As filed with the Securities and Exchange Commission on July 14, 2014
Registration No. 333-196974
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Intersect ENT, Inc.
(Exact name of Registrant as specified in its charter)
Delaware | 3841 | 20-0280837 | ||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
1555 Adams Drive
Menlo Park, California 94025
(650) 641-2100
(Address, including zip code, and telephone number, including area code, of Registrants principal executive offices)
Lisa D. Earnhardt
President and Chief Executive Officer
Intersect ENT, Inc.
1555 Adams Drive
Menlo Park, California 94025
(650) 641-2100
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Matthew B. Hemington Brett D. White Seth J. Gottlieb Cooley LLP 3175 Hanover Street Palo Alto, California 94304 Telephone: (650) 843-5000 Facsimile: (650) 849-7400 |
B. Shayne Kennedy Thomas E. Mitchell Latham & Watkins LLP 650 Town Center Drive, 20th Floor Costa Mesa, California 92626 Telephone: (714) 540-1235 Facsimile: (714) 755-8290 |
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer x | Smaller reporting company ¨ | |||
(Do not check if a smaller reporting company) |
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities to be Registered |
Amount to be Registered(1) |
Proposed Maximum Offering Price Per Share(2) |
Proposed Maximum Aggregate Offering Price(1)(2) |
Amount of Registration Fee(3) | ||||
Common stock, $0.001 par value per share |
5,750,000 | $13.00 | $74,750,000 | $9,628 | ||||
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(1) | Includes shares the underwriters have the option to purchase. |
(2) | Estimated solely for the purpose of computing the amount of registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended. |
(3) | The Registrant previously paid the registration fee of $10,304 with the initial filing of this registration statement. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to completion, dated July 14, 2014
Prospectus
5,000,000 Shares
Common Stock
This is the initial public offering of common stock of Intersect ENT, Inc. We are offering 5,000,000 shares of our common stock. We anticipate the initial public offering price will be between $11.00 and $13.00 per share.
Prior to this offering, there has been no public market for our common stock. We intend to apply for our common stock to be listed on The Nasdaq Global Market under the symbol XENT.
We are an emerging growth company as that term is defined under the federal securities laws of the United States and, as such, may elect to comply with certain reduced public company reporting requirements for this and future filings.
Per Share | Total | |||||||
Initial public offering price |
$ | $ | ||||||
Underwriting discounts and commissions(1) |
$ | $ | ||||||
Proceeds, before expenses, to Intersect ENT, Inc. |
$ | $ |
(1) | See Underwriting for additional disclosure regarding the compensation payable to the underwriters. |
We have granted to the underwriters an option to purchase up to 750,000 additional shares of common stock at the initial public offering price, less the underwriting discounts and commissions, for 30 days after the date of this prospectus.
Investing in our common stock involves a high degree of risk. See Risk Factors beginning on page 12 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock to investors on or about , 2014.
J.P. Morgan | Piper Jaffray | |
Leerink Partners | Wedbush PacGrow Life Sciences |
The date of this prospectus is , 2014.
CLINICALLY PROVEN TO IMPROVE SURGERY OUTCOMES FOR CHRONIC SINUSITIS OPENS. The PROPEL implants self-expanding design conforms to and holds open the surgically enlarged sinus. DELIVERS. Designed to gradually release mometasone furoate directly to the sinus lining over a period of 30 days, before being fully absorbed into the body. MAINTAINS. Based on clinical data over six months, clinically proven to improve the outcomes of sinus surgery, reducing the need for oral steroid and surgical intervention. The long-term effects of sinus surgery in conjunction with our steroid-eluting implants beyond six months are not known.
Neither we nor the underwriters have authorized anyone to provide you with information that is different from that contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters are offering to sell shares of common stock and are seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
Until , 2014 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
TRADEMARKS
Intersect ENT, Inc. and our logo are our trademarks and are used in this prospectus. This prospectus also includes trademarks, tradenames and service marks that are the property of other organizations. Solely for convenience, our trademarks and tradenames referred to in this prospectus appear without the symbol, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the right of the applicable licensor to these trademarks and tradenames.
INVESTORS OUTSIDE THE UNITED STATES
Neither we nor any of the underwriters have taken any action that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons who have come into possession of this prospectus in a jurisdiction outside the United States are required to inform themselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.
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This summary highlights information contained elsewhere in this prospectus. This summary is not complete and may not contain all the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under the heading Risk Factors, and our financial statements and related notes included elsewhere in this prospectus before making an investment decision. Except as otherwise indicated herein or as the context otherwise requires, references in this prospectus to Intersect ENT, the company, we, us and our refer to Intersect ENT, Inc.
Overview
We are a commercial stage drug-device company committed to improving the quality of life for patients with ear, nose and throat conditions. We have developed a drug-eluting bioabsorbable implant technology that enables targeted and sustained release of therapeutic agents. This targeted drug delivery technology is designed to allow ear, nose and throat, or ENT, physicians to improve patient care. Our initial products, PROPEL and PROPEL mini, are the first and only drug-eluting implants approved by the U.S. Food and Drug Administration, or FDA, for use in patients with chronic sinusitis. Inserted by a physician during ethmoid sinus surgery, the self-expanding implants are designed to conform to and hold open the surgically enlarged sinus, while gradually releasing an anti-inflammatory steroid over a period of 30 days, before being fully absorbed into the body. Use of our PROPEL implants is clinically proven to improve surgical outcomes by maintaining the open pathways created in surgery and reducing the need for oral steroids and additional surgical procedures. In addition, we are using our drug-eluting bioabsorbable implant technology to develop new, less-invasive and more cost-effective treatment options for the management of chronic sinusitis in the physician office setting to provide benefits for patients, physicians and payors. Any new products we develop, or changes that we make in the therapeutic agent used in PROPEL or PROPEL mini, will require FDA approval prior to commercialization in the United States.
Chronic sinusitis is one of the most prevalent chronic diseases in the United States and significantly impacts the quality of life of patients. According to the Centers for Disease Control and Prevention, or CDC, approximately 12% of the U.S. adult population, or 29 million people, are affected by chronic sinusitis, making it more prevalent than heart disease and asthma. Chronic sinusitis is an inflammatory condition in which the sinus lining becomes swollen and inflamed, leading to significant patient morbidity, including difficulty breathing, chronic headaches, recurrent infections, bodily pain, and loss of sense of smell and taste. These persistent symptoms can severely impact a patients day-to-day well-being, resulting in frequent doctor visits and lost work productivity and can lead to chronic fatigue and depression. Chronic sinusitis is managed by a combination of medical management and surgical intervention. The first line of therapy is medical management involving antibiotics, anti-inflammatory steroids and decongestants. Patients whose symptoms persist, despite medical management, are recommended to undergo functional endoscopic sinus surgery, or FESS. FESS is performed in the operating room to open the blocked sinus pathways by removing inflamed tissue and bone using surgical tools. Approximately 540,000 patients underwent sinus surgery for chronic sinusitis in 2013 in the United States. Although sinus surgery can be effective, a majority of patients experience recurrent symptoms which commonly necessitate additional treatment with medications and surgery.
Our two commercial products, PROPEL and PROPEL mini, are designed to improve the outcomes of sinus surgery by reducing postoperative inflammation and scarring from the underlying condition as well as the surgery. PROPEL and PROPEL mini were clinically proven in a meta-analysis of prospective, multicenter, randomized, controlled, double-blind clinical studies to improve surgical outcomes, including a 35% reduction in the need for postoperative oral steroid and surgical intervention.
In August 2011 we received Premarket Approval, or PMA, from the FDA for our first product, PROPEL, indicated for use in patients 18 years or older following ethmoid sinus surgery to maintain patency. Our second product, PROPEL mini, received PMA approval from the FDA in November 2012. PROPEL mini is designed for patients requiring less extensive surgery and those who have smaller anatomy, thus expanding the treatable patient population. In the first half of 2013, we began scaling our U.S. direct commercial presence. As of March 31, 2014, over 1,000 physicians in the United States have been trained and have incorporated our steroid-
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eluting implants into their practice. Based on the number of units shipped as of March 31, 2014, we estimate that physicians have treated over 25,000 patients with PROPEL and PROPEL mini. For the year ended December 31, 2013, we generated revenue of $17.9 million and had a net loss of $18.4 million. For the three months ended March 31, 2014, we generated revenue of $7.5 million and had a net loss of $4.4 million. As of March 31, 2014, we had an accumulated deficit of $82.7 million.
The Market
According to the CDC, approximately 12% of the U.S. adult population, or 29 million people, are affected by chronic sinusitis, making it more prevalent than heart disease and asthma. The CDC estimated that in 2005 the condition resulted in 12.6 million physician office and 1.2 million hospital out-patient department visits per year in the United States. Industry sources estimate that chronic sinusitis resulted in $8.6 billion in direct healthcare costs in 2007 in the United States.
Our target market consists of more than 3.5 million people with chronic sinusitis in the United States who are managed by ENT physicians and who we believe could benefit from products that incorporate our drug-eluting bioabsorbable implant technology. These patients are treated by approximately 7,500 ENT physicians who perform sinus surgery. Approximately 540,000 patients underwent sinus surgery for chronic sinusitis in 2013 in the United States. This includes patients who are under the age of 18 and surgeries on the frontal sinuses, both of which represent potential expanded future indications for PROPEL and PROPEL mini and would require FDA approval. Based on the number of sinus surgeries (including surgeries performed by the approximately 40% of surgeons that do not use packing materials in their surgeries), and assuming two devices per surgery and an average selling price of $695 per device, we estimate the annual total addressable market for PROPEL and PROPEL mini in the United States to be approximately $830 million. We further estimate the annual total addressable market for our products in clinical development in the United States that are specifically designed to address patients in the physician office setting to be approximately $4.0 billion. This estimate is based on our estimate that of the more than 3.5 million chronic sinusitis patients in the United States who are managed by ENT physicians, (i) approximately 34% have undergone prior FESS procedures and we assume that 64% of these patients would undergo approximately 1.5 procedures per year to treat recurring symptoms using two devices at an average selling price of $495 per device, and (ii) the remaining approximately 66% of all chronic sinusitis patients managed by ENT physicians would use a different device we have in clinical development assuming that these patients would undergo approximately one procedure per year using two devices at an average selling price of $595 per device.
While our current commercial focus is the U.S. market, we plan to initiate efforts that will allow for future expansion into international geographies. To that end, in July 2014, we received CE mark approval for PROPEL and PROPEL mini which enables market access in Europe. We estimate the annual total addressable market for PROPEL and PROPEL mini in these regions to be greater than $1.0 billion. This estimate is based on an estimated approximately 865,000 FESS procedures annually in the 16 countries in which we did research (including surgeries performed by the approximately 40% of surgeons that do not use packing materials in their surgeries), assuming that 85% involve ethmoid sinuses and 25% frontal sinuses and assuming using two devices at an average selling price of $695 per device. Therefore, we estimate the global annual total addressable market for our products and products in clinical development for chronic sinusitis patients to exceed $6.0 billion.
Current Treatments for Chronic Sinusitis and Their Limitations
The treatment of chronic sinusitis often entails a combination of medical management and surgical intervention to treat the underlying inflammation of the sinus lining, while addressing the secondary symptoms caused by obstruction of the natural drainage pathways.
Medical Management
The first line of therapy for chronic sinusitis is medical management, which typically includes prescribed antibiotics, anti-inflammatory steroids and decongestants. Steroids are prescribed in two forms, oral steroid pills and nasal steroid sprays, both of which have serious limitations. Oral steroid therapy is effective at reaching the sinus lining, but it does so by means of systemic exposure and therefore carries the risk of serious side effects,
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including glaucoma, bone loss, weight gain, psychosis and difficulty in controlling blood glucose levels in patients with diabetes. Nasal steroid sprays, commonly indicated for rhinitis, or inflammation of the nasal passage, are routinely prescribed for chronic sinusitis patients. While nasal steroid sprays avoid systemic exposure, an estimated 70% of the drug is swallowed and the remainder is directed to the nasal passages, instead of the sinuses, which limits efficacy. In a published study, the fraction of drug deposited in the sinuses from a nasal steroid spray was measured to be less than 2%. Poor patient compliance further limits the effectiveness of nasal steroid sprays. Although medical management can reduce symptoms, an estimated 20% or more of chronic sinusitis patients who receive medical therapy are unresponsive.
Sinus Surgery
In cases where patients are symptomatic despite medical management, a physician may recommend FESS. In the FESS procedure, the physician enlarges the inflamed and obstructed sinus pathways by removing inflamed tissue and bone in order to facilitate normal sinus drainage and aeration. While FESS is the standard of care for treating chronic sinusitis, it has several limitations:
| Limited effectiveness. Inflammation and scarring in the postoperative period are common and can compromise the surgical result by negatively impacting the ability of the sinuses to heal. This increases the need for continued medical management and additional surgical procedures. Within the first year after surgery, approximately 64% of patients experience recurrent symptoms. |
| Limited ability to address postoperative inflammation. While oral steroids prescribed postoperatively can be effective at addressing inflammation and scarring, the required doses are significant and can result in serious systemic side effects. We believe, as a result, only 20% of physicians prescribe them routinely after surgery. The absence of anti-inflammatory steroid therapy leaves the surgical wound susceptible to postoperative complications. |
| Pain and discomfort during postoperative period. During surgery, an ENT physician typically places sinus packing materials into the ethmoid sinuses to physically separate tissues in an attempt to prevent scarring and adhesions. The sinus packing materials are removed in the physicians office postoperatively by pulling or suctioning them from the newly opened cavity, a painful and time-consuming process, often necessitating pain medication. Moreover, the use of sinus packing materials obstructs the newly opened sinuses, leading to patient symptoms of congestion and discomfort. Despite the use of packing materials, scarring and adhesions are common, necessitating painful removal of additional tissue during postoperative treatments. |
| Potential for revision surgery. Within the first year after FESS, approximately 10% of patients will return to the operating room to undergo a revision procedure, while additional patients will return for a revision procedure after one year. We believe the risk of potential revision surgery is a significant deterrent to some patients that would otherwise undergo FESS for chronic sinusitis. |
We believe that because of the limitations of medical management and lack of disease resolution after FESS, many chronic sinusitis patients remain undertreated. We estimate that only a third of patients recommended for sinus surgery proceed with the potentially beneficial procedure, which we believe is due to its limitations and high risk for additional medical management and surgical revision. While balloon sinuplasty has been introduced to open the frontal, maxillary and sphenoid sinuses, or dependent sinuses, in a less invasive manner, it cannot treat disease in the most commonly involved sinuses, the ethmoids, and does not address the underlying inflammation associated with chronic sinusitis. We believe that an opportunity exists to reach these undertreated patients by providing a more effective option to address their inflammatory disease, while improving the overall outcomes of FESS.
Our Solution
We have designed a drug-eluting implant that consists of bioabsorbable polymers that control drug release and provide structural support to adjacent tissues during the healing process, while the implant is gradually and fully absorbed into the body.
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Our PROPEL implants are designed to improve the outcomes of sinus surgery by holding open the sinus passageways, reducing postoperative inflammation and scarring. They are inserted by a physician under endoscopic visualization during sinus surgery in the ethmoids. Once inserted, the self-expanding implants conform to and hold open the surgically enlarged sinus, while gradually releasing an anti-inflammatory steroid, mometasone furoate, directly to the sinus lining over a period of 30 days. Mometasone furoate, which is available generically and has been approved by the FDA for use in PROPEL and PROPEL mini, is the active ingredient in NASONEX, a nasal spray used to treat allergic rhinitis and other indications. The implants fully absorb into the body after a period of four to six weeks or are removed at the discretion of a physician during a routine office visit. Once absorbed or removed, the implant no longer provides structural support. We believe the principal benefits of our steroid-eluting implants are:
| Improved surgical outcomes. Our PROPEL implants have been clinically proven to improve FESS results by reducing postoperative inflammation and scarring. In a meta-analysis of prospective, multicenter, randomized, controlled, double-blind clinical studies, our PROPEL implants provided a 46% relative reduction in inflammation and a 70% relative reduction in scarring compared to the control implant. The control implant was identical to the PROPEL implant in composition, size, structure and mode of insertion but lacked the mometasone furoate coating. |
| Targeted steroid therapy to address postoperative inflammation. Our PROPEL implants are the first and only drug-eluting bioabsorbable sinus implants. They deliver postoperatively an anti-inflammatory steroid directly to the sinus lining in a controlled fashion over a period of 30 days, which helps in the wound healing process. In a meta-analysis of prospective, multicenter, randomized, controlled, double-blind clinical studies, our PROPEL implants reduced the need for oral steroids by 40% compared to the control implant. |
| Reduced pain and discomfort during postoperative period. Our PROPEL implants improve postoperative care. Once inserted, the self-expanding implants are designed to conform to and hold open the surgically enlarged ethmoid sinuses until fully absorbed into the body, which improves wound healing without obstructing the sinuses and causing congestion. Our steroid-eluting implants are designed to obviate the need for sinus packing materials, which can be a significant source of postoperative pain and discomfort. Our PROPEL implants significantly reduce scarring and adhesions, which reduces the potential for pain in postoperative treatments. |
| Reduced surgical revisions. In clinical studies, our PROPEL implants demonstrated a significant reduction in need for postoperative surgical intervention. In a meta-analysis of prospective, multicenter, randomized, controlled, double-blind clinical studies, our PROPEL implants provided a 35% relative reduction in the need for postoperative oral steroid and surgical intervention compared to the control implant. We believe that patients who have been deterred by the high revision rates associated with FESS may now consider surgical intervention to treat their chronic sinusitis condition. |
We believe these benefits will help expand the size of the FESS market as referring physicians increase their prescription of surgical intervention for chronic sinusitis and more patients elect to undergo sinus surgery to resolve their condition. However, although we believe PROPEL and PROPEL mini have significant advantages over sinus packing materials and other treatment options, we do not have clinical results directly comparing the effectiveness of our PROPEL implants versus sinus packing materials. Additionally, PROPEL and PROPEL mini are expensive relative to packing materials and may not be reimbursed by third-party payors, which has led some ENT physicians to not use these products, or to use them sparingly. ENT physicians may be slow to adopt our PROPEL implants until further clinical evidence or physician experience exists. Until we are able to obtain widespread coverage of our products by third-party payors, our products may be viewed by some ENT physicians, hospitals or other healthcare providers as too expensive to employ in every FESS procedure.
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Our Strategy
Our goal is to be a leading drug-device company committed to advancing clinically proven therapeutic solutions that improve the quality of life for patients with ENT conditions. The key elements of our strategy include:
| Expand our sales and marketing organizations to support growth. We plan to continue to invest in the expansion of our sales and marketing organizations to provide ENT physicians in the United States with access to our steroid-eluting implants. |
| Promote awareness amongst ENT physicians, referring physicians and patients. We believe that many patients with chronic sinusitis are currently undertreated, and we intend to educate ENT physicians, allergists, primary care physicians or other referring medical professionals and patients to raise awareness of the disease and available treatment alternatives, including the advantages of using our steroid-eluting implants. |
| Advance our platform of innovative products for additional chronic sinusitis patients. We are developing additional products using our drug-eluting bioabsorbable implant technology that are specifically designed to treat and manage chronic sinusitis in the physician office setting during a routine visit. We are also working to expand indications for our PROPEL implants to allow for the treatment of the dependent sinuses. |
| Facilitate access to our products via third-party reimbursement. We believe that establishment of reimbursement codes specific to the use of drug-eluting implants for chronic sinusitis is an important factor in expanding access to our products, especially in the physician office setting. Therefore, our strategy includes efforts to engage physician societies and encourage third-party payors to establish coverage, coding and payment that will facilitate access to our drug-eluting implants as we expand our commercialization efforts in the United States. |
| Introduce our steroid-eluting implants in markets outside the United States. We plan to leverage our FDA PMA approved products and clinical data to access markets outside the United States, starting first with the development of clinical, regulatory and reimbursement strategies for countries in Europe and the Asia-Pacific region. |
Risks Related to Our Business
Our ability to successfully operate our business is subject to numerous risks, including those that are generally associated with operating in the medical device industry. Any of the factors set forth under the heading Risk Factors may limit our ability to successfully execute our business strategy. You should carefully consider all of the information set forth in this prospectus and, in particular, you should evaluate the specific factors set forth under the heading Risk Factors in deciding whether to invest in our common stock. Some of the principal risks relating to our business and our ability to execute our business strategy include:
| We have incurred significant operating losses since inception and may not be able to achieve profitability. |
| All of our revenue is generated from a limited number of products and we are completely dependent on the success of our PROPEL and PROPEL mini steroid-eluting implants, which have a limited commercial history. If these products fail to gain widespread market acceptance, our business will suffer. |
| The establishment of adequate coverage and reimbursement is important for sales of our products. Coverage and reimbursement policies for procedures using our steroid-eluting implants could affect the adoption of our products, particularly our product candidates for the physician office setting, and our future revenue. |
| Pricing pressure from our hospital and ambulatory surgery center customers due to limited coverage and reimbursement for our products may impact our ability to sell our products at prices necessary to support our current business strategies. |
| We may never obtain regulatory approval for future products or products outside the United States. |
| If we are unable to protect our intellectual property, or operate our business without infringing on the intellectual property rights of third parties, our business will be negatively affected. |
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Corporate Information
We were incorporated in Delaware in October 2003 as Sinexus, Inc. We changed our name to Intersect ENT, Inc. in November 2009. Our offices are located at 1555 Adams Drive, Menlo Park, California 94025. Our telephone number is (650) 641-2100. Our corporate website is at www.intersectent.com. The information contained on or that can be accessed through our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus or in deciding to purchase our common stock.
Preliminary Unaudited Second Quarter 2014 Financial Expectations
Set forth below are certain preliminary revenue, cost, expense and net loss expectations for the three and six months ended June 30, 2014. These preliminary results represent our estimates only based on currently available information and do not present all necessary information for an understanding of our financial condition as of June 30, 2014 or our results of operations for the three and six months ended June 30, 2014. As we complete our quarter-end financial close process and finalize our second quarter 2014 unaudited financial statements, we will be required to make significant judgments in a number of areas, including inventory, stock-based compensation and the liability for preferred stock warrants. This financial information has been prepared by and is the responsibility of our management. Our independent registered public accounting firm has not audited, reviewed or performed any procedures with respect to this preliminary financial data or the accounting treatment thereof and does not express an opinion or any other form of assurance with respect thereto. We expect to complete our unaudited financial statements for the quarter ended June 30, 2014 subsequent to the completion of this offering. It is possible that we or our independent registered public accounting firm may identify items that require us to make adjustments to the financial information set forth below and those changes could be material. Accordingly, undue reliance should not be placed on these preliminary estimates. These preliminary estimates are not necessarily indicative of any future period and should be read together with Risk Factors, Special Note Regarding Forward-Looking Statements, Managements Discussion and Analysis of Financial Condition and Results of Operations, Selected Financial Data and our financial statements and related notes included elsewhere in this prospectus.
We estimate that our total revenue for the three months ended June 30, 2014 was between approximately $8.4 million and $8.6 million as compared to $3.9 million for the three months ended June 30, 2013. We estimate that our total revenue for the six months ended June 30, 2014 was between approximately $15.9 million and $16.1 million as compared to $6.7 million for the six months ended June 30, 2013. The estimated increase in total revenue is primarily attributable to the growth of our revenue as we expanded our commercial sales force by increasing the number of our territory managers.
