Form 10-Q EndoChoice Holdings, For: Jun 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2015
Or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-37414
EndoChoice Holdings, Inc.
(Exact name of Registrant as specified in its Charter)
Delaware | 90-0886803 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
11810 Wills Road
Alpharetta, Georgia 30009
(Address of principal executive offices) (Zip Code)
(888) 682-3636
(Registrant’s telephone number, including area code)
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 x
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 x 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 definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |
Non-accelerated filer | x | (Do not check if a smaller reporting company) | Smaller Reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
The Registrant had 24,728,740 shares of Common Stock, $0.001 par value per share, outstanding as of August 3, 2015.
EndoChoice Holdings, Inc.
Table of Contents
Page | ||||
i
Part I. Financial Information
Item 1. Financial Statements
EndoChoice Holdings, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
in thousands (except share and per share data) | December 31, 2014 | June 30, 2015 | ||||||
Assets: | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 13,761 | $ | 118,459 | ||||
Receivables, net | 8,379 | 8,213 | ||||||
Inventories | 13,637 | 12,376 | ||||||
Deferred tax assets | 970 | 485 | ||||||
Prepaid expenses and other current assets | 2,363 | 2,861 | ||||||
Total current assets | 39,110 | 142,394 | ||||||
Property and equipment, net | 9,668 | 8,283 | ||||||
Intangible assets, net | 16,655 | 15,570 | ||||||
Goodwill | 20,301 | 20,598 | ||||||
Deposits and other long-term assets | 1,075 | 781 | ||||||
Total assets | $ | 86,809 | $ | 187,626 | ||||
Liabilities and Stockholders' Equity: | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 5,127 | $ | 5,419 | ||||
Accrued expenses and other current liabilities | 8,328 | 10,407 | ||||||
Current portion of deferred rent | 55 | 191 | ||||||
Deferred revenue | 1,278 | 1,004 | ||||||
Total current liabilities | 14,788 | 17,021 | ||||||
Long-term debt, net of discount | 38,939 | 42,591 | ||||||
Deferred rent, less current portion | 607 | 380 | ||||||
Deferred tax liabilities | 4,147 | 3,941 | ||||||
Other long-term liabilities | 2,089 | 1,035 | ||||||
Total liabilities | 60,570 | 64,968 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.001 par value per share; 50,000,000 shares authorized; no shares issued and outstanding at December 31, 2014 and June 30, 2015 | — | — | ||||||
Common stock, $0.001 par value; 150,000,000 shares authorized; 14,467,219 shares issued and outstanding at December 31, 2014; 24,728,740 shares issued and outstanding at June 30, 2015 | 14 | 25 | ||||||
Additional paid-in capital | 125,404 | 255,512 | ||||||
Accumulated deficit | (97,165 | ) | (131,921 | ) | ||||
Accumulated other comprehensive loss | (2,014 | ) | (958 | ) | ||||
Total stockholders’ equity | 26,239 | 122,658 | ||||||
Total liabilities and stockholders’ equity | $ | 86,809 | $ | 187,626 | ||||
See accompanying notes to condensed consolidated financial statements.
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EndoChoice Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||
in thousands (except share and per share data) | 2014 | 2015 | 2014 | 2015 | |||||||||||||
Revenues: | |||||||||||||||||
GI equipment and supplies | $ | 12,017 | $ | 15,285 | $ | 22,925 | $ | 29,080 | |||||||||
GI pathology services | 3,064 | 3,357 | 6,003 | 6,310 | |||||||||||||
Net revenues | 15,081 | 18,642 | 28,928 | 35,390 | |||||||||||||
Cost of revenues: | |||||||||||||||||
GI equipment and supplies | 8,397 | 10,952 | 14,543 | 20,978 | |||||||||||||
GI pathology services | 1,393 | 1,157 | 2,700 | 2,300 | |||||||||||||
Cost of revenues | 9,790 | 12,109 | 17,243 | 23,278 | |||||||||||||
Gross profit | 5,291 | 6,533 | 11,685 | 12,112 | |||||||||||||
Operating expenses: | |||||||||||||||||
Research and development | 5,923 | 5,166 | 11,073 | 9,849 | |||||||||||||
Sales and marketing | 6,794 | 7,557 | 13,303 | 15,800 | |||||||||||||
General and administrative | 3,952 | 7,944 | 7,652 | 12,361 | |||||||||||||
Amortization of intangible assets | 1,188 | 690 | 2,361 | 1,377 | |||||||||||||
Operating expenses | 17,857 | 21,357 | 34,389 | 39,387 | |||||||||||||
Operating loss | (12,566 | ) | (14,824 | ) | (22,704 | ) | (27,275 | ) | |||||||||
Other expense: | |||||||||||||||||
Other expense | (270 | ) | (598 | ) | (277 | ) | (1,631 | ) | |||||||||
Interest expense | (740 | ) | (1,503 | ) | (1,089 | ) | (3,094 | ) | |||||||||
Loss on early retirement of debt | — | (2,282 | ) | — | (2,282 | ) | |||||||||||
Total other expense | (1,010 | ) | (4,383 | ) | (1,366 | ) | (7,007 | ) | |||||||||
Net loss before income taxes | (13,576 | ) | (19,207 | ) | (24,070 | ) | (34,282 | ) | |||||||||
Income tax expense | (132 | ) | (280 | ) | (516 | ) | (479 | ) | |||||||||
Net loss | (13,708 | ) | (19,487 | ) | (24,586 | ) | (34,761 | ) | |||||||||
Other comprehensive income (loss) | 583 | 1,796 | (23 | ) | 1,056 | ||||||||||||
Comprehensive loss | $ | (13,125 | ) | $ | (17,691 | ) | $ | (24,609 | ) | $ | (33,705 | ) | |||||
Net loss per share attributable to common stockholders, basic and diluted | $ | (1.13 | ) | $ | (1.01 | ) | $ | (2.04 | ) | $ | (2.01 | ) | |||||
Weighted-average shares of common stock used to compute net loss per share attributable to common stockholders, basic and diluted | 12,091,134 | 19,300,197 | 12,075,655 | 17,320,472 | |||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
EndoChoice Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, | |||||||
in thousands | 2014 | 2015 | |||||
Cash flows from operating activities: | |||||||
Net loss | $ | (24,586 | ) | $ | (34,761 | ) | |
Adjustments to reconcile net loss to net cash used in operations: | |||||||
Depreciation and amortization | 4,281 | 4,027 | |||||
Loss on disposal of fixed assets | — | 227 | |||||
Non-cash interest expense and discount amortization | 71 | 475 | |||||
Change in fair value of warrant liability | — | 435 | |||||
Provision for doubtful accounts | 400 | 588 | |||||
Unrealized foreign currency loss | 322 | 952 | |||||
Deferred taxes | 445 | 176 | |||||
Stock-based compensation | 10 | 3,501 | |||||
Loss on early retirement of debt | — | 2,282 | |||||
Loss on impairment of property and equipment | — | 912 | |||||
Changes in certain working capital components and other assets and liabilities: | |||||||
Accounts receivable | (746 | ) | (467 | ) | |||
Inventories | (830 | ) | 875 | ||||
Prepaid expenses and other current assets | (735 | ) | (432 | ) | |||
Other assets | (1,271 | ) | 299 | ||||
Accounts payable, accrued expenses, and other liabilities | 536 | 2,350 | |||||
Net cash used in operations | (22,103 | ) | (18,561 | ) | |||
Cash flows from investing activities: | |||||||
Capital expenditures | (6,788 | ) | (2,555 | ) | |||
Net cash used in investing activities | (6,788 | ) | (2,555 | ) | |||
Cash flows from financing activities: | |||||||
Borrowings on line of credit | 11,100 | — | |||||
Payments on line of credit | (13,571 | ) | — | ||||
Proceeds from term loan | 30,000 | 43,000 | |||||
Principal payments on term loan | — | (40,000 | ) | ||||
Prepayment and end of term fees for early retirement of debt | — | (2,306 | ) | ||||
Payments for debt financing fees | (506 | ) | (417 | ) | |||
Principal payments on capital leases | (39 | ) | — | ||||
Proceeds from issuance of member units, net | 141 | 31,000 | |||||
Proceeds from issuance of common stock, net of issuance costs | — | 94,460 | |||||
Proceeds from option exercises | — | 71 | |||||
Net cash provided by financing activities | 27,125 | 125,808 | |||||
Effect of exchange rate changes on cash and cash equivalents | 1 | 6 | |||||
Net (decrease) increase in cash and cash equivalents | (1,765 | ) | 104,698 | ||||
Cash and cash equivalents, beginning of period | 8,040 | 13,761 | |||||
Cash and cash equivalents, end of period | $ | 6,275 | $ | 118,459 | |||
Supplemental disclosure of cash flow information: | |||||||
Cash paid during the period for: | |||||||
Interest, net of capitalized interest | $ | 1,018 | $ | 2,824 | |||
Income taxes | $ | — | $ | 6 | |||
See accompanying notes to condensed consolidated financial statements.
4
EndoChoice Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) | Background and Basis of Presentation |
Description of Business
EndoChoice Holdings, Inc. and its subsidiaries ("EndoChoice", or the "Company") is a medical device company headquartered in Alpharetta, Georgia focused exclusively on designing and commercializing a platform of innovative products for gastrointestinal, or GI, caregivers. The Company offers a comprehensive range of products and services that span single use devices and infection control, pathology, and imaging technologies. Since the Company began commercial operations in 2008, it has developed an extensive line of devices and infection control products and acquired pathology and scope repair services providers.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are presented in accordance with United States generally accepted accounting principles pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. The unaudited condensed consolidated financial statements include the accounts of EndoChoice Holdings, Inc. (formerly ECPM Holdings, LLC prior to the corporate conversion discussed below; EndoChoice Innovation Center, Ltd.; EndoChoice GmbH; and Robert S. Smith, M.D., Inc. d/b/a EndoChoice Pathology ("EC Pathology"). The Company also owns a 67% interest in EndoChoice Israel, Ltd., which had no material transactions during the three and six months ended June 30, 2014 or 2015. All significant intercompany transactions and balances were eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of June 30, 2015 and the results of its operations and its cash flows for the three and six months ended June 30, 2014 and 2015. The condensed consolidated financial statements, including these condensed notes, exclude some of the disclosures required in annual consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s final prospectus filed with the Securities Exchange Commission (SEC) on June 5, 2015 pursuant to Rule 424(b) under the Securities and Exchange Act of 1933, as amended, relating to the Company’s Registration Statement on Form S-1 (File No. 333-203883).
The results for the three and six months ended June 30, 2015 are not necessarily indicative of results to be expected for the year ending December 31, 2015, any other interim periods, or any future year or period.
Corporate Conversion
On June 4, 2015, ECPM Holdings, LLC converted into a Delaware corporation pursuant to a statutory conversion and changed its name to EndoChoice Holdings, Inc. As a result of the corporate conversion, the holders of the different classes and series of units of ECPM Holdings, LLC became holders, in aggregate, of 17,580,918 shares of common stock and 579,869 shares of restricted stock in EndoChoice Holdings, Inc. In addition, holders of options and warrants to purchase units of ECPM Holdings, LLC received an aggregate of 339,373 options and 187,161 warrants to purchase shares of EndoChoice Holdings, Inc. common stock.
The accompanying condensed consolidated financial statements and related notes thereto have been retroactively adjusted to account for the effect of the corporate conversion for all periods presented prior to June 4, 2015.
Initial Public Offering
On June 10, 2015, the Company completed an initial public offering (the "IPO", or the "offering") of 7,302,500 shares of common stock, including 952,500 shares sold to underwriters for the exercise of their option to purchase additional shares, at an offering price of $15.00 per share. Of the 7,302,500 common shares sold in the offering, 7,052,500 shares were sold by the Company and 250,000 shares were sold by existing stockholders. The Company received net proceeds from the IPO of approximately $94.5 million after deducting underwriting discounts and commissions of $7.4 million and offering expenses of $3.9 million.
5
Net Loss Per Share of Common Stock
Basic and diluted net loss per share of common stock reflect the conversion of all member units of ECPM Holdings, LLC to shares of EndoChoice common stock by treating all units as if they had been converted as of the beginning of the periods presented. Basic and diluted net loss per share amounts do not give effect to potentially dilutive securities where the impact would have been anti-dilutive.
Reclassifications
Certain prior period amounts in the accompanying condensed consolidated financial statements have been reclassified to conform to the current period presentation.
(2) | Summary of Significant Accounting Policies |
There have been no significant changes to the accounting policies during the three and six months ended June 30, 2015 as compared to the significant accounting policies described in Note 3 of the “Notes to consolidated financial statements” in the Company’s December 31, 2014 audited financial statements included in the final prospectus filed with the SEC on June 5, 2015, other than as detailed below.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments with remaining maturities at the purchase date of three months or less to be cash equivalents. The Company deposits its domestic cash in non-interest-bearing deposit accounts in U.S. banks, and the Company’s foreign subsidiaries maintain cash accounts denominated in Euros and Shekels. Foreign currency accounts are remeasured to U.S. dollars at each month-end. At times, deposit balances in the U.S. may exceed the FDIC insured limit. The Company had $0 and $112,745 of investments in money market funds classified as cash equivalents as of December 31, 2014 and June 30, 2015, respectively.
Net Loss per Common Share
Basic net loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and dilutive common stock equivalents outstanding for the period. Stock options, warrants, and restricted shares are considered to be common stock equivalents and are evaluated for dilutive effect using the treasury-stock method. Basic and diluted net loss per common share are the same for the three and six months ended June 30, 2014 and 2015 due to the Company's reported net losses during those periods.
(3) | Recent Accounting Pronouncements |
Adoption of New Accounting Pronouncements
In April 2015, the FASB issued Accounting Standards Update ("ASU") 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 will require an entity to present debt issuance costs in the balance sheet as a direct deduction from the carrying amount of the related debt liability rather than as an asset, consistent with the treatment of debt discounts. The amendment does not change the recognition and measurement guidance for debt issuance costs, and the amortization of debt issuance costs will continue to be reported as interest expense. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2016.
6
The Company early adopted ASU 2015-03 as of June 2015, as permitted, and applied the new guidance retrospectively to all prior periods presented in the financial statements. There is no impact from the early adoption of ASU 2015-03 on the condensed consolidated statements of comprehensive loss. The impact from early adoption on the condensed consolidated balance sheets for the periods presented is detailed in the table below (in thousands):
December 31, 2014 | June 30, 2015 | ||||||||||||||||||||||
Prior to Adoption of ASU 2015-03 | Effect of Adoption | As Adopted | Prior to Adoption of ASU 2015-03 | Effect of Adoption | As Adopted | ||||||||||||||||||
Prepaid expenses and other current assets | $ | 2,774 | $ | (411 | ) | $ | 2,363 | $ | 3,055 | $ | (194 | ) | $ | 2,861 | |||||||||
Total current assets | 39,521 | (411 | ) | 39,110 | 142,588 | (194 | ) | 142,394 | |||||||||||||||
Total assets | 87,220 | (411 | ) | 86,809 | 187,820 | (194 | ) | 187,626 | |||||||||||||||
Long-term debt | $ | 39,350 | $ | (411 | ) | $ | 38,939 | $ | 42,785 | $ | (194 | ) | $ | 42,591 | |||||||||
Total liabilities | 60,981 | (411 | ) | 60,570 | 65,162 | (194 | ) | 64,968 | |||||||||||||||
Future Adoption of Accounting Pronouncements
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. ASU 2015-11 changes the measurement principle for inventory for entities using FIFO or average cost from the lower of cost or market to lower of cost and net realizable value. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. ASU 2015-11 should be applied prospectively. We are currently evaluating the impact of the future adoption of this standard, but we do not expect the adoption to have a material effect on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require 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. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017, and early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating the impact of the future adoption of this standard.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 will explicitly require management to assess an entity’s ability to continue as a going concern at each annual and interim period. Related footnote disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern within one year after the report issuance date. If conditions do not give rise to substantial doubt, no disclosures will be required specific to going concern uncertainties. The ASU defines substantial doubt using a likelihood threshold of “probable” similar to the current use of that term in U.S. GAAP for loss contingencies and provides example indicators. ASU 2014-15 is effective for reporting periods ending after December 15, 2016, and early adoption is permitted. We are currently evaluating the impact of the future adoption of this standard, but we do not expect the adoption to have a material effect on our consolidated financial statements.
(4) | Inventories |
Inventories consisted of the following:
December 31, 2014 | June 30, 2015 | ||||||
Raw materials | $ | 4,428 | $ | 3,944 | |||
Work-in-process | 3,282 | 2,848 | |||||
Finished goods | 5,927 | 5,584 | |||||
$ | 13,637 | $ | 12,376 | ||||
7
(5) | Property and Equipment |
Property and equipment consisted of the following:
December 31, 2014 | June 30, 2015 | ||||||
Furniture and fixtures | $ | 925 | $ | 1,167 | |||
Leasehold improvements | 2,053 | 2,210 | |||||
Computers and software | 2,864 | 2,650 | |||||
Demonstration equipment | 6,553 | 6,066 | |||||
Machinery and equipment | 3,666 | 4,443 | |||||
16,061 | 16,536 | ||||||
Accumulated depreciation | (6,393 | ) | (8,253 | ) | |||
Property and equipment, net | $ | 9,668 | $ | 8,283 | |||
Depreciation expense was $1,188 and $1,236 for the three months ended June 30, 2014 and 2015, respectively, and $1,920 and $2,650 for the six months ended June 30, 2014 and 2015, respectively. During the six months ended June 30, 2015, we recognized an impairment of $912 on demonstration equipment due to the planned replacement of certain of this equipment with newer versions of Fuse®. No impairment on demonstration equipment was recognized during the three months ended June 30, 2015.
(6) | Goodwill and Other Intangible Assets |
The gross carrying amount of goodwill and other intangible assets and the related accumulated amortization for amortizable intangible assets as of December 31, 2014 and June 30, 2015 are as follows:
December 31, 2014 | June 30, 2015 | ||||||||||||||||||||||
Gross carrying amount | Accumulated amortization | Net carrying value | Gross carrying amount | Accumulated amortization | Net carrying value | ||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Amortizable intangible assets: | |||||||||||||||||||||||
Customer relationships | $ | 1,845 | $ | (595 | ) | $ | 1,250 | $ | 1,718 | $ | (662 | ) | $ | 1,056 | |||||||||
Developed technology | 20,435 | (5,109 | ) | 15,326 | 21,016 | (6,568 | ) | 14,448 | |||||||||||||||
Other intangible assets | 2,203 | (2,124 | ) | 79 | 2,254 | (2,188 | ) | 66 | |||||||||||||||
$ | 24,483 | $ | (7,828 | ) | $ | 16,655 | $ | 24,988 | $ | (9,418 | ) | $ | 15,570 | ||||||||||
Unamortizable intangible assets: | |||||||||||||||||||||||
Goodwill | $ | 20,301 | $ | — | $ | 20,301 | $ | 20,598 | $ | — | $ | 20,598 | |||||||||||
The Company recorded amortization expense related to the amortizable intangible assets of $1,188 and $690 for the three months ended June 30, 2014 and 2015, respectively, and $2,361 and $1,377 for the six months ended June 30, 2014 and 2015, respectively. As of June 30, 2015, estimated aggregate future amortization expense for the intangible assets is as follows:
Estimated amortization expenses: | |||
2015 (remaining) | $ | 1,412 | |
2016 | 2,804 | ||
2017 | 2,804 | ||
2018 | 2,804 | ||
2019 | 2,804 | ||
2020 | 2,789 | ||
Thereafter | 153 | ||
$ | 15,570 | ||
8
Changes in the carrying amount of amortizable intangible assets and goodwill for the six months ended June 30, 2015 are as follows:
Amortizable intangible assets: | |||
Balance at December 31, 2014 | 16,655 | ||
Amortization | (1,377 | ) | |
Foreign currency translation adjustment | 292 | ||
Balance at June 30, 2015 | $ | 15,570 | |
Goodwill: | |||
Balance at December 31, 2014 | 20,301 | ||
Foreign currency translation adjustment | 297 | ||
Balance at June 30, 2015 | $ | 20,598 | |
(7) | Accrued Expenses and Other Current Liabilities |
Accrued expenses and other current liabilities consisted of the following:
December 31, 2014 | June 30, 2015 | ||||||
Payroll and employee related expenses | $ | 4,293 | $ | 4,809 | |||
Accrued warranty costs | 803 | 1,466 | |||||
Sales and other taxes payable | 412 | 768 | |||||
Income taxes payable | 26 | 317 | |||||
Other accrued liabilities | 2,794 | 3,047 | |||||
Accrued expenses and other current liabilities | $ | 8,328 | $ | 10,407 | |||
(8) | Fair Value Measurements |
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. The Company categorizes its financial assets and liabilities into a three-level hierarchy based on the priority of the inputs to the valuation, pursuant to the Fair Value Measurements and disclosures of ASC Topic 820. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the overall fair value measurement of the instrument.
