liabilities of approximately $1.4 million.
The following is a roll forward of the Companys unrecognized tax benefits (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Unrecognized tax benefit as of the beginning of the year
|
|
$
|
1,426
|
|
|
$
|
1,252
|
|
Gross increases tax positions of the prior periods
|
|
|
|
|
|
|
|
|
Gross increases current period tax positions
|
|
|
23
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits as of the end of the year
|
|
$
|
1,449
|
|
|
$
|
1,426
|
|
The Company will recognize interest and penalties related to uncertain tax positions, should they be assessed,
in income tax expense. As of December 31, 2016 and 2015, the Company had no accrued interest or penalties related to uncertain tax positions, and no amounts have been recognized in the Companys consolidated statements of comprehensive loss.
The statute of limitations for assessment by the Internal Revenue Service (IRS) and state tax authorities is open for tax
years ended December 31, 2012 through December 31, 2016, although carryforward attributes that were generated prior to tax year 2012 may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be
used in a future period. The statute of limitations for assessment by foreign tax authorities is open for tax years ended December 31, 2012 through December 31, 2016. There are currently no federal or state audits in progress.
The Company has not, as yet, completed a study of its research and development credit carryforwards. Once completed, this study may result in
an adjustment to the Companys research and development credit carryforwards. A full valuation allowance has been provided against the Companys research and development credits, and if an adjustment is required at the time the study is
completed, this adjustment would be offset by an adjustment to the deferred tax asset established for the research and development credit carryforward and the valuation allowance.
F-32
GI Dynamics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
17. Selected Quarterly Financial Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Total Year
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
209
|
|
|
$
|
132
|
|
|
$
|
136
|
|
|
$
|
68
|
|
|
$
|
545
|
|
Gross loss*
|
|
|
(144
|
)
|
|
|
(505
|
)
|
|
|
(2
|
)
|
|
|
(95
|
)
|
|
|
(746
|
)
|
Loss from operations
|
|
|
(3,465
|
)
|
|
|
(3,855
|
)
|
|
|
(2,764
|
)
|
|
|
(3,034
|
)
|
|
|
(13,118
|
)
|
Net loss
|
|
|
(3,438
|
)
|
|
|
(3,890
|
)
|
|
|
(2,754
|
)
|
|
|
(3,034
|
)
|
|
|
(13,116
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(0.36
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(1.37
|
)
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
616
|
|
|
$
|
310
|
|
|
$
|
175
|
|
|
$
|
215
|
|
|
$
|
1,316
|
|
Gross profit (loss)*
|
|
|
(270
|
)
|
|
|
(1,702
|
)
|
|
|
(743
|
)
|
|
|
(1,692
|
)
|
|
|
(4,407
|
)
|
Loss from operations
|
|
|
(9,870
|
)
|
|
|
(10,252
|
)
|
|
|
(7,905
|
)
|
|
|
(6,479
|
)
|
|
|
(34,506
|
)
|
Net loss
|
|
|
(10,349
|
)
|
|
|
(10,234
|
)
|
|
|
(8,089
|
)
|
|
|
(6,489
|
)
|
|
|
(35,161
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(1.09
|
)
|
|
$
|
(1.08
|
)
|
|
$
|
(0.85
|
)
|
|
$
|
(0.68
|
)
|
|
$
|
(3.71
|
)
|
*
|
In the second quarter of 2016 the Company recorded a reduction of cost of revenue of approximately $0.2 million and in the fourth quarter of 2016 the Company recorded a change of approximately $0.1 million to
cost of revenue for excess, expired and obsolete inventory. In the second and fourth quarter of 2015, the Company recorded a charge to cost of revenue of approximately $1.7 million and $1.5 million, respectively, for excess, expired and
obsolete inventory.
|
18. Subsequent Events
In January 2017, the Company completed the sale of 249,632 shares (12,481,600 CDIs) to eligible investors under a Security Purchase Plan
for approximately $0.83 per share resulting in net proceeds after expenses of approximately $0.2 million.
F-33