We estimate that our cost of sales was between approximately $2.3 million and $2.6 million for the three months ended June 30, 2014 as compared to cost of sales of $2.2 million for the three months ended June 30, 2013. We estimate that our cost of sales was between approximately $4.7 million and $5.0 million for the six months ended June 30, 2014 as compared to cost of sales of $4.2 million for the six months ended June 30, 2013. This estimated increase is primarily due to the increase in units sold.
We estimate that our operating expenses for the three months ended June 30, 2014 was between approximately $10.7 million and $11.2 million as compared to $6.5 million for the three months ended June 30, 2013. We estimate that our operating expenses for the six months ended June 30, 2014 was between approximately $19.9 million and $20.4 million as compared to $12.1 million for the six months ended June 30, 2013. This increase is primarily due to headcount increases associated with the commercial expansion of our sales force and related growth of our business and increased marketing and promotional expenses.
We estimate that our operating loss for the three months ended June 30, 2014 was between approximately $4.4 million and $5.4 million and between $8.5 million and $9.5 million for the six months ended June 30, 2014. We also estimate that our net loss for the three months ended June 30, 2014 was between approximately $4.4 million and $5.4 million and between $8.8 million and $9.8 million for the six months ended June 30, 2014. Consequently, we expect that our accumulated deficit increased to between approximately $87.1 million and $88.1 million as of June 30, 2014.
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Implications of Being an Emerging Growth Company
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. These include, but are not limited to, (1) reduced obligations with respect to the disclosure of selected financial data in registration statements filed with the Securities and Exchange Commission, or the SEC, including the registration statement on Form S-1 of which this prospectus is a part, (2) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, (3) an exception from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, and (4) exemptions from the requirements of holding a non-binding advisory vote on executive compensation and the requirement to obtain shareholder approval of any golden parachute payments not previously approved.
We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenue, we have more than $700 million in market value of our stock held by non-affiliates or we issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of certain reduced reporting burdens in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.
In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, or Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for private companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable.
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The Offering
Issuer |
Intersect ENT, Inc. |
Common stock offered by us |
5,000,000 shares (or 5,750,000 shares if the underwriters exercise in full their option to purchase additional shares) |
Common stock to be outstanding immediately after this offering |
22,501,808 shares (or 23,251,808 shares if the underwriters exercise in full their option to purchase additional shares) |
Underwriters option to purchase additional shares |
750,000 shares |
Use of proceeds |
We intend to use substantially all of the net proceeds from this offering for sales, marketing, research and development activities, clinical and regulatory initiatives, working capital and general corporate purposes. See Use of Proceeds on page 43 for a more complete description of the intended use of proceeds from this offering. |
Risk factors |
See Risk Factors beginning on page 12 and other information included in this prospectus for a discussion of factors that you should consider carefully before deciding to invest in our common stock. |
Proposed Nasdaq Global Market Symbol |
XENT |
The number of shares of common stock to be outstanding after this offering is based on 17,501,808 shares of common stock outstanding as of March 31, 2014, and excludes the following:
| 1,964,978 shares of common stock issuable upon the exercise of outstanding options as of March 31, 2014, having a weighted average exercise price of $1.34 per share; |
| 47,554 shares of common stock issuable upon the exercise and subsequent conversion of warrants to purchase our Series A convertible preferred stock at an exercise price of $3.68 per share; |
| Up to 20,313 shares of common stock issuable upon the exercise and subsequent conversion of a warrant to purchase our Series D convertible preferred stock at an exercise price of $6.89 per share, which, as of March 31, 2014, was exercisable for 5,803 shares; |
| 4,750,000 shares of common stock reserved for future issuance under our 2014 Equity Incentive Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan, which will become effective upon the execution of the underwriting agreement related to this offering; and |
| 496,092 shares of common stock reserved for future issuance under our 2014 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan, which will become effective upon the execution of the underwriting agreement related to this offering. |
Unless otherwise indicated, all information in this prospectus assumes:
| the automatic conversion of 15,703,875 shares of our convertible preferred stock outstanding as of March 31, 2014, into an aggregate of 15,703,875 shares of our common stock immediately prior to the closing of this offering; |
| the automatic conversion of all convertible preferred stock warrants outstanding as of March 31, 2014, into warrants to purchase up to an aggregate 67,867 shares of our common stock immediately prior to the closing of this offering; |
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| the filing of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws immediately prior to the closing of this offering; |
| no exercise of the underwriters option to purchase additional shares; and |
| a 1-for-4 reverse stock split of our common stock and preferred stock effected on July 11, 2014. |
9
Summary Financial Data
The following tables set forth a summary of our historical financial data as of, and for the period ended on, the dates indicated. The statements of operations data for the years ended December 31, 2012 and 2013, are derived from our audited financial statements included elsewhere in this prospectus. The statements of operations data for the three months ended March 31, 2013 and 2014, and the balance sheet data as of March 31, 2014, are derived from our unaudited interim financial statements included elsewhere in this prospectus. We have prepared the unaudited interim financial statements on the same basis as the audited financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. You should read this data together with our audited financial statements and related notes appearing elsewhere in this prospectus and the information under the captions Selected Financial Data and Managements Discussion and Analysis of Financial Condition and Results of Operations. Our historical results are not necessarily indicative of our future results and are not necessarily indicative of results to be expected for the full year ending December 31, 2014, or any other period.
Year
Ended December 31, |
Three Months Ended March 31, |
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2012 | 2013 | 2013 | 2014 | |||||||||||||
(in thousands, except per share data) |
(unaudited) | |||||||||||||||
Statements of Operations Data: |
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Revenue |
$ | 5,863 | $ | 17,931 | $ | 2,744 | $ | 7,497 | ||||||||
Cost of sales |
3,837 | 8,150 | 1,949 | 2,360 | ||||||||||||
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Gross profit |
2,026 | 9,781 | 795 | 5,137 | ||||||||||||
Operating expenses: |
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Selling, general and administrative |
9,251 | 18,229 | 3,350 | 6,658 | ||||||||||||
Research and development |
9,260 | 9,518 | 2,256 | 2,577 | ||||||||||||
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Total operating expenses |
18,511 | 27,747 | 5,606 | 9,235 | ||||||||||||
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Loss from operations |
(16,485 | ) | (17,966 | ) | (4,811 | ) | (4,098 | ) | ||||||||
Other income (expense), net |
120 | (403 | ) | 58 | (311 | ) | ||||||||||
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Net loss |
$ | (16,365 | ) | $ | (18,369 | ) | $ | (4,753 | ) | $ | (4,409 | ) | ||||
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Net loss per share, basic and diluted |
$ | (16.38 | ) | $ | (12.57 | ) | $ | (4.57 | ) | $ | (2.49 | ) | ||||
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Weighted average common shares used to compute net loss per share, basic and diluted |
999 | 1,461 | 1,039 | 1,773 | ||||||||||||
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Pro forma net loss per share, basic and diluted (unaudited)(1) |
$ | (1.17 | ) | $ | (0.25 | ) | ||||||||||
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Weighted average common shares used to compute pro forma net loss per share, basic and diluted (unaudited)(1) |
15,655 | 17,474 | ||||||||||||||
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10
As of March 31, 2014 | ||||||||||||
(in thousands) |
Actual | Pro Forma(1) | Pro
Forma As Adjusted(2)(3) |
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(unaudited) | ||||||||||||
Balance Sheet Data: |
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Cash and cash equivalents |
$ | 7,478 | $ | 7,478 | $ | 60,278 | ||||||
Working capital |
8,643 | 9,137 | 61,937 | |||||||||
Total assets |
16,767 | 16,767 | 69,567 | |||||||||
Preferred stock warrant liability |
494 | | | |||||||||
Total debt |
1,280 | 1,280 | 1,280 | |||||||||
Total liabilities |
6,783 | 6,289 | 6,289 | |||||||||
Convertible preferred stock |
90,789 | | | |||||||||
Accumulated deficit |
(82,668 | ) | (82,668 | ) | (82,668 | ) | ||||||
Total stockholders (deficit) equity |
(80,805 | ) | 10,478 | 63,278 |
(1) | Reflects the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 15,703,875 shares of common stock immediately prior to the closing of this offering and the conversion of warrants to purchase up to 67,867 shares of convertible preferred stock into warrants to purchase up to 67,867 shares of common stock immediately prior to the closing of this offering. |
(2) | Reflects the pro forma adjustments described in footnote (1) above and the sale by us of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. |
(3) | A $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of pro forma as adjusted cash and cash equivalents, working capital, total assets and total stockholders equity by $4.7 million, assuming the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) each of pro forma as adjusted cash and cash equivalents, working capital, total assets and total stockholders equity by approximately $11.2 million, assuming the assumed initial public offering price per share remains the same. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price, number of shares offered and other terms of this offering determined at pricing. |
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An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors together with all of the other information contained in this prospectus, including our financial statements and the related notes, before deciding whether to invest in shares of our common stock. Each of these risks could harm our business, operating results, financial condition or growth prospects. As a result, the trading price of our common stock could decline and you may lose all or part of your investment.
Risks Related to Our Business
We have incurred significant operating losses since inception and may not be able to achieve profitability.
We have incurred net losses since our inception in 2003. For the years ended December 31, 2012 and 2013, and for the three months ended March 31, 2014, we had net losses of $16.4 million, $18.4 million and $4.4 million, respectively. As of March 31, 2014, we had an accumulated deficit of $82.7 million. To date, we have financed our operations primarily through private placements of our equity securities, certain debt-related financing arrangements and from sales of our approved products. We have devoted substantially all of our resources to research and development of our products, sales and marketing activities and clinical and regulatory initiatives to obtain approvals for our products. Our ability to generate sufficient revenue from our existing products or from any of our product candidates in development, and to transition to profitability and generate consistent positive cash flows is uncertain. Following this offering, we expect that our operating expenses will continue to increase as we continue to build our commercial infrastructure, develop, enhance and commercialize new products and incur additional operational and reporting costs associated with being a public company. As a result, we expect to continue to incur operating losses for the foreseeable future and may never achieve profitability.
All of our revenue is generated from our PROPEL and PROPEL mini steroid-eluting implants and we are completely dependent on the success of these products, which have a limited commercial history. If these products fail to gain widespread market acceptance, our business will suffer.
We started selling PROPEL in August 2011 and PROPEL mini in November 2012. We expect that sales of these products will account for substantially all of our revenue for the foreseeable future and therefore our ability to become profitable will depend upon the commercial success of these products. Because of their recent commercial introduction, PROPEL and PROPEL mini have limited product and brand recognition. We market these products primarily to ear, nose and throat, or ENT, physicians and believe they may be slow or fail to adopt our products for a variety of reasons, including, among others:
| lack of experience with our products; |
| lack of availability of adequate coverage and reimbursement for hospitals, ambulatory surgery centers and physicians; |
| lack of evidence supporting cost benefits or cost effectiveness of our products over existing alternatives; |
| lack of clinical data supporting patient benefits beyond six months; |
| perception that our products are unproven, investigational or experimental; |
| liability risks generally associated with the use of new products and procedures; and |
| training required to use new products. |
If we are unable to effectively demonstrate to ENT physicians the benefits of our products when used during sinus surgery and our products fail to achieve market acceptance, our future revenue will be adversely impacted. In addition, we believe recommendations and support of our products by influential ENT physicians are essential for market acceptance and adoption. If we do not receive support from these influential ENT physicians, ENT physicians in general may not use our products and our future revenue will be harmed.
Because of the numerous risks and uncertainties associated with our commercialization efforts, we are unable to predict the extent to which we will continue to generate revenue from our products or the timing for
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when or the extent to which we will become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis.
Pricing pressure from our hospital and ambulatory surgery center customers due to limited coverage and reimbursement for our products may impact our ability to sell our products at prices necessary to support our current business strategies.
Hospital and other healthcare provider customers, including ambulatory surgery center customers, that purchase our products typically bill various third-party payors to cover all or a portion of the costs and fees associated with the sinus surgery procedures in which our products are used and bill patients for any deductibles or co-payments. Because there is often no separate reimbursement for supplies used in surgical procedures, the additional cost associated with the use of our steroid-eluting implants can impact the profit margin of the hospital or surgery center where the sinus surgery is performed. Some of our target customers may be unwilling to adopt our steroid-eluting implants in light of the additional associated cost. Further, any decline in the amount payors are willing to reimburse our customers for sinus surgery procedures could make it difficult for existing customers to continue using, or adopt, our steroid-eluting implants and could create additional pricing pressure for us. If we are forced to lower the price we charge for our products, our gross margins will decrease, which will adversely affect our ability to invest in and grow our business.
We are actively seeking new billing codes for our products and the procedure associated with their use, including codes that are established by the Centers for Medicare & Medicaid Services, or CMS, and the American Medical Association, or AMA. Our ability to obtain new billing codes will depend, in part, on support from the ENT community and physician acceptance of our technology. Although obtaining billing codes may result in payment amounts that better reflect the costs and resources of our products and related procedure, there is a possibility that they may not do so.
We cannot assure you that we will be successful in garnering the necessary support for new codes from the ENT community or from third-party payors, who are responsible for determining which billing codes are to be used for procedures performed on their insured population. Even if we are able to establish reimbursement codes for our products, we will continue to be subject to significant pricing pressure, which could harm our business, results of operations, financial condition and prospects.
Our future growth depends on physician awareness and adoption of our steroid-eluting implants.
We focus our sales, marketing and education efforts primarily on ENT physicians. We train physicians on the patient population that would benefit from our steroid-eluting implants. This patient population is based on those included in our clinical studies and includes, for example, patients with or without polyps as well as patients undergoing either primary or revision surgery. Some physicians may choose to utilize our products on a subset of their patients such as patients with severe polyp disease that they deem at higher risk for postoperative complications. If we are not able to effectively demonstrate to those physicians that our products are beneficial in a broad range of patients on which they operate, their adoption of our products will be limited.
We train our physician customers on the proper techniques in using our devices to achieve the intended outcome. The successful use of our steroid-eluting implants depends in large part on the physicians adherence to the techniques that they are provided in training by our sales representatives. In the event that physicians do not adhere to these techniques or if they perceive that our products are too cumbersome for them to use, we may have difficulty facilitating adoption. Additionally, physicians may develop their own techniques for use of our products during insertion and during the period in which the drug is delivered and is bioabsorbed. For example, we are aware some physicians are removing our steroid-eluting implants before all of the drug has eluted into the surrounding tissue. While physicians were allowed to remove the implant at any time at their discretion in our clinical studies, early removal could lead to suboptimal outcomes. In addition, if physicians utilize our products in a manner that is inconsistent with how they were studied clinically, their outcomes may not be consistent with the outcomes achieved in our clinical studies, which may impact their perception of patient benefit and limit their adoption of our products.
In addition, the initial point of contact for many patients suffering from chronic sinusitis may be primary care physicians or other referring medical professionals who commonly treat patients experiencing sinus-related
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symptoms or complications. We believe that we must educate these primary care physicians and other referring medical professionals about our steroid-eluting implants in order to grow the market beyond the over 3.5 million patients with chronic sinusitis who are currently managed by ENT physicians. If we fail to do so, these primary care physicians and other referring medical professionals may not refer patients to an ENT physician who will perform sinus surgery and use our steroid-eluting implants. As a result, those patients may go untreated, attempt to manage their sinusitis through medical management alone or seek alternative surgical procedures. If we are not successful in educating primary care physicians and other referring medical professionals about our steroid-eluting implants, our ability to increase our revenue may be impaired.
We have limited experience marketing and selling our steroid-eluting implants, and if we are unable to expand, manage and maintain our direct sales and marketing organizations we may not be able to generate anticipated revenue.
We started selling our first approved product, PROPEL, on a limited basis in August 2011. We subsequently started selling PROPEL mini in November 2012, and in the first half of 2013 we began to expand and scale our direct sales and marketing organizations in the United States. As a result, we have limited experience marketing and selling our steroid-eluting implants. As of March 31, 2014, our direct sales organization, including marketing, customer service and reimbursement, consisted of 62 employees, having increased from 21 employees as of December 31, 2012. Our operating results are directly dependent upon the sales and marketing efforts of our employees. If our direct sales representatives fail to adequately promote, market and sell our products, our sales may suffer.
In order to generate our anticipated sales, we will need to expand the size and geographic scope of our direct sales organization. As a result, our future success will depend largely on our ability to continue to hire, train, retain and motivate skilled regional sales managers and direct sales representatives with significant technical knowledge of ENT. Because of the competition for their services, we cannot assure you we will be able to hire and retain additional direct sales representatives on favorable or commercially reasonable terms, if at all. Failure to hire or retain qualified sales representatives would prevent us from expanding our business and generating sales. Additionally, new hires require training and take time before they achieve full productivity. If we fail to train new hires adequately, new hires may not become as productive as may be necessary to maintain or increase our sales.
If we are unable to expand our sales and marketing capabilities, we may not be able to effectively commercialize our products, which would adversely affect our business, results of operations and financial condition.
Our clinical studies were designed to demonstrate the safety and efficacy of our steroid-eluting implants based on FDA requirements and may not be seen as compelling to physicians. Any subsequent clinical studies that are conducted and published may not be positive or consistent with our existing data, which would affect the rate of adoption of our products.
Our success depends on the medical communitys acceptance of our steroid-eluting implants as tools that are useful to ENT physicians treating patients with chronic sinusitis. We have sponsored three multi-center, prospective studies of over 200 patients to track outcomes of treatment with our steroid-eluting implants, which clinical data has resulted in the highest level of evidence generated for any product used in sinus surgery. The principal safety and efficacy information of our steroid-eluting implants is derived from the ADVANCE II study, a prospective, multicenter, randomized controlled, double-blind, pivotal study that was completed in September 2010. We also sponsored the ADVANCE study, a prospective, multicenter, single-cohort, open-label trial completed in December 2009 and the PROPEL Pilot Study, a prospective, multicenter, randomized, controlled, double-blind feasibility study completed in April 2009. While the results of these three studies collectively indicate a favorable safety and efficacy profile, the study designs and results may not be viewed as compelling to our physician customers. If physicians do not find our data compelling, they may choose not to use our products or limit their use. Our PROPEL Pilot study and ADVANCE II study incorporated an intra-patient control design comparing PROPEL to a non-drug-eluting control version of the implant in order to maintain blinding. Primary efficacy endpoints for these two studies were measured at 30 days after placement as we believe that proper healing in the immediate postoperative period is indicative of long-term outcomes. Additionally, it was important to allow for medical intervention after day 30 given one sinus side of each patient had the control device. Clinical
14
efficacy demonstrated at this short-term endpoint does not guarantee long-term clinical benefits. Our ADVANCE study measured patient symptom improvements out to six months. The long-term effects of sinus surgery in conjunction with our steroid-eluting implants beyond six months are not known. Certain ENT physicians, hospitals and surgery centers may prefer to see longer term efficacy data than we have produced. We cannot assure you that any data that we or others generate will be consistent with that observed in these studies nor that results will be maintained beyond the time points studied. We also cannot assure you that any data that may be collected will be compelling to the medical community because the data may not be scientifically meaningful and may not demonstrate that sinus surgery using our steroid-eluting implants is an attractive procedure when compared against data from alternative treatments.
Each ENT physicians individual experience with our steroid-eluting implants will vary, and we believe that physicians will compare actual long-term outcomes in their own practices using our steroid-eluting implants against sinus surgery used in conjunction with traditional sinus packing techniques. A long-term, adequately-controlled clinical study comparing sinus surgery performed in conjunction with our steroid-eluting implants against sinus surgery performed in conjunction with the variety of traditional sinus packing techniques incorporated by physicians would be expensive and time-consuming and we have not conducted, and are not currently planning to conduct, such a study. If the experience of physicians indicates that the use of our steroid-eluting implants in FESS is not as safe or efficacious as other treatment options or does not provide a lasting solution to patients with chronic sinusitis, adoption of our products may suffer and our business would be harmed.
We utilize third-party, single source suppliers for many of the components and materials used in our steroid-eluting implants, and the loss of any of these suppliers could harm our business.
The active pharmaceutical ingredient, or API, and a number of our critical components used in our steroid-eluting implants are supplied to us from single source suppliers. We rely on single source suppliers for some of our polymer materials, some extrusions and molded components, some off-the-shelf components and for finished goods testing. Our ability to supply our products commercially and to develop our product candidates depends, in part, on our ability to obtain these components in accordance with regulatory requirements and in sufficient quantities for commercialization and clinical testing. We have entered into manufacturing, supply or quality agreements with a number of our single source suppliers pursuant to which they supply the components we need. We are not certain that our single source suppliers will be able to meet our demand for their products, either because of the nature of our agreements with those suppliers, our limited experience with those suppliers or our relative importance as a customer to those suppliers. It may be difficult for us to assess their ability to timely meet our demand in the future based on past performance. While our suppliers have generally met our demand for their products on a timely basis in the past, they may subordinate our needs in the future to their other customers.
Establishing additional or replacement suppliers for the API or any of the components or processes used in our products, if required, may not be accomplished quickly. If we are able to find a replacement supplier, the replacement supplier would need to be qualified and may require additional regulatory authority approval, which could result in further delay. For example, the U.S. Food and Drug Administration, or FDA, could require additional supplemental data if we rely upon a new supplier for the API used in PROPEL and PROPEL mini. While we seek to maintain adequate inventory of the single source components and materials used in our products, any interruption or delay in the supply of components or materials, or our inability to obtain components or materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders.
If our third-party suppliers fail to deliver the required commercial quantities of materials, on a timely basis and at commercially reasonable prices, and we are unable to find one or more replacement suppliers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality, and on a timely basis, the continued commercialization of our products and the development of our product candidates would be impeded, delayed, limited or prevented, which could harm our business, results of operations, financial condition and prospects.
It is difficult to forecast future performance, which may cause our financial results to fluctuate unpredictably.
Our limited operating history and commercial experience make it difficult for us to predict future performance. As we gain additional commercial experience, a number of factors over which we have limited
15
control may contribute to fluctuations in our financial results, such as seasonal variations in revenue. In the first quarter, our results can be impacted by adverse weather and by resetting of annual patient healthcare insurance plan deductibles, both of which may cause patients to delay elective procedures such as FESS. In the second quarter, demand may be impacted by the seasonal nature of allergies and the resultant onset of sinus-related symptoms. In the third quarter, the number of FESS procedures nationwide is historically lower than other quarters throughout the year, which we believe is attributable to the summer vacations of ENT physicians and their patients. In the fourth quarter, demand may be impacted by the onset of the cold and flu season and related symptoms, as well as 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. Other factors that may impact our quarterly results include:
| ENT physician adoption of our steroid-eluting implants; |
| unanticipated pricing pressure; |
| the hiring, retention and continued productivity of our sales representatives; |
| our ability to expand the geographic reach of our sales and marketing efforts; |
| our ability to obtain regulatory clearance or approval for our products in development or for our current products outside the United States; |
| results of clinical research and trials on our existing products and products in development; |
| delays in receipt of anticipated purchase orders; |
| timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors; |
| delays in, or failure of, component and raw material deliveries by our suppliers; and |
| positive or negative coverage in the media or clinical publications of our steroid-eluting implants or products of our competitors or our industry. |
In the event our actual revenue and operating results do not meet our forecasts for a particular period, the market price of our common stock may decline substantially.
Our long-term growth depends on our ability to develop and commercialize additional ENT products.