Level 1 – Quoted prices available in active markets for identical investments as of the reporting date;
Level 2 – Inputs other than quoted prices for identical assets or liabilities in active markets that are either directly or indirectly observable as of the reporting date; and,
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability. These inputs reflect management judgment about the assumptions that market participants would use in valuing the asset or liability.
As of June 30, 2015, the Company has categorized the following as Level 3 within the fair value hierarchy:
• | Contingent liabilities for accrued earn-out consideration were recorded at fair value on the acquisition date and are remeasured periodically based on the then assessed fair value. They are adjusted if deemed necessary and have been recorded in other long-term liabilities within the condensed consolidated balance sheets. The increases or decreases in the fair value of these contingent consideration liabilities can result from changes in anticipated revenue levels and changes in assumed discount periods and rates. As the fair value measures are based on significant inputs that are not observable in the market, they are categorized as Level 3. |
9
Warrants issued to Triple Point Capital, LLC in connection with the Growth Capital Facility (as defined in Note 9) were previously categorized as Level 3 within the fair value level hierarchy. As a result of the corporate conversion on June 4, 2015 (see Note 1), the warrants were converted from warrants to purchase 2,091,175 Class A member units in ECPM Holdings, LLC at an exercise price of $0.96 to warrants to purchase 187,161 shares of EndoChoice Holdings, Inc. common stock at an exercise price of $10.95. Accordingly, the warrant liability was remeasured to fair value on the date of the corporate conversion and reclassified from other long-term liabilities to additional paid-in capital on the condensed consolidated balance sheet. The Company recognized losses of $407 and $435 within other expense on the condensed consolidated statement of comprehensive loss during the three and six months ended June 30, 2015, respectively, due to increases in the fair value of the warrant liability during those periods through the date of the corporate conversion. The fair value of the warrant liability was determined using the Black-Scholes-Merton option pricing model, which resulted in an estimate of fair value at the time of conversion that was consistent with the value of the common shares issued to the warrant holders upon the full exercise of the warrants on June 16, 2015.
Other financial assets and liabilities recorded in the accompanying condensed consolidated balance sheets as of December 31, 2014 and June 30, 2015 that require fair value disclosure include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and long-term debt. The estimated fair values of these financial assets and liabilities as of December 31, 2014 and June 30, 2015 reasonably approximate their respective carrying values as reported within the condensed consolidated balance sheets.
For the Company’s assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the following table provides a reconciliation of the beginning and ending balances for each category therein and gains or losses recognized during the period:
Fair value measurements using significant unobservable inputs (level 3): | Contingent liabilities for accrued earn-out acquisition consideration | ||
Balance as of December 31, 2014 | $ | 632 | |
Foreign currency translation adjustments | (24 | ) | |
Balance as of June 30, 2015 | $ | 608 | |
Contingent liabilities for accrued earn-out acquisition consideration are included in other long-term liabilities within the condensed consolidated balance sheets.
(9) | Debt |
The Company had $38.9 million and $42.6 million in total debt outstanding, net of discount, as of December 31, 2014 and June 30, 2015, respectively, which was fully included in long-term debt on our condensed consolidated balance sheets. Effective June 30, 2015, the Company refinanced its outstanding debt by entering into a new term loan credit and security agreement (the "Term Loan Credit Agreement") and a new revolving loan credit and security agreement (the "Revolving Loan Credit Agreement", and together with the Term Loan Credit Agreement, the "Credit Agreements") each dated June 30, 2015 (the "Closing Date") by and among EndoChoice and certain of its subsidiaries, MidCap Financial Trust, and Silicon Valley Bank.
The Credit Agreements contain representations and covenants typical for credit arrangements of comparable size in the medical device industry, including certain financial covenants related to minimum liquidity levels and net revenues. The Credit Agreements also contain customary events of default. If an event of default occurs and is not cured within any applicable grace period or is not waived, the creditors are entitled to take various actions, including, without limitation, the acceleration of amounts due thereunder, termination of commitments under the Credit Agreements, and realization upon the collateral securing the credit facilities.
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Term Loan Facility
The Term Loan Credit Agreement provides for a five-year $43.0 million senior term loan facility (the "Term Loan Facility") secured by a lien on substantially all of the assets of EndoChoice and its domestic subsidiaries, other than intellectual property, which is subject to a negative pledge only. The Term Loan Facility bears interest at a fixed rate of 9.5% per year and is subject to an end of term fee of 2.95% on the $43.0 million advanced under the facility on the Closing Date. Interest-only payments are due during the first 30 months of the Term Loan Facility, with principal payments beginning in January 2018 in equal monthly installments until maturity. The end of term fee is not applied to scheduled principal payments and is due only upon the earlier of repayment or maturity of the loan. The end of term fee will be accrued as additional interest expense using the effective interest rate method over the term of the loan.
We incurred debt issuance costs of $0.4 million in connection with entering into the Term Loan Facility. Pursuant to our adoption of ASU 2015-03 as discussed in Note 3, we recognized the debt issuance costs, including deferred financing costs, as a direct deduction from the carrying amount of the long-term debt outstanding under the Term Loan Facility. The debt issuance costs will be amortized each period after the Closing Date using the effective interest method and will be reported as interest expense.
Proceeds from the Term Loan Facility were used to voluntarily prepay $40.0 million of outstanding loans under the Growth Capital Loan and Security Agreement dated February 18, 2014 with Triple Point Capital, LLC (the "Growth Capital Facility"), to pay $2.3 million of prepayment and end of term fees, and to pay $0.5 million of other fees and expenses in connection with the refinancing.
Revolving Credit Facility
The Revolving Loan Credit Agreement provides for a five-year $15.0 million senior revolving credit facility (the "Revolving Credit Facility") also secured by a lien on substantially all of the assets of EndoChoice and its domestic subsidiaries, other than intellectual property, which is subject to a negative pledge only. Amounts drawn under the Revolving Credit Facility will bear interest at the LIBOR Rate (as defined in the Revolving Loan Credit Agreement) plus 5.25% per year, while the undrawn portion is subject to an unused line fee of 0.50% per year. No amounts were drawn or outstanding under the Revolving Credit Facility as of June 30, 2015. The Revolving Credit Facility expires on June 30, 2020.
Early Debt Retirement
Concurrently with entering into the Credit Agreements described above, on June 30, 2015, the Company repaid all outstanding loans under and terminated the Growth Capital Facility with Triple Point Capital, LLC. In connection with such termination, the Company recognized a loss on early debt retirement of $2.3 million in the condensed consolidated statements of comprehensive loss for the three and six months ended June 30, 2015. In accordance with Accounting Standards Codification (“ASC”) Section 470-50-40-2 - Debt - Modifications and Extinguishments, the loss on early retirement of debt was calculated based on the difference between the amount paid to retire the debt less its net carrying value on the repayment date, adjusted for the write-off of certain unamortized balances such as deferred financing costs and debt discounts.
Also concurrently with entering into the Credit Agreements described above, on June 30, 2015, the Company terminated the Loan and Security Agreement dated as of September 9, 2013 for its line of credit with Silicon Valley Bank. There were no outstanding amounts owed under the line of credit with Silicon Valley Bank at the time of termination.
(10) | Stock-based Compensation |
Equity Incentive Plans
Our equity incentive plans are broad-based, long-term programs intended to attract, motivate, and retain talented non-employee directors, officers, and employees and to align their interests with stockholders. As of June 30, 2015, the Company had the following equity incentive plans:
2015 Omnibus Equity Incentive Plan
In June 2015, the Company adopted the 2015 Omnibus Equity Incentive Plan (the "2015 Plan"). The 2015 plan allows for the granting of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance unit awards, performance share awards, cash-based awards, and other stock-based awards to eligible individuals. As of June 30, 2015, no awards had been made under the 2015 Plan.
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A total of 1,225,539 shares of our common stock were available for issuance under the 2015 Plan as of June 30, 2015. In addition, the 2015 Plan contains an “evergreen” provision allowing for an annual increase in the number of shares of our common stock available for issuance under the 2015 Plan on January 1 of each year during the period beginning January 1, 2016 and ending on (and including) January 1, 2025. The annual increase in the number of shares will be equal to four percent (4%) of the total number of shares of common stock outstanding on December 31st of the preceding calendar year; provided, however, that our board of directors is authorized to act prior to the first day of any calendar year to determine if the increase will be a lesser number of shares of common stock than would otherwise occur.
Employee Stock Purchase Plan
In June 2015, the Company adopted an Employee Stock Purchase Plan (the "ESPP"). The ESPP is designed to allow our eligible employees to purchase shares of our common stock with accumulated payroll deductions of up to 15%, subject to a purchase limitation of the lesser of 5,000 shares per offering period or $25 thousand in fair market value of shares of common stock (determined at the time the option to purchase shares under the ESPP is granted) per annual period. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code and is administered by the compensation committee of the Board of Directors (the "Compensation Committee"). The first offering period under the ESPP began on July 1, 2015 and concludes on December 31, 2015.
2013 Incentive Unit Plan
In January 2013, the Company adopted the 2013 Incentive Unit Plan (the "2013 Plan"). The 2013 plan allowed for the granting of incentive unit awards to employees, non-employee directors, and consultants. No new awards may be made under the 2013 Plan subsequent to our corporate conversion on June 4, 2015; however, 579,869 shares of restricted stock granted under the plan are outstanding as of June 30, 2015 and continue to vest pursuant to the terms of their original award agreements.
2010 Peer Medical Ltd. Israeli Share Option Plan
In 2012, one of our predecessors adopted the Peer Medical Ltd. 2010 Israeli Share Option Plan, or 2010 Share Option Plan. In 2013, in connection with our acquisition of Peer Medical, we assumed the 2010 Share Option Plan. No new awards may be made under the 2010 Share Option Plan subsequent to January 4, 2013; however, stock options granted under the plan prior to this date continue to vest or remain outstanding until their original expiration date.
2007 Stock Incentive Plan
In December 2007, one of our predecessors adopted the EndoChoice, Inc. 2007 Stock Incentive Plan (the "2007 Plan"). The 2007 Plan, as amended and restated, was assumed by the Company in January 2013. No new awards may be made under the 2007 Plan subsequent to January 4, 2013; however, stock options granted under the plan prior to this date continue to vest or remain outstanding until their original expiration date.
Stock Options
Following is a summary of stock option activity for the six months ended June 30, 2015:
Number of Options | Weighted average exercise price | Weighted average remaining contractual term | ||||||
Outstanding at December 31, 2014 | 341,345 | $ | 2.30 | 5.2 years | ||||
Granted | — | |||||||
Exercised | (25,197 | ) | 3.02 | |||||
Forfeited | (1,130 | ) | 3.32 | |||||
Outstanding at June 30, 2015 | 315,018 | 2.25 | 4.6 years | |||||
Vested and exercisable at June 30, 2015 | 315,018 | 2.25 | ||||||
We estimate the fair value of stock options at the grant date using the Black-Scholes-Merton option pricing model. No stock options have been granted since 2012. As of June 30, 2015, there was $3 of total unrecognized compensation cost related to stock options. These costs are expected to be recognized over a weighted average period of three months.
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Restricted Stock
Following is a summary of the restricted stock activity for the six months ended June 30, 2015:
Number of Restricted Stock Shares | ||
Unvested at December 31, 2014 | 715,577 | |
Granted | 149,086 | |
Vested | (274,808 | ) |
Forfeited | (9,986 | ) |
Unvested at June 30, 2015 | 579,869 | |
As of June 30, 2015, total unrecognized compensation cost related to the restricted stock shares was $1,664, net of estimated forfeitures, which is expected to be recognized over a weighted-average period of 2.5 years.
Estimated Grant Date Fair Values
All restricted stock outstanding as of June 30, 2015 relate to grants made prior to our initial public offering. As such, the Company estimated the underlying grant-date fair values of the restricted stock shares using methodologies, approaches, and assumptions consistent with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (the “AICPA Practice Guide"). For grants made prior to April 2015, the Company utilized the option pricing method (“OPM"), an accepted valuation method under the AICPA Practice Guide. The OPM values each equity class by creating a series of call options on the equity value, with exercise prices based on the liquidation preferences, participation rights, and strike prices of derivatives. Prior to starting preparations for the Company’s IPO, the OPM was utilized because the Company could not reasonably estimate the form and timing of potential liquidity events.
For grants made during the second quarter of 2015, including for determining changes in grant-date fair values associated with the modification discussed below, the Company completed a valuation of its equity utilizing the probability-weighted expected return method (“PWERM”) as outlined in the AICPA Practice Aid. The company utilized the PWERM because it could reasonably estimate the form and timing of a potential liquidity event, as preparations for the Company’s IPO had commenced. Under the PWERM valuation method, the per share value of equity is estimated based upon the probability-weighted present value of expected future equity values under various possible future liquidity event scenarios.
Modification
All holders of shares of restricted stock of EndoChoice as of June 30, 2015 originally held incentive units of ECPM Holdings, LLC prior to the corporate conversion discussed in Note 1. On May 7, 2015, the terms of the incentive unit awards were modified to provide for the exchange of unvested incentive units for unvested shares of restricted stock upon consummation of the corporate conversion. Under the original terms of the incentive award agreements, unvested incentive units were to be cancelled and forfeited upon a liquidity event. In accordance with the provisions of Accounting Standards Codification (ASC) 718, Compensation — Stock Compensation, the aforementioned change of terms resulted in a modification of the vesting terms for unvested incentive units and re-measurement of fair value for purposes of determining stock-based compensation expense. As a result of the modification, total unrecognized compensation cost for incentive unit grants to 55 employees and non-employee directors increased from $2,353 to $5,160, net of estimated forfeitures. Approximately $1,952 of the incremental compensation cost was included in the $3,501 non-cash charge for stock-based compensation recognized in the condensed consolidated statements of comprehensive loss during the three and six months ended June 30, 2015.
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Stock-based Compensation Expense
Stock-based compensation expense is recorded within the operating expense captions in the condensed consolidated statements of comprehensive loss based on the employees receiving the awards. We recognized stock-based compensation expense as follows during the three and six months ended June 30, 2014 and 2015:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2014 | 2015 | 2014 | 2015 | ||||||||||||
Cost of revenues | $ | — | $ | 101 | $ | — | $ | 101 | |||||||
Research and development | 1 | 516 | 2 | 517 | |||||||||||
Sales and marketing | 1 | 420 | 2 | 421 | |||||||||||
General and administrative | 3 | 2,459 | 6 | 2,462 | |||||||||||
Total | $ | 5 | $ | 3,496 | $ | 10 | $ | 3,501 | |||||||
Stock-based compensation expense during the three and six months ended June 30, 2015 includes $3,496 of previously unrecognized compensation cost for restricted stock grants that vested in connection with our initial public offering, or IPO, discussed in Note 1. The restricted stock grants contain vesting criteria based on both service (four years) and performance (the achievement of a minimum valuation threshold upon a liquidity event or initial public offering). The minimum valuation threshold was achieved in connection with our IPO.
(11) | Net Loss per Common Share |
After giving effect to the corporate conversion on a retroactive basis as described in Note 1, the following table provides a reconciliation of the numerator and denominator used in calculating basic and diluted net loss per share attributable to common stockholders for the three and six months ended June 30, 2014 and 2015.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2014 | 2015 | 2014 | 2015 | ||||||||||||
Numerator: | |||||||||||||||
Net loss attributable to common stockholders | $ | (13,708 | ) | $ | (19,487 | ) | $ | (24,586 | ) | $ | (34,761 | ) | |||
Denominator: | |||||||||||||||
Weighted-average common shares outstanding - basic | 12,091,134 | 19,300,197 | 12,075,655 | 17,320,472 | |||||||||||
Dilutive effect of stock options, warrants, and restricted stock units(1) | — | — | — | — | |||||||||||
Weighted-average common shares outstanding - diluted | 12,091,134 | 19,300,197 | 12,075,655 | 17,320,472 | |||||||||||
Net loss per share attributable to common stockholders - basic and diluted | $ | (1.13 | ) | $ | (1.01 | ) | $ | (2.04 | ) | $ | (2.01 | ) | |||
(1) Potentially dilutive stock options, warrants, and restricted stock were excluded from the calculation of diluted weighted-average shares outstanding as they would have had an anti-dilutive effect due to losses reported during the three and six months ended June 30, 2014 and 2015.
The treasury stock method is used to determine the dilutive effect of the Company’s potentially dilutive securities. The following potentially dilutive securities outstanding at the end of the periods presented were excluded from the calculation of diluted shares outstanding due to their anti-dilutive effect:
June 30, 2014 | June 30, 2015 | ||||
Stock options | 340,407 | 315,018 | |||
Warrants for common stock | 141,386 | 4,061 | |||
Restricted stock units | — | 579,869 | |||
Total | 481,793 | 898,948 | |||
(12) | Income Taxes |
Prior to our conversion to a corporation on June 5, 2015, we were organized as a limited liability company and had elected to be taxed as a corporation subject to applicable domestic and foreign income tax laws. Therefore, the corporate conversion had no impact on our income taxes, deferred tax assets, or deferred tax liabilities; however, our net operating loss carryforwards could be subject to limitation based on the ownership changes associated with our initial public offering in June 2015.
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Income taxes are determined using an estimated annual effective tax rate applied against income, which are then adjusted for the tax impacts of certain discrete items. The Company recorded income tax expense of $132 and $280 during the three months ended June 30, 2014 and June 30, 2015, respectively, resulting in effective rates of 0.97% and 1.46%, respectively. The Company recorded income tax expense of $516 and $479 during the six months ended June 30, 2014 and June 30, 2015, respectively, resulting in effective rates of 2.14% and 1.40%, respectively. The Company updates its annual effective income tax rate each quarter, and if the estimated effective income tax rate changes, a cumulative adjustment is made. The low effective tax rates for the three and six months ended June 30, 2014 and 2015 are primarily due to full valuation allowances against certain deferred tax assets.
The Company evaluates the realizability of the deferred tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes guidance requires that a valuation allowance be established when it is more-likely than-not that all or a portion of the deferred tax assets will not be realized. As part of the evaluation, the Company reviews both positive and negative evidence to determine if a valuation allowance is needed.
The Company’s review of positive evidence included the review of in-process tax planning strategies, favorable historical results and forecasted pretax income. Negative evidence includes a forecasted current year loss and near-term industry challenges. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more-likely than-not realizable, the Company establishes a valuation allowance. The Company determined that there was sufficient evidence to establish that the Company’s current recorded valuation allowance against certain deferred tax assets remains reasonable. The Company will monitor the need for additional valuation allowances at each quarter in the future and if the negative evidence outweighs the positive evidence an allowance will be recorded. No liability for uncertain tax positions has been recorded as of December 31, 2014 or June 30, 2015.