It is important to our business that we continue to build a more complete product offering within the ENT market. We are using our drug-eluting bioabsorbable technology to develop new products for use in the physician office setting. Developing additional products is expensive and time-consuming and could divert managements attention away from our current sinus surgery products and harm our business. Even if we are successful in developing additional products, including those currently in development for use in the physician office setting, the success of any new product offering or enhancement to an existing product will depend on several factors, including our ability to:
| properly identify and anticipate ENT physician and patient needs; |
| develop and introduce new products or product enhancements in a timely manner; |
| avoid infringing upon the intellectual property rights of third parties; |
| demonstrate, if required, the safety and efficacy of new products with data from preclinical studies and clinical trials; |
| obtain the necessary regulatory clearances or approvals for new products or product enhancements; |
| be fully FDA-compliant with marketing of new devices or modified products; |
| provide adequate training to potential users of our products; |
| receive adequate coverage and reimbursement for procedures performed with our products; and |
| develop an effective and FDA-compliant, dedicated sales and marketing team. |
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If we are unsuccessful in developing and commercializing additional products in other areas of ENT, our ability to increase our revenue may be impaired.
If clinical studies of our future products do not produce results necessary to support regulatory clearance or approval in the United States or, with respect to our current or future products, elsewhere, we will be unable to commercialize these products.
We will likely need to conduct additional clinical studies in the future to support new product approvals, or for the approval of the use of our products in some foreign countries. Clinical testing takes many years, is expensive and carries uncertain outcomes. The initiation and completion of any of these studies may be prevented, delayed, or halted for numerous reasons, including, but not limited to, the following:
| the FDA, institutional review boards or other regulatory authorities do not approve a clinical study protocol, force us to modify a previously approved protocol, or place a clinical study on hold; |
| patients do not enroll in, or enroll at a lower rate than we expect, or do not complete a clinical study; |
| patients or investigators do not comply with study protocols; |
| patients do not return for post-treatment follow-up at the expected rate; |
| patients experience unexpected adverse event or side effects for a variety of reasons that may or may not be related to our products; |
| sites participating in an ongoing clinical study withdraw, requiring us to engage new sites; |
| difficulties or delays associated with establishing additional clinical sites; |
| third-party clinical investigators decline to participate in our clinical studies, do not perform the clinical studies on the anticipated schedule, or are inconsistent with the investigator agreement, clinical study protocol, good clinical practices or other agency requirements; |
| third-party organizations do not perform data collection and analysis in a timely or accurate manner; |
| regulatory inspections of our clinical studies or manufacturing facilities require us to undertake corrective action or suspend or terminate our clinical studies; |
| changes in federal, state, or foreign governmental statutes, regulations or policies; |
| interim results are inconclusive or unfavorable as to immediate and long-term safety or efficacy; |
| the study design is inadequate to demonstrate safety and efficacy; or |
| the study does not meet the statistical endpoints. |
Clinical failure can occur at any stage of the testing. Our clinical studies may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and non-clinical testing in addition to those we have planned. Our failure to adequately demonstrate the safety and efficacy of any of our devices would prevent receipt of regulatory clearance or approval and, ultimately, the commercialization of that device or indication for use. Even if our future products are approved in the United States, commercialization of our products in foreign countries would require approval by regulatory authorities in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials. Any of these occurrences may harm our business, results of operations, financial condition and prospects.
Consolidation in the healthcare industry could lead to demands for price concessions, which may impact our ability to sell our products at prices necessary to support our current business strategies.
Healthcare costs have risen significantly over the past decade, which has driven numerous cost reform initiatives by legislators, regulators and third-party payors. A typical FESS procedure is paid at a Medicare rate of approximately $10,000. Private insurer payment rates average 139 percent of Medicare rates nationally. Cost reform has elicited a consolidation trend in the healthcare industry to aggregate purchasing power, which may
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create more requests for pricing concessions in the future. Additionally, group purchasing organizations, independent delivery networks and large single accounts may continue to use their market power to consolidate purchasing decisions for hospitals and ambulatory surgery centers. We expect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the healthcare industry worldwide, resulting in further business consolidations and alliances among our customers, which may exert further downward pressure on the prices of our products and may adversely impact our business, results of operations, financial condition and prospects.
We compete or may compete in the future against other companies, some of which have longer operating histories, more established products and greater resources, which may prevent us from achieving significant market penetration or improved operating results.
Our industry is highly competitive, subject to change and significantly affected by new product introductions and other activities of industry participants. Many of the companies developing or marketing ENT products are publicly traded or are divisions of publicly-traded companies, including the Xomed division of Medtronic, the Gyrus ACMI division of Olympus, the Acclarent division of Johnson & Johnson, Stryker and ArthroCare. These companies enjoy several competitive advantages, including:
| greater financial and human capital resources; |
| significantly greater name recognition; |
| established relationships with ENT physicians, referring physicians, customers and third-party payors; |
| additional lines of products, and the ability to offer rebates or bundle products to offer greater discounts or incentives to gain a competitive advantage; and |
| established sales, marketing and worldwide distribution networks. |
Because of the size of the market opportunity for the treatment of chronic sinusitis, we believe potential competitors have historically dedicated and will continue to dedicate significant resources to aggressively promote their products or develop new products. New product developments that could compete more effectively with our products are possible because of the prevalence of chronic sinusitis and the extensive research efforts and technological progress that exist within the market. Large medical device companies with ENT divisions, such as Medtronic, also have capability in drug-eluting stents and smaller companies may develop competing products. Though we are not aware of any such products to date, these or other companies may develop drug-eluting products that could compete with our products.
Our commercially available products are designed to be used during sinus surgery. If another company successfully develops an approach for the treatment of chronic sinusitis that would not benefit from the use of our steroid-eluting implants, if another company develops a device to treat the inflammation and scarring associated with sinus surgery that is more efficacious than our steroid-eluting implants, or if a pharmaceutical company successfully develops a drug that addresses chronic sinusitis without the need for surgical intervention, sales of our products would be significantly and adversely affected.
We may be unable to manage our growth effectively.
Our past growth has provided, and our future growth may create, challenges to our organization. From December 31, 2012, to March 31, 2014, the number of our employees increased from 75 to 146. In the future, we expect to hire and train new personnel as we continue to grow and expand our operations. As a public company, we will need to further expand our scientific, sales and marketing, managerial, operational, financial and other resources to support our planned research, development and commercialization activities. This growth may place significant strain on our management, financial and operational resources. Successful growth is also dependent upon our ability to implement appropriate financial and management controls, systems and procedures and securing a sufficient amount of office space for additional personnel. If we fail to manage these challenges effectively, our business could be harmed.
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We face the risk of product liability claims that could be expensive, divert managements attention and harm our reputation and business. We may not be able to maintain adequate product liability insurance.
Our business exposes us to the risk of product liability claims that are inherent in the testing, manufacturing and marketing of medical devices and drug products. This risk exists even if a device or product is approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA, such as the case with PROPEL and PROPEL mini, or an applicable foreign regulatory authority. Our products and product candidates are designed to affect important bodily functions and processes. Any side effects, manufacturing defects, misuse or abuse associated with our products or our product candidates could result in patient injury or death. The medical device industry has historically been subject to extensive litigation over product liability claims, and we cannot offer any assurance that we will not face product liability suits. We may be subject to product liability claims if our steroid-eluting implants cause, or merely appear to have caused, patient injury or death. In addition, an injury that is caused by the activities of our suppliers, such as those who provide us with components and raw materials, may be the basis for a claim against us. Product liability claims may be brought against us by consumers, health care providers or others selling or otherwise coming into contact with our products or product candidates, among others. If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in:
| costs of litigation; |
| distraction of managements attention from our primary business; |
| the inability to commercialize our products or, if approved, our product candidates; |
| decreased demand for our products or, if approved, product candidates; |
| impairment of our business reputation; |
| product recall or withdrawal from the market; |
| withdrawal of clinical trial participants; |
| substantial monetary awards to patients or other claimants; or |
| loss of revenue. |
While we may attempt to manage our product liability exposure by proactively recalling or withdrawing from the market any defective products, any recall or market withdrawal of our products may delay the supply of those products to our customers and may impact our reputation. We can provide no assurance that we will be successful in initiating appropriate market recall or market withdrawal efforts that may be required in the future or that these efforts will have the intended effect of preventing product malfunctions and the accompanying product liability that may result. Such recalls and withdrawals may also be used by our competitors to harm our reputation for safety or be perceived by patients as a safety risk when considering the use of our products, either of which could have an adverse effect on our business.
In addition, although we have product liability and clinical study liability insurance that we believe is appropriate, this insurance is subject to deductibles and coverage limitations. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business, financial condition and results of operations.
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The misuse or off-label use of our products may harm our image in the marketplace, result in injuries that lead to product liability suits or result in costly investigations and sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.
The products we currently market have been approved by the FDA for specific treatments. We train our marketing and direct sales force to not promote our products for uses outside of the FDA-approved indications for use, known as off-label uses. We cannot, however, prevent a physician from using our products off-label, when in the physicians independent professional medical judgment he or she deems it appropriate. There may be increased risk of injury to patients if physicians attempt to use our products off-label. Furthermore, the use of our products for indications other than those approved by the FDA or any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.
Physicians may also misuse our products or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our products are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. Product liability claims could divert managements attention from our core business, be expensive to defend, and result in sizable damage awards against us that may not be covered by insurance. In addition, if the FDA or any foreign regulatory body determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, and the curtailment of our operations. Any of these events could significantly harm our business and results of operations and cause our stock price to decline.
Our ability to maintain our competitive position depends on our ability to attract and retain highly qualified personnel.
We believe that our continued success depends to a significant extent upon the efforts and abilities of our key executives. All of our executive officers and other employees are at-will employees, and therefore may terminate employment with us at any time with no advance notice. The replacement of any of our key personnel likely would involve significant time and costs and may significantly delay or prevent the achievement of our business objectives and would harm our business.
Our future success also depends on our ability to continue to attract and retain our executive officers and other key employees. Many of our employees have become or will soon become vested in a substantial amount of stock or number of stock options. Our employees may be more likely to leave us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or if the exercise prices of the options that they hold are significantly below the market price of our common stock. Further, our employees ability to exercise those options and sell their stock in a public market after the closing of this offering may result in a higher than normal turnover rate. We do not carry any key person insurance policies.
If our facilities or the facility of a supplier become inoperable, we will be unable to continue to research, develop, manufacture and commercialize our products and, as a result, our business will be harmed until we are able to secure a new facility.
We do not have redundant facilities. We perform substantially all of our research and development, manufacturing and commercialization activity and maintain all our raw material and finished goods inventory in a single location in Menlo Park, California. Menlo Park is situated on or near earthquake fault lines. Our facility and equipment would be costly to replace and could require substantial lead time to repair or replace. The facility may be harmed or rendered inoperable by natural or man-made disasters, including, but not limited to, earthquakes, flooding, fire and power outages, which may render it difficult or impossible for us to perform our research, development, manufacturing and commercialization activities for some period of time. The inability to perform those activities, combined with our limited inventory of reserve raw materials and finished product, may
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result in the inability to continue manufacturing our products during such periods and the loss of customers or harm to our reputation. Although we possess insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and this insurance may not continue to be available to us on acceptable terms, or at all.
We expect to incur significant additional costs as a result of being a public company, which may adversely affect our operating results and financial condition.
We expect to incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as rules implemented by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the Securities and Exchange Commission, or the SEC, and NASDAQ. These rules and regulations are expected to increase our accounting, legal and financial compliance costs and make some activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements and we expect those costs to increase in the future. We also expect these rules and regulations to make it more expensive for us to maintain directors and officers liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees, or as executive officers. Increases in costs incurred as a result of becoming a publicly traded company may adversely affect our operating results and financial condition.
We estimate the additional annual cost that we will incur as a result of our public company reporting obligations is approximately $3.0 million. However, because these rules and regulations are often subject to varying interpretations, it is difficult to accurately estimate or predict the amount or timing of these additional costs. Further, the lack of specificity of many of the rules and regulations may result in an application in practice that may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
If we experience significant disruptions in our information technology systems, our business may be adversely affected.
We depend on our information technology systems for the efficient functioning of our business, including accounting, data storage, compliance, purchasing and inventory management. Our current systems provide virtual redundancy but are operated from one physical location in Menlo Park. However, we are in the process of upgrading the level of redundancy for our IT systems. We expect these upgrades to take one to two years to complete. While we will attempt to mitigate interruptions, we may experience difficulties in implementing some upgrades which could impact our business operations, or experience difficulties in operating our business during the upgrade, either of which could disrupt our operations, including our ability to timely ship and track product orders, project inventory requirements, manage our supply chain and otherwise adequately service our customers. In the event we experience significant disruptions as a result of the current implementation of our information technology systems, we may not be able to repair our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our results of operations and cash flows.
We are increasingly dependent on sophisticated information technology for our infrastructure. Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance existing systems. Failure to maintain or protect our information systems and data integrity effectively could have a materially adverse effect on our business. For example, third parties may attempt to hack into our information systems and may obtain our proprietary information.
Fluctuations in insurance costs and availability could adversely affect our profitability or our risk management profile.
We hold a number of insurance policies, including product liability insurance, directors and officers liability insurance, general liability insurance, property insurance and workers compensation insurance. If the costs of maintaining adequate insurance coverage increase significantly in the future, our operating results could
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be materially adversely affected. Likewise, if any of our current insurance coverage should become unavailable to us or become economically impractical, we would be required to operate our business without indemnity from commercial insurance providers. If we operate our business without insurance, we could be responsible for paying claims or judgments against us that would have otherwise been covered by insurance, which could adversely affect our results of operations or financial condition.
Risks Relating to Regulatory Matters
The existence of adequate coverage and reimbursement is important for sales of our products. Inadequate coverage and reimbursement policies for procedures using our steroid-eluting implants could affect the adoption of our products and our future revenue.
Successful sales of our steroid-eluting implants depend on the availability of adequate coverage and reimbursement from third-party payors for either the products specifically, the procedures associated with the use of the products, or both. Providers that purchase our products generally rely on third-party payors to reimburse all or part of the costs and fees associated with the procedures performed with these medical devices or the devices themselves. Adequate coverage and reimbursement from third-party payors, including governmental payors, such as Medicare and Medicaid, therefore, is important for obtaining product acceptance and widespread adoption in the marketplace.
In the United States, coverage and reimbursement for medical devices vary among payors. In addition, payors continually review new technologies for possible coverage and can, without notice, deny coverage for these new products and procedures. We estimate that, as of March 31, 2014, private payors covering approximately 37% of U.S. covered lives currently have non-coverage policies with respect to PROPEL and PROPEL mini and they consider these products investigational or experimental. Some governmental and private third-party payors do not currently cover or reimburse our products because they have determined insufficient evidence of favorable clinical outcomes is available. Although they consider the steroid-eluting implants investigational or experimental at this time, these payors may in the future determine sufficient evidence has been developed to cover and reimburse our products and related procedures. We are actively working to reverse these non-coverage decisions but cannot provide assurance that we will be successful in these efforts. If we are not successful in reversing existing non-coverage policies, or if other third-party payors issue similar policies, this could have a material adverse effect on our business and operations. Further, third-party payors who currently cover and reimburse customers for procedures using our products may in the future choose to decrease current levels of reimbursement or eliminate reimbursement altogether, either of which will cause our business to suffer.
To contain costs of new technologies, governmental healthcare programs and third-party payors are increasingly scrutinizing new and even existing treatments by requiring extensive evidence of favorable clinical outcomes and cost effectiveness before extending or continuing coverage, respectively. Such evidence generally must be derived from well-designed independent studies and published in peer-reviewed journals. Payors also may be influenced by positive position statements on the value of this technology issued by medical specialty societies. For example, payors may be persuaded to extend coverage by positive clinical data demonstrating the long-term safety and efficacy of FESS performed with our steroid-eluting implants against FESS alone. A long-term clinical study randomizing FESS using our products against FESS alone would require an extremely large patient population to demonstrate these differences, and would be expensive and time-consuming. We have not conducted and are not currently planning to conduct such a study. Further, even positive study results do not guarantee adequate third-party payor coverage and reimbursement. Although the American Rhinologic Society has issued a positive position statement regarding the use of our steroid-eluting implants, if the society changes its position in an unfavorable manner, third-party payors may reverse existing favorable coverage and reimbursement policies or otherwise decline to adopt favorable policies for our products, either of which will cause our business to suffer.
Generally, third-party payors currently reimburse hospitals and ambulatory surgery centers and physicians for the FESS procedures during which our technology is implanted using existing Category I Current Procedure Terminology, or CPT, codes relating to the FESS procedures performed. These CPT codes do not currently distinguish between procedures performed with or without our steroid-eluting implants. The amount of reimbursement received by our customers from third-party payors is dependent generally on fee schedules
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established by these payors for the existing FESS CPT codes. For governmental payors, such as Medicare and Medicaid, the fee schedule amount is determined by statutory and regulatory formulas. For commercial payors, the reimbursement amount generally is dependent upon the specific contract terms between the provider and payor. We cannot provide assurance that government or private third-party payors will continue to reimburse for FESS with our products using the existing codes, nor can we provide assurance that the payment rates will be adequate. If providers and physicians are unable to obtain reimbursement for FESS with the use of our products at cost-effective levels, this could have a material adverse effect on our business and operations. Hospitals and ambulatory surgery centers are unlikely to purchase our products if they do not receive payment sufficient to cover the cost of our products and related procedures. In addition, in the event that the current coding and/or payment methodology for these procedures changes, this could have a material adverse effect on our business and business operations.
To secure separate payment for our products, whether for our currently marketed products or those under development, a unique billing code is required for either the implant, the procedure associated with use of our products, or both. Although a unique billing code currently exists for our marketed products it is not associated with payment by most payors and is not reportable to many payors, including Medicare. New billing codes, including CPT codes, may be developed which are both reportable and payable. In addition, new billing codes may be developed for the specific procedure performed to implant our products. As of now, it is not possible to assess the full impact of product or procedure-specific codes on our business or results of operations or the likelihood of securing such specific codes. If new product or procedure-specific codes are adopted, and the levels of reimbursement declines significantly below current levels, our business and results of operations would be harmed and our stock price would likely decline.
Healthcare cost containment pressures and legislative or administrative reforms resulting in restrictive reimbursement practices of third-party payors could decrease the demand for our products, the prices that customers are willing to pay and the number of procedures performed using our steroid-eluting implants, which could have an adverse effect on our business.
All third-party payors, whether governmental or commercial, whether inside the United States or outside, are developing increasingly sophisticated methods of controlling healthcare costs. These cost-control methods include prospective payment systems, bundled payment models, capitated arrangements, group purchasing, benefit redesign, pre-authorization processes, and requirements for second opinions prior to major surgery. These cost-control methods also potentially limit the amount that healthcare providers may be willing to pay for medical devices. Therefore, coverage or reimbursement for medical devices may decrease in the future.
Further, from time to time, typically on an annual basis, payment amounts are updated and revised by third-party payors. Because the cost of our products generally is recovered by the healthcare provider as part of the payment for performing a procedure and not separately reimbursed, these updates could directly impact the demand for our products. An example of payment updates is the Medicare program updates to physician payments, which is done on an annual basis using a prescribed statutory formula. In the past, when the application of the formula resulted in lower payment, Congress has passed interim legislation to prevent the reductions. Most recently, the Protecting Access to Medicare Act of 2014, signed into law in April 2014, provided for a 0.5% update from 2013 payment rates under the Medicare Physician Fee Schedule through 2014 and a 0% update from January 1 until April 1, 2015. If Congress fails to intervene to prevent the negative update factor in future years, the resulting decrease in payment may adversely affect our revenue and results of operations. In addition, the Medicare physician fee schedule has been adapted by some private payors into their plan-specific physician payment schedule. We cannot predict how pending and future healthcare legislation will impact our business, and any changes in coverage and reimbursement that further restricts coverage of our products or lowers reimbursement for procedures using our products could materially affect our business.
Reimbursement in international markets may require us to undertake country-specific reimbursement activities, including additional clinical studies, which could be time-consuming and expensive and may not yield acceptable reimbursement rates.
In international markets, market acceptance of our products will likely depend in large part on the availability of reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare
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payment systems in international markets vary significantly by country, and by region in some countries, and include both government-sponsored healthcare and private insurance. We may not obtain international reimbursement approvals in a timely manner, if at all. In addition, even if we do obtain international reimbursement approvals, the level of reimbursement may not be enough to commercially justify expansion of our business into the approving jurisdiction. To the extent we or our customers are unable to obtain reimbursement for our steroid-eluting implants in major international markets in which we seek to market and sell our products, our international revenue growth would be harmed, and our business and results of operations would be adversely affected.
Our products are subject to extensive regulation by the FDA, including the requirement to obtain premarket approval and the requirement to report adverse events. If we fail to obtain necessary FDA device or drug approvals for our products, or are subject to regulatory enforcement action as a result of our failure to properly report adverse events or otherwise comply with regulatory requirements, our commercial operations would be harmed.
Our steroid-eluting implants are subject to extensive regulation by the FDA and various other federal, state and foreign governmental authorities. The PMA and New Drug Application, or NDA, approval processes can be expensive and lengthy. Despite the time, effort and cost required to obtain approval, there can be no assurance that any product that we intend to commercialize in the future will be approved by the FDA in a timely fashion, if at all. For example, we do not have any prior experience in obtaining approval of an NDA, and this lack of experience may delay or adversely affect our ability to obtain approval for our steroid-eluting implant for refractory disease treated in the physician office setting, which will require NDA approval prior to commercialization in the United States.
Our marketed products are subject to Medical Device Reporting, or MDR, obligations, which require that we report to the FDA any incident in which our products may have caused or contributed to a death or serious injury, or in which our products malfunctioned and, if the malfunction were to recur, it could likely cause or contribute to a death or serious injury. We take a conservative approach in reporting MDRs and have had eight events occur postoperatively with PROPEL and PROPEL mini that we have reported to FDA as MDRs, six of which were for infections and two of which were for adhesions.
The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA or state agencies, which may include any of the following sanctions:
| adverse publicity, warning letters, fines, injunctions, consent decrees and civil penalties; |
| repair, replacement, recall or seizure of our products; |
| operating restrictions or partial suspension or total shutdown of production; |
| delaying or refusing our requests for approval of new products, new intended uses or modifications to our existing products; |
| refusal to grant export approval for our products; |
| withdrawing PMAs that have already been granted; and |
| criminal prosecution. |
If any of these enforcement actions were to be taken by the government, our business could be harmed.
If we materially modify our FDA-approved products, we may need to seek and obtain new approvals, which, if not granted, would prevent us from selling our modified products.
A component of our strategy is to continue to modify and upgrade our steroid-eluting implants. Medical devices can be marketed only for the indications for which they are approved. We have received a number of PMA supplement approvals since the original approvals of PROPEL and PROPEL mini. We may not be able to obtain additional regulatory approvals for new products or for modifications to, or additional indications for, our existing product in a timely fashion, or at all. Delays in obtaining future approvals would adversely affect our
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ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenue and potential future profitability.
We may fail to obtain foreign regulatory approvals to market our products in other countries.
We do not have any sales outside the United States. Sales of our steroid-eluting implants outside the United States are subject to foreign regulatory requirements that vary widely from country to country. In addition, the FDA regulates exports of medical devices from the United States. Complying with international regulatory requirements can be an expensive and time-consuming process and approval is not certain. The time required to obtain approvals, if required by other countries, may be longer than that required for FDA approvals, and requirements for such approvals may significantly differ from FDA requirements. In certain countries we may rely upon a third-party or third party distributors to obtain all required regulatory approvals, and these distributors may be unable to obtain or maintain such approvals. Our distributors in these countries may also incur significant costs in attempting to obtain and in maintaining foreign regulatory approvals or qualifications, which could increase the difficulty of attracting and retaining qualified distributors. If these distributors experience delays in receiving necessary qualifications, clearances or approvals to market our products outside the United States, or if they fail to receive those qualifications, clearances or approvals, we may be unable to market our products or enhancements in certain international markets effectively, or at all.
If we expand our operations outside the United States, we will need to expand our international marketing. International jurisdictions require separate regulatory approvals and compliance with numerous and varying regulatory requirements. The approval procedures vary among countries and may involve requirements for additional testing, and the time required to obtain approval may differ from country to country and from that required to obtain clearance or approval in the United States.
Approval in the United States does not ensure approval or certification by regulatory authorities in other countries or jurisdictions, and approval or certification by one foreign regulatory authority does not ensure approval or certification by regulatory authorities in other foreign countries or by the FDA. The foreign regulatory approval or certification process may include all of the risks associated with obtaining FDA approval. In addition, some countries only approve or certify a product for a certain period of time, and we are required to re-approve or re-certify our products in a timely manner prior to the expiration of our prior approval or certification. We may not obtain foreign regulatory approvals on a timely basis, if at all. We may not be able to file for regulatory approvals or certifications and may not receive necessary approvals to commercialize our products in any market. If we fail to receive necessary approvals or certifications to commercialize our products in foreign jurisdictions on a timely basis, or at all, or if we fail to have our products re-approved or re-certified, our business, results of operations and financial condition could be adversely affected.
These and other factors may have a material adverse effect on our international operations or on our business, results of operations and financial condition generally.
If we or our suppliers fail to comply with ongoing FDA or foreign regulatory authority requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.
Any product for which we obtain approval, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for such product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA and other domestic and foreign regulatory bodies. In particular, we and our third-party suppliers are required to comply with the FDAs current good manufacturing practice. These FDA regulations cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. Compliance with applicable regulatory requirements is subject to continual review and is monitored rigorously through periodic inspections by the FDA. If we, or our manufacturers, fail to adhere to current good manufacturing practice requirements in the United States, this could delay production of our products and lead to fines, difficulties in obtaining regulatory approvals, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences, which could, in turn, have a material adverse effect on our financial condition or results of operations.
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In addition, the FDA audits compliance with the current good manufacturing practice through periodic announced and unannounced inspections of manufacturing and other facilities. The failure by us or one of our suppliers to comply with applicable statutes and regulations administered by the FDA, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in any of the following enforcement actions:
| untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; |
| unanticipated expenditures to address or defend such actions; |
| customer notifications or repair, replacement, refunds, recall, detention or seizure of our products; |
| operating restrictions, partial suspension or total shutdown of production; |
| refusing or delaying our requests for regulatory approvals of new products or modified products; |
| withdrawing PMA approvals that have already been granted; |
| refusal to grant export approval for our products; or |
| criminal prosecution. |
Any of these sanctions could have a material adverse effect on our reputation, business, results of operations and financial condition. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements, which could result in our failure to produce our products on a timely basis and in the required quantities, if at all.
If we expand our operations outside the United States, our products and operations will be required to comply with standards set by foreign regulatory bodies, and those standards, types of evaluation and scope of review differ among foreign regulatory bodies. We intend to comply with the standards enforced by such foreign regulatory bodies as needed to commercialize our products. If we fail to comply with any of these standards adequately, a foreign regulatory body may take adverse actions similar to those within the power of the FDA. For example, if we seek to obtain CE marks permitting us to commercially distribute our products in Europe, we will be subject to a conformity assessment procedure under which a so-called Notified Body, an organization accredited by a member state of the European Economic Area, or EEA, will audit and examine our quality system for the manufacture, design, and release of our products and confirm adherence with applicable regulatory requirements. If we fail to obtain or maintain a CE mark in accordance with these requirements, we would be precluded from selling our products in the EEA. Any such action or circumstance may harm our reputation and business, and could have an adverse effect on our business, results of operations and financial condition.
Our products may in the future be subject to product recalls. A recall of our products, either voluntarily or at the direction of the FDA or another governmental authority, or the discovery of serious safety issues with our products, could have a significant adverse impact on us.
The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is reasonable probability that the device would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in their respective jurisdictions in the event of material deficiencies or defects in the design or manufacture of our products. We may, under our own initiative, recall a product if any material deficiency in our steroid-eluting implants is found. The FDA requires that recalls be reported to the FDA within 10 working days after the recall is initiated. A government-mandated or voluntary recall by us or one of our international distributors could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our reputation, results of operations and financial condition, which could impair our ability to produce our products in a cost- effective and timely manner in order to meet our customers demands. We may also be subject to liability claims, be required to bear other costs, or take other actions that may have a negative impact on our future sales and our ability to generate profits. Companies are required to maintain certain records of recalls, even if they are not
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reportable to the FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted.
If the third parties on which we rely to conduct our clinical trials and to assist us with pre-clinical development do not perform as contractually required or expected, we may not be able to obtain regulatory approval for or commercialize our products.
We often must rely on third parties, such as medical institutions, clinical investigators, contract research organizations and contract laboratories to conduct our clinical trials and provide data or prepare deliverables for our PMA or NDA submissions. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize, our products on a timely basis, if at all, and our business, operating results and prospects may be adversely affected. Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control.
We may be subject to enforcement action if we engage in improper marketing or promotion of our products.
Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition of the promotion of unapproved, or off-label, use. Physicians may use our products off-label, as the FDA does not restrict or regulate a physicians choice of treatment within the practice of medicine. However, if the FDA determines that our promotional materials or training constitutes promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional or training materials to constitute promotion of an off-label use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. In that event, our reputation could be damaged and adoption of the products could be impaired. Although our policy is to refrain from statements that could be considered off-label promotion of our products, the FDA or another regulatory agency could disagree and conclude that we have engaged in off-label promotion. In addition, the off-label use of our products may increase the risk of product liability claims. Product liability claims are expensive to defend and could divert our managements attention, result in substantial damage awards against us, and harm our reputation.
If we fail to comply with U.S. federal and state healthcare regulatory laws, we could be subject to penalties, including, but not limited to, administrative, civil and criminal penalties, damages, fines, disgorgement, exclusion from participation in governmental healthcare programs, and the curtailment of our operations, any of which could adversely impact our reputation and business operations.
There are numerous U.S. federal and state healthcare regulatory laws, including, but not limited to, anti-kickback laws, false claims laws, privacy laws, and transparency laws. Our relationships with healthcare providers and entities, including but not limited to, physicians, hospitals, ambulatory surgery centers, group purchasing organizations and our international distributors are subject to scrutiny under these laws. Violations of these laws can subject us to penalties, including, but not limited to, administrative, civil and criminal penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in federal and state healthcare programs, including the Medicare, Medicaid and Veterans Administration health programs, and the curtailment of our operations. Healthcare fraud and abuse regulations are complex, and even minor irregularities can
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potentially give rise to claims that a statute or prohibition has been violated. The laws that may affect our ability to operate include, but are not limited to:
| the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering, or paying remuneration, directly or indirectly, in cash or in kind, in exchange for or to induce either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid; |
| the federal civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent; knowingly making using, or causing to be made our used, a false record or statement to get a false or fraudulent claim paid or approved by the government; or knowingly making, using, or causing to be made or used, a false record or statement to avoid, decrease or conceal an obligation to pay money to the federal government; |
| the federal criminal False Claims Act, which imposes criminal fines or imprisonment against individuals or entities who make or present a claim to the government knowing such claim to be false, fictitious or fraudulent; |
| the civil monetary penalties statute, which imposes penalties against any person or entity who, among other things, is determined to have presented or caused to be presented, a claim to a federal healthcare program that the person knows, or should know, is for an item or service that was not provided as claimed or is false or fraudulent; |
| the federal Health Insurance Portability and Accountability Act of 1996, as amended, which created federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; |
| HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, which impose requirements on certain covered healthcare providers, health plans and healthcare clearinghouses as well as their business associates that perform services for them that involve individually identifiable health information, relating to the privacy, security and transmission of individually identifiable health information without appropriate authorization, including mandatory contractual terms as well as directly applicable privacy and security standards and requirements; |
| the Federal Trade Commission Act and similar laws regulating advertisement and consumer protections; |
| the federal Foreign Corrupt Practices Act of 1997, which prohibits corrupt payments, gifts or transfers of value to foreign officials; and |
| foreign or U.S. state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers. |
Further, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or, collectively, the Affordable Care Act, among other things, amends the intent requirements of the federal Anti-Kickback Statute and certain criminal statutes governing healthcare fraud. A person or entity can now be found guilty of violating the statute without actual knowledge of the statute or specific intent to violate it. In addition, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act. Moreover, while we do not submit claims and our customers make the ultimate decision on how to submit claims, from time-to-time, we may provide reimbursement guidance to our customers. If a government authority were to conclude that we provided improper advice to our customers or encouraged the submission of false claims for reimbursement, we could face action against us by government authorities. Any violations of these laws, or any action against us for violation of these laws, even if we successfully defend against it, could result in a material adverse effect on our reputation, business, results of operations and financial condition.
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We have entered into consulting agreements with physicians, including some who influence the ordering of and use our products in procedures they perform. While we believe these transactions were structured to comply with all applicable laws, including state and federal anti-kickback laws, to the extent applicable, regulatory agencies may view these transactions as prohibited arrangements that must be restructured, or discontinued, or for which we could be subject to other significant penalties. We could be adversely affected if regulatory agencies interpret our financial relationships with ENT physicians who influence the ordering of and use our products to be in violation of applicable laws. This could subject us to the penalties described above.
Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available under such laws, it is possible that some of our business activities, including our relationships with healthcare providers and entities, including, but not limited to, physicians, hospitals, ambulatory surgery centers, group purchasing organizations and our independent distributors and certain sales and marketing practices, including the provision of certain items and services to our customers, could be subject to challenge under one or more of such laws.
To enforce compliance with the healthcare regulatory laws, federal and state enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Responding to investigations can be time-and resource-consuming and can divert managements attention from the business. Additionally, as a result of these investigations, healthcare providers and entities may have to agree to additional onerous compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business.
In certain cases, federal and state authorities pursue actions for false claims on the basis that manufacturers and distributors are promoting off-label uses of their products. Pursuant to FDA regulations, we can only market our products for cleared or approved uses. Although physicians are permitted to use medical devices for indications other than those cleared or approved by the FDA in their professional medical judgment, we are prohibited from promoting products for off-label uses. We market our products and provide promotional materials and training programs to physicians regarding the use of our products. If it is determined that our business activities, including our marketing, promotional materials or training programs constitute promotion of unapproved uses, we could be subject to significant fines in addition to regulatory enforcement actions, including the issuance of a warning letter, injunction, seizure and criminal penalty.
In addition, there has been a recent trend of increased federal and state regulation of payments and transfers of value provided to healthcare professionals or entities. On February 8, 2013, the Centers for Medicare & Medicaid Services, or CMS, released its final rule implementing section 6002 of the Affordable Care Act known as the Physician Payment Sunshine Act that imposes new annual reporting requirements on device manufacturers for payments and other transfers of value provided by them, directly or indirectly, to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their family members. A manufacturers failure to submit timely, accurately and completely the required information for all payments, transfers of value or ownership or investment interests may result in civil monetary penalties of up to an aggregate of $150,000 per year, and up to an aggregate of $1.0 million per year for knowing failures. The period between August 1, 2013, and December 31, 2013 was the first reporting period, for which manufacturers were required to report aggregate payment data to CMS by March 31, 2014. Manufacturers also will be required to report to CMS detailed payment and transfers of value data and submit legal attestation to the accuracy of such data during Phase 2 of the program, which is expected to begin in May 2014 and extends for at least 30 days. Thereafter, manufacturers must submit reports by the 90th day of each subsequent calendar year. Due to the difficulty in complying with the Physician Payment Sunshine Act, we cannot assure you that we will successfully report all payments and transfers of value provided by us, and any failure to comply could result in significant fines and penalties. Some states, such as California and Connecticut, also mandate implementation of commercial compliance programs, and other states, such as Massachusetts and Vermont, impose restrictions on device manufacturer marketing practices and tracking and reporting of gifts, compensation and other remuneration to healthcare professionals and entities. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance and reporting requirements in multiple jurisdictions increase the possibility that a healthcare company may fail to comply fully with one or more of these requirements.
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Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our managements attention from the operation of our business.
Most of these laws apply to not only the actions taken by us, but also actions taken by our distributors. We have limited knowledge and control over the business practices of our distributors, and we may face regulatory action against us as a result of their actions which could have a material adverse effect on our reputation, business, results of operations and financial condition.
In addition, the scope and enforcement of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations. Federal or state regulatory authorities might challenge our current or future activities under these laws. Any such challenge could have a material adverse effect on our reputation, business, results of operations and financial condition. Any state or federal regulatory review of us, regardless of the outcome, would be costly and time-consuming. Additionally, we cannot predict the impact of any changes in these laws, whether or not retroactive.
Legislative or regulatory healthcare reforms may make it more difficult and costly for us to obtain regulatory approval of our products and to produce, market and distribute our products after approval is obtained.
FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of our products. Delays in receipt of, or failure to receive, regulatory approvals for our new products would have a material adverse effect on our business, results of operations and financial condition.
Federal and state governments in the United States have recently enacted legislation to overhaul the nations healthcare system. While the goal of healthcare reform is to expand coverage to more individuals, it also involves increased government price controls, additional regulatory mandates and other measures designed to constrain medical costs. The Affordable Care Act significantly impacts the medical device industry. Among other things, the Affordable Care Act:
| imposes an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States beginning in 2013; |
| establishes a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical effectiveness research in an effort to coordinate and develop such research; |
| implements payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models; and |
| creates an independent payment advisory board that will submit recommendations to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate. |
In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. On August 2, 2011, President Obama signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislations automatic reduction to several government programs. This includes reductions to Medicare payments to providers of 2% per fiscal year, which went into effect in April 2013 and will stay in effect through 2024, unless additional congressional action is taken. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressure.
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Our financial performance may be adversely affected by medical device tax provisions in the healthcare reform laws.
The Affordable Care Act imposes, among other things, an excise tax of 2.3% on any entity that manufactures or imports specified medical devices offered for sale in the United States beginning in 2013. Under these provisions, the Congressional Research Service predicts that the total cost to the medical device industry may be up to $29 billion over the next decade. The Internal Revenue Service issued final regulations implementing the tax in December of 2012 which requires, among other things, bi-monthly payments and quarterly reporting. We anticipate that primarily all sales of our products in the United States will be subject to this 2.3% excise tax. During the year ended December 31, 2013, we recognized $0.3 million in tax expense associated with the medical device tax in the United States, which is included in selling, general and administrative expenses.
Our operations involve the use of hazardous and toxic materials, and we must comply with environmental laws and regulations, which can be expensive, and may affect our business and operating results.
We are subject to a variety of federal, state and local regulations relating to the use, handling, storage, disposal and human exposure to hazardous materials. Liability under environmental laws can be joint and several and without regard to comparative fault, and environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations, which could harm our business. Although we believe that our activities conform in all material respects with environmental laws, there can be no assurance that violations of environmental and health and safety laws will not occur in the future as a result of human error, accident, equipment failure or other causes. The failure to comply with past, present or future laws could result in the imposition of fines, third-party property damage and personal injury claims, investigation and remediation costs, the suspension of production, or a cessation of operations. We also expect that our operations will be affected by other new environmental and health and safety laws on an ongoing basis. Although we cannot predict the ultimate impact of any such new laws, they will likely result in additional costs, and may require us to change how we manufacture our products, which could have a material adverse effect on our business.
Failure to comply with the United States Foreign Corrupt Practices Act, or the FCPA, and similar laws associated with any activities outside the United States could subject us to penalties and other adverse consequences.
We are subject to the FCPA and other anti-bribery legislation around the world. The FCPA generally prohibits covered entities and their intermediaries from engaging in bribery or making other prohibited payments, offers or promises to foreign officials for the purpose of obtaining or retaining business or other advantages. In addition, the FCPA imposes recordkeeping and internal controls requirements on publicly traded corporations and their foreign affiliates, which are intended to, among other things, prevent the diversion of corporate funds to the payment of bribes and other improper payments, and to prevent the establishment of off books slush funds from which such improper payments can be made. Although we do not currently have any operations outside the United States, in the future we may face significant risks if we fail to comply with the FCPA and other laws that prohibit improper payments, offers or promises of payment to foreign governments and their officials and political parties by us and other business entities for the purpose of obtaining or retaining business or other advantages. In many foreign countries, particularly in countries with developing economies, some of which represent significant markets for us, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other laws and regulations. Although we have implemented a company policy requiring our employees and consultants to comply with the FCPA and similar laws, such policy may not be effective at preventing all potential FCPA or other violations. There can be no assurance that none of our employees and agents, or those companies to which we outsource certain of our business operations will not take actions that violate our policies or applicable laws, for which we may be ultimately held responsible. As a result of our focus on managing our growth, our development of infrastructure designed to identify FCPA matters and monitor compliance is at an early stage. Any violation of the FCPA and related policies could result in severe criminal or civil sanctions, which could have a material and adverse effect on our reputation, business, operating results and financial condition.
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Risks Relating to Intellectual Property Matters
Intellectual property rights may not provide adequate protection, which may permit third parties to compete against us more effectively.
Our success depends significantly on our ability to protect our proprietary rights to the technologies and inventions used in, or embodied by, our products. To protect our proprietary technology, we rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, as well as nondisclosure, confidentiality and other contractual restrictions in our consulting and employment agreements. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage.
Patents
The process of applying for patent protection itself is time consuming and expensive and we cannot assure you that all of our patent applications will issue as patents or that, if issued, they will issue in a form that will be advantageous to us. The rights granted to us under our patents, including prospective rights sought in our pending patent applications, may not be meaningful or provide us with any commercial advantage and they could be opposed, contested or circumvented by our competitors or be declared invalid or unenforceable in judicial or administrative proceedings.
We own numerous issued patents and pending patent applications that relate to the sinus delivery of sustained release therapeutics, sinus delivery of implants, implant designs as well as individual components of our steroid-eluting implants. The API contained in our steroid-eluting implants is generic and is not the subject of independent patent protection. If any of our patents are challenged, invalidated or legally circumvented by third parties, and if we do not own other enforceable patents protecting our products, competitors could market products and use processes that are substantially similar to, or superior to, ours, and our business will suffer. In addition, the patents we own may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage, and competitors may be able to design around our patents or develop products that provide outcomes comparable to ours without infringing on our intellectual property rights.
Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art, may affect patent litigation, and switch the U.S. patent system from a first-to-invent system to a first-to-file system. Under a first-to-file system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor had made the invention earlier. The U.S. Patent and Trademark Office, or USPTO, recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first-to-file provisions, only became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition. In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement, and defense of our patents and applications.
We may be subject to a third-party preissuance submission of prior art to the USPTO, or become involved in opposition, derivation, reexamination, inter partes review, post-grant review, or other patent office proceedings or litigation, in the United States or elsewhere, challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights.
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Moreover, the USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In addition, periodic maintenance fees on issued patents often must be paid to the USPTO and foreign patent agencies over the lifetime of the patent. While an unintentional lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we fail to maintain the patents and patent applications covering our products or procedures, we may not be able to stop a competitor from marketing products that are the same as or similar to our products, which would have a material adverse effect on our business.
Furthermore, we do not have patent rights in certain foreign countries in which a market may exist in the future, and the laws of many foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. Thus, we may not be able to stop a competitor from marketing and selling in foreign countries products that are the same as or similar to our products.
Trademarks
We rely on our trademarks as one means to distinguish our products from the products of our competitors, and have registered or applied to register many of these trademarks. Our trademark applications may not be approved, however. Third parties may oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources to advertising and marketing new brands. Our competitors may infringe our trademarks and we may not have adequate resources to enforce our trademarks.
Trade Secrets and Know-How
We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors, former employees or current employees, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized uses and disclosures of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be effective.
Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Competitors could purchase our steroid-eluting implants and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property is not adequately protected so as to protect our market against competitors products and methods, our competitive position could be adversely affected, as could our business.
We may in the future be a party to patent and other intellectual property litigation and administrative proceedings that could be costly and could interfere with our ability to sell our steroid-eluting implants.
The medical device industry has been characterized by frequent and extensive intellectual property litigation. Additionally, the ENT market is extremely competitive. Our competitors or other patent holders may assert that our steroid-eluting implants and the methods employed in our steroid-eluting implants are covered by their patents. If our steroid-eluting implants or methods are found to infringe, we could be prevented from manufacturing or marketing our steroid-eluting implants. In the event that we become involved in such a dispute, we may incur significant costs and expenses and may need to devote resources to resolving any claims, which would reduce the cash we have available for operations and may be distracting to management. We do not know whether our competitors or potential competitors have applied for, will apply for, or will obtain patents that will prevent, limit or interfere with our ability to make, use, sell, import or export our steroid-eluting implants.
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Competing products may also be sold in other countries in which our patent coverage might not exist or be as strong. If we lose a foreign patent lawsuit, alleging our infringement of a competitors patents, we could be prevented from marketing our steroid-eluting implants in one or more foreign countries. We may also initiate litigation against third parties to protect our own intellectual property. Our intellectual property has not been tested in litigation. If we initiate litigation to protect our rights, we run the risk of having our patents invalidated, which would undermine our competitive position.
Litigation related to infringement and other intellectual property claims, with or without merit, is unpredictable, can be expensive and time-consuming and can divert managements attention from our core business. If we lose this kind of litigation, a court could require us to pay substantial damages, treble damages and attorneys fees, and prohibit us from using technologies essential to our steroid-eluting implants, any of which would have a material adverse effect on our business, results of operations and financial condition. If relevant patents are upheld as valid and enforceable and we are found to infringe, we could be prevented from selling our steroid-eluting implants unless we can obtain licenses to use technology or ideas covered by such patents. We do not know whether any necessary licenses would be available to us on satisfactory terms, if at all. If we cannot obtain these licenses, we could be forced to design around those patents at additional cost or abandon our products altogether. As a result, our ability to grow our business and compete in the market may be harmed.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of our competitors or are in breach of non-competition or non-solicitation agreements with our competitors.
Many of our employees were previously employed at other medical device companies, including our competitors or potential competitors, in some cases until recently. We could in the future be subject to claims that we or our employees have inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information of these former employers or competitors. In addition, we have been and may in the future be subject to claims that we caused an employee to breach the terms of his or her non-competition or non-solicitation agreement. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction to management. If our defense to those claims fails, in addition to paying monetary damages, a court could prohibit us from using technologies or features that are essential to our products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. An inability to incorporate technologies or features that are important or essential to our products would have a material adverse effect on our business, and may prevent us from selling our products. In addition, we may lose valuable intellectual property rights or personnel. Any litigation or the threat thereof may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our products, which could have an adverse effect on our business, results of operations and financial condition.
Risks Relating to Our Capital Requirements and Finances
We may need substantial additional funding beyond the proceeds of this offering and may be unable to raise capital when needed, which would force us to delay, reduce, eliminate or abandon our commercialization efforts or product development programs.