(13) | Commitments and Contingencies |
The Company has certain minimum obligations under noncancelable operating leases, principally in connection with office and warehouse space. The Company has entered into noncancelable lease agreements, which contain provisions for rent-free periods. The total amount of rental payments due over the lease terms are being charged to rent expense on the straight-line method over the terms of the leases. Rent expense associated with noncancelable operating leases totaled $310 and $320 for the three months ended June 30, 2014 and 2015, respectively, and $629 and $609 for the six months ended June 30, 2014 and 2015, respectively.
Future minimum lease payments under noncancelable operating leases at June 30, 2015 are as follows:
Amount | |||
Year: | |||
2015 (remaining) | $ | 755 | |
2016 | 1,529 | ||
2017 | 1,239 | ||
2018 | 925 | ||
2019 | 640 | ||
2020 | 16 | ||
Thereafter | — | ||
$ | 5,104 | ||
(14) | Segment, Geographical, and Customer Concentration |
Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company globally manages the business within one reportable segment, which is consistent with how management reviews the business, makes investing and resource allocation decisions, and assesses operating performance. The Company’s geographic regions consist of the United States and other areas, which are referred to as international.
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The following table represents net revenues by geographic area based on the location of the customer during the three and six months ended June 30, 2014 and 2015:
Three months ended | Six months ended | ||||||||||||||
June 30, 2014 | June 30, 2015 | June 30, 2014 | June 30, 2015 | ||||||||||||
United States | $ | 13,551 | $ | 16,579 | $ | 26,301 | $ | 31,899 | |||||||
International | 1,530 | 2,063 | 2,627 | 3,491 | |||||||||||
Total | $ | 15,081 | $ | 18,642 | $ | 28,928 | $ | 35,390 | |||||||
For the three and six months ended June 30, 2014 and 2015, no customers accounted for greater than 10% of revenues. Additionally, no customers accounted for greater than 10% of accounts receivable as of December 31, 2014 or June 30, 2015.
The composition of the Company’s long-lived assets, consisting of property and equipment, amortizable intangible assets, and goodwill by geographic area is set forth below:
December 31, 2014 | June 30, 2015 | ||||||
United States | $ | 6,516 | $ | 5,286 | |||
Israel | 33,855 | 33,608 | |||||
Other Regions | 6,253 | 5,557 | |||||
Total | $ | 46,624 | $ | 44,451 | |||
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following management's discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2014, included in our prospectus dated June 5, 2015, filed with the U.S. Securities and Exchange Commission (SEC) pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the "Prospectus").
When we refer to "we," "our," "us" or "EndoChoice" in this Quarterly Report on Form 10-Q, we mean EndoChoice Holdings, Inc. as well as all of our consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires.
Special note regarding forward-looking statements
This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, "anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend," "may," "plan," "project," "seek," "should," "strategy," "target," "will," "would" and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties, and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" included under Part II, Item 1A below. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
We are a medical device company focused exclusively on designing and commercializing a platform of innovative products and services for gastrointestinal, or GI, caregivers. We currently serve over 2,500 GI departments that perform endoscopic procedures, which represent approximately one-third of the U.S. market. We offer a comprehensive range of products and services that span single-use devices and infection control products, pathology and imaging systems. In December 2013, we began limited commercialization of our Fuse® full spectrum endoscopy system, or Fuse®. Our Fuse® system enables GI specialists to see more than twice the anatomy at any one time compared to standard, forward-viewing colonoscopes and has been clinically demonstrated to detect 69% more pre-cancerous polyps than standard colonoscopes. We believe our commitment to continuing innovation and focus on GI specialists provides us with the unique capability to meet their evolving needs. We intend to leverage our broad product platform, established customer relationships, commercial infrastructure and Fuse® technology to set a new standard of care for the global GI market.
We estimate that the addressable worldwide market for our GI endoscopy products and services is over $6 billion, with more than 70 million GI endoscopies performed each year in the United States, Japan and Europe combined. We estimate that the addressable market for our GI endoscopy products and services is growing at 7% annually driven by increased governmental and payor focus on screening, prevention and treatment of colorectal cancer and other GI conditions, an aging global population and changing dietary habits. GI endoscopies involve inserting a thin tube containing a camera or cameras into a natural orifice of the patient to examine the upper or lower GI tract in order to diagnose and treat various GI conditions, including colorectal cancer. GI endoscopies require a large number of steps, including setup, imaging, therapy, specimen retrieval, pathology and endoscope disinfection and repair, which we refer to collectively as the GI procedure cycle. The GI endoscopy market is highly fragmented and served by numerous companies, many of which focus on only one or two areas of the GI procedure cycle. We believe the needs of GI specialists are currently underserved due to the lack of a comprehensive provider solely focused on innovation in the GI endoscopy market.
We founded our company to serve the evolving needs of GI specialists by continually bringing to market a broad suite of innovative products across the GI procedure cycle. Since we began our commercial operations in 2008, we have developed an extensive line of devices and infection control products and have added pathology and scope repair services capabilities. Our products and services are designed to improve clinical outcomes and GI specialist productivity. In 2013, we acquired Peer Medical Ltd., which was developing a new endoscope system that we now call Fuse®. Our focus on product innovation and services that span the GI endoscopy procedure cycle has enabled our direct salesforce to penetrate approximately one-third of the GI departments in the United States in just six years while increasing our sales per customer over that time.
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Our products are used in colonoscopy and EGD and other procedures of the upper GI tract, which represent approximately 15 million and 8 million annual procedures in the United States, respectively, and together account for 96% of all GI endoscopic procedures. Colonoscopy is used for the screening, surveillance and diagnosis of GI diseases including colorectal cancer, inflammatory bowel disease and GI bleeding.
Our Fuse® system, which is intended for visualization of the GI tract and related therapeutic interventions, enables a wider field of view for upper and lower endoscopy procedures. Specifically, the Fuse® colonoscope offers a 330° view of the colon during colonoscopy instead of the 140° to 170° view offered by standard colonoscopes. This enables the GI specialist to visualize more than twice the anatomy at any one time as compared to a standard colonoscope and improves the ability to more thoroughly examine the colon without prolonging the time to complete the colonoscopy. According to the results of a tandem clinical trial published in The Lancet Oncology, GI specialists using Fuse® during colonoscopy identified 69% more pre-cancerous polyps than when using standard endoscopes. The improved detection is clinically important not only because pre-cancerous polyps are removed during the procedure, but also because clinical guidelines recommend more frequent colonoscopies following initial detection of pre-cancerous polyps. Further, we believe that increased adoption of Fuse® for colorectal cancer screening could result in significant savings to healthcare payors given the high cost of colorectal cancer related surgical intervention and subsequent treatment. The costs of surgeries and related care can be significant, with total costs to the U.S. healthcare system estimated to exceed $8 billion per year.
During the six months ended June 30, 2014 and 2015, our net revenue was $28.9 million and $35.4 million, respectively and for the three months ended June 30, 2014 and 2015, our net revenue was $15.1 million and $18.6 million, respectively. During the six months ended June 30, 2014 and 2015, our net loss was $24.6 million and $34.8 million, respectively and for the three months ended June 30, 2014 and 2015, our net loss was $13.7 million and $19.5 million, respectively. We have not been profitable since inception and as of June 30, 2015, our accumulated deficit was $131.9 million. We have made significant investments over the past two years in our research and development, sales and marketing, general administrative and manufacturing operations in support of the commercialization of Fuse®. We intend to continue to make investments in building our U.S. and International commercial infrastructure and sales force and in recruiting and training our sales representatives in addition to research and development of new products.
Recent developments
Corporate conversion
On June 4, 2015, ECPM Holdings, LLC converted into a Delaware corporation pursuant to a statutory conversion and changed its name to EndoChoice Holdings, Inc. As a result of the corporate conversion, the holders of the different classes and series of units of ECPM Holdings, LLC became holders of an aggregate of 17,580,918 shares of common stock and 579,869 shares of restricted stock in EndoChoice Holdings, Inc. In addition, holders of options and warrants to purchase units of ECPM Holdings, LLC received an aggregate of 339,373 options and 187,161 warrants to purchase shares of EndoChoice Holdings, Inc. common stock.
The condensed consolidated financial statements and related notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q have been retroactively adjusted to account for the effect of the corporate conversion for all periods presented prior to June 30, 2015.
Initial Public Offering
On June 5, 2015, we completed our initial public offering, or IPO, by issuing 7,302,500 shares of common stock, including 952,500 shares sold to underwriters for the exercise of their option to purchase additional shares, at an offering price of $15.00 per share. Of the 7,302,500 common shares sold in the offering, 7,052,500 shares were sold by the Company and 250,000 shares were sold by existing stockholders. The Company received net proceeds from the IPO of approximately $94.5 million after deducting underwriting discounts and commissions of $7.4 million and offering expenses of $3.9 million.
Debt Refinancing
On June 30, 2015, we refinanced our outstanding debt by entering into a new term loan credit and security agreement (the "Term Loan Credit Agreement") and a new revolving loan credit and security agreement (the "Revolving Loan Credit Agreement"). The Term Loan Credit Agreement provides for a five-year $43.0 million senior term loan facility. The Revolving Loan Credit Agreement provides for a five-year $15.0 million senior revolving credit facility. The new facilities are secured by substantially all of the assets of the Company and its domestic subsidiaries and are discussed in greater detail under "Liquidity and Capital Resources."
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Components of our results of operations
We manage our business globally within one reportable segment, which is consistent with how our management reviews our business, prioritizes investment and resource allocation decisions and assesses operating performance.
Net revenues
We generate revenue primarily from the sales of GI equipment and supplies and GI pathology services, to GI caregivers treating a wide range of GI diseases. Net revenues from GI equipment and supplies include revenue from imaging systems, single use therapeutic devices and infection control products, and endoscope repair and maintenance, and our net revenues from GI pathology services include revenues from our GI pathology laboratory. Sales to U.S. customers represented approximately 90.9% and 90.1% of our net revenues for the six months ended June 30, 2014 and 2015, respectively, and 89.8% and 88.9% for the three months ended June 30, 2014 and 2015, respectively.
Our Fuse® system is comprised of colonoscopes and gastroscopes, a FuseBox® video processor, a FusePanel® image management system, a FuseView® monitor system, a standard FuseCart® and other related supplies. We sell our Fuse® system primarily to GI departments in ASCs and hospitals in the United States and Germany and through distributors in other international markets.
We expect revenue to increase in the future as we expand our sales, marketing and distribution capabilities to support growth in the United States and internationally as our Fuse® system becomes more widely adopted. We expect revenues to increase during the remainder of 2015 from 2014 levels due to the commercialization of Fuse®, as well as a growing base of customers for our single-use infection control and device products and our pathology services.
Cost of revenues
We have manufacturing facilities in Caesarea, Israel and Halstenbek, Germany and assemble products in the United States at our facilities in Alpharetta, Georgia and Reno, Nevada. Cost of revenues consist primarily of manufacturing, procurement and shipping, overhead costs, direct material costs and direct labor. A significant portion of our cost of revenues consists of manufacturing overhead costs such as quality assurance, material procurement, inventory control, warehousing and shipment, facilities, depreciation on equipment and operations supervision and management. Due to our relatively low production volumes compared to our available manufacturing capacity, currently a large portion of our Fuse® unit product cost consists of manufacturing overhead expense. We expect cost of revenues to decrease as a percentage of net revenues in the future as our per-unit manufacturing costs decline due to greater absorption of our fixed manufacturing costs over an increase in units produced. In addition, we expect our direct materials and direct labor costs to also decline with higher sales and production volumes as we are able to negotiate more favorable pricing from component suppliers and introduce design programs to reduce the number and complexity of parts.
Gross profit
We calculate gross profit as net revenues less cost of revenues. Our gross profit has been and will continue to be affected by a variety of factors, including production volumes, manufacturing costs, product reliability and production yields, and the implementation over time of cost-reduction strategies. We expect our gross profit to increase over time as our production volume increases and as we allocate the fixed portion of our manufacturing overhead costs over a larger number of units produced, thereby significantly reducing our per unit manufacturing costs. However, our gross profit will likely fluctuate from quarter to quarter.
Research and development
Our research and development, or R&D, employees are located in Israel, the United States, and Germany who are exclusively focused on the GI industry. R&D expenses consist primarily of engineering, product development, clinical and regulatory affairs, consulting services, materials, depreciation, and other costs associated with our products under development, patent related costs, and start-up manufacturing costs and R&D activities associated with our core technologies and processes. We expense all R&D costs as incurred. For the six months ended June 30, 2014 and 2015, R&D expenses included $1.8 million and $1.3 million, respectively, and for the three months ended June 30, 2014 and 2015, R&D expenses included $0.9 million and $0.5 million, respectively, of labor and overhead costs associated with certain engineering activities required to advance the design of the Fuse® product for manufacture.
We expect the amount of our R&D expense to increase as we continue to innovate and introduce new products and technologies addressing the evolving needs of the GI caregiver. However, we anticipate that our R&D costs will decrease as a percentage of net revenues over time if we are successful growing the sales of our products.
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Sales and marketing
We employ a team of experienced sales and marketing professionals in the United States and Germany. In international markets, we sell through 31 distributors and employ a team of experienced sales and marketing representatives in Germany who together serve our markets in Europe, the Middle East, Latin America and Asia. Sales and marketing expense consists primarily of salaries, employee benefits, commissions and bonuses, and related costs for personnel in sales and marketing. In addition, sales and marketing expense includes marketing and promotional activities, trade shows, travel expenses, depreciation on Fuse® demonstration equipment, and professional fees for consulting services. We expect the amount of sales and marketing expense to increase as we expand our sales force and marketing activities during the second half of 2015 to support the commercialization of Fuse® and further sales of our other products. The timing of these increased expenditures are dependent upon the commercial success of Fuse® and sales growth of our other products, as well as the timing of any new product launches and the hiring of additional sales people. We expect sales and marketing expense as a percentage of net revenue to increase over the next year but then to decline over time if we are able to increase the sales of our products.
General and administrative
General and administrative expense, or G&A, consists primarily of salaries, employee benefits, bonuses, stock-based compensation expense, and related costs for personnel who support our general operations such as executive management, legal, information technology, finance, accounting, and human resource functions. Beginning in 2013, our G&A expense included the effect of a 2.3% excise tax on the sale of medical devices in the United States. We expect the amount of G&A expenses to continue to increase for the foreseeable future as we employ additional personnel and incur additional legal, accounting, insurance and other professional service fees associated with being a public company. However, we expect G&A expenses to decrease as a percentage of net revenue if we are successful in growing the sales of our products.
Amortization of intangible assets
Amortization of intangible assets consists primarily of amortization expense related to separately identified intangible assets including developed technology, customer relationships and other assets acquired as a result of the acquisitions of Peer Medical Ltd. ("Peer Medical") and RMS Endoskopie-Technik Stephan Wieth e.K. ("RMS") in January 2013. The value of the intangible assets acquired in the Peer Medical and RMS transactions was $23.7 million and $1.9 million, respectively. The amortization of intangibles is expected to decline over time based on the useful lives of each identified intangible asset.
Other income (expense)
Other income (expense) primarily consists of interest expense, loss on early retirement of debt, foreign currency transaction gains and losses, and changes in the fair value of warrant liabilities. Interest expense consists primarily of interest payments made pursuant to our previous Senior Secured Credit Facility with Silicon Valley Bank (which we refer to as our Senior Secured Credit Facility) and the growth capital loan facility with Triple Point Capital (which we refer to as our Growth Capital Facility). We refinanced our Senior Secured Credit Facility and Growth Capital Facility on June 30, 2015 leading to the recognition of a loss on early retirement of debt. Interest expense will fluctuate in future periods to the extent we incur additional, or pay down, indebtedness. Our foreign currency transaction gains and losses primarily relate to foreign currency denominated cash, liabilities, and intercompany receivables and payables. The warrants issued to Triple Point Capital in connection with the Growth Capital Facility were remeasured to fair value on the date of the corporate conversion and reclassified from other long term liabilities to additional paid-in capital on the condensed consolidated balance sheet.
Income taxes
Income tax expense consists primarily of income taxes in foreign jurisdictions in which we conduct business. We maintain a full valuation allowance in certain jurisdictions for deferred tax assets, including net operating loss carryforwards, research and development credits, and other tax credits. We are taxed at the rates applicable within each jurisdiction in which we operate and/or generate revenue. The composite income tax rate, tax provisions, deferred tax assets, and deferred tax liabilities will vary according to the jurisdiction in which profits arise. Tax laws are complex and subject to different interpretations by management and the respective governmental taxing authorities and require us to exercise judgment in determining our income tax provision, our deferred tax assets and liabilities, and the valuation allowance recorded against our net deferred tax assets. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not that the future realization of all or some of the deferred tax assets will not be achieved.
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Critical accounting policies and estimates
Management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.
There have been no significant changes to our critical accounting policies during the three and six months ended June 30, 2015 as compared to the significant accounting policies described in our final prospectus filed with the Securities and Exchange Commission, or SEC, on June 5, 2015 related to our Registration Statement on Form S-1, as amended (File No. 333-203883) for our initial public offering. We believe that the critical accounting policies discussed in that prospectus are important to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates.
Recently issued accounting pronouncements
In July 2015, the FASB issued Accounting Standards Update ("ASU") 2015-11, Simplifying the Measurement of Inventory. ASU 2015-11 changes the measurement principle for inventory for entities using FIFO or average cost from the lower of cost or market to lower of cost and net realizable value. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. ASU 2015-11 should be applied prospectively. We are currently evaluating the impact of the future adoption of this standard, but we do not expect the adoption to have a material effect on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 will require an entity to present debt issuance costs in the balance sheet as a direct deduction from the carrying amount of the related debt liability rather than as an asset, consistent with the treatment of debt discounts. The amendment does not change the recognition and measurement guidance for debt issuance costs, and the amortization of debt issuance costs will continue to be reported as interest expense. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2016. The Company early adopted ASU 2015-03 as of June 2015, as permitted, and applied the new guidance retrospectively to all prior periods presented in the financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require 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. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017, and early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating the impact of the future adoption of this standard.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 will explicitly require management to assess an entity’s ability to continue as a going concern at each annual and interim period. Related footnote disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern within one year after the report issuance date. If conditions do not give rise to substantial doubt, no disclosures will be required specific to going concern uncertainties. The ASU defines substantial doubt using a likelihood threshold of “probable” similar to the current use of that term in U.S. GAAP for loss contingencies and provides example indicators. ASU 2014-15 is effective for reporting periods ending after December 15, 2016, and early adoption is permitted. We are currently evaluating the impact of the future adoption of this standard, but we do not expect the adoption to have a material effect on our consolidated financial statements.