Our ability to continue as a going concern may require us to obtain additional financing to fund our operations. We may need to raise substantial additional capital to:
| expand the commercialization of our products; |
| fund our operations and clinical studies; |
| continue our research and development activities; |
| defend, in litigation or otherwise, any claims that we infringe third-party patents or other intellectual property rights; |
| enforce our patent and other intellectual property rights; |
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| address legal or enforcement actions by the FDA or other governmental agencies and remediate underlying problems; |
| commercialize our new products in development, if any such products receive regulatory clearance or approval for commercial sale; and |
| acquire companies and in-license products or intellectual property. |
We believe that the net proceeds from this offering, together with our existing cash and cash equivalents, revenue, and available debt financing arrangements will be sufficient to meet our capital requirements and fund our operations until at least through 2016. However, we have based these estimates on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect. Any future funding requirements will depend on many factors, including:
| market acceptance of our products; |
| the scope, rate of progress and cost of our clinical studies; |
| the cost of our research and development activities; |
| the cost of filing and prosecuting patent applications and defending and enforcing our patent or other intellectual property rights; |
| the cost of defending, in litigation or otherwise, any claims that we infringe third-party patents or other intellectual property rights; |
| the cost and timing of additional regulatory clearances or approvals; |
| the cost and timing of establishing additional sales, marketing and distribution capabilities; |
| costs associated with any product recall that may occur; |
| the effect of competing technological and market developments; |
| the extent to which we acquire or invest in products, technologies and businesses, although we currently have no commitments or agreements relating to any of these types of transactions; and |
| the costs of operating as a public company. |
If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter may impose upon us covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that 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 some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets, or delay, reduce the scope of or eliminate some or all of our development programs.
We cannot be certain that additional funding will be available on acceptable terms, if at all. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. Any of these factors could harm our operating results.
Our outstanding debt financing arrangements contain restrictive covenants that may limit our operating flexibility.
The agreements relating to our outstanding debt contain certain covenants limiting our ability to transfer or dispose of assets, merge with or acquire other companies, make investments, pay dividends, incur additional indebtedness and liens and conduct transactions with affiliates. We therefore may not be able to engage in any of the foregoing transactions until our current debt obligations are paid in full or we obtain the consent of the lenders. We cannot assure you that we will be able to generate sufficient cash flows or revenue to meet the
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financial covenants or pay the principal and interest on our debt. Furthermore, we cannot assure you that future working capital, borrowings or equity financing will be available to repay or refinance any such debt.
Our ability to use our net operating losses and research and development credit carryforwards to offset future taxable income may be subject to certain limitations.
In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an ownership change, generally defined as a greater than 50% change by value in its equity ownership over a three-year period, is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, and its research and development credit carryforwards to offset future taxable income. Our existing NOLs and research and development credit carryforwards may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change, our ability to utilize NOLs and research and development credit carryforwards could be further limited by Sections 382 and 383 of the Code. Future changes in our stock ownership, some of which might be beyond our control, could result in an ownership change under Section 382 of the Code. For these reasons, in the event we experience a change of control, we may not be able to utilize a material portion of the NOLs and research and development credit carryforwards, even if we attain profitability.
Risks Related to Our Common Stock and This Offering
There has been no prior public market for our common stock and an active trading market may not develop.
Prior to this offering, there has been no public market for our common stock. An active trading market may not develop following completion of this offering or, if developed, may not be sustained. The lack of an active market may impair the value of your shares and your ability to sell your shares at the time you wish to sell them. An inactive market may also impair our ability to both raise capital by selling shares and acquire other complementary products, technologies or businesses by using our shares as consideration.
We expect that the price of our common stock will fluctuate substantially and you may not be able to sell the shares you purchase in this offering at or above the offering price.
The initial public offering price for the shares of our common stock sold in this offering is determined by negotiation between the representatives of the underwriters and us. This price may not reflect the market price of our common stock following this offering. In addition, the market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including:
| volume and timing of sales of our steroid-eluting implants; |
| the introduction of new products or product enhancements by us or others in our industry; |
| disputes or other developments with respect to our or others intellectual property rights; |
| our ability to develop, obtain regulatory clearance or approval for, and market new and enhanced products on a timely basis; |
| product liability claims or other litigation; |
| quarterly variations in our results of operations or those of others in our industry; |
| sales of large blocks of our common stock, including sales by our executive officers and directors; |
| media exposure of our steroid-eluting implants or products of others in our industry; |
| changes in governmental regulations or in the status of our regulatory approvals or applications; |
| changes in earnings estimates or recommendations by securities analysts; and |
| general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors. |
In recent years, the stock markets generally have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market
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and industry factors may significantly affect the market price of our common stock, regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our common stock shortly following this offering. If the market price of shares of our common stock after this offering does not ever exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment.
In addition, in the past, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in our stock price, regardless of the merit or ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and operating results and divert managements attention and resources from our business.
These and other factors may make the price of our stock volatile and subject to unexpected fluctuation.
Securities analysts may not publish favorable research or reports about our business or may publish no information at all, which could cause our stock price or trading volume to decline.
If a trading market for our common stock develops, the trading market will be influenced to some extent by the research and reports that industry or financial analysts publish about us and our business. We do not control these analysts. As a newly public company, we may be slow to attract research coverage and the analysts who publish information about our common stock will have had relatively little experience with our company or industry, which could affect their ability to accurately forecast our results and could make it more likely that we fail to meet their estimates. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock price could decline. If one or more of these analysts cease coverage of our company or fail to publish reports covering us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.
We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies that are not emerging growth companies. In particular, while we are an emerging growth company (1) we will not be required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, (2) we will be exempt from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditors report on financial statements, (3) we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and (4) we will not be required to hold nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments not previously approved.
In addition, while we are an emerging growth company we will not be required to comply with any new financial accounting standard until such standard is generally applicable to private companies. As a result, our financial statements may not be comparable to companies that are not emerging growth companies or elect not to avail themselves of this provision.
We may remain an emerging growth company until as late as December 31, 2019, the fiscal year-end following the fifth anniversary of the completion of this initial public offering, though we may cease to be an emerging growth company earlier under certain circumstances, including (1) if the market value of our common stock that is held by nonaffiliates exceeds $700 million as of any June 30, in which case we would cease to be an emerging growth company as of the following December 31, or (2) if our gross revenue exceeds $1.0 billion in any fiscal year.
The exact implications of the JOBS Act are still subject to interpretations and guidance by the SEC and other regulatory agencies, and we cannot assure you that we will be able to take advantage of all of the benefits of the JOBS Act. In addition, investors may find our common stock less attractive if we rely on the exemptions and relief
37
granted by the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may decline or become more volatile.
If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.
Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the pro forma as adjusted net tangible book value per share. As a result, investors purchasing common stock in this offering will incur immediate dilution of $9.19 per share, based on an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and our pro forma as adjusted net tangible book value per share as of March 31, 2014. For more information on the dilution you may suffer as a result of investing in this offering, see the section entitled Dilution.
This dilution is due to the substantially lower price paid by our investors who purchased shares prior to this offering as compared to the price offered to the public in this offering and the exercise of stock options granted to our employees. The exercise of any of these options would result in additional dilution. As a result of the dilution to investors purchasing shares in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of our liquidation.
A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell their shares, could result in a decrease in the market price of our common stock. Immediately after this offering, we will have outstanding 22,501,808 shares of common stock based on the number of shares outstanding as of March 31, 2014. This includes the shares that we are selling in this offering, which may be resold in the public market immediately without restriction, unless purchased by our affiliates. Of the remaining shares, 17,501,808 shares are currently restricted as a result of securities laws or lock-up agreements but will be able to be sold after the offering as described in the section of this prospectus entitled Shares Eligible for Future Sale. Moreover, immediately after this offering, holders of an aggregate of up to 15,771,742 shares of our common stock, including shares of our common stock issuable upon the exercise or, in certain cases, net exercise of outstanding warrants, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders as described in the section of this prospectus entitled Description of Capital StockRegistration Rights. We also intend to register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in the Underwriting section of this prospectus.
Our directors, officers and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders.
After this offering, our officers, directors and principal stockholders each holding more than 5% of our common stock, collectively, will control approximately 65.9% of our outstanding common stock. As a result, these stockholders, if they act together, will be able to control the management and affairs of our company and most matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change of control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of our other stockholders.
We have broad discretion in the use of proceeds of this offering for working capital and general corporate purposes.
The net proceeds of this offering will be allocated to sales, marketing, research and development activities, clinical and regulatory initiatives, working capital and general corporate purposes. We may also use a portion of the net proceeds of this offering to acquire complementary products, technologies or businesses. Within those
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categories, we have not determined the specific allocation of the net proceeds of this offering. Our management will have broad discretion over the use and investment of the net proceeds of this offering within those categories. Accordingly, investors in this offering have only limited information concerning managements specific intentions and will need to rely upon the judgment of our management with respect to the use of proceeds.
If we experience material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately report our financial condition or results of operations which may adversely affect investor confidence in us and, as a result, the value of our common stock.
As a result of becoming a public company, we will be required, under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year ended December 31, 2015. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a companys annual and interim financial statements will not be detected or prevented on a timely basis.
We are further enhancing internal controls, processes and related documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. The effectiveness of our controls and procedures may be limited by a variety of factors, including:
| faulty human judgment and simple errors, omissions or mistakes; |
| fraudulent action of an individual or collusion of two or more people; |
| inappropriate management override of procedures; and |
| the possibility that any enhancements to controls and procedures may still not be adequate to assure timely and accurate financial control. |
When we cease to be an emerging growth company under the federal securities laws, our auditors will be required to express an opinion on the effectiveness of our internal controls. If we are unable to confirm that our internal control over financial reporting is effective, or if our auditors are unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
Upon the closing of this offering, we will become subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We designed our disclosure controls and procedures to provide reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
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Provisions in our corporate charter documents and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws that will become effective upon the closing of this offering may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. Among others, these provisions include that:
| our board of directors has the right to expand the size of our board of directors and to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors; |
| our stockholders may not act by written consent or call special stockholders meetings; as a result, a holder, or holders, controlling a majority of our capital stock would not be able to take certain actions other than at annual stockholders meetings or special stockholders meetings called by the board of directors, the chairman of the board, the chief executive officer or the president; |
| our certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; |
| the affirmative vote of holders of at least 66-2/3% of the voting power of all of the then outstanding shares of voting stock, voting as a single class, will be required (a) to amend certain provisions of our certificate of incorporation, including provisions relating to the size of the board, removal of directors, special meetings, actions by written consent and cumulative voting and (b) to amend or repeal our bylaws, although our bylaws may be amended by a simple majority vote of our board of directors; |
| stockholders must provide advance notice and additional disclosures in order to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquirors own slate of directors or otherwise attempting to obtain control of our company; and |
| our board of directors may issue, without stockholder approval, shares of undesignated preferred stock; the ability to issue undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us. |
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as aim, anticipate, assume, believe, contemplate, continue, could, due, estimate, expect, goal, intend, may, objective, plan, predict, potential, positioned, seek, should, target, will, would, and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These forward-looking statements include, but are not limited to, statements about:
| estimates of our future revenue, expenses, capital requirements and our needs for additional financing; |
| preliminary estimates of our revenue, cost, expense and net loss expectations for the three and six months ended June 30, 2014; |
| our ability to obtain additional financing in this or future offerings; |
| the implementation of our business model and strategic plans for our products, technologies and businesses; |
| our future clinical results; |
| competitive companies and technologies and our industry; |
| our ability to manage and grow our business by expanding our sales to existing customers or introducing our products to new customers; |
| our ability to establish and maintain intellectual property protection for our products or avoid claims of infringement; |
| extensive government regulation; |
| the timing or likelihood of regulatory filings and approvals; |
| our ability to hire and retain key personnel; |
| our financial performance; |
| the volatility of our share price; and |
| our expectations regarding use of proceeds from this offering. |
Forward-looking statements are based on managements current expectations, estimates, forecasts, and projections about our business and the industry in which we operate, and managements beliefs and assumptions and are not guarantees of future performance or development and involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this prospectus may turn out to be inaccurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Risk Factors and elsewhere in this prospectus. Potential investors are urged to consider these factors carefully in evaluating the forward-looking statements. These forward-looking statements speak only as of the date of this prospectus. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this prospectus.
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MARKET, INDUSTRY AND OTHER DATA
This prospectus contains estimates, projections and other information concerning our industry, our business, and the markets for our products and product candidates, including data regarding the estimated size of those markets, their projected growth rates, the perceptions and preferences of patients and physicians regarding certain therapies and other prescription, prescriber and patient data, as well as data regarding market research, estimates and forecasts prepared by our management. We obtained the industry, market and other data throughout this prospectus from our own internal estimates and research, as well as from industry publications and research, surveys and studies conducted by third parties.
Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. In some cases, we do not expressly refer to the sources from which this data is derived.
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We estimate that the net proceeds from this initial public offering of 5,000,000 shares of common stock will be approximately $52.8 million, or $61.2 million if the underwriters exercise their option to purchase additional shares in full, assuming an initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses.
A $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per share would increase (decrease) the net proceeds from this offering by approximately $4.7 million, assuming that the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering by approximately $11.2 million, assuming that the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
We expect to use approximately $7.0 million of the net proceeds from this offering to fund the Phase 3 clinical trial of our Steroid-Eluting Implant for Refactory Disease in Office and pre-clinical development our Steroid-Eluting Implant for Primary Disease Management in Office products in development and approximately $3.3 million for research and development expenses related to these products. We expect to use the remainder of the net proceeds from this offering for sales, marketing, working capital and general corporate purposes.
We may also use a portion of our net proceeds to acquire and invest in complementary products, technologies or businesses; however, we currently have no agreements or commitments to complete any such transaction. The amounts and timing of our expenditures will depend upon numerous factors, including:
| rate of adoption of our products; |
| the expenses we incur in selling and marketing PROPEL and PROPEL mini; |
| the scope of research and development efforts; |
| the timing and success of preclinical studies or clinical trials we may commence in the future; and |
| the timing of regulatory submissions. |
Accordingly, our management will have broad discretion over the use of the net proceeds from this offering. Pending the use of the proceeds from this offering, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities, certificates of deposit or government securities.
We have never declared or paid any cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our capital stock in the foreseeable future. In addition, our credit facility with Silicon Valley Bank restricts our ability to pay dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. Any future determination to pay dividends will be made at the discretion of our board of directors subject to applicable laws, and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions and capital requirements. Our future ability to pay cash dividends on our capital stock may also be limited by the terms of any future debt or preferred securities or future credit facility.
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The following table sets forth our equipment loan, convertible preferred stock warrant liability and capitalization as of March 31, 2014:
| on an actual basis; |
| on a pro forma basis to reflect: (a) the conversion of all outstanding shares of convertible preferred stock into an aggregate of 15,703,875 shares of common stock immediately prior to the closing of this offering; (b) the automatic conversion of warrants to purchase up to 67,867 shares of our convertible preferred stock into warrants to purchase up to 67,867 shares of common stock immediately prior to the closing of this offering; and (c) the effectiveness of our amended and restated certificate of incorporation; and |
| on a pro forma as adjusted basis to give further effect to the issuance and sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses. |
You should read this information together with our financial statements and related notes appearing elsewhere in this prospectus and the information set forth under the headings Selected Financial Data and Managements Discussion and Analysis of Financial Condition and Results of Operations.
As of March 31, 2014 | ||||||||||||
Actual | Pro Forma(1) |
Pro Forma As Adjusted(1) |
||||||||||
(in thousands, except for share and per share amounts) |
(unaudited) | |||||||||||
Equipment loans |
$ | 1,280 | $ | 1,280 | $ | 1,280 | ||||||
Convertible preferred stock warrant liability |
494 | | | |||||||||
Convertible preferred stock, $0.001 par value, 15,907,322 shares authorized, 15,703,875 shares issued and outstanding, actual; no shares issued and outstanding pro forma and pro forma as adjusted |
90,789 | | | |||||||||
Stockholders (deficit) equity: |
||||||||||||
Preferred stock, $0.001 par value, no shares authorized, issued and outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted |
| | | |||||||||
Common stock, $0.001 par value; |
||||||||||||
150,000,000 shares authorized, 1,797,933 shares issued and outstanding, actual; 150,000,000 shares authorized, 17,501,808 shares issued and outstanding, pro forma and 22,501,808 shares issued and outstanding, pro forma as adjusted |
2 | 18 | 23 | |||||||||
Additional paid-in capital |
2,065 | 93,332 | 146,127 | |||||||||
Notes receivable from related party |
(204 | ) | (204 | ) | (204 | ) | ||||||
Accumulated deficit |
(82,668 | ) | (82,668 | ) | (82,668 | ) | ||||||
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|
|
|
|
|
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Total stockholders (deficit) equity |
(80,805 | ) | 10,478 | 63,278 | ||||||||
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|
|
|
|
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Total capitalization |
$ | 10,478 | $ | 10,478 | 63,278 | |||||||
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(1) | Each $1.00 increase (decrease) in the assumed initial price to the public of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of additional paid-in capital, total stockholders equity and total capitalization by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) each of additional paid-in capital, total stockholders equity and total capitalization by approximately $11.2 million, assuming that the |
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assumed initial price to the public remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial price to the public and other terms of this offering determined at pricing. |
The number of shares of our common stock reflected in the discussion and tables above is based on 17,501,808 shares of our common stock outstanding as of March 31, 2014, including convertible preferred stock on an as-converted basis, and excludes the following:
| 1,964,978 shares of common stock issuable upon the exercise of outstanding options as of March 31, 2014, having a weighted average exercise price of $1.34 per share; |
| 47,554 shares of common stock issuable upon the exercise and subsequent conversion of warrants to purchase our Series A convertible preferred stock at an exercise price of $3.68 per share; |
| Up to 20,313 shares of common stock issuable upon the exercise and subsequent conversion of a warrant to purchase our Series D convertible preferred stock at an exercise price of $6.89 per share, which, as of March 31, 2014, was exercisable for 5,803 shares; |
| 4,750,000 shares of common stock reserved for future issuance under our 2014 Equity Incentive Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan, which will become effective upon the execution of the underwriting agreement related to this offering; and |
| 496,092 shares of common stock reserved for future issuance under our 2014 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan, which will become effective upon the execution of the underwriting agreement related to this offering. |
To the extent that any outstanding options or warrants are exercised, new options are issued under our stock-based compensation plans or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering.
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If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the assumed initial public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock after this offering.
Historical net tangible book value (deficit) per share represents our total tangible assets less our liabilities and convertible preferred stock that is not included in equity divided by the total number of shares outstanding. As of March 31, 2014, our historical net tangible book value (deficit) was approximately $(80.8) million, or $(44.94) per share. Our pro forma net tangible book value as of March 31, 2014, was approximately $10.5 million, or $0.60 per share after giving effect to the conversion of all of our outstanding convertible preferred stock into 15,703,875 shares of common stock upon the consummation of this offering.
After giving further effect to receipt of the net proceeds from our sale of 5,000,000 shares of common stock at an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of March 31, 2014, would have been approximately $63.3 million, or $2.81 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $2.21 per share to our existing stockholders and an immediate dilution of $9.19 per share to investors purchasing common stock in this offering.
The following table illustrates this dilution to new investors on a per share basis:
Assumed initial public offering price per share |
$ | 12.00 | ||||||
Historical net tangible book value (deficit) per share as of March 31, 2014 |
$ | (44.94 | ) | |||||
Pro forma increase in net tangible book value (deficit) per share attributable to the conversion of our convertible preferred stock |
45.54 | |||||||
|
|
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Pro forma net tangible book value per share as of March 31, 2014 |
0.60 | |||||||
Increase in net tangible book value per share attributable to new investors purchasing shares in this offering |
2.21 | |||||||
|
|
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Pro forma as adjusted net tangible book value per share after this offering |
2.81 | |||||||
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|
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Dilution per share to new investors participating in this offering |
$ | 9.19 | ||||||
|
|
If the underwriters option to purchase additional shares in this offering is exercised in full, the pro forma as adjusted net tangible book value would be $3.08 per share, and the dilution to new investors participating in this offering would be $8.92 per share.
Each $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value, by $0.21 per share and the dilution per share to new investors by $0.79 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and estimated offering expenses.
We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 shares in the number of shares we are offering would increase (decrease) our pro forma as adjusted net tangible book value by approximately $11.2 million, or $0.36 per share, and decrease (increase) the pro forma dilution per share to investors in this offering by $0.36 per share, assuming that the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses. The pro forma information discussed above is illustrative only and will change based on the actual initial public offering price, number of shares and other terms of this offering determined at pricing.
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The table below summarizes, as of March 31, 2014, on the pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration, and the average price per share (1) paid to us by our existing stockholders and (2) to be paid by new investors participating in this offering at an assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.
(in thousands, except share, per share and percentages) | Shares Purchased | Total Consideration | Average Price Per Share |
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Number | Percent | Amount | Percent | |||||||||||||||||
Existing stockholders |
17,501,808 | 77.8 | % | $ | 92,479,490 | 60.7 | % | $ | 5.28 | |||||||||||
New investors |
5,000,000 | 22.2 | 60,000,000 | 39.3 | $ | 12.00 | ||||||||||||||
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Total |
22,501,808 | 100.0 | % | $ | 152,479,490 | 100.0 | % | |||||||||||||
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In addition, if the underwriters option to purchase additional shares is exercised in full, the number of shares held by existing stockholders will be reduced to 75.3% of the total number of shares of common stock to be outstanding upon completion of this offering, and the number of shares of common stock held by new investors participating in this offering will be further increased to 24.7% of the total number of shares of common stock to be outstanding upon completion of the offering.
Each $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per share would increase (decrease) total consideration paid by new investors by $5.0 million assuming the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares offered by us would increase (decrease) total consideration paid by new investors by $12.0 million, assuming that the assumed initial price to the public remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
The number of shares of our common stock reflected in the discussion and tables above is based on 17,501,808 shares of our common stock outstanding as of March 31, 2014, and excludes:
| 1,964,978 shares of common stock issuable upon the exercise of outstanding options as of March 31, 2014, having a weighted average exercise price of $1.34 per share; |
| 47,554 shares of common stock issuable upon the exercise and subsequent conversion of warrants to purchase our Series A convertible preferred stock at an exercise price of $3.68 per share; |
| Up to 20,313 shares of common stock issuable upon the exercise and subsequent conversion of a warrant to purchase our Series D convertible preferred stock at an exercise price of $6.89 per share, which, as of March 31, 2014, was exercisable for 5,803 shares; |
| 4,750,000 shares of common stock reserved for future issuance under our 2014 Equity Incentive Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan, which will become effective upon the execution of the underwriting agreement related to this offering; and |
| 496,092 shares of common stock reserved for future issuance under our 2014 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan, which will become effective upon the execution of the underwriting agreement related to this offering. |
Effective as of the date of the effectiveness of the registration statement of which this prospectus forms a part, an aggregate of 4,750,000 shares of our common stock will be reserved for issuance under the 2014 Equity Incentive Plan and 496,092 shares of our common stock will be reserved for issuance under the 2014 Employee Stock Purchase Plan. Furthermore, we may choose to raise additional capital through the sale of equity or convertible debt securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that any of our options are exercised, new options are issued under our equity incentive plans or we issue additional shares of common stock or other equity or convertible debt securities in the future, there will be further dilution to investors participating in this offering.
47
You should read the following selected financial data together with our audited and unaudited financial statements, the related notes appearing at the end of this prospectus and the information under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations. The selected financial data included in this section are not intended to replace the financial statements and the related notes included elsewhere in this prospectus.
We derived the selected statements of operations data for the years ended December 31, 2012 and 2013, and the balance sheet data as of December 31, 2012 and 2013, from our audited financial statements appearing elsewhere in this prospectus. The statements of operations data for the three months ended March 31, 2013 and 2014, and the balance sheet data as of March 31, 2014, are derived from our unaudited interim financial statements included elsewhere in this prospectus. We have prepared the unaudited interim financial statements on the same basis as the audited financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. You should read this data together with our audited financial statements and related notes appearing elsewhere in this prospectus and the information under the captions Selected Financial Data and Managements Discussion and Analysis of Financial Condition and Results of Operations. Our historical results are not necessarily indicative of our future results and our interim results are not necessarily indicative of results to be expected for the full year ending December 31, 2014, or any other period.