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Results of operations
Comparison of the Three and Six Months ended June 30, 2014 and 2015
The following table set forth amounts from our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2014 and 2015 (dollars in thousands):
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2014 | 2015 | 2014 | 2015 | ||||||||||||
Net revenues: | |||||||||||||||
GI equipment and supplies | $ | 12,017 | $ | 15,285 | $ | 22,925 | $ | 29,080 | |||||||
GI pathology services | 3,064 | 3,357 | 6,003 | 6,310 | |||||||||||
Net revenues | 15,081 | 18,642 | 28,928 | 35,390 | |||||||||||
Cost of revenues: | |||||||||||||||
GI equipment and supplies | 8,397 | 10,952 | 14,543 | 20,978 | |||||||||||
GI pathology services | 1,393 | 1,157 | 2,700 | 2,300 | |||||||||||
Cost of revenues | 9,790 | 12,109 | 17,243 | 23,278 | |||||||||||
Gross profit | 5,291 | 6,533 | 11,685 | 12,112 | |||||||||||
Operating Expenses: | |||||||||||||||
Research and development | 5,923 | 5,166 | 11,073 | 9,849 | |||||||||||
Sales and marketing | 6,794 | 7,557 | 13,303 | 15,800 | |||||||||||
General and administrative | 3,952 | 7,944 | 7,652 | 12,361 | |||||||||||
Amortization of intangible assets | 1,188 | 690 | 2,361 | 1,377 | |||||||||||
Operating expenses | 17,857 | 21,357 | 34,389 | 39,387 | |||||||||||
Operating loss | (12,566 | ) | (14,824 | ) | (22,704 | ) | (27,275 | ) | |||||||
Other expense | (1,010 | ) | (4,383 | ) | (1,366 | ) | (7,007 | ) | |||||||
Net loss before income taxes | (13,576 | ) | (19,207 | ) | (24,070 | ) | (34,282 | ) | |||||||
Income tax expense | (132 | ) | (280 | ) | (516 | ) | (479 | ) | |||||||
Net loss | $ | (13,708 | ) | $ | (19,487 | ) | $ | (24,586 | ) | $ | (34,761 | ) | |||
Net revenues
The following table sets forth revenue by product category for the three and six months ended June 30, 2014 and 2015 (dollars in thousands):
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2014 | 2015 | 2014 | 2015 | ||||||||||||
Imaging | $ | 3,435 | $ | 6,095 | $ | 6,564 | $ | 11,600 | |||||||
Single-use products | 8,582 | 9,190 | 16,361 | 17,480 | |||||||||||
GI equipment and supplies | 12,017 | 15,285 | 22,925 | 29,080 | |||||||||||
GI pathology services | 3,064 | 3,357 | 6,003 | 6,310 | |||||||||||
Net revenues | $ | 15,081 | $ | 18,642 | $ | 28,928 | $ | 35,390 | |||||||
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Net revenues for GI equipment and supplies increased $3.3 million, or 27.2%, to $15.3 million for the three months ended June 30, 2015 compared to $12.0 million during the three months ended June 30, 2014. Net revenues for GI equipment and supplies increased $6.2 million, or 26.8%, to $29.1 million for the six months ended June 30, 2015 compared to $22.9 million during the six months ended June 30, 2014. The growth in net revenues for GI equipment and supplies was primarily attributable to increases in imaging sales of Fuse® systems from 15 systems to 27 systems, or 80.0%, for the three months ended June 30, 2014 compared to the three months ended June 30, 2015, respectively, and from 25 systems to 53 systems, or 112.0%, for the six months ended June 30, 2014 compared to the six months ended June 30, 2015. Our average selling price per system was consistent for all periods presented. Fuse® had minimal sales during the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2015, as we continued its commercial introduction. The growth in net revenues for GI equipment and supplies was also attributable to a 7.1% and 6.8% increase in net revenues for the three and six months ended June 30, 2015 for our single-use therapeutic devices and infection control products, respectively, which was achieved through expansion of our customer base and an increase in average monthly order size.
Net revenues for GI pathology services increased $0.3 million, or 9.6%, to $3.4 million for the three months ended June 30, 2015 compared to $3.1 million during the three months ended June 30, 2014. Net revenues for GI pathology services increased $0.3 million, or 5.1%, to $6.3 million for the six months ended June 30, 2015 compared to $6.0 million during the six months ended June 30, 2014. The growth in net revenues for GI pathology services was attributable to a 12.5% increase in the number of specimens processed for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 and an 8.6% increase in the number of specimens processed for the six months ended June 30, 2015 compared to the six months ended June 30, 2014.
Cost of revenues
Cost of revenues for GI equipment and supplies increased $2.6 million, or 30.4%, to $11.0 million during the three months ended June 30, 2015 compared to $8.4 million during the three months ended June 30, 2014. Cost of revenues increased $6.5 million, or 44.2%, to $21.0 million during the six months ended June 30, 2015 compared to $14.5 million during the six months ended June 30, 2014. The increase in cost of revenues was primarily attributable to the growth in the number of Fuse® systems sold, which resulted in the allocation of the fixed portion of our manufacturing overhead costs over more production units. In addition, the three and six months ended June 30, 2015 included a charge of $0.8 million for warranty costs related to earlier generations of the Fuse® system. As a percentage of GI equipment and supplies revenues, cost of revenues for GI equipment and supplies were 69.9% and 63.4% for the three and six months ended June 30, 2014 compared to 71.7% and 72.1% for the three and six months ended June 30, 2015. The increase in GI equipment and supply costs is due to the launch of Fuse® and the initially lower gross margin of Fuse® during the ramp up of global manufacturing operations prior to achieving significant sales.
Cost of revenues for GI pathology services decreased $0.2 million, or 16.9%, to $1.2 million during the three months ended June 30, 2015 compared to $1.4 million during the three months ended June 30, 2014. Cost of revenues decreased $0.4 million, or 14.8%, to $2.3 million during the six months ended June 30, 2015 compared to $2.7 million during the six months ended June 30, 2014. The decrease in GI pathology costs relates to a reduction in average headcount, supplies, and customer acquisition costs, as well as the delayed timing of backfilling of open positions. In addition, the higher number of specimens processed resulted in the allocation of the fixed portion of our production overhead costs over more specimens. As a percentage of GI pathology services revenues, cost of revenues for GI pathology services were 45.5% and 45.0% for the three and six months ended June 30, 2014 compared to 34.5% and 36.5% for the three and six months ended June 30, 2015.
During 2015, we expect that cost of revenues as a percentage of net revenues may not decrease significantly and may even increase due to the ongoing launch of Fuse® and the continuing need to scale up manufacturing activities and costs prior to achieving the expected volume of sales. As we continue commercialization of Fuse® in the future beyond 2015, if we are able to achieve higher sales volumes and economies of scale in manufacturing, we expect cost of revenues to decrease as a percentage of net revenues as our per-unit manufacturing costs decline from the absorption of fixed manufacturing costs over higher production units as well as the introduction of design and sourcing programs to reduce the cost of direct materials. Our ability to achieve this goal to decrease cost of revenues as a percentage of revenues is dependent upon the reliability of our products and the widespread acceptance of Fuse®.
Gross profit
Gross profit was $5.3 million and $11.7 million for the three and six months ended June 30, 2014 compared to $6.5 million and $12.1 million for the three and six months ended June 30, 2015, an increase of $1.2 million and $0.4 million, or 23.5% and 3.7%, respectively, for the reasons discussed above.
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Research and development
Research and development expenses decreased $0.7 million, or 12.8%, to $5.2 million during the three months ended June 30, 2015 compared to $5.9 million during the three months ended June 30, 2014. Research and development expenses decreased $1.3 million, or 11.1%, to $9.8 million during the six months ended June 30, 2015 compared to $11.1 million during the six months ended June 30, 2014. The decrease in expense is primarily attributable to the reduction of Fuse® start-up manufacturing costs. Research and development expense included $0.9 million and $1.8 million for the three and six months ended June 30, 2014, respectively, of labor and overhead costs associated with certain engineering activities required to advance the design of Fuse® for manufacture compared to $0.5 million and $1.3 million for the three and six months ended June 30, 2015. As a percentage of net revenues, research and development expenses were 39.3% and 38.3% for the three and six months ended June 30, 2014, respectively, compared to 27.7% and 27.8% for the three and six months ended June 30, 2015 respectively.
Sales and marketing
Sales and marketing expense increased $0.8 million, or 11.2%, to $7.6 million during the three months ended June 30, 2015 compared to $6.8 million during the three months ended June 30, 2014. Sales and marketing expenses increased $2.5 million, or 18.8%, to $15.8 million during the six months ended June 30, 2015 compared to $13.3 million during the six months ended June 30, 2014. The increase is primarily attributable to expanding the sales and marketing organization with a $1.0 million and $1.6 million increase in employee related expenses for the three and six months ended June 30, 2015, respectively. In addition, sales and marketing expense included an impairment charge of $0.9 million for the six months ended June 30, 2015 taken on existing demonstration equipment as the Company plans to replace this equipment with new versions of Fuse®. No impairment charge was recognized during the three months ended June 30, 2015. As a percentage of net revenues, sales and marketing expenses were 45.1% and 46.0% for the three and six months ended June 30, 2014, respectively, compared to 40.5% and 44.6% for the three and six months ended June 30, 2015, respectively.
General and administrative
General and administrative expense increased $3.9 million, or 101.0%, to $7.9 million during the three months ended June 30, 2015 compared to $4.0 million during the three months ended June 30, 2014. General and administrative expenses increased $4.7 million, or 61.5%, to $12.4 million during the six months ended June 30, 2015 compared to $7.7 million during the six months ended June 30, 2014. The increase was due to higher headcount, as we invested in our infrastructure and systems and added personnel to support the growth of the company and commercialization of Fuse®, along with a $0.5 million state use tax accrual incurred in conjunction with the deployment of demonstration equipment. In addition, general and administrative expense included a $2.5 million charge for stock based compensation during the three months ended June 30, 2015 recorded in conjunction with the corporate conversion and IPO. As a percentage of net revenues, general and administrative expenses were 26.2% and 26.5% for the three and six months ended June 30, 2014, respectively, compared to 42.6% and 34.9% for the three and six months ended June 30, 2015, respectively.
Amortization of intangible assets
Amortization of intangible assets was $1.2 million and $2.4 million for the three and six months ended June 30, 2014 compared to $0.7 million and $1.4 million for the three and six months ended June 30, 2015. The decrease relates to fully amortizing the noncompete agreement associated with the 2013 acquisition of Peer.
Other expense
For the three and six months ended June 30, 2014 and 2015, other expense was as follows (dollars in thousands):
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2014 | 2015 | 2014 | 2015 | ||||||||||||
Interest expense | $ | (740 | ) | $ | (1,503 | ) | $ | (1,089 | ) | $ | (3,094 | ) | |||
Exchange rate loss | (279 | ) | (180 | ) | (171 | ) | (1,166 | ) | |||||||
Loss on early retirement of debt | $ | — | $ | (2,282 | ) | $ | — | $ | (2,282 | ) | |||||
Warrant liability mark-to-market | $ | — | $ | (407 | ) | $ | (435 | ) | |||||||
Other income (expense) | 9 | (11 | ) | (106 | ) | (30 | ) | ||||||||
Other expense | $ | (1,010 | ) | $ | (4,383 | ) | $ | (1,366 | ) | $ | (7,007 | ) | |||
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Other expenses increased $3.4 million, or 334.0%, to $4.4 million during the three months ended June 30, 2015 compared to $1.0 million during the three months ended June 30, 2014. Other expenses increased $5.6 million, or 413.0%, to $7.0 million during the six months ended June 30, 2015 compared to $1.4 million during the six months ended June 30, 2014. The increase was primarily due to the $2.3 million loss on retirement of debt recorded in conjunction with the debt refinancing on June 30, 2015, a $0.4 million change in the fair value of the warrant liability recognized upon the corporate conversion and an increased interest expense on higher borrowings. The foreign currency losses recorded during 2015 relate to the impact of revaluing certain of our intercompany receivables and payables between our U.S., German, and Israeli subsidiaries as a result of changes in the respective Euro and Shekel to U.S. dollar exchange rates.
Income tax expense
Income tax expense was $0.1 million and $0.5 million for the three and six months ended June 30, 2014 compared to income tax expense of $0.3 million and $0.5 million for the three and six months ended June 30, 2015, an increase of $0.2 million and $0.0 million, respectively. The increase during the three months ended June, 2015 compared to the three months ended June 30, 2014 was due to income taxes on foreign subsidiary earnings during the year.
Net loss
Net loss increased from $13.7 million and $24.6 million for the three and six months ended June 30, 2014 to $19.5 million and $34.8 million for the three and six months ended June 30, 2015 for the reasons discussed above, in particular the overall increase in operating expenses, interest expense, foreign currency losses and the loss on early retirement of debt.
Significant trends and uncertainties impacting our business
The global GI Endoscopy market has been growing as a result of:
• | increased governmental and payor focus on colorectal cancer screening, prevention and treatment of colorectal cancer and other GI conditions; |
• | an aging global population; and |
• | changing dietary habits. |
Nonetheless, we face a number of challenges and uncertainties, including:
• | lack of experience that GI customers have with out products (and our Fuse® system in particular) and their concerns that we are relatively new to the business of designing and manufacturing endoscopy systems; |
• | concerns that our competitors have greater financial and other resources than our company; |
• | entrenched relationships that our competitors have with potential customers and their competitive response and negative selling effors against us; and |
• | reluctance by GI caregivers to change or to use new products and services for established procedures. |
We are also subject to additional risks and uncertainties discussed in our final prospectus filed with the Securities and Exchange Commission on June 5, 2015 for our initial public offering and in the section titled “Risk Factors” included under Part II, Item 1A below.
Seasonality and quarterly fluctuations
Our business is seasonal in nature. We have experienced and expect to continue to experience variability in our revenue and gross profit among quarters, as well as within each quarter, as a result of a number of factors, including adverse weather and by resetting of annual patient healthcare insurance plan deductibles, both of which tend to happen in the first quarter and may cause patients to delay elective procedures. Demand and timing for GI endoscopy procedures may be impacted by provider budgetary cycles and by the desire of patients to spend their remaining balances in flexible spending accounts or because they have met their annual deductibles under their health insurance plans. In addition, sale cycles for medical capital equipment such as our Fuse® system can be longer than other products, which may result in revenue variations caused by the timing of the receipt of customer orders or the shipment of our systems. In the third quarter, the number of GI endoscopy procedures in the U.S. and Europe is historically lower than other quarters throughout the year, which we believe is attributable to the summer vacations of GI specialists and their patients. Other factors that may cause variability in our results include: the number and mix of products sold in the quarter, the demand for, and pricing of, our products and the products of our competitors; the timing of or failure to obtain regulatory clearances or approvals for products; costs, benefits and timing of new product introductions; increased competition; the timing of the receipt of customer orders; changes in average selling prices; the availability and cost of components and materials; number of selling days, and fluctuations in foreign currency exchange rates.
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Liquidity and capital resources
Overview
Since our inception through June 30, 2015, we have financed our operations primarily through non-public equity financings and to a lesser extent, debt financings. On June 5, 2015, we completed our IPO and received net proceeds of approximately $94.5 million. Based on our current operating plan, we expect that cash on hand together with anticipated funds from operations and $15.0 million of available capital under our revolving line of credit will be sufficient to fund our operations into 2019. As of June 30, 2015, we had cash and cash equivalents of $118.5 million and an accumulated deficit of $131.9 million compared to cash and cash equivalents of $13.8 million and an accumulated deficit of $97.2 million as of December 31, 2014.
On June 30, 2015, the Company refinanced its outstanding debt by entering into a new $58.0 million credit facility, which includes a Term Loan Credit Agreement and a Revolving Loan Credit Agreement with MidCap Financial Trust and Silicon Valley Bank. The Term Loan Credit Agreement provides for a five-year $43.0 million senior term loan facility secured by a lien on substantially all of the assets of the Company and its domestic subsidiaries (other than intellectual property, which is subject to a negative pledge only). The Revolving Loan Credit Agreement provides for a five-year $15.0 million senior revolving credit facility also secured by a substantially all assets lien. Interest-only payments are due during the first 30 months of the Term Loan Facility, with principal payments beginning in January 2018 in equal monthly installments until maturity.
Proceeds from the Term Loan Facility were used to repay $40.0 million of outstanding loans under the Growth Capital Loan and Security Agreement dated February 18, 2014 with Triple Point Capital, LLC (the "Growth Capital Facility"), $2.3 million of prepayment and end of term fees under the Growth Capital Facility, and approximately $0.5 million of other fees and expenses in connection with the refinancing, with the remaining $0.2 million of proceeds used for general business purposes. The Revolving Credit Facility is expected to be used in the future for working capital needs and general business purposes. The Term Loan Credit Agreement and Revolving Loan Credit Agreement are discussed below under the caption "Indebtedness".
Our liquidity position and capital requirements may be impacted by a number of factors, including the following:
• | our ability to generate revenues; |
• | fluctuations in gross margins, operating expenses and net loss; and |
• | fluctuations in working capital. |
Our primary short-term capital needs, which are subject to change, include expenditures related to:
• | support of our commercialization efforts related to Fuse®; |
• | expansion of our sales and marketing activities, including hiring new direct sales representatives; |
• | purchases of new product demonstration equipment, including colon models and other simulation equipment, used by our sales representatives and other personnel for Fuse® product demonstrations to GI specialists; |
• | improvements in our manufacturing capacity as sales of our Fuse® system and other products increase in the future, which will include the acquisition of equipment and other fixed assets related primarily to the manufacturing of our Fuse® system and our other products; and |
• | payment of interest due under our Term Loan Credit Agreement. |
We may raise additional funds to finance future cash needs through public or private equity offerings, debt financings, receivables or royalty financings or corporate collaboration and licensing arrangements. The covenants under our credit facilities limit our ability to obtain additional debt financing. We cannot be certain that additional funding will be available on acceptable terms, or at all. Any failure to raise capital in the future could have a negative impact on our financial condition and our ability to pursue our business strategies.
If we raise additional funds by issuing equity securities or convertible debt, our stockholders will experience dilution. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional equity that we raise may contain terms, such as liquidation and other preferences, which are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our products, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us.
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Cash flows
The following table provides a summary of our cash flows for the periods indicated (dollars in thousands):
Six months ended June 30, | |||||||
2014 | 2015 | ||||||
Net cash used in operating activities | $ | (22,103 | ) | $ | (18,561 | ) | |
Net cash used in investing activities | (6,788 | ) | (2,555 | ) | |||
Net cash provided by financing activities | 27,125 | 125,808 | |||||
Cash flows from operating activities
During the six months ended June 30, 2014, net cash used in operating activities was $22.1 million, consisting primarily of a net loss of $24.6 million and an increase in net operating assets of $3.0 million, partially offset by non-cash charges of $5.5 million. The cash used in operations was primarily due to the ongoing commercialization of Fuse® and the expansion of our infrastructure in sales and marketing, research and development and manufacturing supply chain. The increase in the change in net operating assets was due to increases in accounts receivable, inventories, prepaid expenses and other current assets, and other assets, partially offset by an increase in accounts payable, accrued liabilities, and other liabilities. The non-cash charges primarily consisted of depreciation and amortization and non-cash interest expense and discount amortization.
During the six months ended June 30, 2015, net cash used in operating activities was $18.6 million, consisting primarily of a net loss of $34.8 million, partially offset by the decrease in in net operating assets of $2.6 million, non-cash charges of $11.3 million, and loss on early debt retirement of $2.3 million. The cash used in operations was primarily due to the ongoing commercialization of Fuse® and the expansion of our infrastructure in sales and marketing, research and development and manufacturing supply chain. The decrease in the change in net operating assets was due to increases in accounts payable, accrued liabilities and other liabilities, decreases in inventories and other assets, partially offset by increases in accounts receivable and prepaid expenses and other current assets. The non-cash charges primarily consisted of depreciation and amortization, loss on impairment of property and equipment, stock based compensation, change in the fair value of warranty liability, and an unrealized foreign currency loss.
Cash flows from investing activities
During the six months ended June 30, 2014, net cash used in investing activities was $6.8 million, consisting of an increase in the deployment of Fuse® demonstration equipment and an increase in other capital expenditures associated with the global expansion of our infrastructure to support the commercialization of Fuse®.
During the six months ended June 30, 2015, net cash used in investing activities was $2.6 million, consisting of Fuse® demonstration equipment and other purchases of property and equipment associated with the global expansion of our infrastructure to support the commercialization of Fuse®.
Cash flows from financing activities
During the six months ended June 30, 2014, net cash provided by financing activities was $27.1 million consisting of proceeds from the issuance of member units of $0.1 million and a drawdown of cash of $30.0 million under our Growth Capital Facility, partially offset by net repayments on the Senior Secured Credit Facility of $2.5 million and payment of financing fees and capital lease obligations of $0.5 million.
During the six months ended June 30, 2015, net cash provided by financing activities was $125.8 million consisting of proceeds from the issuance of member units of $31.0 million, net proceeds from our IPO of $94.5 million, net proceeds from our debt refinancing of $3.0 million, partially offset by prepayment and end of term fees for early retirement of debt of $2.3 million and payments for debt financing fees of $0.4 million.
Indebtedness
On June 30, 2015, the Company refinanced its outstanding debt by entering into the $43.0 million Term Loan Credit Agreement and $15.0 million Revolving Loan Credit Agreement with MidCap Financial Trust and Silicon Valley Bank.
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The Credit Agreements contain representations and covenants typical for credit arrangements of comparable size in the medical device industry, including certain financial covenants related to minimum liquidity levels and net revenues. The Credit Agreements also contain customary events of default. If an event of default occurs and is not cured within any applicable grace period or is not waived, the creditors are entitled to take various actions, including, without limitation, the acceleration of amounts due thereunder, termination of commitments under the Credit Agreements, and realization upon the collateral securing the credit facilities.
Term Loan Facility
The Term Loan Credit Agreement provides for a five-year $43.0 million senior term loan facility (the "Term Loan Facility") secured by a lien on substantially all of the assets of EndoChoice and its domestic subsidiaries, other than intellectual property, which is subject to a negative pledge only. The Term Loan Facility bears interest at a fixed rate of 9.5% per year and is subject to an end of term fee of 2.95% on the $43.0 million advanced under the facility on the Closing Date. Interest-only payments are due during the first 30 months of the Term Loan Facility, with principal payments beginning in January 2018 in equal monthly installments until maturity. The end of term fee is not applied to scheduled principal payments and is due only upon the earlier of repayment or maturity of the loan. The end of term fee will be accrued as additional interest expense using the effective interest rate method over the term of the loan.
Proceeds from the Term Loan Facility were used to voluntarily prepay $40.0 million of outstanding loans under the Growth Capital Facility with Triple Point Capital, LLC, to pay $2.3 million of prepayment and end of term fees, and to pay $0.5 million of other fees and expenses in connection with the refinancing.
Revolving Credit Facility
The Revolving Loan Credit Agreement provides for a five-year $15.0 million senior revolving credit facility (the "Revolving Credit Facility") also secured by a lien on substantially all of the assets of EndoChoice and its domestic subsidiaries, other than intellectual property, which is subject to a negative pledge only. Amounts drawn under the Revolving Credit Facility will bear interest at the LIBOR Rate (as defined in the Revolving Loan Credit Agreement) plus 5.25% per year, while the undrawn portion is subject to an unused line fee of 0.50% per year. No amounts were drawn or outstanding under the Revolving Credit Facility as of June 30, 2015. The Revolving Credit Facility expires on June 30, 2020.
Contractual obligations and commitments
The following table summarizes our expected material contractual payment obligations as of June 30, 2015 (dollars in thousands):
Payments due by period | |||||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Long-term debt obligations(1)(2) | $ | 44,269 | $ | — | $ | 25,800 | $ | 18,469 | $ | — | |||||||||
Operating leases | 5,104 | 1,516 | 2,569 | 1,019 | — | ||||||||||||||
Total | $ | 49,373 | $ | 1,516 | $ | 28,369 | $ | 19,488 | $ | — | |||||||||
(1) | Under the terms of the Term Loan Credit Agreements, principal payments begin January 2018 and continue until maturity on June 30, 2020. |
(2) | Includes aggregate end of term fees of $1,269 due at maturity of the Term Loan Credit Agreement. |
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements.
JOBS Act
We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, reduced disclosure obligations relating to the presentation of financial statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations, exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation. We have availed ourselves of the reduced reporting
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obligations and executive compensation disclosure in this prospectus, and expect to continue to avail ourselves of the reduced reporting obligations available to emerging growth companies in future filings.
In addition, an emerging growth company can delay its adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we plan to comply with any new or revised accounting standards on the relevant dates on which non-emerging growth companies must adopt such standards. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks in the ordinary course of our business. The primary market risks that we are exposed to include interest rate risk, foreign currency exchange rate risk, and inflation risk.
Interest rate risk
We are exposed to interest rate risk in connection with future borrowings under our Revolving Credit Facility, which will bear interest annually at a floating rate based upon the LIBOR Rate (as defined in the Revolving Loan Credit Agreement) plus 5.25%. As of June 30, 2015, no amounts were outstanding under our Revolving Credit Facility. We do not believe that we are exposed to material interest rate risk with respect to our Term Loan Facility, which bears interest at a fixed rate of 9.5% that is not subject to changes in market interest rates.
We are also exposed to a degree of interest rate risk related to investments in marketable debt securities classified as cash equivalents on the condensed consolidated balance sheet as of June 30, 2015. As of June 30, 2015, cash and cash equivalents were comprised of $5.8 million in cash and $112.7 million of investments in liquid money market funds with durations of less than 90 days. The primary objectives of our investment activities are to ensure liquidity and preserve capital. We also seek to maximize income from our investments without assuming significant risk. To achieve these objectives, we have established policies allowing excess cash to be invested in a diversified portfolio of high credit quality (Standard & Poor’s credit rating of A or better), U.S. dollar denominated marketable debt securities with durations of less than 1 year, including U.S. Treasury securities, U.S. government agency bonds, money market funds, certificates of deposit, and commercial paper. Due to their short-term nature, we do not believe that our investments in marketable debt securities are subject to significant interest rate risk. Nor do we believe that we are exposed to material interest rate risk with respect to cash, which is not subject to loss of principal due to fluctuations in interest rates and is held in readily available checking accounts with high quality financial institutions.
A hypothetical 1% change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.
Foreign currency risk
A portion of our operating expenses are incurred outside the United States, are denominated in foreign currencies, and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro and the Shekel. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statements of comprehensive loss. To date, foreign currency transaction realized gains and losses have not been material to our consolidated financial statements, and we have not engaged in any foreign currency hedging transactions. As our international operations grow, we will continue to reassess our approach to managing the risks relating to fluctuations in currency rates.
For the three months ended June 30, 2014 and 2015, approximately 6.6% and 7.1%, respectively, of our sales were denominated in foreign currencies, and approximately 28.3% and 20.7%, respectively, of our purchases were denominated in foreign currencies. For the six months ended June 30, 2014 and 2015, approximately 6.4% and 6.1%, respectively, of our sales were denominated in foreign currencies, and approximately 29.5% and 20.5%, respectively, of our purchases were denominated in foreign currencies.
Inflation risk
Inflation generally affects us by increasing our cost of labor and manufacturing and other costs. We do not believe that inflation had a material effect on our business, financial condition, or results of operations during the three and six month periods ended June 30, 2014 and 2015.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (Exchange Act), our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2015, our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II. Other Information
Item 1. Legal Proceedings
The medical device industry is characterized by frequent claims and litigation, including claims regarding product liability, intellectual property, employment, and other general matters. As a result, we may be involved in various legal proceedings from time to time. We are not presently a party to any legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business, operating results, or financial condition.
Item 1A. Risk Factors
An investment in our common stock involves risks. You should carefully consider the risk factors as previously disclosed in our final prospectus filed with the Securities and Exchange Commission, or SEC, on June 5, 2015 related to our Registration Statement on Form S-1, as amended (File No. 333-203883) for our initial public offering, or IPO, together with the updated risk factors below as well other information in this Quarterly Report on Form 10-Q, including the financial statements and related notes, before deciding whether to purchase, hold, or sell shares of our common stock. The occurrence of any of these risks could harm our business, financial condition, or results of operations or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the risk factors described when evaluating our business. Other than the risk factors described below, there have been no material changes to the risk factors as previously disclosed in our final prospectus filed with the SEC on June 5, 2015, the discussion of which is specifically incorporated by reference into this Quarterly Report on Form 10-Q.
Risks related to our financial position and capital requirements
Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations.
As of June 30, 2015, the amount of our total indebtedness, including accrued interest and end of term fees, was approximately $42.6 million, net of discount, representing amounts borrowed under our Term Loan Facility. No amounts were drawn or outstanding under the Revolving Credit Facility as of June 30, 2015.
Our outstanding debt and related debt service obligations could have important adverse consequences to us, including:
• | heightening our vulnerability to downturns in our business or our industry or the general economy and restricting us from making acquisitions, or exploring business opportunities; |
• | requiring a significant portion of our available cash to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our available cash to fund our operations, capital expenditures and future business opportunities; |
• | limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who have greater capital resources; and |
• | subjecting us to financial and other restrictive covenants in our debt instruments, the failure with which to comply could result in an event of default under the applicable debt instrument that allows the lender to demand immediate repayment of the related debt. |
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay product development, sales and marketing, capital and other expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
Our Term Loan Facility and Revolving Credit Facility (the "Facilities") contain negative covenants restricting, among other things, dispositions of assets, changes in business, management, ownership, or business locations, mergers or acquisitions, indebtedness, encumbrances, maintenance of collateral accounts, distributions and investments, liens, and transactions with affiliates. The Facilities also include financial covenants requiring a minimum level of liquidity and revenue. As of June 30, 2015 we were in compliance with all of the covenants in the facilities. The Facilities also contain financial reporting requirements.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities
Common Stock Issuances
During the three months ended June 30, 2015, we issued an aggregate of 304 shares of our common stock to employees upon the exercise of stock options under our 2007 Stock Incentive Plan for total consideration of $1 thousand. The issuance was exempt from registration under the Securities Act as an offer and sale of securities pursuant to certain compensatory benefit plans and contracts relating to compensation in compliance with Rule 701.
Warrant Issuances
During the three months ended June 30, 2015, we issued an aggregate of 67,989 shares of our common stock to warrant holders upon the cashless exercise of 183,100 warrants at a weighted-average exercise price of $10.92 per warrant. The issuance was effected without registration in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act.
Corporate Conversion
On June 4, 2015, ECPM Holdings, LLC converted into a Delaware corporation pursuant to a statutory conversion and changed its name to EndoChoice Holdings, Inc. As a result of the corporate conversion, the holders of the different classes and series of units of ECPM Holdings, LLC became holders, in aggregate, of 17,580,918 shares of common stock and 579,869 shares of restricted stock in EndoChoice Holdings, Inc. In addition, holders of options and warrants to purchase units of ECPM Holdings, LLC received an aggregate of 339,373 options and 187,161 warrants, respectively, to purchase shares of EndoChoice Holdings, Inc. common stock. The issuance was effected without registration in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act.
(b) Use of Proceeds from the Sale of Registered Securities
On June 10, 2015, we completed an initial public offering, or IPO, of our common stock. In connection with the IPO, we issued 7,302,500 shares of our common stock at a price of $15.00 per share, including 952,500 shares pursuant to the underwriters’ full exercise of their over-allotment option. The underwriters’ over-allotment option was comprised of 702,500 shares sold by us and 250,000 shares sold by certain selling stockholders. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1, as amended (File No. 333-203883), which was declared effective by the SEC on June 5, 2015. The offering commenced on June 5, 2015 and did not terminate before all of the shares in the IPO that were registered in the registration statement were sold. J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as joint book-running managers, and William Blair & Company, L.L.C. and Stifel, Nicolaus & Company, Incorporated acted as co-managers for the offering.
We received total net proceeds from the IPO of approximately $94.5 million after deducting underwriting discounts and commissions of approximately $7.4 million and other offering expenses of approximately $3.9 million. The selling stockholders received total net proceeds from the IPO of approximately $3.5 million after deducting underwriting discounts and commissions of approximately $0.5 million. No offering expenses were paid or are payable, directly or indirectly, to any of our directors or officers (or their associates), to persons owning ten percent or more of any class of our equity securities, or to any other affiliates.
The net proceeds from the IPO have been invested in highly-liquid money market funds. There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on June 5, 2015.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
The agreements and other documents filed as exhibits to this Quarterly Report on Form 10-Q are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
Incorporated by Reference | ||||||||||
Exhibit Number | Exhibit Description | Form | Date | Number | Filed Herewith | |||||
3.1 | Certificate of Incorporation of EndoChoice Holdings, Inc. | X | ||||||||
3.2 | Bylaws of EndoChoice Holdings, Inc. | X | ||||||||
4.1 | Reference is made to Exhibits 3.1 and 3.2 | |||||||||
4.2 | Form of Stock Certificate for Common Stock | S-1/A | 05/25/15 | 4.1 | ||||||
10.1# | EndoChoice Holdings, Inc. 2015 Omnibus Equity Incentive Plan | S-8 | 06/12/15 | 10.1 | ||||||
10.2# | Form of Incentive Stock Option Agreement for EndoChoice Holdings, Inc. 2015 Omnibus Equity Incentive Plan | S-1 | 05/05/15 | 10.22 | ||||||
10.3# | Form of Restricted Stock Award Agreement for EndoChoice Holdings, Inc. 2015 Omnibus Equity Incentive Plan | S-1 | 05/05/15 | 10.22 | ||||||
10.4# | EndoChoice Holdings, Inc. Employee Stock Purchase Plan | S-8 | 06/12/15 | 10.4 | ||||||
10.5# | Peer Medical Ltd. 2010 Israeli Share Option Plan as assumed by ECPM Holdings, LLC and amended and restated effective January 4, 2013 | S-8 | 06/12/15 | 10.5 | ||||||
10.6# | 2014 Declaration of Amendment, dated August 6, 2014, to Peer Medical Ltd. 2010 Israeli Share Option Plan as assumed by ECPM Holdings, LLC and amended and restated effective January 4, 2013 | S-8 | 06/12/15 | 10.6 | ||||||
10.7# | Endochoice, Inc. 2007 Stock Incentive Plan as assumed by ECPM Holdings, LLC and amended and restated effective January 4, 2013 | S-1/A | 05/26/15 | 10.13 | ||||||
10.8# | Form of Stock Option Award Agreement for Endochoice, Inc. 2007 Stock Incentive Plan (Employees) | S-1/A | 05/26/15 | 10.14 | ||||||
10.9# | Form of Stock Option Award Agreement for Endochoice, Inc. 2007 Stock Incentive Plan (Non-Employee Directors) | S-1/A | 05/26/15 | 10.15 | ||||||
10.10 | Credit and Security Agreement (Term Loan) dated as of June 30, 2015, by and among EndoChoice Holdings, Inc., the other parties thereto that are designated as borrowers, MidCap Financial Trust as Administrative Agent, and the lenders party thereto | 8-K | 06/30/15 | 10.1 | ||||||
10.11 | Credit and Security Agreement (Revolving Loan) dated as of June 30, 2015, by and among EndoChoice Holdings, Inc., the other parties thereto that are designated as borrowers, MidCap Financial Trust as Administrative Agent and as a lender, and the other lenders party thereto | 8-K | 06/30/15 | 10.2 | ||||||
10.12# | Form of Nonqualified Stock Option Agreement for EndoChoice Holdings, Inc. 2015 Omnibus Equity Incentive Plan | X | ||||||||
31.1 | Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) | X | ||||||||
31.2 | Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) | X | ||||||||
32.1* | Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350) | X | ||||||||
101.INS | XBRL Instance Document | X | ||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||
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# Indicates management contract or compensatory plan.
* The certification attached as Exhibit 32.1 that accompanies this Quarterly Report on Form 10-Q is not deemed filed with the SEC and is not to be incorporated by reference into any filing of EndoChoice Holdings, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EndoChoice Holdings, Inc. | ||||||
(Registrant) | ||||||
Date: August 6, 2015 | By: | /s/ David N. Gill | ||||
David N. Gill Chief Financial Officer (Principal Financial Officer and Accounting Officer and duly authorized signatory) | ||||||
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CERTIFICATE OF INCORPORATION
OF
ENDOCHOICE HOLDINGS, INC.
ARTICLE I - NAME
The name of the corporation is EndoChoice Holdings, Inc. (the “Corporation”).
ARTICLE II - REGISTERED OFFICE AND AGENT
The address of the Corporation’s registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the County of New Castle, City of Wilmington, Delaware 19801. The name of the Corporation’s registered agent at such address is The Corporation Trust Company.
ARTICLE III - PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (the “DGCL”).
ARTICLE IV - CAPITALIZATION
(a)Authorized Shares. The total number of shares of stock which the Corporation shall have authority to issue is 200,000,000, consisting of:
i. | 150,000,000 shares of Common Stock, par value $0.001 per share (“Common Stock”), and |
ii. | 50,000,000 shares of Preferred Stock, par value $0.001 per share (“Preferred Stock”). |
Such stock may be issued from time to time by the Corporation for such consideration as may be fixed by the board of directors of the Corporation (the “Board of Directors”).
(b)Common Stock. Subject to the powers, preferences and rights of any Preferred Stock, including any series thereof having any preference or priority over, or rights superior to, Common Stock, and except as otherwise provided by law and this Article IV, the holders of Common Stock shall have all powers and voting and other rights pertaining to the stock of the Corporation.
i. | Voting. Each holder of Common Stock, as such, shall be entitled to one vote for each share of Common Stock held of record by such holder on all matters on which stockholders generally are entitled to vote; provided, that, except as otherwise required by law, holders of Common Stock, as such, shall not be |
entitled to vote on any amendment to this Certificate of Incorporation (including, but not limited to, any certificate of designations relating to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other series, to vote thereon pursuant to this Certificate of Incorporation (including, but not limited to, any certificate of designations relating to any series of Preferred Stock) or pursuant to the DGCL. There shall be no cumulative voting in the election of directors.
ii. | Dividends. Dividends may be declared and paid on Common Stock from funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock. Except as otherwise provided by the DGCL or this Certificate of Incorporation, the holders of record of Common Stock shall share ratably in all dividends payable in cash, stock or otherwise and other distributions, whether in respect of liquidation or dissolution (voluntary or involuntary) or otherwise. |
iii. | No Preemptive Rights. The holders of Common Stock shall have no preemptive rights to subscribe for any shares of any class of stock of the Corporation whether now or hereafter authorized. |
iv. | No Conversion Rights. Common Stock shall not be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same class of the Corporation’s capital stock. |
v. | Liquidation Rights. Upon the dissolution or liquidation of the Corporation, whether voluntary or involuntary, holders of Common Stock will be entitled to receive all assets of the Corporation available for distribution to its stockholders ratably in proportion to the number of shares of Common Stock held by them, subject to any preferential rights of any then outstanding Preferred Stock. A merger or consolidation of the Corporation with or into any other corporation or other entity or a sale or conveyance of all or any part of the assets of the Corporation, in any such case which shall not in fact result in the liquidation of the Corporation and the distribution of assets to its stockholders, shall not be deemed to be a voluntary or involuntary liquidation or dissolution or winding up of the Corporation within the meaning of this Article IV(b)(v). |
(c)Preferred Stock. Shares of Preferred Stock may be issued in one or more series, from time to time, with each such series to consist of such number of shares and to have such voting powers relative to other classes or series of Preferred Stock, if any, or Common Stock, with full, limited or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated in the resolution or resolutions providing for the issuance of such series of Preferred Stock adopted by the Board of Directors, and the Board of Directors is hereby expressly vested with the authority, to the full extent now or hereafter provided by applicable
law, to adopt any such resolution or resolutions. Except as otherwise provided in this Certificate of Incorporation, no vote of the holders of Preferred Stock or Common Stock shall be a prerequisite to the designation or issuance of any shares of any series of Preferred Stock authorized by and complying with the conditions of this Certificate of Incorporation, the right to have such vote being expressly waived by all present and future holders of the capital stock of the Corporation. Any shares of Preferred Stock that are redeemed, purchased or acquired by the Corporation may be reissued except as otherwise provided by law or this Certificate of Incorporation. Different series of Preferred Stock shall not be construed to constitute different classes of shares for the purposes of voting by classes unless expressly provided in the certificate of designations or any resolution or resolutions providing for the issuance of such series adopted by the Board of Directors.