Year Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
(in thousands, except per share data) |
2012 | 2013 | 2013 | 2014 | ||||||||||||
(unaudited) | ||||||||||||||||
Statements of Operations Data: |
||||||||||||||||
Revenue |
$ | 5,863 | $ | 17,931 | $ | 2,744 | $ | 7,497 | ||||||||
Cost of sales |
3,837 | 8,150 | 1,949 | 2,360 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
2,026 | 9,781 | 795 | 5,137 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative |
9,251 | 18,229 | 3,350 | 6,658 | ||||||||||||
Research and development |
9,260 | 9,518 | 2,256 | 2,577 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Total operating expenses |
18,511 | 27,747 | 5,606 | 9,235 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss from operations |
(16,485 | ) | (17,966 | ) | (4,811 | ) | (4,098 | ) | ||||||||
Other income (expense), net |
120 | (403 | ) | 58 | (311 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
$ | (16,365 | ) | $ | (18,369 | ) | $ | (4,753 | ) | $ | (4,409 | ) | ||||
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|
|
|
|
|
|
|
|||||||||
Net loss per share, basic and diluted |
$ | (16.38 | ) | $ | (12.57 | ) | $ | (4.57 | ) | $ | (2.49 | ) | ||||
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|
|
|
|
|
|
|
|||||||||
Weighted average common shares used to compute net loss per share, basic and diluted |
999 | 1,461 | 1,039 | 1,773 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Pro forma net loss per share, basic and diluted (unaudited)(1) |
$ | (1.17 | ) | $ | (0.25 | ) | ||||||||||
|
|
|
|
|||||||||||||
Weighted average common shares used to compute pro forma net loss per share, basic and diluted (unaudited)(1) |
15,655 | 17,474 | ||||||||||||||
|
|
|
|
48
As of December 31, |
As of March 31, 2014 |
|||||||||||
2012 | 2013 | |||||||||||
(in thousands) |
(unaudited) | |||||||||||
Balance Sheet Data: |
||||||||||||
Cash and cash equivalents |
$ | 2,060 | $ | 12,294 | $ | 7,478 | ||||||
Working capital |
1,152 | 13,118 | 8,643 | |||||||||
Total assets |
7,227 | 21,035 | 16,767 | |||||||||
Preferred stock warrant liability |
93 | 237 | 494 | |||||||||
Total debt |
2,000 | 1,452 | 1,280 | |||||||||
Total liabilities |
5,627 | 6,892 | 6,783 | |||||||||
Convertible preferred stock |
60,320 | 90,760 | 90,789 | |||||||||
Accumulated deficit |
(59,890 | ) | (78,259 | ) | (82,668 | ) | ||||||
Total stockholders deficit |
(58,720 | ) | (76,617 | ) | (80,805 | ) |
(1) | Reflects the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 15,703,875 shares of common stock immediately prior to the closing of this offering and the conversion of warrants to purchase up to 67,867 shares of convertible preferred stock into warrants to purchase up to 67,867 shares of common stock immediately prior to the closing of this offering. |
49
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations together with the section entitled Selected Financial Data, should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this prospectus. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Risk Factors and elsewhere in this prospectus.
Overview
We are a commercial stage drug-device company committed to improving the quality of life for patients with ear, nose and throat conditions. We have developed a drug-eluting bioabsorbable implant technology that enables targeted and sustained release of therapeutic agents. This targeted drug delivery technology is designed to allow ear, nose and throat, or ENT, physicians to improve patient care. Our initial products, PROPEL and PROPEL mini, are the first and only drug-eluting implants approved by the U.S. Food and Drug Administration, or FDA, for use in patients with chronic sinusitis. Inserted by a physician during ethmoid sinus surgery, the self-expanding implants are designed to conform to and hold open the surgically enlarged sinus, while gradually releasing an anti-inflammatory steroid over a period of 30 days, before being fully absorbed into the body. Use of our PROPEL implants is clinically proven to improve surgical outcomes by maintaining the open pathways created in surgery and reducing the need for oral steroids and additional surgical procedures. In addition, we are using our drug-eluting bioabsorbable implant technology to develop new, less-invasive and more cost-effective treatment options for the management of chronic sinusitis in the physician office setting to provide benefits for patients, physicians and payors. Any new products we develop, or changes that we make in the therapeutic agent used in PROPEL or PROPEL mini, will require FDA approval prior to commercialization in the United States.
Our two commercial products, PROPEL and PROPEL mini, are designed to improve the outcomes of sinus surgery by reducing postoperative inflammation and scarring, both from the underlying condition as well as the surgery. Prior to obtaining FDA approval, we devoted substantially all of our resources to the design and clinical development of our steroid-eluting implants. Following approval, we commenced a limited commercial launch of PROPEL in the United States in September 2011, with four territory managers. In November 2012, we received FDA approval and commenced a limited commercial launch of PROPEL mini. In the first half of 2013 we began scaling our U.S. direct commercial presence. In addition to PROPEL and PROPEL mini, we are developing additional products using our drug-eluting bioabsorbable implant technology that are specifically designed to treat chronic sinusitis in the physician office setting during a routine visit.
Our direct sales force engages in sales efforts and promotional activities focused on ENT physicians. We increased the number of employees in our sales, marketing and reimbursement organizations from 21 as of December 31, 2012, to 62 as of March 31, 2014, and we expect to continue to expand this infrastructure to further penetrate the chronic sinusitis market. As of March 31, 2014, over 1,000 ENT physicians in the United States have been trained and have incorporated our steroid-eluting implants into their practice. Although our sales and marketing efforts are directed at ENT physicians because they are the primary users of our technology, we consider the hospitals and ambulatory surgery centers where the procedure is performed to be our customers, as they typically are responsible for making the decisions to purchase our products. No single customer accounted for more than 6% of our revenue during 2012, 2013, and 2014. We manufacture our steroid-eluting implants at our 32,500 square foot facility in Menlo Park, California with components supplied by external suppliers. On March 31, 2014, our manufacturing organization included 53 people and we expect our existing facility to meet expected demand for the foreseeable future.
During the year ended December 31, 2013, our revenue was $17.9 million, and during the three months ended March 31, 2014, our revenue was $7.5 million. During the year ended December 31, 2013, our net loss was $18.4 million, and during the three months ended March 31, 2014, our net loss was $4.4 million. We have not been profitable since inception and as of March 31, 2014, our accumulated deficit was $82.7 million. Since
50
inception, we have financed our operations primarily through private placements of our convertible preferred securities and, to a lesser extent, certain debt financing arrangements.
Components of Our Results of Operations
Revenue
All of our revenue is currently derived from sales of PROPEL and PROPEL mini in the United States. We expect our revenue to increase as we expand our sales, marketing and reimbursement infrastructure and increase awareness of our products. We also expect our revenue to fluctuate from quarter to quarter due to a variety of factors. In the first quarter, our results can be impacted by adverse weather and by resetting of annual patient healthcare insurance plan deductibles, both of which may cause patients to delay elective procedures such as functional endoscopic sinus surgery, or FESS. In the second quarter, demand may be impacted by the seasonal nature of allergies and the resultant onset of sinus-related symptoms. In the third quarter, the number of FESS procedures nationwide is historically lower than other quarters throughout the year, which we believe is attributable to the summer vacations of ENT physicians and their patients. In the fourth quarter, demand may be impacted by the onset of the cold and flu season and related symptoms, as well as 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.
Our currently approved products are commonly treated as general supplies utilized in sinus surgery and are paid for as part of the FESS procedure. We believe that establishment of reimbursement codes specific to the use of drug-eluting implants for chronic sinusitis is an important factor in expanding access to our products, especially in the physician office setting.
Cost of Sales and Gross Profit
PROPEL and PROPEL mini are manufactured at our facility in Menlo Park, California. Cost of sales consists primarily of manufacturing overhead costs, material costs and direct labor. A significant portion of our cost of sales currently consists of manufacturing overhead costs. These overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment and operations supervision and management. We expect overhead costs as a percentage of revenue to become less significant as our production volume increases. Cost of sales also includes depreciation expense for production equipment and certain direct costs such as shipping costs. We expect cost of sales to increase in absolute dollars primarily as, and to the extent, our revenue grows.
We calculate gross margin as gross profit divided by revenue. Our gross margin has been and will continue to be affected by a variety of factors, primarily production volumes, manufacturing costs and product yields, and to a lesser extent the implementation of cost-reduction strategies. We expect our gross margin to increase over the long term as our production volume increases and as we spread 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 margin will likely fluctuate from quarter to quarter.
Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses consist primarily of compensation for personnel, including stock-based compensation, related to selling, marketing, business development, finance, information technology, and human resource functions. Other SG&A expenses include commissions, training, travel expenses, promotional activities, conferences, trade shows, professional services fees, audit fees, insurance costs and general corporate expenses including allocated facilities-related expenses. We expect SG&A expenses to continue to increase in absolute dollars for the foreseeable future as we expand our commercial infrastructure to both drive and support the anticipated growth in revenue and incur additional legal, accounting, insurance and other professional service fees associated with being a public company. However, for the foreseeable future we expect SG&A expenses to continue to decrease as a percentage of revenue.
Research and Development Expenses
Research and development, or R&D, expenses consist primarily of engineering, product development, clinical and regulatory affairs, consulting services, materials, depreciation and other costs associated with
51
products and technologies in development. These expenses include employee and non-employee compensation, including stock-based compensation, supplies, materials, quality assurance expenses allocated to R&D programs, consulting, related travel expenses and facilities expenses. Clinical expenses include clinical trial design, clinical site reimbursement, data management and travel expenses, and the cost of manufacturing products for clinical trials. We expect R&D expenses to increase in absolute dollars for the foreseeable future as we continue to develop, enhance and commercialize new products and technologies. However, we expect R&D expenses as a percentage of revenue to vary over time depending on the level and timing of initiating new product development efforts as well as our clinical development activities.
Results of Operations
Year Ended December 31, | Three Months Ended March 31, |
|||||||||||||||
2012 | 2013 | 2013 | 2014 | |||||||||||||
(in thousands, except percentages) | (unaudited) | |||||||||||||||
Revenue |
$ | 5,863 | $ | 17,931 | $ | 2,744 | $ | 7,497 | ||||||||
Cost of sales |
3,837 | 8,150 | 1,949 | 2,360 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
2,026 | 9,781 | 795 | 5,137 | ||||||||||||
Gross margin |
35 | % | 55 | % | 29 | % | 69 | % | ||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative |
9,251 | 18,229 | 3,350 | 6,658 | ||||||||||||
Research and development |
9,260 | 9,518 | 2,256 | 2,577 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
18,511 | 27,747 | 5,606 | 9,235 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss from operations |
(16,485 | ) | (17,966 | ) | (4,811 | ) | (4,098 | ) | ||||||||
Other income (expense), net |
120 | (403 | ) | 58 | (311 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
$ | (16,365 | ) | $ | (18,369 | ) | $ | (4,753 | ) | $ | (4,409 | ) | ||||
|
|
|
|
|
|
|
|
Comparison of Three Months Ended March 31, 2013 and 2014
Revenue
Revenue increased $4.8 million, or 173%, to $7.5 million during the three months ended March 31, 2014, compared to $2.7 million during the three months ended March 31, 2013. The growth in revenue was attributable to an increase in unit sales of PROPEL and PROPEL mini from 3,900 units, to 10,800 units, or 177%. Our average selling price per unit was consistent for both periods. The increase in units was driven by an expansion of our sales, marketing and reimbursement organizations. In addition, PROPEL mini had minimal sales in the three months ended March 31, 2013, as compared to the three months ended March 31, 2014, as we continued its commercial introduction.
Cost of Sales and Gross Margin
Cost of sales increased $0.5 million, or 21%, to $2.4 million during the three months ended March 31, 2014, compared to $1.9 million during the three months ended March 31, 2013. The increase in cost of sales was primarily attributable to the growth in the number of PROPEL and PROPEL mini units sold. In addition, cost of sales incurred during the three months ended March 31, 2013, included $0.7 million for expenses associated with establishing and qualifying our new manufacturing facility in Menlo Park, California. After qualification of the Menlo Park facility in June 2013, we closed our facility in Palo Alto, California.
Gross margin for the three months ended March 31, 2014, increased to 69%, compared to 29% for the three months ended March 31, 2013. The increase in gross margin was primarily due to the growth in unit sales which allowed us to spread the fixed portion of our manufacturing overhead costs over more production units, and the impact of the completion of qualification of our Menlo Park facility in June 2013. The fixed portion of our manufacturing overhead allows our costs of sales to grow at a slower rate than our revenue. As a result, we expect gross margin to continue to increase.
52
Selling, General and Administrative Expenses
SG&A expenses increased $3.3 million, or 99%, to $6.7 million during the three months ended March 31, 2014, compared to $3.4 million during the three months ended March 31, 2013. The increase in SG&A expenses was primarily due to the build out of our infrastructure to support the commercialization of PROPEL and PROPEL mini. The primary driver of this increase was employee-related expenses of our sales, marketing and reimbursement organizations which increased $2.9 million as we increased headcount to 62 as of March 31, 2014, compared to 26 at March 31, 2013. In addition, other SG&A expenses increased $0.4 million primarily due to an increase in headcount.
Research and Development Expenses
R&D expenses increased $0.3 million, or 14%, to $2.6 million during the three months ended March 31, 2014, compared to $2.3 million during the three months ended March 31, 2013. The increase in R&D expenses was primarily due to an increase in clinical trial costs for the evaluation of our steroid-eluting implant for refractory disease for use in the physician office setting.
Other Income (Expense), Net
Other income (expense), net, decreased $0.4 million, or 636%, to an expense of $0.3 million during the three months ended March 31, 2014, compared to an income of $0.1 million during the three months ended March 31, 2013. The decrease in other income (expense), net was attributable to a fair value adjustment of the convertible preferred stock warrants, which are accounted for as liabilities and marked-to-market at each reporting period, and interest expense related to our debt financing arrangements.
Comparison of Years Ended December 31, 2012 and 2013
Revenue
Revenue increased $12.0 million, or 206%, to $17.9 million during the year ended December 31, 2013, compared to $5.9 million during the year ended December 31, 2012. The growth in revenue was attributable to an increase in unit sales of PROPEL and PROPEL mini from 8,400 units to 25,600 units, or 205%. Our average selling price per unit was consistent for both periods. The increase in units was driven by the increased commercialization of PROPEL and the introduction of PROPEL mini in late 2012, supported by an expansion of our sales, marketing and reimbursement organizations.
Cost of Sales and Gross Margin
Cost of sales increased $4.4 million, or 112%, to $8.2 million during the year ended December 31, 2013, compared to $3.8 million during the year ended December 31, 2012. The increase in cost of sales was primarily attributable to the growth in the number of PROPEL and PROPEL mini units sold, partially offset by a decrease of $0.6 million for expenses associated with establishing and qualifying our new manufacturing facility in Menlo Park, California. After qualification of the Menlo Park facility in June 2013, we closed our facility in Palo Alto, California.
Gross margin for the year ended December 31, 2013, increased to 55%, compared to 35% for the year ended December 31, 2012. The increase in gross margin was primarily due to the growth in unit sales which allowed us to spread the fixed portion of our manufacturing overhead costs over more production units, and the impact of the completion of the qualification of our Menlo Park facility in June 2013. The fixed portion of our cost of sales allows our cost of sales to grow at a slower rate than our revenue.
Selling, General and Administrative Expenses
SG&A expenses increased $8.9 million, or 97%, to $18.2 million during the year ended December 31, 2013, compared to $9.3 million during the year ended December 31, 2012. The increase in SG&A expenses was primarily due to the build out of our infrastructure to support the commercialization of PROPEL and PROPEL mini. The primary driver of this increase was employee-related expenses of our sales, marketing and
53
reimbursement organizations, which increased $8.3 million as we increased headcount to 55 as of December 31, 2013, compared to 21 at December 31, 2012. In addition, other SG&A expenses increased $0.7 million primarily due to the newly enacted medical device tax.
Research and Development Expenses
R&D expenses increased $0.2 million, or 3%, to $9.5 million during the year ended December 31, 2013, compared to $9.3 million during the year ended December 31, 2012. The increase in R&D expenses was primarily due to an increase of $1.9 million in clinical trial costs for the evaluation of our steroid-eluting implant for refractory disease for use in the physician office setting. This was partially offset by a decrease of $1.0 million in development costs as that product transitioned into clinical trials and a decrease of $0.6 million in quality assurance costs allocated to R&D programs.
Other Income (Expense), Net
Other income (expense), net, decreased $0.5 million to an expense of $0.4 million during the year ended December 31, 2013, compared to an income of $0.1 million during the year ended December 31, 2012. The decrease in other income (expense), net was primarily attributable to a fair value adjustment of the preferred stock financing option in connection with our Series D convertible preferred stock financing, the fair value adjustment of the preferred stock warrants, which are accounted for as liabilities and marked-to-market at each reporting period, and interest expense related to our debt financing arrangements.
Quarterly Results of Operations Data
The following tables set forth our unaudited quarterly statements of operations and comprehensive loss data for each quarter in the year ended December 31, 2013, and the quarter ended March 31, 2014. We have prepared the quarterly data on a consistent basis as our audited financial statements included in this prospectus. This information should be read in conjunction with the audited financial statements and related notes for the year ended December 31, 2013, included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results of our operations for the year ending December 31, 2014, or any future period.
Three Months Ended | ||||||||||||||||||||
March 31, 2013 |
June 30, 2013 |
September 30, 2013 |
December 31, 2013 |
March 31, 2014 |
||||||||||||||||
(in thousands, except percentages) | (unaudited) | |||||||||||||||||||
Revenue |
$ | 2,744 | $ | 3,936 | $ | 4,279 | $ | 6,972 | $ | 7,497 | ||||||||||
Cost of sales(1) |
1,949 | 2,202 | 1,438 | 2,561 | 2,360 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Gross profit |
795 | 1,734 | 2,841 | 4,411 | 5,137 | |||||||||||||||
Gross margin(1) |
29 | % | 44 | % | 66 | % | 63 | % | 69 | % | ||||||||||
Operating expenses: |
||||||||||||||||||||
Selling, general and administrative |
3,350 | 4,087 | 4,700 | 6,092 | 6,658 | |||||||||||||||
Research and development |
2,256 | 2,421 | 2,077 | 2,764 | 2,577 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
5,606 | 6,508 | 6,777 | 8,856 | 9,235 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loss from operations |
(4,811 | ) | (4,774 | ) | (3,936 | ) | (4,445 | ) | (4,098 | ) | ||||||||||
Other income (expense), net(2) |
58 | (111 | ) | (163 | ) | (187 | ) | (311 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net loss |
$ | (4,753 | ) | $ | (4,885 | ) | $ | (4,099 | ) | $ | (4,632 | ) | $ | (4,409 | ) | |||||
|
|
|
|
|
|
|
|
|
|
(1) | The three months ended March 31, 2013, included $0.7 million for establishing and qualifying our new manufacturing facility. The three months ended June 30, 2013, included a charge of $0.5 million related to a packaging issue and $0.1 million for establishing and qualifying our new manufacturing facility. |
(2) | The three months ended June 30 and September 30, 2013, each included a $0.1 million fair value expense adjustment for the preferred stock financing option. The three months ended December 31, 2013, and March 31, 2014, included a $0.1 million and $0.3 million fair value expense adjustment for the preferred stock warrants classified as liabilities, respectively. |
54
Seasonality
Our business is affected by seasonality. In the first quarter, our results can be impacted by adverse weather and by resetting of annual patient healthcare insurance plan deductibles, both of which may cause patients to delay elective procedures such as FESS. In the second quarter, demand may be impacted by the seasonal nature of allergies and the resultant onset of sinus-related symptoms. In the third quarter, the number of FESS procedures nationwide is historically lower than other quarters throughout the year, which we believe is attributable to the summer vacations of ENT physicians and their patients. In the fourth quarter, demand may be impacted by the onset of the cold and flu season and related symptoms, as well as 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.
Liquidity and Capital Resources
Overview
As of March 31, 2014, we had cash and cash equivalents of $7.5 million and an accumulated deficit of $82.7 million, compared to cash and cash equivalents of $12.3 million and an accumulated deficit of $78.3 million as of December 31, 2013. We currently believe that our existing cash and cash equivalents, revenue and available debt financing arrangements will be sufficient to meet our capital requirements and fund our operations until at least December 31, 2014. Our primary sources of capital have been from private placements of convertible preferred securities and debt financing agreements. To date, we have raised $91.4 million from private placements of convertible preferred securities from our investors. In August 2013, we entered into a loan and security agreement with Silicon Valley Bank for up to $12.0 million of debt financing consisting of an $8.0 million growth capital facility and a $4.0 million revolving accounts receivable line of credit. As of March 31, 2014, we had no outstanding amounts under the loan and security agreement. We entered into equipment loans totaling $2.1 million, of which $1.3 million is outstanding as of March 31, 2014. There are no remaining amounts available under these loans.
Cash Flows
Year Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2012 | 2013 | 2013 | 2014 | |||||||||||||
(in thousands) | (unaudited) | |||||||||||||||
Net cash (used in) provided by: |
||||||||||||||||
Operating activities |
$ | (16,148 | ) | $ | (19,101 | ) | $ | (6,118 | ) | $ | (4,546 | ) | ||||
Investing activities |
5,956 | (467 | ) | (52 | ) | (136 | ) | |||||||||
Financing activities |
2,302 | 29,802 | 20,674 | (134 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net (decrease) increase in cash and cash equivalents |
$ | (7,890 | ) | $ | 10,234 | $ | 14,504 | $ | (4,816 | ) | ||||||
|
|
|
|
|
|
|
|
Net cash Used in Operating Activities
During the three months ended March 31, 2014, net cash used in operating activities was $4.5 million, consisting primarily of a net loss of $4.4 million and an increase in net operating assets of $0.8 million, partially offset by non-cash charges of $0.7 million. The cash used in operations was primarily due to the ongoing commercialization of PROPEL and PROPEL mini. To support the commercialization of these products, we continued to expand our sales, marketing and reimbursement organizations and manufacturing supply chain. The increase in net operating assets was primarily due to increases in accounts receivable and inventory to support the growth of our operations and a decrease in accrued compensation as annual bonuses were paid, partially offset by increases in accounts payable and other liabilities as we expanded our operations. The non-cash charges primarily consisted of the change in fair value of convertible preferred stock warrants accounted for as liabilities and stock-based compensation as the underlying value of our company increased with the expansion of our business.
During the three months ended March 31, 2013, net cash used in operating activities was $6.1 million, consisting primarily of a net loss of $4.8 million and an increase in net operating assets of $1.6 million, partially
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offset by non-cash charges of $0.3 million. The increase in net operating assets was primarily due to increases in accounts receivable and inventory as we expanded our sales, marketing and reimbursement organizations and manufacturing supply chain and a decrease in accrued compensation as annual bonuses were paid. The non-cash charges primarily consisted of depreciation and amortization and the forgiveness of a related party loan.
Net cash used in operating activities for 2013 was $19.1 million, consisting primarily of a net loss of $18.4 million and an increase in net operating assets of $2.1 million, partially offset by non-cash charges of $1.4 million. The cash used in operations was primarily due to the expansion our sales, marketing and reimbursement organizations to support the ongoing commercialization of PROPEL and PROPEL mini resulting in increases in accounts receivable and inventory, offset by an increase in accrued compensation due to the growth in our sales, marketing and reimbursement organizations. Non-cash charges consisted primarily of depreciation from the investment in our Menlo Park manufacturing facility and stock-based compensation. As of December 31, 2013, 87% of accounts receivable was less than 60 days old.