(d)No Class Vote On Changes In Authorized Number of Shares Of Preferred Stock. Subject to the special rights of the holders of any series of Preferred Stock pursuant to the terms of this Certificate of Incorporation, any certificate of designations or any resolution or resolutions providing for the issuance of such series of stock adopted by the Board of Directors, the number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of the then outstanding shares of capital stock of the Corporation then entitled to vote generally in the election of directors (“Voting Stock”), voting together as a single class, irrespective of the provisions of Section 242(b)(2) of the DGCL.
ARTICLE V - BOARD OF DIRECTORS
(a)Number of Directors; Vacancies and Newly Created Directorships. The number of directors constituting the Board of Directors shall be not fewer than three and not more than fifteen, each of whom shall be a natural person. Subject to the special rights of the holders of any series of Preferred Stock to elect directors, the precise number of directors shall be fixed from time to time exclusively pursuant to a resolution adopted by the Board of Directors. Vacancies and newly-created directorships shall be filled exclusively by vote of a majority of the directors then in office or by a sole remaining director. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. A director elected to fill a vacancy shall be elected for the unexpired term of his or her predecessor in office, and a director chosen to fill a position resulting from an increase in the number of directors shall hold office until the next election of the class for which such director shall have been chosen, subject to the election and qualification of his or her successor and to his or her earlier death, resignation or removal.
(b)Classified Board of Directors. Subject to the special rights of the holders of any series of Preferred Stock to elect directors, the Board of Directors shall be classified into three classes: Class I; Class II; and Class III. Each class shall consist, as nearly as possible, of one-third of the total number of directors constituting the entire Board of Directors and the allocation of directors among the three classes shall be determined by the Board of Directors. The initial Class I Directors shall serve for a term expiring at the first annual meeting of stockholders of the Corporation following the filing of this Certificate of Incorporation; the initial Class II Directors
shall serve for a term expiring at the second annual meeting of stockholders following the filing of this Certificate of Incorporation; and the initial Class III Directors shall serve for a term expiring at the third annual meeting of stockholders following the filing of this Certificate of Incorporation. Each director in each class shall hold office until his or her successor is duly elected and qualified or until his or her earlier death, resignation or removal. At each annual meeting of stockholders beginning with the first annual meeting of stockholders following the filing of this Certificate of Incorporation, the directors (or successors thereof) of the class whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders to be held in the third year following the year of their election, with each director in each such class to hold office until his or her successor is duly elected and qualified or until his or her earlier death, resignation or removal. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible and such apportionment shall be determined by the Board of Directors.
(c)Removal. Subject to the special rights of the holders of any series of Preferred Stock to elect directors, and notwithstanding any other provision of this Certificate of Incorporation, directors of the Corporation may be removed only for cause at a meeting of stockholders called for that purpose, by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the Voting Stock, voting together as a single class.
ARTICLE VI - LIMITATION OF DIRECTOR LIABILITY
To the fullest extent that the DGCL or any other law of the State of Delaware (as they exist on the date hereof or as they may hereafter be amended) permits the limitation or elimination of the liability of directors, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director.
No amendment to, or modification or repeal of, this Article VI shall adversely affect any right or protection of a director of the Corporation against liability existing hereunder with respect to any state of facts existing or act or omission occurring, or any cause of action, suit or claim that, but for this Article VI, would accrue or arise, prior to such amendment, modification or repeal. If the DGCL is amended after the filing of this Certificate of Incorporation to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended.
ARTICLE VII - MEETINGS OF STOCKHOLDERS
(a)Action by Written Consent. Any action required or permitted to be taken by the stockholders of the Corporation may be effected only at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders.
(b)Annual Meetings of Stockholders. The annual meeting of stockholders for the election of directors and for the transaction of such other business as may properly come before
the meeting shall be held at such date, time and place, if any, as shall be determined exclusively by resolution of the Board of Directors in its sole and absolute discretion.
(c)Special Meetings of Stockholders. Subject to any special rights of the holders of any series of Preferred Stock, and to the requirements of applicable law, special meetings of stockholders of the Corporation may be called only (i) by or at the direction of the Board of Directors, acting pursuant to a resolution adopted by the affirmative vote of the majority of the total number of directors then in office, or (ii) by the chairman of the Board of Directors. Any business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting.
(d)Election of Directors by Written Ballot. Election of directors need not be by written ballot.
ARTICLE VIII - BUSINESS COMBINATIONS
The Corporation hereby expressly elects to be governed by Section 203 of the DGCL.
ARTICLE IX - EXCLUSIVE JURISDICTION FOR CERTAIN ACTIONS
Unless the Corporation, as authorized by the Board of Directors, consents in writing to the selection of one or more alternative forums, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Corporation, (b) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (c) any action asserting a claim against the Corporation arising pursuant to any provision of the DGCL or this Certificate of Incorporation or the Corporation’s bylaws or (d) any action asserting a claim against the Corporation governed by the internal affairs doctrine, in each such case subject to said Court of Chancery having personal jurisdiction over the indispensible parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in the shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article IX.
ARTICLE X - AMENDMENTS
The Corporation reserves the right to alter, amend, repeal or adopt any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by the DGCL, and all rights conferred upon stockholders herein are granted subject to this reservation.
ARTICLE XI - SEVERABILITY
If any provision or provisions of this Certificate of Incorporation shall be held to be invalid, illegal or unenforceable as applied to any circumstance for any reason whatsoever: (a) the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of this Certificate of Incorporation (including, without limitation, each portion of any paragraph of this Certificate of Incorporation containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and (b) to the fullest extent possible, the provisions of this Certificate of Incorporation (including, without limitation, each such portion of any paragraph of this Certificate of Incorporation containing any such provision held to be invalid, illegal or unenforceable) shall be construed so as to permit the Corporation to protect its directors, officers, employees and agents from personal liability in respect of their good faith service to or for the benefit of the Corporation to the fullest extent permitted by law.
ARTICLE XII – EFFECTIVENESS
This Certificate of Incorporation shall be effective upon its filing with the Secretary of State of the State of Delaware in accordance with Section 103(d) of the DGCL.
IN WITNESS WHEREOF, the undersigned has caused this Certificate of Incorporation to be executed by the Incorporator below this 4th day of June, 2015.
By: /s/ James B. Young, Jr. |
Name: James B. Young, Jr. |
Title: Incorporator |
Address: 11810 Wills Road Alpharetta, Georgia 30009 |
BYLAWS
OF
ENDOCHOICE HOLDINGS, INC.
ARTICLE 1 - OFFICES
Section 1.1. Registered Office.
The registered office of EndoChoice Holdings, Inc., a Delaware corporation (the “Corporation”), shall be in the County of New Castle, State of Delaware.
Section 1.2. Other Offices.
The Corporation may also have offices at such other places, either within or outside of the State of Delaware, as the Board of Directors of the Corporation (the “Board of Directors”) may from time to time determine or as the business of the Corporation may require.
ARTICLE 2 - STOCKHOLDERS
Section 2.1. Annual Meeting.
An annual meeting of the stockholders of the Corporation for the election of directors to succeed those whose term expire and for the transaction of such other business as may properly come before the meeting shall be held at the place, if any, within or outside of the State of Delaware, on the date and at the time that the Board of Directors shall each year fix. Unless stated otherwise in the notice of the annual meeting of the stockholders of the Corporation, such annual meeting shall be at the principal office of the Corporation.
Section 2.2. Advance Notice of Nominations and Proposals of Business.
(a) Business at Annual Meetings of Stockholders.
(i) Only such business (other than nominations of persons for election to the Board of Directors, which must be made in compliance with and is governed exclusively by Section 2.2(b) of these Bylaws) shall be conducted at an annual meeting of the stockholders as shall have been brought before the meeting (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (B) by or at the direction of the Board of Directors, or (C) by any stockholder of the Corporation who (1) was a stockholder of record at the time of giving of notice provided for in this Section 2.2(a) and at the time of the meeting, (2) is entitled to vote at the meeting and (3) complies with the notice procedures set forth in this Section 2.2(a). For the avoidance of doubt, the foregoing clause (C) of this Section 2.2(a)(i) shall be the exclusive means for a stockholder to propose such business (other than business included in the Corporation’s proxy materials pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) before an annual meeting of stockholders.
(ii) For business (other than nominations of persons for election to the Board of Directors, which must be made in compliance with and is governed exclusively by Section 2.2(b) of these Bylaws) to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in proper written form as described in Section 2.2(a)(iii) to the Secretary of the Corporation and such business must otherwise be appropriate for stockholder action under the provisions of the General Corporation Law of the State of Delaware (the “DGCL”). To be timely, a stockholder’s notice for such business must be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation in proper written form not less than ninety (90) days and not more than one hundred twenty (120) days prior to the first anniversary of the preceding year’s annual meeting of stockholders; provided, however, that if and only if the annual meeting is not held within a period that commences thirty (30) days before such anniversary date and ends seventy (70) days after such anniversary date, such stockholder’s notice must be delivered not earlier than one hundred and twenty (120) days prior to the annual meeting and not later than the later of (A) the tenth day following the day of the Public Announcement (as defined in Section 2.2(f) below) of the date of the annual meeting or (B) the date which is ninety (90) days prior to the date of the annual meeting. In no event shall any adjournment, deferral or postponement of an annual meeting or the announcement thereof commence a new time period for the giving of a stockholder’s notice as described above.
(iii) To be in proper written form, a stockholder’s notice to the Secretary of the Corporation shall set forth as to each matter of business the stockholder proposes to bring before the annual meeting (A) a brief description of the business desired to be brought before the annual meeting (including the specific text of any resolutions or actions proposed for consideration and if such business includes a proposal to amend the Corporation’s Certificate of Incorporation or these Bylaws, the specific language of the proposed amendment) and the reasons for conducting such business at the annual meeting, (B) the name and address of the stockholder proposing such business, as they appear on the Corporation’s books, the residence name and address (if different from the Corporation’s books) of such proposing stockholder, and the name and address of any Stockholder Associated Person (as defined in Section 2.2(f) below) covered by clauses (C), (D), (F) and (G) below, (C) the class and number of shares of stock of the Corporation which are directly or indirectly held of record or beneficially owned by such stockholder or by any Stockholder Associated Person with respect to the Corporation’s securities, a description of any Derivative Positions (as defined in Section 2.2(f) below) directly or indirectly held or beneficially held by the stockholder or any Stockholder Associated Person, and whether and the extent to which a Hedging Transaction (as defined in Section 2.2(f) below) has been entered into by or on behalf of such stockholder or any Stockholder Associated Person, (D) a description of all arrangements or understandings between such stockholder or any Stockholder Associated Person and any other person or entity (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder, any Stockholder Associated Person or such other person or entity in such business, (E) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting, (F) any other information related to such stockholder or any Stockholder Associated Person that would be required to be disclosed in a proxy statement or other filing required to be made in connection with the solicitation of proxies or consents (even if a solicitation is not involved) by such stockholder or Stockholder Associated Person in support of the business proposed to be brought before the meeting pursuant to Section 14 of the Exchange Act, and the rules and regulations promulgated thereunder and (G) a representation as to whether such stockholder or any Stockholder Associated Person intends to deliver a proxy statement or form of proxy to holders of at least the percentage of the Corporation’s outstanding shares required to approve the proposal or otherwise to solicit proxies from stockholders in support of the proposal. In addition, any stockholder who submits a notice pursuant to this Section 2.2(a) is required to update and supplement the information disclosed in such notice, if necessary, in accordance with Section 2.2(d).
Notwithstanding anything in these Bylaws to the contrary, no business (other than nominations of persons for election to the Board of Directors, which must be made in compliance with and is governed exclusively by Section 2.2(b) of these Bylaws) shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 2.2(a). At an annual meeting, the chairman of the meeting shall determine, if the facts warrant, that business was not properly brought before the meeting and in accordance with the provisions prescribed by these Bylaws, and if the chairman should so determine, the chairman shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted.
(b) Nominations at Annual Meetings of Stockholders.
(i) Only persons who are nominated in accordance and compliance with the procedures set forth in this Section 2.2(b) of these Bylaws shall be eligible for election to the Board of Directors at an annual meeting of stockholders.
(ii) Nominations of persons for election to the Board of Directors of the Corporation may be made at an annual meeting of stockholders only (A) by or at the direction of the Board of Directors or (B) by any stockholder of the Corporation who (1) was a stockholder of record at the time of giving of notice provided for in this Section 2.2(b)(ii) and at the time of the meeting, (2) is entitled to vote at the meeting and (3) complies with the notice procedures set forth in this Section 2.2(b)(ii). For the avoidance of doubt, clause (B) of this Section 2.2(b)(ii) shall be the exclusive means for a stockholder to make nominations of persons for election to the Board of Directors at an annual meeting of stockholders. Any nominations by stockholders at an annual meeting of stockholders shall be made pursuant to timely notice in proper written form as described in Section 2.2(b)(iii) to the Secretary of the Corporation. To be timely, a stockholder’s notice for the nomination of persons for election to the Board of Directors must be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation in proper written form not less than ninety (90) days and not more than one hundred twenty (120) days prior to the first anniversary of the preceding year’s annual meeting of stockholders; provided, however, that if and only if the annual meeting is not held within a period that commences thirty (30) days before such anniversary date and ends seventy (70) days after such anniversary date, such stockholder’s notice must be delivered not earlier than one hundred and twenty (120) days prior to the annual meeting and not later than the later of (C) the tenth day following the day of the Public Announcement of the date of the annual meeting or (D) the date which is ninety (90) days prior to the date of the annual meeting. In no event shall any adjournment, deferral or postponement of an annual meeting or the announcement thereof commence a new time period for the giving of a stockholder’s notice as described above.
(iii) To be in proper written form, a stockholder’s notice to the Secretary of the Corporation shall set forth (A) as to each person whom the stockholder proposes to nominate for election or re-election as a director of the Corporation, (1) the name, age, business address and residence address of the person, (2) the principal occupation or employment of the person, (3) the class or series and number of shares of capital stock of the Corporation which are directly or indirectly owned beneficially or of record by the person, (4) the date such shares were acquired and the investment intent of such acquisition and (5) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitation of proxies or consents for a contested election of directors (even if an election contest or proxy solicitation is not involved), or is otherwise required, pursuant to Section 14 of the Exchange Act, and the rules and regulations promulgated thereunder (including such person’s written consent to being named in the proxy statement as a nominee, if applicable, and to serving if elected); and (B) as to the stockholder giving the notice (1) the name and address of such stockholder, as they appear on the Corporation’s books, the residence name and address (if different from the Corporation’s books) of such proposing stockholder, and the name and address of any Stockholder Associated Person covered by clauses (2), (3), (5) and (6) below, (2) the class and number of shares of stock of the Corporation which are directly or indirectly held of record or beneficially owned by such stockholder or by any Stockholder Associated Person with respect to the Corporation’s securities, a description of any Derivative Positions directly or indirectly held or beneficially held by the stockholder or any Stockholder Associated Person, and whether and the extent to which a Hedging Transaction has been entered into by or on behalf of such stockholder or any Stockholder Associated Person, (3) a description of all arrangements or understandings (including financial transactions and direct or indirect compensation) between such stockholder or any Stockholder Associated Person and each proposed nominee and any other person or entity (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (4) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice, (5) any other information relating to such stockholder or any Stockholder Associated Person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitation of proxies or consents for a contested election of directors (even if an election contest or proxy solicitation is not involved), or otherwise required, pursuant to Section 14 of the Exchange Act, and the rules and regulations promulgated thereunder, and (6) a representation as to whether such stockholder or any Stockholder Associated Person intends to deliver a proxy statement or form of proxy to the holders of a sufficient number of the Corporation’s outstanding shares to elect each proposed nominee or otherwise to solicit proxies from stockholders in support of the nomination. In addition, any stockholder who submits a notice pursuant to this Section 2.2(b) is required to update and supplement the information disclosed in such notice, if necessary, in accordance with Section 2.2(d). At an annual meeting, the chairman of the meeting shall determine, if the facts warrant, that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if the chairman should so determine, the chairman shall so declare to the meeting, and the defective nomination shall be disregarded.
(iv) Notwithstanding anything in the fourth sentence of Section 2.2(b)(ii) of these Bylaws to the contrary, if the number of directors to be elected to the Board of Directors is increased and there is no Public Announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 100 days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice required by Section 2.2(b)(ii) of these Bylaws shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not later than the tenth day following the day on which such Public Announcement is first made by the Corporation.
(c) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting. Subject to Section 2.2(e) of these Bylaws, only persons who are nominated in accordance and compliance with the procedures set forth in this Section 2.2(c) shall be eligible for election to the Board of Directors at a special meeting of stockholders. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of meeting only (i) by or at the direction of the Board of Directors or (ii) provided that the Board of Directors has determined that directors are to be elected at such special meeting, by any stockholder of the Corporation who (A) was a stockholder of record at the time of giving of notice provided for in this Section 2.2(c) and at the time of the special meeting, (B) is entitled to vote at the meeting and (C) complies with the notice procedures provided for in this Section 2.2(c). For the avoidance of doubt, the foregoing clause (ii) of this Section 2.2(c) shall be the exclusive means for a stockholder to propose nominations of persons for election to the Board of Directors at a special meeting of stockholders. Any nominations by stockholders at a special meeting of stockholders shall be made pursuant to timely notice in proper written form as described in this Section 2.2(c) to the Secretary of the Corporation. To be timely, a stockholder’s notice for the nomination of persons for election to the Board of Directors must be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not earlier than one hundred and twenty (120) days prior to the special meeting and not later than the later of (1) the tenth day following the day of the Public Announcement of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting or (2) the date which is ninety (90) days prior to the date of the special meeting. In no event shall any adjournment, deferral or postponement of a special meeting or the announcement thereof commence a new time period for the giving of a stockholder’s notice as described above. To be in proper written form, such stockholder’s notice shall set forth all of the information required by, and otherwise be in compliance with, Section 2.2(b)(iii) of these Bylaws. In addition, any stockholder who submits a notice pursuant to this Section 2.2(c) is required to update and supplement the information disclosed in such notice, if necessary, in accordance with Section 2.2(d). At a special meeting, the chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a proposal or nomination was not made in accordance with the procedures prescribed by these Bylaws, and if the chairman should so determine, the chairman shall so declare to the meeting, and the defective proposal or nomination shall be disregarded.
(d) Update and Supplement of Stockholder’s Notice. Any stockholder who submits a notice of proposal for business or nomination for election pursuant to this Section 2.2 is required to update and supplement the information disclosed in such notice, if necessary, so that the information provided or required to be provided in such notice shall be true and correct as of the record date for the meeting of stockholders and as of the date that is ten (10) business days prior to such meeting of the stockholders or any adjournment or postponement thereof, and such update and supplement shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not later than five (5) business days after the record date for the meeting of stockholders (in the case of the update and supplement required to be made as of the record date), and not later than eight (8) business days prior to the date for the meeting of stockholders or any adjournment or postponement thereof (in the case of the update and supplement required to be made as of ten (10) business days prior to the meeting of stockholders or any adjournment or postponement thereof).