Net cash used in operating activities for 2012 was $16.1 million, consisting primarily of a net loss of $16.4 million and an increase in net operating assets of $0.4 million, partially offset by non-cash charges of $0.6 million. The increase in net operating assets was primarily due to increases in accounts receivable and inventory as we accelerated our commercial launch of PROPEL and introduced PROPEL mini, partially offset by an increase in accrued compensation related to expansion of our sales, marketing and reimbursement organizations. Non-cash charges consisted primarily of depreciation and stock-based compensation.
Net Cash (Used in) Provided by Investing Activities
During each of the three months ended March 31, 2013 and 2014, net cash used in investing activities was $0.1 million, consisting of purchases of property and equipment.
Net cash used in investing activities in 2013 was $0.5 million consisting of purchases of property and equipment. Net cash provided by investing activities in 2012 was $6.0 million in 2012, consisting primarily of net proceeds from short-term investment of $7.3 million, partially offset by purchases of property and equipment of $1.4 million.
Net Cash (Used in) Provided by Financing Activities
During the three months ended March 31, 2014, net cash used in financing activities was $0.1 million, consisting of repayments related to the equipment financing arrangements. During the three months ended March 31, 2013, net cash provided by financing activities was $20.7 million, consisting primarily of net proceeds from the issuance of Series D convertible preferred stock.
Net cash provided by financing activities in 2013 was $29.8 million, consisting primarily of net proceeds from the issuance of our Series D convertible preferred stock of $30.1 million. Net cash provided by financing activities in 2012 was $2.3 million, primarily from proceeds of a $2.0 million equipment loan.
Liquidity
In August 2013, we entered into a loan and security agreement, or the Loan Agreement, with Silicon Valley Bank, or SVB, for a total commitment of $12.0 million. The commitment consists of an $8.0 million growth capital facility and a $4.0 million revolving accounts receivable line of credit.
The $8.0 million growth capital facility consists of two $4.0 million tranches. The first $4.0 million tranche is available until October 31, 2014, and the second $4.0 million tranche will be available until March 31, 2015. Payment on both tranches will be interest only until March 31, 2015, at which time the outstanding balance will convert to a 30-month fully amortizing loan. The interest rate will be fixed at the time of advance and will be the greater of 3.65% or the three-year U.S. Treasury note plus 3.0%. At the end of the amortization period, we will make a final payment in the amount of 3.9% of the advanced amounts. There is a prepayment penalty of 2.0% of the prepaid principal during the first year, 1.0% during the second year and no prepayment penalty during the third year.
The $4.0 million revolving accounts receivable line of credit will expire in August 2016. Advances on this line of credit will be made for up to 80% of eligible accounts receivables. An annual loan fee of 0.75% is owed at the beginning of August in each of the three years. The interest rate is determined monthly and is the greater of 4.25% or SVB Prime Rate plus 0.25%.
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As of March 31, 2014, we have not received advances under the Loan Agreement.
We currently believe that our existing cash and cash equivalents and available debt financing arrangements will be sufficient to meet our capital requirements and fund our operations until at least December 31, 2014. If these sources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or obtain an additional credit facility. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. Additional financing may not be available at all, or in amounts or on terms unacceptable to us. If we are unable to obtain additional financing, we may be required to delay the development, commercialization and marketing of our products.
Off-Balance Sheet Arrangements
As of December 31, 2013, and March 31, 2014, we were not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
The following table sets out, as of December 31, 2013, our contractual obligations due by period.
Payments Due by Period | ||||||||||||||||||||
Less Than 1 Year |
1-3 Years |
3-5 Years |
More Than 5 Years |
Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating lease obligations |
$ | 928 | $ | 390 | $ | | $ | | $ | 1,318 | ||||||||||
Purchase commitments |
407 | 54 | | | 461 | |||||||||||||||
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$ | 1,335 | $ | 444 | $ | | $ | | $ | 1,779 | |||||||||||
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Our contractual obligations as of March 31, 2014, have not significantly changed from December 31, 2013.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The risk associated with fluctuating interest rates is primarily limited to our cash equivalents which are carried at quoted market prices. We do not currently use or plan to use financial derivatives in our investment portfolio.
In September 2012, we entered into an equipment loan with an aggregate principal amount of $2.0 million, all of which was drawn down in December 2012. Payments will be made in monthly installments over a 36-month period with a fixed interest rate of 5.1%. As of March 31, 2014, the amount outstanding under this equipment loan was $1.2 million.
Credit Risk
As of December 31, 2012 and 2013, and March 31, 2014, our cash and cash equivalents were maintained with one financial institution in the United States, and our current deposits are likely in excess of insured limits. We have reviewed the financial statements of this institution and believe it has sufficient assets and liquidity to conduct its operations in the ordinary course of business with little or no credit risk to us.
Our accounts receivable primarily relate to revenue from the sale of PROPEL and PROPEL mini to hospitals and ambulatory surgery centers in the United States. No single customer represented more than 5% of our accounts receivable as of December 31, 2013, and March 31, 2014.
Foreign Currency Risk
Our business is conducted in U.S. dollars. Any transactions that may be conducted in foreign currencies are not expected to have a material effect on our results of operations, financial position or cash flows.
Related Parties
For a description of our related party transactions, see Certain Relationships and Related Party Transactions.
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Critical Accounting Policies and Estimates
Managements 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. generally accepted accounting principles. 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.
While our significant accounting policies are more fully described in Note 2 of our financial statements included in this prospectus, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective and complex judgments.
Revenue Recognition
We derive revenue from the sale of PROPEL and PROPEL mini to hospitals and ambulatory surgery centers in the United States. We recognize revenue when the following revenue recognition criteria are met:
| Persuasive evidence of an arrangement exists. We consider this criterion satisfied when we have an agreement or contract with the customer in place. |
| Delivery has occurred or services rendered. We principally determine this criterion to be satisfied when we ship the product to the customer. |
| The fee is fixed or determinable and collectibility is reasonably assured. We determine the satisfaction of these criteria based on our judgment regarding the nature of the fee charged for products, contractual agreements entered into, and the collectibility of those fees under any contract or agreement. |
We must make significant assumptions regarding the future collectibility of amounts receivable from customers to determine whether revenue recognition criteria have been met. If collectibility is not assured at the time of shipment, we defer revenue until such criteria have been met. Our standard terms and conditions of sale do not allow for product returns, and we generally do not allow product returns, except in the case of damaged goods, and we have not experienced any significant returns of our products. We expense shipping and handling costs as incurred and include them in the cost of sales. In those cases where we bill shipping and handling costs to customers, we classify the amounts billed as a component of revenue.
Common Stock Valuation and Stock-based Compensation
We maintain an equity incentive plan to provide long-term incentive for employees, consultants, and members of the board of directors. The plan allows for the issuance of non-statutory and incentive stock options to employees and non-statutory stock options to consultants and non-employee directors.
We are required to determine the fair value of equity incentive awards and recognize compensation expense for all equity incentive awards made to employees and directors, including employee stock options. We recognize this expense over the requisite service period. In addition, we recognize stock-based compensation expense in the statements of operations and comprehensive loss based on awards expected to vest and, therefore, the amount of expense has been reduced for estimated forfeitures. We use the straight-line method for expense attribution, except for awards issued with performance-based conditions which require an accelerated attribution method over the requisite performance and service periods.
Under the applicable accounting guidance for equity incentive awards granted to non-employees, the measurement date at which the fair value of the equity incentive awards is measured is equal to the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instrument is reached or (2) the date at which the counterpartys performance is complete. We recognize stock-based compensation expense for the fair value of the vested portion of the equity incentive awards in the statements of operations and comprehensive loss. We remeasure the fair value of options granted to consultants and non-employee directors as the options vest.
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The valuation model we used for calculating the fair value of awards for stock-based compensation expense is the Black-Scholes option-pricing model, or the Black-Scholes model. The Black-Scholes model requires us to make assumptions and judgments about the variables used in the calculation, including the expected term weighted average period of time that the options granted are expected to be outstanding, the volatility of common stock, an assumed risk-free interest rate and an estimated forfeiture rate. We use the simplified method to determine the expected term of the stock option. Volatility is based on an average of the historical volatilities of the common stock of publicly-traded companies with characteristics similar to us. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the option. Potential forfeitures of awards are estimated based on our historical forfeiture experience and an analysis of similar companies. The estimate of forfeitures will be adjusted over the service period to the extent that actual forfeitures differ, or are expected to differ, from prior estimates.
The following table summarizes the assumptions we used to determine the fair value of stock options:
Year Ended December 31, 2013 |
Three Months Ended March 31, 2014 |
|||||||
(unaudited) | ||||||||
Expected life (years) |
6.0 | 6.0 | ||||||
Expected volatility |
67 | % | 60 | % | ||||
Risk-free interest rate |
1.6 | % | 1.8 | % | ||||
Dividend yield |
0.0 | % | 0.0 | % |
Fair Value of Common Stock. As discussed below, the fair value of the shares of our common stock underlying the stock options has historically been determined by our board of directors. Because there has been no public market for our common stock, our board of directors has determined the fair value of our common stock at the time of grant of the option by considering a number of objective and subjective factors, including valuations of comparable companies, sales of our convertible preferred stock, our operating and financial performance and the general and industry-specific economic outlook.
Expected Term. The expected term of stock options represents the weighted average period that the stock options are expected to remain outstanding. We estimated the expected term based on the simplified method, which is the average of the weighted average vesting period and contractual term of the option.
Expected Volatility. Since there has been no public market for our common stock and lack of company specific historical volatility, we have determined the share price volatility for options granted based on an analysis of the volatility of a peer group of publicly traded companies. In evaluating similarity, we consider factors such as industry, stage of life cycle and size.
Risk-free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for zero-coupon U.S. Treasury notes with remaining terms similar to the expected term of the options.
Dividend Rate. We assumed the expected dividend to be zero as we have never paid dividends and have no current plans to do so.
Expected Forfeiture Rate. We are required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. To the extent actual forfeitures differ from the estimates, we record the difference as a cumulative adjustment in the period that the estimates are revised.
Service period. We amortize all stock-based compensation over the requisite service period of the awards, which is generally the same as the vesting period of the awards. We amortize the fair value cost on a straight-line basis over the expected service periods. We estimate when and if performance-based grants will be earned. If we consider the award to be probable, we recognize expense over the estimated service period, which would be the estimated period of performance. If we do not consider the awards probable of achievement, we recognize no amount of stock-based compensation.
If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the
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underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. We currently estimate when and if performance-based grants will be earned. If we do not consider the awards probable of achievement, we recognize no amount of stock-based compensation. If we consider the award to be probable, we record expense over the estimated service period. To the extent that our assumptions are incorrect, the amount of stock-based compensation recorded will change.
Our intent has been to grant all options with an exercise price not less than the fair value of our common stock underlying those options on the date of grant. We have determined the estimated fair value of our common stock at each valuation date in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Our board of directors, with the assistance of management, developed these valuations using significant judgment and taking into account numerous factors, including developments at our company, market conditions and contemporaneous independent third-party valuations.
For all option grant dates through March 31, 2014, our board determined the enterprise value based on the Market Approach, Income Approach, Option Pricing Method, or OPM, and Probability Weighted Expected Return Method, or PWERM, or a weighted combination of the OPM and PWERM methods. Under the Market Approach we estimate the value based upon analysis of similar companies. We then apply these derived multiples or values to our financial metrics to estimate our market value. The Income Approach, or Discounted Cash Flow Method, estimates value based on the expectation of future net cash flows, which are then discounted back to the present using a rate of return derived from companies of similar type and risk profile. The allocation of these enterprise values to each part of our capital structure, including our common stock, was done based on OPM. OPM treats the rights of the holders of preferred and common stock as equivalent to call options on any value of the enterprise above certain break points of value based upon the liquidation preferences of the holders of preferred stock, as well as their rights to participation and conversion. Thus, the estimated value of the common stock can be determined by estimating the value of its portion of each of these call option rights. OPM derives the implied equity value of a company from a recent transaction involving the companys own securities issued on an arms-length basis. Under the PWERM the value is estimated based upon analysis of future values for the enterprise under varying scenarios, probabilities are ascribed to these scenarios based on expected future outcomes. Following the closing of this offering, the fair value of our common stock will be determined based on the closing price of our common stock on The Nasdaq Global Market.
In January 2014, we decided to pursue an initial public offering, or an IPO. As a result, in connection with the preparation of our financial statements included in this prospectus, and in preparing for our proposed IPO, we reexamined the estimated fair value of our common stock associated with our stock option grants since our prior common stock valuation report as of October 31, 2013, for financial reporting purposes.
Our board of directors granted options to purchase common stock on December 3, 2013, primarily to employees who were recently hired since we last issued option grants, with each option having an exercise price of $0.33 per share. In establishing this exercise price, our board of directors considered input from management, including the previously issued common stock valuation report which was performed as of October 31, 2013, as well as various objective and subjective factors including:
| the continued lack of liquidity of our common stock as a private company; |
| the second tranche of our Series D convertible preferred stock in October 2013; |
| the rights, preferences and privileges of our convertible preferred stock as compared to those of our common stock, including the liquidation preferences of our convertible preferred stock; |
| the impact of significant ongoing expenses associated with research and development, ongoing clinical trials and commercialization; and |
| the low likelihood of achieving a liquidity event for holders of our common stock, such as an IPO or sale of our company, given the prevailing market conditions. |
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At the time of the grants, our board of directors determined that, at the grant date, the collective effect of these events and circumstances did not indicate a significant change in the fair value of our common stock. Based on these factors, our board of directors determined that the fair value of our common stock on the grant date listed above was $1.32 per share.
In preparation for filing a registration statement with the SEC in connection with this offering, we evaluated whether or not in retrospect the value of the common stock on December 3, 2013, was appropriate for accounting purposes. We determined that in retrospect, the valuation of the common stock as determined by the valuation report issued as of December 31, 2013, provided a closer approximation of the fair value of the common stock for accounting purposes. For the calculation of stock-based compensation expense solely for financial reporting purposes, we have used a fair value of $4.24 per share for the December 3, 2013, stock option awards.
The following table illustrates our stock option grant information from January 1, 2013, through March 31, 2014, including the estimated fair market value of our common stock on the date of grant:
Grant Date |
Shares Subject to Options Granted |
Exercise Price |
Reassessed Estimated Fair Market Value |
Grant Date Aggregate Intrinsic Value |
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April 23, 2013 |
888,498 | $ | 1.20 | $ | 1.20 | | ||||||||||
June 11, 2013 |
54,750 | 1.20 | 1.20 | | ||||||||||||
September 5, 2013 |
90,000 | 1.20 | 1.20 | | ||||||||||||
December 3, 2013 |
94,375 | 1.32 | 4.24 | $ | 275,575 | |||||||||||
March 5, 2014 |
103,560 | 6.20 | 6.20 | |
The intrinsic value of all outstanding vested and unvested options as of March 31, 2014, was $20.9 million based on the assumed initial public offering price of $12.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and based on 1,964,978 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2014, with a weighted average exercise price of $1.34 per share.
Convertible Preferred Stock Warrant Liability
For a warrant classified as a derivative liability, we record the fair value of that warrant on the balance sheet at the inception of such classification and adjust to fair value at each financial reporting date. We record the changes in the fair value of the warrants in the statement of operations as a component of interest and other income or expense as appropriate. We will continue to adjust the carrying value of the convertible preferred stock warrant liability for changes in the fair value of the warrants until the earlier of: the exercise of the warrants, at which time we will reclassify the liability to temporary equity; the conversion of the underlying preferred stock into common stock, at which time we will reclassify the liability to stockholders deficit; or the expiration of the warrant, at which time we would reverse the entire amount and reflect it in the statement of operations. Our assumptions with regard to the warrant valuation are based on estimates of the valuation of the underlying preferred stock, volatility, interest rate and such estimates could vary significantly.
Convertible Preferred Stock Financing Option
For a freestanding option to purchase a future round of financing, we determine the fair value of that option based on the underlying estimated future fair value of the convertible preferred stock, the timing of when such obligation will be satisfied, the discount factor applied based on the timing of the satisfaction of the obligation and the probability that the obligation will be satisfied. We record the initial fair value of the obligation on the balance sheets at the inception of such arrangement and adjust it to fair value at each financial reporting date. We record the change in the fair value of the convertible preferred stock financing option in the statement of operations as a component of interest and other income or expense as appropriate. We adjust the carrying values of the convertible preferred stock financing option liability for changes in the fair value of the option and will continue to do so until the earlier of when all of the options have been exercised or expired. The assumptions used in determining the fair value of the obligation require significant judgment.
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JOBS Act Accounting Election
As an emerging growth company under the Jumpstart Our Business Startups Act of 2012, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We have elected to take advantage of the extended transition period for adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies. There have been no new accounting pronouncements or changes to accounting pronouncements that are of significance or potential significance to us.
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Overview
We are a commercial stage drug-device company committed to improving the quality of life for patients with ear, nose and throat conditions. We have developed a drug-eluting bioabsorbable implant technology that enables targeted and sustained release of therapeutic agents. This targeted drug delivery technology is designed to allow ear, nose and throat, or ENT, physicians to improve patient care. Our initial products, PROPEL and PROPEL mini, are the first and only drug-eluting implants approved by the U.S. Food and Drug Administration, or FDA, for use in patients with chronic sinusitis. Inserted by a physician during ethmoid sinus surgery, the self-expanding implants are designed to conform to and hold open the surgically enlarged sinus while gradually releasing an anti-inflammatory steroid over a period of 30 days, before being fully absorbed into the body. Use of our PROPEL implants is clinically proven to improve surgical outcomes by maintaining the open pathways created in surgery and reducing the need for oral steroids and additional surgical procedures. In addition, we are using our drug-eluting bioabsorbable implant technology to develop new, less-invasive, more cost-effective treatment options for the management of chronic sinusitis in the physician office setting to provide benefits for patients, physicians and payors. Any new products we develop, or changes that we make in the therapeutic agent used in PROPEL or PROPEL mini, will require FDA approval prior to commercialization in the United States.
Chronic sinusitis is one of the most prevalent chronic diseases in the United States and significantly impacts the quality of life of patients. According to the Centers for Disease Control and Prevention, or CDC, approximately 12% of the U.S. adult population, or 29 million people, are affected by chronic sinusitis, making it more prevalent than heart disease and asthma. Chronic sinusitis is an inflammatory condition in which the sinus lining becomes swollen and inflamed, leading to significant patient morbidity, including difficulty breathing, chronic headaches, recurrent infections, bodily pain, and loss of sense of smell and taste. These persistent symptoms can severely impact a patients day-to-day well-being, resulting in frequent doctor visits and lost work productivity and can lead to chronic fatigue and depression. Chronic sinusitis is managed by a combination of medical management and surgical intervention. The first line of therapy is medical management involving antibiotics, anti-inflammatory steroids and decongestants. Despite limited efficacy of the use of antibiotics in this patient population and the consequence of increasing bacterial resistance, there is pervasive overuse of these drugs, which could lead to patient resistance and has resulted in sinusitis being identified as a major target in national efforts to reduce unnecessary medical intervention. Sinusitis is the most common reason for adult outpatient antibiotic use in the United States, comprising 11% of all antibiotic prescriptions. Patients whose symptoms persist despite medical management, are recommended to undergo functional endoscopic sinus surgery, or FESS. FESS is performed in the operating room to open the blocked sinus pathways by removing inflamed tissue and bone using surgical tools. Although sinus surgery can be effective, a majority of patients experience recurrent symptoms which commonly necessitate additional treatment with medications and surgery.
Our two commercial products, PROPEL and PROPEL mini, are designed to improve the outcomes of sinus surgery by reducing postoperative inflammation and scarring from the underlying condition as well as the surgery. PROPEL and PROPEL mini were clinically proven in a meta-analysis of prospective, multicenter, randomized, controlled, double-blind clinical studies to improve surgical outcomes, including a 35% reduction in the need for postoperative oral steroid and surgical intervention.
Our target market consists of more than 3.5 million people with chronic sinusitis in the United States who are managed by ENT physicians and who we believe could benefit from products that incorporate our drug-eluting bioabsorbable implant technology. Approximately 540,000 patients underwent sinus surgery for chronic sinusitis in 2013 in the United States. This includes patients who are under the age of 18 and surgeries on the frontal sinuses, both of which represent potential expanded future indications for PROPEL and PROPEL mini and would require FDA approval. Based on the number of sinus surgeries (including surgeries performed by the approximately 40% of surgeons that do not use packing materials in their surgeries), and assuming two devices per surgery and an average selling price of $695 per device, we estimate the annual total addressable market for PROPEL and PROPEL mini in the United States to be approximately $830 million. We further estimate the annual total addressable market for our products in clinical development in the United States that are specifically designed to address patients in the physician office setting to be approximately $4.0 billion. This estimate is based on our estimate that of the more than 3.5 million chronic sinusitis patients in the United States who are
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managed by ENT physicians, (i) approximately 34% have undergone prior FESS procedures and we assume that 64% of these patients would undergo approximately 1.5 procedures per year to treat recurring symptoms using two devices at an average selling price of $495 per device, and (ii) the remaining approximately 66% of all chronic sinusitis patients managed by ENT physicians would use a different device we have in clinical development assuming that these patients would undergo approximately one procedure per year using two devices at an average selling price of $595 per device. While our current commercial focus is the U.S. market, we plan to initiate efforts that will allow for future expansion into international geographies. We estimate the annual total addressable market for PROPEL and PROPEL mini in these regions to be greater than $1.0 billion. This estimate is based on an estimated approximately 865,000 FESS procedures annually in the 16 countries in which we did research (including surgeries performed by the approximately 40% of surgeons that do not use packing materials in their surgeries), assuming that 85% involve ethmoid sinuses and 25% frontal sinuses and assuming using two devices at an average selling price of $695 per device. Therefore, we estimate the global annual total addressable market for our products and products in clinical development for chronic sinusitis patients to exceed $6.0 billion.
In August 2011 we received Premarket Approval, or PMA, from the FDA for our first product, PROPEL, indicated for use in patients 18 years or older following ethmoid sinus surgery to maintain patency. Our second product, PROPEL mini, received PMA approval from the FDA in November 2012.
PROPEL mini is designed for patients requiring less extensive surgery and those who have smaller anatomy, thus expanding the treatable patient population. In the first half of 2013, we began scaling our U.S. direct commercial presence. As of March 31, 2014, over 1,000 physicians in the United States have been trained and have incorporated our steroid-eluting implants into their practice. Based on the number of units shipped as of March 31, 2014, we estimate that physicians have treated over 25,000 patients with PROPEL and PROPEL mini. For the year ended December 31, 2013, we generated revenue of $17.9 million and had a net loss of $18.4 million. For the three months ended March 31, 2014, we generated revenue of $7.5 million and had a net loss of $4.4 million. As of March 31, 2014, we had an accumulated deficit of $82.7 million.
We expanded our sales, marketing and reimbursement organizations from 21 people as of December 31, 2012, to 62 people as of March 31, 2014, and have plans to increase sales by further expanding these organizations. We believe this expansion will allow us to further penetrate and expand the market by demonstrating the benefits of our steroid-eluting implants to our physician customers. We expect this would, in turn, persuade more patients to undergo sinus surgery to treat their condition as they are convinced of the ability of our products to improve recovery and surgical outcomes, allowing us to further penetrate and expand the market. In addition, we are using our drug-eluting bioabsorbable implant technology to develop new products for use in the physician office setting, expanding the patient population that can benefit.