(e) Requirements of Exchange Act. In addition to the foregoing provisions of this Section 2.2, a stockholder shall also comply with all applicable requirements of the Exchange Act, and the rules and regulations thereunder with respect to the matters set forth in these Bylaws; provided, however, that any references in these Bylaws to the Exchange Act, or the rules and regulations promulgated thereunder are not intended to and shall not limit the requirements of these Bylaws applicable to nominations or proposals as to any other business to be considered pursuant to these Bylaws regardless of the stockholder’s intent to utilize Rule 14a-8 promulgated under the Exchange Act. Nothing in this Section 2.2 shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 promulgated under the Exchange Act or (ii) of the holders of any series of preferred stock if and to the extent provided for under law, the Certificate of Incorporation or these Bylaws.
(f) Definitions. For purposes of Section 2.2 of these Bylaws, the term:
(i) “Derivative Positions” means, with respect to a stockholder or any Stockholder Associated Person, any derivative positions including, without limitation, any short position, profits interest, option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the Corporation or with a value derived in whole or in part from the value of any class or series of shares of the Corporation, whether or not such instrument or right shall be subject to settlement in the underlying class or series of capital stock of the Corporation or otherwise and any performance-related fees to which such stockholder or any Stockholder Associated Person is entitled based, directly or indirectly, on any increase or decrease in the value of shares of capital stock of the Corporation;
(ii) “Hedging Transaction” means, with respect to a stockholder or any Stockholder Associated Person, any hedging or other transaction (such as borrowed or loaned shares) or series of transactions, or any other agreement, arrangement or understanding, the effect or intent of which is to increase or decrease the voting power or economic or pecuniary interest of such stockholder or any Stockholder Associated Person with respect to the Corporation’s securities;
(iii) “Public Announcement” means disclosure in a press release reported by the Dow Jones News Service, Associated Press, Business Wire, PR Newswire or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act; and
(iv) “Stockholder Associated Person” of any stockholder means (A) any person controlling, directly or indirectly, or acting in concert with, such stockholder, (B) any beneficial owner of shares of stock of the Corporation owned of record or beneficially by such stockholder or (C) any person directly or indirectly controlling, controlled by or under common control with such Stockholder Associated Person.
(v) “Beneficial ownership” shall be determined in accordance with Rule 13d-3 promulgated under the Exchange Act.
Section 2.3. Special Meetings; Notice.
Special meetings of the stockholders of the Corporation may be called only in the manner set forth in the Certificate of Incorporation. Notice of every special meeting of the stockholders of the Corporation shall state the purpose or purposes of such meeting. Except as otherwise required by law, the business conducted at a special meeting of stockholders of the Corporation shall be limited exclusively to the business set forth in the Corporation’s notice of meeting, and the individual or group calling such meeting shall have exclusive authority to determine the business included in such notice.
Section 2.4. Notice of Meetings.
Notice of the place, if any, date and time of all meetings of stockholders of the Corporation, the record date for determining the stockholders entitled to vote at the meeting (if such date is different from the record date for stockholders entitled to notice of the meeting) and the means of remote communications, if any, by which stockholders and proxy holders may be deemed present and vote at such meeting, and, in the case of all special meetings of stockholders, the purpose or purposes of the meeting, shall be given, not less than 10 nor more than 60 days before the date on which such meeting is to be held, to each stockholder entitled to notice of the meeting.
The Corporation may postpone or cancel any previously called annual or special meeting of stockholders of the Corporation by making a Public Announcement (as defined in Section 2.2(f)) of such postponement or cancellation prior to the meeting. When a previously called annual or special meeting is postponed to another time, date or place, if any, notice of the place (if any), date and time of the postponed meeting, the record date for determining the stockholders entitled to vote at the meeting (if such date is different from the record date for stockholders entitled to notice of the meeting) and the means of remote communications, if any, by which stockholders and proxy holders may be deemed present and vote at such postponed meeting, shall be given in conformity with this Section 2.4 unless such meeting is postponed to a date that is not more than 60 days after the date that the initial notice of the meeting was provided in conformity with this Section 2.4.
When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place, if any, thereof and the means of remote communication, if any, by which stockholders and proxy holders may be deemed to be present and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken; provided, however, that if the adjournment is for more than 30 days, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting, or if after the adjournment a new record date for stockholders entitled to vote is fixed for the adjourned meeting the Board of Directors shall fix a new record date for notice of such adjourned meeting in conformity herewith and such notice shall be given to each stockholder of record entitled to vote at such adjourned meeting as of the record date for notice of such adjourned meeting. At any adjourned meeting, any business may be transacted that may have been transacted at the original meeting.
Section 2.5. Quorum.
At any meeting of the stockholders, the presence in person or by proxy of the holders of a majority in voting power of the outstanding shares of stock of the Corporation entitled to vote at the meeting, shall be necessary and sufficient to constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number is required by applicable law, the Certificate of Incorporation, these Bylaws or the rules of any stock exchange upon which the Corporation’s securities are listed. If a separate vote by one or more classes or series is required, the holders of shares entitled to cast a majority of the total votes entitled to be cast on the matter by the holders of the shares of the class or classes or series, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to the vote on that matter.
Section 2.6. Organization.
The Chairman of the Board of Directors, or, in his or her absence, the person whom the Board of Directors designates or, in the absence of that person or the failure of the Board of Directors to designate a person, the President of the Corporation or, in his or her absence, the person chosen at the meeting by the vote of a majority of the stockholders entitled to vote at the meeting, shall preside over the meeting. The Secretary shall act as the secretary of the meeting, but in his or her absence, any Assistant Secretary of the Corporation or any other person the chairman appoints shall act as secretary.
Section 2.7. Conduct of Business.
The chairman of any meeting of stockholders of the Corporation shall determine the order of business and the rules of procedure for the conduct of such meeting, including the manner of voting and the conduct of discussion as he or she determines to be in order.
The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of the meeting shall have the right and authority to convene and (for any or no reason, including, without limitation, lack of a quorum) to adjourn the meeting to another place, if any, date and time, to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (a) the establishment of an agenda or order of business for the meeting; (b) rules and procedures for maintaining order at the meeting and the safety of those present; (c) limitations on attendance at or participation in the meeting to stockholders entitled to vote at the meeting, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (d) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (e) limitations on the time allotted to questions or comments by participants. The chairman of the meeting of stockholders, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall, if the facts warrant, determine and declare to the meeting that a nomination or matter of business was not properly brought before the meeting and if such chairman should so determine, such chairman shall so declare to the meeting and any such matter or business not properly brought before the meeting shall not be transacted or considered. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.
Section 2.8. Proxies; Inspectors.
(a) Each stockholder entitled to vote at a meeting of stockholders or express consent to corporation action in writing without a meeting (if permitted by the Certificate of Incorporation) may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy that is not irrevocable by attending the meeting and voting in person or by delivering to the Secretary of the Corporation a revocation of the proxy or a new proxy bearing a later date.
(b) Prior to a meeting of the stockholders of the Corporation, the Corporation shall appoint one or more inspectors (who may be employees of the Corporation) to act at a meeting of stockholders of the Corporation and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting may, and to the extent required by applicable law, shall, appoint one or more inspectors to act at the meeting. Each inspector, before beginning the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of inspectors. The inspectors shall have the duties prescribed by applicable law.
Section 2.9. Voting.
Except as otherwise required by any law or regulation applicable to the Corporation or its securities, by the Certificate of Incorporation, by these Bylaws or by the rules of any stock exchange upon which the Corporation’s securities are listed, when a quorum is present, all matters other than the election of directors shall be determined by the affirmative vote of the holders of a majority in voting power of the shares of stock of the Corporation which are present in person or by proxy and entitled to vote thereon. All elections of directors shall be determined by a plurality of the votes cast.
Section 2.10. Action by Written Consent.
Except as otherwise provided in the Certificate of Incorporation, stockholders may not take any action by written consent in lieu of a meeting of stockholders.
Section 2.11. Stock List.
A complete list of stockholders of the Corporation entitled to vote at any meeting of stockholders of the Corporation, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in the name of such stockholder, shall be open to the examination of any such stockholder, for any purpose germane to a meeting of the stockholders of the Corporation, for a period of at least 10 days before the meeting (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting or (ii) during ordinary business hours at the principal place of business of the Corporation; provided, however, if the record date for determining the stockholders entitled to vote is less than 10 days before the meeting date, the list shall reflect the stockholders entitled to vote as of the 10th day before such meeting date. If the meeting is to be held at a place, then a list of stockholders entitled to vote at the meeting shall be produced and kept at the time and place of the meeting during the whole time thereof and may be examined by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting.
Except as otherwise provided by law, the stock ledger shall be the sole evidence of the identity of the stockholders entitled to vote at a meeting and the number of shares held by each stockholder.
ARTICLE 3 - BOARD OF DIRECTORS
Section 3.1. General Powers and Qualifications of Directors.
The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authorities these Bylaws expressly confer upon them, the Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by the DGCL or by the Certificate of Incorporation or by these Bylaws required to be exercised or done by the stockholders. Directors need not be stockholders of the Corporation to be qualified for election or service as a director of the Corporation.
Section 3.2. Number.
Subject to the Certificate of Incorporation, the total number of directors constituting the entire Board of Directors shall be fixed from time to time solely by resolutions adopted by a majority of the directors then in office.
Section 3.3. Removal; Resignation.
Directors may only be removed as set forth in the Certificate of Incorporation. Any director may resign at any time upon notice given in writing, including by electronic transmission, to the Corporation. Such resignation shall take effect at the time specified therein or, if the time is not specified, upon receipt thereof. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
Section 3.4. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such places (if any), within or outside the State of Delaware, on the date and at the time as shall have been established by the Board of Directors and publicized among all directors. A notice of a regular meeting, the date of which has been so publicized, shall not be required.
Section 3.5. Special Meetings.
Special meetings of the Board of Directors may be called by the Chairman of the Board of Directors, the Chief Executive Officer, the President or by two or more directors then in office, and shall be held at the place, if any, on the date and at the time as he, she or they shall fix. Notice of the place, if any, date and time of each special meeting shall be given to each director not less than twenty-four hours before the meeting. Any and all business may be transacted at a special meeting of the Board of Directors.
Section 3.6. Quorum; Vote Required for Action.
At any meeting of the Board of Directors, a majority of the total number of directors then in office shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, if any, date or time, without further notice or waiver thereof. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, a majority of directors present at a meeting at which a quorum is present shall be the act of the Board of Directors.
Section 3.7. Telephone Meetings.
Members of the Board of Directors, or of any committee thereof, may participate in a meeting of the Board of Directors or committee thereof by means of conference telephone or other communications equipment by means of which all directors participating in the meeting can hear each other director, and such participation shall constitute presence in person at the meeting.
Section 3.8. Conduct of Business; Action by Written Consent.
At any meeting of the Board of Directors or any committee thereof, business shall be transacted in the order and manner that the Board of Directors may from time to time determine. The Board of Directors or any committee thereof may take action without a meeting if all members thereof consent thereto in writing or by electronic transmission, and the writing or writings, or electronic transmission or electronic transmissions, are filed with the minutes of proceedings of the Board of Directors or any committee thereof.
Section 3.9. Compensation of Directors.
The Board of Directors shall be authorized to fix the compensation of directors. The directors of the Corporation shall be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors, paid an annual retainer or paid other compensation, including equity compensation, as the Board of Directors determines. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of committees shall have their expenses, if any, of attendance of each meeting of such committee reimbursed and may be paid compensation for attending committee meetings or being a member of a committee.
ARTICLE 4 - COMMITTEES
Section 4.1. Committees of the Board of Directors.
The Board of Directors may designate one or more committees of the Board of Directors, each with such lawfully delegable powers and duties as the Board of Directors thereby confers, to serve at the pleasure of the Board of Directors and shall appoint one or more directors to serve as the member or members of such committee or committees, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of any committee. In the absence or disqualification of any member of any committee and any alternate member in his or her place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. All provisions of this Section 4.1 are subject to, and nothing in this Section 4.1 shall in any way limit the exercise, or method or timing of the exercise of the rights of any person granted by the Corporation with respect to the existence, duties, composition or conduct of any committee of the Board of Directors.
Section 4.2. Committee Rules.
Unless the Board of Directors otherwise provides, each committee designated by the Board of Directors may make, alter and repeal rules for the conduct of its business. In the absence of such rules, each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article 3 of these Bylaws.
ARTICLE 5 - OFFICERS
Section 5.1. Generally.
The officers of the Corporation shall be chosen by the Board of Directors and shall be a Chairman of the Board of Directors, a Chief Executive Officer, a Chief Financial Officer, one or more Vice Presidents and a Secretary. The Board of Directors may also designate as officers a President, one or more Assistant Secretaries, a Treasurer, one or more Assistant Treasurers, and such other officers and agents as it shall deem necessary. Each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any number of offices may be held by the same person. The compensation of officers appointed by the Board of Directors shall be determined from time to time by the Board of Directors or a committee thereof or by the officers as may be designated by resolution of the Board of Directors.
Section 5.2. Chairman of the Board.
The Chairman of the Board of Directors shall preside at all meetings of the Board of Directors and shall have such other powers and duties as may from time to time be assigned by the Board of Directors.
Section 5.3. Chief Executive Officer.
The Chief Executive Officer shall have, subject to the supervision, direction and control of the Board of Directors, the general powers and duties of supervision, direction, and management of the business and affairs of the Corporation, including, without limitation, all powers necessary to direct and control the organizational and reporting relationships within the Corporation. The Chief Executive Officer shall see that all orders and resolutions of the Board of Directors are carried into effect. In addition, the Chief Executive Officer shall have such other powers and perform such other duties as may be delegated to him or her by the Board of Directors or as are set forth in the Certificate of Incorporation or these Bylaws. If the Board of Directors has not elected or appointed a President or the office of the President is otherwise vacant, and no officer otherwise functions with the powers and duties of the President, then, unless otherwise determined by the Board of Directors, the Chief Executive Officer shall also have all the powers and duties of the President.
Section 5.4. President.
The President, if there is such an officer and the Board of Directors so directs, shall serve as chief operating officer and have the powers and duties customarily and usually associated with the office of chief operating officer unless the Board of Directors provides for another officer to serve as chief operating officer (or to have the powers and duties of chief operating officer). The President shall have such other powers and perform such other duties as may be delegated to him or her from time to time by the Board of Directors or the Chief Executive Officer. If the Board of Directors has not elected or appointed a Chief Executive Officer or the office of Chief Executive Officer is otherwise vacant, then, unless otherwise determined by the Board of Directors, the President shall also have all the powers and duties of the Chief Executive Officer.
Section 5.5. Vice President.
Each Vice President shall have the powers and duties delegated to him or her by the Board of Directors, the Chief Executive Officer or his or her superior officer.
Section 5.6. Secretary and Assistant Secretaries.
The Secretary shall issue all authorized notices for, and shall keep minutes of, all meetings of the stockholders and the Board of Directors. He or she shall have charge of the corporate books and shall perform other duties as the Board of Directors may from time to time prescribe.
Any Assistant Secretary, if there is such an officer, shall perform such duties and possess such powers as the Board of Directors, the Chief Executive Officer, the President or the Secretary may from time to time prescribe. In the event of the absence, inability or refusal to act of the Secretary, the Assistant Secretary (or if there shall be more than one, the Assistant Secretaries in the order determined by the Board of Directors), shall perform the duties and exercise the powers of the Secretary.
Section 5.7. Chief Financial Officer, Treasurer and Assistant Treasurers.
The Chief Financial Officer shall keep or cause to be kept the books of account of the Corporation in a thorough and proper manner and shall render statements of the financial affairs of the Corporation in such form and as often as required by the Board of Directors, the Chief Executive Officer or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the Corporation. The Chief Financial Officer shall perform other duties commonly incident to such office and shall also perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer or the President shall designate from time to time. The Chief Executive Officer or President may direct the Treasurer or any Assistant Treasurer, if there is such an officer, to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer shall perform other duties commonly incident to such office and shall also perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer or the President shall designate from time to time.
Section 5.8. Delegation of Authority.
The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof.
Section 5.9. Removal.
The Board of Directors may remove any officer of the Corporation at any time, with or without cause.
Section 5.10. Appointing Attorneys and Agents; Voting Securities of Other Entities. Unless otherwise provided by resolution adopted by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or any Vice President may from time to time appoint an attorney or attorneys or agent or agents of the Corporation, in the name and on behalf of the Corporation, to cast the votes which the Corporation may be entitled to cast as the holder of stock or other securities in any other corporation or other entity, any of whose stock or other securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporation or other entity, or to consent in writing, in the name of the Corporation as such holder, to any action by such other corporation or other entity, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consents, and may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal or otherwise, all such written proxies or other instruments as he or she may deem necessary or proper. Any of the rights set forth in this Section 5.10 which may be delegated to an attorney or agent may also be exercised directly by the Chairman of the Board, the Chief Executive Officer or the Vice President.
Section 5.11. Additional Matters. The Chief Executive Officer, the President and the Chief Financial Officer of the Corporation shall have the authority to designate employees of the Corporation to have the title of Vice President, Assistant Vice President, Assistant Treasurer or Assistant Secretary. Any employee so designated shall have the powers and duties determined by the officer making such designation. The persons upon whom such titles are conferred shall not be deemed officers of the Corporation unless elected by the Board of Directors.
ARTICLE 6 - STOCK
Section 6.1. Certificates of Stock.
Shares of the stock of the Corporation may be certificated or uncertificated, as provided in the DGCL. Stock certificates shall be signed by, or in the name of the Corporation by, (i) the Chairman of the Board (if any) or the vice-chairman of the Board (if any), the Chief Executive Officer, the President or a Vice President, and (ii) the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, or the Chief Financial Officer, certifying the number of shares owned by such stockholder. Any signatures on a certificate may be by facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue.
Section 6.2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation (within or outside of the State of Delaware) or by transfer agents designated to transfer shares of the stock of the Corporation.
Section 6.3. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to regulations as the Board of Directors may establish concerning proof of the loss, theft or destruction and concerning the giving of a satisfactory bond or indemnity, if deemed appropriate.
Section 6.4. Regulations.
The issue, transfer, conversion and registration of certificates of stock of the Corporation shall be governed by other regulations as the Board of Directors may establish.
Section 6.5. Record Date.
(a) In order that the Corporation may determine the stockholders entitled to notice of any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall, unless otherwise required by law, not be more than 60 nor less than 10 days before the date of such meeting. If the Board of Directors so fixes a date, such date shall also be the record date for determining the stockholders entitled to vote at such meeting unless the Board of Directors determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for determining stockholders entitled to vote. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of and to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for determination of stockholders entitled to vote at the adjourned meeting, and in such case shall also fix as the record date for stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote in accordance herewith at the adjourned meeting.
(b) If and to the extent that stockholder action by written consent is permitted by the Certificate of Incorporation, in order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in this State, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the DGCL, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.
(c) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
ARTICLE 7 - INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
Section 7.1. Indemnification.
The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), any person (an “Indemnitee”) who was or is made, or is threatened to be made, a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “Proceeding”), by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was a director or an officer of the Corporation or, while a director or an officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee, member, trustee or agent of another corporation or of a partnership, joint venture, trust, nonprofit entity or other enterprise (including, but not limited to, service with respect to employee benefit plans) (any such entity, an “Other Entity”), against all liability and loss suffered (including, but not limited to, expenses (including, but not limited to, attorneys’ fees and expenses), judgments, fines and amounts paid in settlement actually and reasonably incurred by such Indemnitee in connection with such Proceeding). Notwithstanding the preceding sentence, the Corporation shall be required to indemnify an Indemnitee in connection with a Proceeding (or part thereof) commenced by such Indemnitee only if the commencement of such Proceeding (or part thereof) by the Indemnitee was authorized by the Board of Directors of the Corporation or the Proceeding (or part thereof) relates to the enforcement of the Corporation’s obligations under this Section 7.1.
Section 7.2. Advancement of Expenses.
The Corporation shall to the fullest extent not prohibited by applicable law pay, on an as-incurred basis, all expenses (including, but not limited to attorneys’ fees and expenses) incurred by an Indemnitee in investigating, responding to, defending or testifying in any Proceeding in advance of its final disposition. Such advancement shall be unconditional, unsecured and interest free and shall be made without regard to Indemnitee’s ability to repay any expenses advanced; provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the Proceeding shall be made only upon receipt of an unsecured undertaking by the Indemnitee to repay all amounts advanced if it should be ultimately determined that the Indemnitee is not entitled to be indemnified under this Article 7 or otherwise.
Section 7.3. Claims.
If a claim for indemnification (following the final disposition of such proceeding) or advancement of expenses under this Article 7 is not paid in full within sixty days after a written claim therefor by the Indemnitee has been received by the Corporation, the Indemnitee may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim to the fullest extent permitted by law. In any such action the Corporation shall have the burden of proving that the Indemnitee is not entitled to the requested indemnification or advancement of expenses under applicable law.
Section 7.4. Insurance.
The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, member, trustee or agent of an Other Entity, against any liability asserted against the person and incurred by the person in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power or the obligation to indemnify such person against such liability under the provisions of this Article 7 or the DGCL.
Section 7.5. Survival; Non-Exclusivity of Rights.
The rights conferred on any Indemnitee by this Article 7 shall continue as to a person who has ceased to be a director or officer of the Corporation and are not exclusive of other rights arising under any bylaw, agreement, vote of directors or stockholders or otherwise. Any such rights shall inure to the benefit of the heirs and legal representatives of such Indemnitee. The Corporation may enter into agreements with any Indemnitee for the purpose of providing for indemnification or advancement of expenses.
Section 7.6. Amounts Received from an Other Entity.
The Corporation’s obligation, if any, to indemnify or to advance expenses to any Indemnitee who was or is serving at the Corporation’s request as a director, officer, employee, member, trustee or agent of an Other Entity shall be reduced by any amount such Indemnitee may collect as indemnification or advancement of expenses from such Other Entity.
Section 7.7. Amendment or Repeal.
Any right to indemnification or to advancement of expenses of any Indemnitee arising hereunder shall not be eliminated or impaired by an amendment to or repeal of this Article 7 after the occurrence of the act or omission that is the subject of the Proceeding or other matter for which indemnification or advancement of expenses is sought.
Section 7.8. Other Indemnification and Advancement of Expenses.
This Article 7 shall not limit the right of the Corporation, to the extent and in the manner permitted by law, to indemnify and to advance expenses to persons other than Indemnitees when and as authorized by appropriate corporate action.
Section 7.9. Reliance.
Indemnitees who after the date of the adoption of this Article 7 become or remain an Indemnitee described in Section 7.1 will be conclusively presumed to have relied on the rights to indemnity, advancement of expenses and other rights contained in this Article 7 in entering into or continuing the service. The rights to indemnification and to the advancement of expenses conferred in this Article 7 will apply to claims made against any Indemnitee described in Section 7.1 arising out of acts or omissions that occurred or occur either before or after the adoption of this Article 7 in respect of service as a director or officer of the corporation or other service described in Section 7.1.
Section 7.10. Successful Defense.
In the event that any proceeding to which an Indemnitee is a party is resolved in any manner other than by adverse judgment against the Indemnitee (including, without limitation, settlement of such proceeding with or without payment of money or other consideration) it shall be presumed that the Indemnitee has been successful on the merits or otherwise in such proceeding for purposes of Section 145(c) of the DGCL. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.
ARTICLE 8 - NOTICES
Section 8.1. Methods of Notice.
Except as otherwise provided herein or permitted by applicable law, notices to directors and stockholders shall be in writing and delivered personally or mailed to the directors or stockholders at their addresses appearing on the books of the Corporation or given as permitted by applicable law. If mailed, notice to a stockholder of the Corporation shall be deemed given when deposited in the mail, postage prepaid, directed to a stockholder at such stockholder’s address as it appears on the records of the Corporation. Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders of the Corporation may be given by electronic transmission in the manner provided in Section 232 of the DGCL.
Section 8.2. Waivers.
A written waiver of any notice, signed by a stockholder or director, or a waiver of any notice by electronic transmission by such person or entity, whether given before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such person or entity. Neither the business nor the purpose of any meeting need be specified in the waiver. Attendance at any meeting shall constitute waiver of notice except attendance for the sole purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.
ARTICLE 9 - MISCELLANEOUS
Section 9.1. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary of the Corporation. If and when so directed by the Board of Directors, duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary, Assistant Treasurer or the Chief Financial Officer.
Section 9.2. Reliance upon Books, Reports, and Records.
Each director and each member of any committee designated by the Board of Directors of the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books and records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers, agents or employees, or committees of the Board of Directors so designated, or by any other person or entity as to matters which such director or committee member reasonably believes are within such other person’s or entity’s professional or expert competence and that has been selected with reasonable care by or on behalf of the Corporation.
Section 9.3. Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the Board of Directors.
Section 9.4. Time Periods.
In applying any provision of these Bylaws that requires that an act be done or not be done a specified number of days before an event or that an act be done during a specified number of days before an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included.
ARTICLE 10 - AMENDMENTS
In furtherance and not in limitation of the powers conferred by law, the Board of Directors is expressly authorized to adopt, alter, amend or repeal the Bylaws of the Corporation subject to the power of the stockholders of the Corporation entitled to vote with respect thereto to adopt, alter, amend or repeal the bylaws. Any adoption, alteration, amendment or repeal of the bylaws of the Corporation by the Board of Directors shall require the approval of a majority of the Board of Directors then in office.
ENDOCHOICE HOLDINGS, INC.
2015 OMNIBUS EQUITY INCENTIVE PLAN
Nonqualified Stock Option Agreement
This Nonqualified Stock Option Agreement (this “Agreement”) is made and entered into as of [DATE] by and between EndoChoice Holdings, Inc., a Delaware corporation (the “Company”) and [NAME] (the “Participant”).
Grant Date: ____________________________________
Exercise Price per Share: ____________________________________
Total Shares of Stock Subject to Option: ____________________________________
Expiration Date: ____________________________________
1.Grant of Option.
1.1 Grant; Type of Option. The Company hereby grants to the Participant an option (the “Option”) to purchase the total number of shares of Common Stock of the Company, at the Exercise Price set forth above. The Option is being granted pursuant to the terms of the EndoChoice Holdings, Inc. 2015 Omnibus Equity Incentive Plan (the “Plan”). The Option is intended to be a Nonqualified Stock Option and not an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code.
1.2 Consideration; Subject to Plan. The grant of the Option is made in consideration of the services to be rendered by the Participant to the Company or its Affiliates and is subject to the terms and conditions of the Plan. Capitalized terms used but not defined herein will have the meaning ascribed to them in the Plan.
2. Exercise Period; Vesting.
2.1 Vesting Schedule. The Option will become vested and exercisable with respect to [NUMBER] of shares on [VESTING SCHEDULE] until the Option is 100% vested. Except as provided in this Agreement, the unvested portion of the Option will not be exercisable on or after the Participant's Termination.
2.2 Expiration. The Option will expire on the Expiration Date set forth above, or earlier as provided in this Agreement or the Plan.
3. Termination of Employment or Service. The Participant’s Option shall be forfeited upon his or her Termination of employment or service, except as set forth below:
3.1 Termination for Reasons Other Than Cause, Death, Disability or Retirement. Upon a Participant’s Termination for any reason other than death, Disability, Retirement or for Cause, any Option held by such Participant that was vested and exercisable immediately before such Termination may be exercised at any time until the earlier of (a) the ninetieth (90th) day following such Termination and (b) the Expiration Date.
3.2 Termination for Cause. Upon a Participant’s Termination for Cause, the Option (whether vested or unvested) shall immediately terminate and cease to be exercisable.
3.3 Termination Due to Disability. Upon a Participant’s Termination by reason of Disability, any Option held by such Participant that was vested and exercisable immediately before such Termination may be exercised at any time until the earlier of (a) the first anniversary of such Termination and (b) the Expiration Date.
3.4 Termination Due to Death. Upon the Participant’s Termination by reason of death, any Option held by such Participant that was vested and exercisable immediately before such Termination may be exercised at any time until the earlier of (a) the first anniversary of the date of such death and (b) the Expiration Date.
3.5 Termination Due to Retirement. Upon a Participant’s Termination by reason of Retirement, any Option held by such Participant that was vested and exercisable immediately before such Termination may be exercised at any time until the earlier of (a) the fifth (5th) anniversary of such Termination and (b) the Expiration Date.
3.6 Death after Termination. Notwithstanding the above provisions of this Section 3, if a Participant dies after such Participant’s Termination, but while his or her Option remains exercisable as set forth above, such Option may be exercised at any time until the earlier of (a) the first anniversary of the date of such death and (b) the Expiration Date.
4. Manner of Exercise.
4.1 Election to Exercise. To exercise the Option, the Participant (or in the case of exercise after the Participant's death or incapacity, the Participant's executor, administrator, heir or legatee, as the case may be) must deliver to the Company a written notice of intent to exercise in the form specified or accepted by the Committee (or by complying with any alternative exercise procedures that may be authorized by the Committee), setting forth the number of Shares with respect to which the Option is to be exercised. If someone other than the Participant exercises the Option, then such person must submit documentation reasonably acceptable to the Company verifying that such person has the legal right to exercise the Option.
4.2 Payment of Exercise Price. The entire Exercise Price of the Option shall be payable to the Company in full (which payment shall include applicable taxes, if any, in accordance with Article XVII of the Plan) at the time of exercise, by certified or bank check or such other instrument as the Committee may accept. If approved by the Committee, and subject to any such terms, conditions and limitations as the Committee may prescribe and to the extent permitted by applicable law, payment of the Option Price, in full or in part, may also be made in one or more of the manners permitted by Section 6.6 of the Plan.
4.3 Withholding. The Company or any Subsidiary or Affiliate is authorized to withhold from any Award granted or payment due under the Plan the amount of all federal, state, local and non-United States taxes due in respect of such Award or payment and take any such other action as may be necessary or appropriate, as determined by the Committee, to satisfy all obligations for the payment of such taxes. No later than the date as of which an amount first becomes includible in the gross income or wages of a Participant for federal, state, local, or non-U.S. tax purposes with respect to any Award, such Participant shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any federal, state, local or non-U.S. taxes or social security (or similar) contributions of any kind required by law to be withheld with respect to such amount, in accordance with Article XVII of the Plan.
4.4 Issuance of Shares. Subject to any governing rules or regulations, as soon as practicable after receipt of a written notification of exercise and full payment in accordance with the preceding provisions of this Section 4 and Section 6.6 of the Plan and satisfaction of tax obligations in accordance with Article XVII of the Plan, the Company shall deliver to the Participant exercising an Option, in the Participant’s name, evidence of book entry Shares, in an appropriate amount based upon the number of Shares purchased under the Option, subject to Section 20.9 of the Plan.
5. No Right to Continued Service; No Rights as Shareholder. Neither the Plan nor this Agreement shall confer upon the Participant any right to be retained in any position, as an Employee, Independent Contractor, Consultant or Director of the Company. Further, nothing in the Plan or this Agreement shall be construed to limit the discretion of the Company to terminate the Participant's employment or service at any time, with or without Cause. No Participant or other person shall become the beneficial owner of any Shares subject to an Option, nor have any rights to dividends or other rights of a stockholder with respect to any such Shares, until a book entry has been created for the Participant with respect to such Shares following exercise of his or her Option in accordance with the provisions of the Plan and this Agreement; provided, that notwithstanding the foregoing, a Participant receiving an Option shall not have any rights to dividends with respect to any Shares earned upon satisfaction or achievement of the terms and conditions of such Option with respect to any period prior to the date upon which such a book entry is created for the Participant.
6. Transferability. Except as otherwise provided in Sections 8.5 or 13.3 of the Plan or as otherwise determined at any time by the Committee, the Option may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than (i) by will or by the laws of descent and distribution or (ii) by gift or other transfer to any trust or estate in which the Participant or the Participant’s spouse or other immediate relative has a substantial beneficial interest, or to a spouse or other immediate relative, provided that any such transfer is permitted subject to Rule 16b-3 issued pursuant to the Exchange Act as in effect when such transfer occurs and the Board does not rescind this provision prior to such transfer; provided that the Committee may permit further transferability, on a general or a specific basis, and may impose conditions and limitations on any permitted transferability, subject to Section 13.1 of the Plan; provided further, however, that the Option may not be transferred for value or other consideration without first obtaining approval thereof by the stockholders of the Company and the Option shall not be transferable pursuant to a domestic relations order or similar order. Further, except as otherwise determined at any time by the Committee, or unless the Committee decides to permit further transferability, subject to Section 13.1 of the Plan, the Option shall be exercisable during the Participant’s lifetime only by the Participant.
7. Change in Control. The terms of the Plan will govern the Option in the event of a Change in Control.
8. Adjustments. The shares of Common Stock subject to the Option may be adjusted or terminated in any manner as contemplated by Section 4.4 of the Plan.
9. Tax Liability and Withholding. Notwithstanding any action the Company takes with respect to any or all income tax, social insurance, payroll tax, or other tax-related withholding (“Tax-Related Items”), the ultimate liability for all Tax-Related Items is and remains the Participant's responsibility and the Company (a) makes no representation or undertakings regarding the treatment of any Tax-Related Items in connection with the grant, vesting, or exercise of the Option or the subsequent sale of any shares acquired on exercise; and (b) does not commit to structure the Option to reduce or eliminate the Participant's liability for Tax-Related Items.
10. Non-competition and Non-solicitation.
10.1 Non-competition and Non-solicitation Restrictions. In consideration of the Option, the Participant agrees and covenants not to:
(a) contribute his or her knowledge, directly or indirectly, in whole or in part, as an employee, officer, owner, manager, advisor, consultant, agent, partner, director, shareholder, volunteer, intern or in any other similar capacity to an entity engaged in the same or similar business as the Company and its Affiliates, including those engaged in the business of [DESCRIPTION OF BUSINESS] for a period of [TERM OF MONTHS OR YEARS] following the Participant's Termination;
(b) directly or indirectly, solicit, hire, recruit, attempt to hire or recruit, or induce the termination of employment of any employee of the Company or its Affiliates for [TERM OF MONTHS OR YEARS] following the Participant's Termination; or
(c) directly or indirectly, solicit, contact (including, but not limited to, e-mail, regular mail, express mail, telephone, fax, and instant message), attempt to contact or meet with the current[, former or prospective] customers of the Company or any of its Affiliates for purposes of offering or accepting goods or services similar to or competitive with those offered by the Company or any of its Affiliates for a period of [TERM OF MONTHS OR YEARS] following the Participant's Termination.
10.2 Enforcement of Non-competition and Non-solicitation Restrictions. In the event of a breach or threatened breach by the Participant of any of the covenants contained in Section 10.1:
(a) any unvested portion of the Option shall be forfeited effective as of the date of such breach, unless sooner terminated by operation of another term or condition of this Agreement or the Plan; and
(b) the Participant hereby consents and agrees that the Company shall be entitled to seek, in addition to other available remedies, a temporary or permanent injunction or other equitable relief against such breach or threatened breach from any court of competent jurisdiction, without the necessity of showing any actual damages or that money damages would not afford an adequate remedy, and without the necessity of posting any bond or other security. The aforementioned equitable relief shall be in addition to, not in lieu of, legal remedies, monetary damages or other available forms of relief.
11. Compliance with Law. The exercise of the Option and the issuance and transfer of shares of Common Stock shall be subject to compliance by the Company and the Participant with all applicable requirements of federal and state securities laws and with all applicable requirements of any stock exchange on which the Company's shares of Common Stock may be listed. No shares of Common Stock shall be issued pursuant to this Option unless and until any then applicable requirements of state or federal laws and regulatory agencies have been fully complied with to the satisfaction of the Company and its counsel. The Participant understands that the Company is under no obligation to register the shares with the Securities and Exchange Commission, any state securities commission or any stock exchange to effect such compliance.
12. Notices. Any notice required to be delivered to the Company under this Agreement shall be in writing and addressed to the Committee, care of the Company, at the Company's principal corporate offices. Any notice required to be delivered to the Participant under this Agreement shall be in writing and addressed to the Participant at the Participant's address as shown in the records of the Company. Either party may designate another address in writing (or by such other method approved by the Committee) from time to time.
13. Governing Law. This Agreement will be construed and interpreted in accordance with the laws of the State of Delaware without regard to conflict of law principles.
14. Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by the Participant or the Company to the Committee for review. The resolution of such dispute by the Committee shall be final and binding on the Participant and the Company.
15. Options Subject to Plan. This Agreement is subject to the Plan as approved by the Company's shareholders. The terms and provisions of the Plan as it may be amended from time to time are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.
16. Successors and Assigns. The Company may assign any of its rights under this Agreement. This Agreement will be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Agreement will be binding upon the Participant and the Participant's beneficiaries, executors, administrators and the person(s) to whom this Agreement may be transferred by will or the laws of descent or distribution.
17. Severability. The invalidity or unenforceability of any provision of the Plan or this Agreement shall not affect the validity or enforceability of any other provision of the Plan or this Agreement, and each provision of the Plan and this Agreement shall be severable and enforceable to the extent permitted by law.
18. Discretionary Nature of Plan. The Plan is discretionary and may be amended, cancelled or terminated by the Company at any time, in its discretion. The grant of the Option in this Agreement does not create any contractual right or other right to receive any Options or other Awards in the future. Future Awards, if any, will be at the sole discretion of the Company. Any amendment, modification, or termination of the Plan shall not constitute a change or impairment of the terms and conditions of the Participant's employment with the Company.
19. Amendment. The Committee has the right to amend, alter, suspend, discontinue or cancel the Option, prospectively or retroactively; provided, that, no such amendment shall materially impair the previously accrued rights of the Participant under this Agreement without the Participant’s consent, subject to the provisions of Sections 16.1 and 16.2 of the Plan.
20. No Impact on Other Benefits. The value of the Participant's Option is not part of his or her normal or expected compensation for purposes of calculating any severance, retirement, welfare, insurance or similar employee benefit.
21. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. Counterpart signature pages to this Agreement transmitted by facsimile transmission, by electronic mail in portable document format (.pdf), or by any other electronic means intended to preserve the original graphic and pictorial appearance of a document, will have the same effect as physical delivery of the paper document bearing an original signature.
22. Acceptance. The Participant hereby acknowledges receipt of a copy of the Plan and this Agreement. The Participant has read and understands the terms and provisions thereof, and accepts the Option subject to all of the terms and conditions of the Plan and this Agreement. The Participant acknowledges that there may be adverse tax consequences upon exercise of the Option or disposition of the underlying shares and that the Participant should consult a tax advisor prior to such exercise or disposition.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
ENDOCHOICE HOLDINGS, INC. | ||||
By: _____________________ Name: Title: | ||||
[EMPLOYEE NAME] | ||||
By: _____________________ Name: | ||||
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Mark G. Gilreath, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of EndoChoice Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrantís internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 6, 2015
/s/ Mark G. Gilreath |
Mark G. Gilreath President and Chief Executive Officer (Principal Executive Officer) |
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, David N. Gill, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of EndoChoice Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 6, 2015
/s/ David N. Gill |
David N. Gill Chief Financial Officer (Principal Financial Officer and Accounting Officer) |
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of EndoChoice Holdings, Inc. (the “Company”) on Form 10-Q for the fiscal quarter ended June 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Mark G. Gilreath, Chief Executive Officer of the Company, and David N. Gill, Chief Financial Officer of the Company, respectively, do each hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: August 6, 2015
/s/ Mark G. Gilreath |
Mark G. Gilreath President and Chief Executive Officer (Principal Executive Officer) |
/s/ David N. Gill |
David N. Gill Chief Financial Officer (Principal Financial Officer and Accounting Officer) |
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