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Overview of Sinusitis
The sinuses are a system of connected air-filled cavities located within the bones around the nose and eyes that allow for natural ventilation and drainage of mucus. There are four sinus cavities: ethmoid, frontal, maxillary and sphenoid. One of each type of sinus lies on either side of the face. The sinuses are lined with soft, pink tissue called mucosa, which serves to constantly cleanse the sinuses of impurities such as dust, dirt, allergens, pollutants and bacteria. To clear these inhaled pathogens, the sinus lining secretes mucus which is then cleared away by small, hair-like structures called cilia, which act in coordination to sweep the mucus through the sinus pathways and out through the back of the throat.
The ethmoid sinuses, which lie between the eyes, are a series of small cells with multiple, often interconnected openings in a honeycomb-like formation. These sinuses serve as the central aeration and drainage pathway for all other sinuses. The frontal, maxillary and sphenoid sinuses are known as dependent sinuses, as they each consist of one large cell that drains through an opening, or ostium, into the ethmoid sinus.
Chronic sinusitis is an inflammatory condition in which the sinus lining becomes swollen and inflamed, leading to significant patient morbidity including difficulty breathing, chronic headaches, recurrent infections, bodily pain, and loss of sense of smell and taste. These persistent symptoms can severely impact a patients day-to-day well-being, resulting in frequent doctor visits and can lead to chronic fatigue and depression. The condition significantly reduces work productivity from absenteeism and reduced on-the-job effectiveness, especially meaningful given the average chronic sinusitis patient age of approximately 37 years.
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The debilitating patient symptoms and quality of life impairments attributed to chronic sinusitis create a significant healthcare burden to patients, insurers and employers. According to the CDC, approximately 12% of the U.S. adult population, or 29 million people, are affected by the disease, making it more prevalent than heart disease and asthma. The CDC estimated that in 2005 the condition resulted in 12.6 million physician office and 1.2 million hospital out-patient department visits per year in the United States. It is estimated that chronic sinusitis resulted in $8.6 billion in direct healthcare costs in 2007 in the United States. The indirect costs of chronic sinusitis are also significant, with one study attributing a 38% loss in work productivity due to the illness. In addition, a study of over 200,000 managed care patients found that chronic sinusitis patients made 43% more physician office visits and 25% more urgent care visits, ranking chronic sinusitis among the top 10 most costly conditions to U.S. employers.
Our target market consists of more than 3.5 million people with chronic sinusitis in the United States who are managed by ENT physicians and who we believe could benefit from products that incorporate our drug-eluting bioabsorbable implant technology. While approximately 1.6 million chronic sinusitis patients are offered surgery as a treatment option, approximately one third or 540,000 patients will proceed to surgery. This includes patients who are under the age of 18 and surgeries on the frontal sinuses, both of which are indications that require FDA approval before PROPEL and PROPEL mini may be indicated for use in these procedures. Of the 540,000 patients, we estimate that 85% underwent surgeries for the ethmoid sinuses for which PROPEL and PROPEL mini have been approved for use in adults, and 25% underwent surgeries on the frontal sinuses. We believe that less than 5% of all the procedures were performed on patients under 18 years old. Patients suffering from chronic sinusitis are treated by approximately 7,500 ENT physicians who perform sinus surgery. Based on the number of sinus surgeries, and assuming two devices per surgery and using our estimated average selling price of PROPEL and PROPEL mini of $695 per device, we estimate the annual total addressable market for PROPEL and PROPEL mini in the United States, including for future use in frontal sinus surgeries and on patients under 18 years old, to be approximately $830 million. Penetration of this addressable market would require adoption of PROPEL and PROPEL mini by the 60% of ENT physicians who place sinus packing material into the ethmoid sinuses during surgery and the remaining ENT physicians who do not place packing materials in the ethmoid sinuses or frontal sinuses during surgery. We further estimate the annual total addressable market for our products in clinical development in the United States that are specifically designed to address patients in the physician office setting to be approximately $4.0 billion. This estimate is based on an estimated 3.5 million sinusitis patients at all stages of the disease who are managed by ENT physicians in the United States, for which we estimate (i) approximately 34% have undergone FESS procedures and we assume that 64% of these patients would undergo approximately 1.5 procedures per year to treat recurring symptoms using two devices at an average selling price of $495 per device, and (ii) the remaining approximately 66% of all chronic sinusitis patients managed by ENT physicians would use a different device we have in clinical development assuming that these patients would undergo approximately one procedure per year using two devices at an average selling price of $595 per device.
While our current commercial focus is the U.S. market, we plan to initiate efforts that will allow for future expansion into international geographies. To that end, in July 2014, we received CE mark approval for PROPEL and PROPEL mini which enables market access in Europe. Based on the number of sinus surgeries in Europe and the Asia-Pacific region and our estimated average selling price per implant, and assuming two implants per procedure, we estimate the annual total addressable market for PROPEL and PROPEL mini in these regions to be greater than $1.0 billion. This estimate is based on an estimated approximately 865,000 FESS procedures annually in the 16 countries in which we did research (including surgeries performed by the approximately 40% of surgeons that do not use packing materials in their surgeries), assuming that 85% involve ethmoid sinuses and 25% frontal sinuses and assuming using two devices at an average selling price of $695 per device. Therefore, we estimate the global annual total addressable market for our products and products in clinical development for chronic sinusitis patients to exceed $6.0 billion.
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Current Treatments for Chronic Sinusitis and Their Limitations
The treatment of chronic sinusitis often entails a combination of medical management and surgical intervention to treat the underlying inflammation of the sinus lining, while addressing the secondary symptoms caused by obstruction of the natural drainage pathways.
Medical Management
The first line of therapy for chronic sinusitis is medical management, which typically includes prescribed antibiotics, anti-inflammatory steroids and decongestants. Despite limited efficacy of use of antibiotics in this patient population and the consequence of increasing bacterial resistance, there is pervasive overuse of these drugs, which could lead to patient resistance and has resulted in sinusitis being identified as a major target in national efforts to reduce unnecessary medical intervention. Sinusitis is the most common reason for adult outpatient antibiotic use in the United States, comprising 11% of all antibiotic prescriptions. In addition, physicians often prescribe decongestants and other drugs to target mucus accumulation.
Steroids are prescribed in two forms, oral steroid pills and nasal steroid sprays, both of which have serious limitations. Oral steroid therapy is effective at reaching the sinus lining, but it does so by means of systemic exposure and therefore carries the risk of serious side effects, including glaucoma, bone loss, weight gain, psychosis and difficulty in controlling blood glucose levels in patients with diabetes. Nasal steroid sprays, commonly indicated for rhinitis, or inflammation of the nasal passage, are routinely prescribed for chronic sinusitis patients. While nasal steroid sprays avoid systemic exposure and thus lack such serious side effects, an estimated 70% of the drug is swallowed and the remainder is directed to the nasal passages, instead of the sinuses, which limits efficacy. In a published study, the fraction of drug deposited in the sinuses from a nasal steroid spray was measured to be less than 2%. Poor patient compliance further limits the effectiveness of nasal steroid sprays. Although medical management can reduce symptoms, an estimated 20% or more of chronic sinusitis patients who receive medical therapy are unresponsive.
Sinus Surgery
In cases where patients are symptomatic despite medical management, a physician may recommend FESS. In the FESS procedure, the physician enlarges the inflamed and obstructed sinus pathways by removing inflamed tissue and bone in order to facilitate normal sinus drainage and aeration. First introduced in the United States in the 1980s, FESS is considered the standard of care for surgical intervention to treat chronic sinusitis. During the procedure, the honeycomb-like cells of the ethmoid sinuses are removed, resulting in one large open cavity. Given their essential role in sinus function, the ethmoid sinuses are opened in over 85% of FESS procedures. The dependent sinuses each drain into the ethmoid sinuses through ostia, which may be enlarged by either surgically removing tissue or via balloon sinuplasty.
FESS is typically performed under general anesthesia in an operating room. During the procedure, a physician inserts an endoscope into the nasal cavity to provide visualization of the patients anatomy. Surgical instruments, powered cutting tools and balloon sinuplasty devices are used to remove or dilate obstructive tissue and bone. Following the surgical intervention, physicians often pack the newly opened ethmoid sinuses with gauze or other obstructive sinus packing materials to hold the sinus cavities open. A follow-up office visit is required several days after the procedure to remove the sinus packing materials and an additional one to two follow-up visits typically occur over the first four to six weeks following surgery to monitor for and treat complications. A typical FESS procedure is paid at a Medicare rate of approximately $10,000. Private insurer payment rates average 139 percent of Medicare rates nationally.
Since the introduction of FESS, several new technologies, such as image-guided surgical navigation systems, powered surgical tools and balloon sinuplasty devices have expanded the addressable patient population who can benefit from FESS and allowed for treatment of patients in the physician office setting. For instance, balloon sinuplasty devices were developed to be used in combination with traditional surgical instruments during FESS to treat the dependent sinuses. Balloon sinuplasty is now also used during a procedure in the physician office setting to treat mild chronic sinusitis patients who may not be willing to undergo or are not candidates for sinus surgery under general anesthesia in the operating room setting.
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While FESS is the standard of care for treating chronic sinusitis, it has several limitations:
| Limited effectiveness. Inflammation and scarring in the postoperative period are common and can compromise the surgical result by negatively impacting the ability of the sinuses to heal. This increases the need for continued medical management and additional surgical procedures. Within the first year after surgery, approximately 64% of patients experience recurrent symptoms. |
| Limited ability to address postoperative inflammation. While oral steroids prescribed postoperatively can be effective at addressing inflammation and scarring, the required doses are significant and can result in serious systemic side effects, including glaucoma, bone loss, weight gain, and psychosis. Further, they have restricted use in diabetic individuals, patients with glaucoma and certain psychological disorders. We believe, as a result, only 20% of physicians prescribe them routinely after surgery. The absence of anti-inflammatory steroid therapy leaves the surgical wound susceptible to postoperative complications. |
| Pain and discomfort during postoperative period. During surgery, an ENT physician typically places sinus packing materials into the ethmoid sinuses to physically separate tissues in an attempt to prevent scarring and adhesions. Following surgery, physicians see patients two to three times in order to monitor for and, if necessary, to treat complications as well as remove these sinus packing materials. The sinus packing materials are removed by pulling or suctioning them from the newly opened cavity, a painful and time-consuming process, often necessitating pain medication. Moreover, the use of sinus packing materials obstructs the newly opened sinuses, leading to patient symptoms of congestion and discomfort. Despite the use of packing materials, scarring and adhesions are common, necessitating painful removal of additional tissue during postoperative treatments. |
| Potential for revision surgery. Within the first year after FESS, approximately 10% of patients will return to the operating room to undergo a revision procedure, while additional patients will return for a revision procedure after one year. We believe the risk of potential revision surgery is a significant deterrent to some patients that would otherwise undergo FESS for chronic sinusitis. |
We believe that because of the limitations of medical management and lack of disease resolution after FESS, many chronic sinusitis patients remain undertreated. We estimate that only a third of patients recommended for sinus surgery proceed with the potentially beneficial procedure, which we believe is due to its limitations and high risk for additional medical management and surgical revision. While balloon sinuplasty has been introduced to open frontal, maxillary and spenoid sinuses, or dependent sinuses, in a less invasive manner, it cannot treat disease in the most commonly involved sinuses, the ethmoids, and does not address the underlying inflammation associated with chronic sinusitis. We believe that an opportunity exists to reach these undertreated patients by providing a more effective option to address their inflammatory disease, while improving the overall outcomes of FESS.
Our Solution
We have designed a drug-eluting implant that consists of bioabsorbable polymers that control drug release and provide structural support to adjacent tissues during the healing process, while the implant is gradually and fully absorbed into the body. We believe the development, manufacturing, and regulatory approval for products incorporating this technology requires capabilities in polymer science, drug delivery, analytical testing and combination products. These competencies allow our technical team to tailor drug formulation, polymer design, drug release duration, implant radial strength and degradation period to meet different clinical needs. This expertise has been utilized in the development of PROPEL and PROPEL mini and is currently being leveraged in the development of our pipeline products. Any new products we develop, or changes that we make in the therapeutic agent used in our PROPEL or PROPEL mini, will require FDA approval prior to commercialization in the United States.
Our PROPEL implants are designed to improve the outcomes of sinus surgery by holding open the sinus passageways, reducing postoperative inflammation and scarring. They are inserted by a physician under endoscopic visualization during sinus surgery in the ethmoids. Once inserted, the self-expanding implants conform to and hold open the surgically enlarged sinus, while gradually releasing an anti-inflammatory steroid,
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mometasone furoate, directly to the sinus lining over a period of 30 days. Mometasone furoate, which is available generically and has been approved by the FDA for use in PROPEL and PROPEL mini, is the active ingredient in NASONEX, a nasal spray used to treat allergic rhinitis and other indications. The implants fully absorb into the body over a period of four to six weeks or are removed at the discretion of a physician during a routine office visit. Once absorbed or removed, the implant no longer provides structural support. The graphic below illustrates the operation of PROPEL and PROPEL mini in the sinuses:
We believe the principal benefits of our steroid-eluting implants are:
| Improved surgical outcomes. Our PROPEL implants have been clinically proven to improve FESS results by reducing postoperative inflammation and scarring. In a meta-analysis of prospective, multicenter, randomized, controlled, double-blind clinical studies, our PROPEL implants provided a 46% relative reduction in inflammation and a 70% relative reduction in scarring compared to the control implant. The control implant was identical to the PROPEL implant in composition, size, structure and mode of insertion but lacked the mometasone furoate coating. Our PROPEL implants also demonstrated a significant reduction in postoperative complications, including severe inflammation, such as polyps, and scarring, which are both common reasons for FESS failure. |
| Targeted steroid therapy to address postoperative inflammation. Our PROPEL implants are the first and only drug-eluting bioabsorbable sinus implants. They deliver postoperatively an anti-inflammatory steroid directly to the sinus lining in a controlled fashion over a period of 30 days, which helps in the wound healing process. In a meta-analysis of prospective, multicenter, randomized, controlled, double-blind clinical studies, our PROPEL implants reduced the need for oral steroids by 40% compared to the control implant. |
| Reduced pain and discomfort during postoperative period. Our PROPEL implants improve postoperative care. Once inserted, the self-expanding implants are designed to conform to and hold open the surgically enlarged ethmoid sinuses until fully absorbed into the body, which improves wound healing without obstructing the sinuses and causing congestion. Our steroid-eluting implants are designed to obviate the need for sinus packing materials, which can be a significant source of postoperative pain and discomfort. Our PROPEL implants significantly reduce scarring and adhesions, which reduces the potential for pain in postoperative treatments. |
| Reduced surgical revisions. In clinical studies, our PROPEL implants demonstrated a significant reduction in need for postoperative surgical intervention. In a meta-analysis of prospective, multicenter, randomized, controlled, double-blind clinical studies, our PROPEL implants provided a 35% relative reduction in the need for postoperative oral steroid and surgical intervention compared to the control implant. We believe that patients who have been deterred by the high revision rates associated with FESS may now consider surgical intervention to treat their chronic sinusitis condition. |
We believe these benefits will help expand the size of the FESS market as referring physicians increase their prescription of surgical intervention for chronic sinusitis and more patients elect to undergo sinus surgery to treat their condition.
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Our Strategy
Our goal is to be a leading drug-device company committed to advancing clinically proven therapeutic solutions that improve the quality of life for patients with ENT conditions. The key elements of our strategy include:
| Expand our sales and marketing organizations to support growth. In the territories in which we focus, our sales team has been able to achieve meaningful adoption and utilization since our first product launch in September 2011. After refining our commercial model, we began to scale our sales and marketing organizations in the first half of 2013 and as of March 31, 2014 are selling in 35 territories. We plan to continue to invest in the expansion of this scalable infrastructure to provide ENT physicians in the United States with access to our steroid-eluting implants. We believe that investment in our sales and marketing organizations will drive continued adoption of our products to establish our steroid-eluting implants as the standard of care. |
| Promote awareness amongst ENT physicians, referring physicians and patients. We believe that many patients with chronic sinusitis are currently undertreated, and we intend to educate ENT physicians, allergists, primary care physicians or other referring medical professionals and patients to raise awareness of the disease and available treatment alternatives, including the advantages of using our steroid-eluting implants. We intend to continue promoting this awareness through conducting advertising campaigns, training and educating physicians, publishing additional clinical data demonstrating the benefits of our devices including improved patient outcomes and exhibiting at tradeshows. We have various ongoing marketing initiatives focused on improving referring patterns to our trained physicians. In addition, we plan to launch direct-to-patient marketing programs that we believe will further increase product awareness. |
| Advance our platform of innovative products for additional chronic sinusitis patients. We believe improving treatment options for chronic sinusitis patients across the continuum of care holds tremendous market opportunity, and has significant potential to reduce healthcare costs. We are developing additional products using our drug-eluting bioabsorbable implant technology that are specifically designed to treat and manage chronic sinusitis in the physician office setting during a routine visit. This technology is currently under clinical evaluation in the United States. We are also working to expand indications for our PROPEL implants to allow for the treatment of the dependent sinuses. |
| Facilitate access to our products via third-party reimbursement. Our currently approved products are commonly treated as general supplies utilized in sinus surgery and if covered by third-party payors, are paid for as part of the FESS procedure. We believe that establishment of reimbursement codes specific to the use of drug-eluting implants for chronic sinusitis is an important factor in expanding access to our products, especially in the physician office setting. Therefore, our strategy includes efforts to engage physician societies and encourage third-party payors to establish coverage, coding and payment that will facilitate access to our drug-eluting implants as we expand our commercialization efforts in the United States. |
| Introduce our steroid-eluting implants in markets outside the United States. While our current commercial focus is the U.S. market, we plan to initiate efforts that will allow for future expansion into international geographies. To that end, in July 2014, we received CE mark approval for PROPEL and PROPEL mini which enables market access in Europe. Based on the number of sinus surgeries in Europe and the Asia-Pacific region, we estimate the annual total addressable market for PROPEL and PROPEL mini in these regions to be greater than $1.0 billion. We plan to leverage our FDA PMA approved products and clinical data to access these markets, starting first with the development of clinical, regulatory and reimbursement strategies for countries in Europe and the Asia-Pacific region. |
Our Products
Our Technology Platform
Our drug-eluting bioabsorbable implant technology consists of a polymer-based implant that is coated with a drug and polymer matrix. In fabricating the implant, we use polymers that are bioabsorbable and, over time,
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gradually and fully absorb into the body. The polymers chosen are materials with established safety profiles and have been used in medical devices for over 30 years. Individual polymer properties can further enhance biocompatibility in the sinus anatomy. For example, the polyethylene glycol used in the drug coating for PROPEL and PROPEL mini has been proven to be an anti-inflammatory, protein-resistant barrier.
Our innovative design process enables us to develop the mechanical and drug delivery features independently, lending to our customization capability. Our highly specialized bioabsorbable polymer engineering capability, allows us to design the implant with various physical characteristics depending on the size, radial strength and other attributes that are appropriate to enable treatment of the underlying disease in its location. Our implants are designed to be self-expanding, which facilitates insertion when compressed, and expand to conform to the surrounding anatomy after insertion. The ability to control radial strength is important in enabling us to address different diseases at different states. For example, in some instances an implant may be used to maintain an already open passageway. In other situations an implant with significantly greater strength may mechanically dilate a diseased passageway.
Our expertise in drug delivery allows us to effectively pair appropriate polymer delivery matrices with desired therapeutic agents. This allows us to select the therapeutic agent based on its clinical effectiveness and tailor the platform accordingly. In the case of PROPEL, we considered the wide range of off-patent corticosteroids, chose the one best suited for treatment of sinus inflammation, then customized the polymer delivery. Once a drug is selected, our specialized capability in drug formulation allow us to control the speed at which the drug elutes, allowing us to design implants from which the drug is released over a matter of weeks to even longer durations. As a result, we have the flexibility to select the type of drug to be used on the implant and then engineer the implant to control the amount, timing and delivery of the drug.
PROPEL Implant and Delivery System
Our steroid-eluting implants are the first and only FDA-approved drug-eluting implants for chronic sinusitis sufferers. They are indicated for use in patients 18 years or older following ethmoid sinus surgery to maintain patency.
The PROPEL implant is formed from a bioabsorbable polymer fiber, poly-(L-lactide-co-glycolide), or PLG, a material that has been used in medical devices for 30 years. The implant is coated with a drug-eluting coating containing 370 micrograms of mometasone furoate, a corticosteroid with anti-inflammatory properties, in a polymer matrix containing PLG and polyethylene glycol, or PEG. Because of its bioabsorbable nature, the implant will be fully and gradually absorbed into the body over a period of four to six weeks, or it may be removed prior to such time at the discretion of the physician. The implant is designed to accommodate the size and variability of the surgically enlarged ethmoid sinus anatomy and features a nominal expanded implant length of 23 millimeters. PROPEL is delivered using a one-handed ergonomically designed delivery system that provides access to the ethmoid sinuses using endoscopic visualization. The delivery system is comprised of a sheath with a curved distal tip, inside which the implant is housed for deployment. A funnel tool is included in the product kit and is attached to the distal tip of the delivery system to assist in the loading of the implant into the delivery system.
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We designed the steroid drug release of PROPEL for a duration of 30 days to match the postoperative healing cycle characterized in published medical literature. We selected mometasone furoate as the anti-inflammatory agent among numerous evaluated compounds based on three important characteristics: absorbability, binding affinity and low systemic bioavailability. The compound preferentially absorbs into the sinus lining instead of the surrounding mucous fluid. The drug has the highest glucocorticoid receptor binding affinity, making it highly potent in preventing inflammation once within tissue. Glucocorticoid receptors are the molecules in the surface membranes of cells throughout the body to which corticosteroids chemically bind. Additionally, the compound has low systemic bioavailability, meaning that it has negligible systemic safety side effects.
![]() PROPEL and PROPEL mini steroid-eluting implants |
PROPEL and PROPEL mini implant delivery systems |
PROPEL Mini Implant and Delivery System
The PROPEL mini implant, is a smaller version of PROPEL and is manufactured from the same bioabsorbable polymer fiber and with the same drug-eluting coating and other design characteristics. The nominal expanded implant length of the PROPEL mini is 16 millimeters. The profile of the delivery system is smaller, facilitating treatment of smaller anatomy. The distal tip is curved to allow for treatment of additional sinuses as future indications are obtained. A crimper, loading tool and funnel are provided in the product kit to assist in the crimping and loading of the implant into the delivery system.
Product Pipeline and Research and Development
We continue to expand our product pipeline by applying our proprietary drug-eluting bioabsorbable implant technology to additional chronic sinusitis-targeted applications, which we believe will expand the patient population that can benefit from our steroid-eluting technology.
Steroid-Eluting Implant for Refractory Disease in Office
Our steroid-eluting implants are clinically proven to improve surgical results for patients undergoing FESS, reducing the need for postoperative surgical and steroid intervention. However, given the underlying chronic inflammation associated with this condition, recurrent obstruction of the sinus cavity can occur over time following sinus surgery, especially in patients afflicted with polyps, a sign of severe inflammation. Improving care of such chronic patients holds meaningful opportunity to significantly reduce healthcare costs by preventing revision surgery. We have developed an alternative treatment option for patients who are candidates for revision surgery that can be placed in the physician office setting during a routine visit. This implant is based on the same drug-eluting bioabsorbable implant technology as PROPEL, but is designed to have greater radial strength in order to dilate an obstructed, polyp-filled sinus cavity, and deliver drug for an extended period of time. This implant is currently under clinical evaluation in the United States and, unlike PROPEL, which is regulated as a medical device, the implant is subject to regulation as a drug product and will require the submission to the FDA of a New Drug Application, or NDA. We intend to pursue the NDA for this implant under Section 505(b)(2) of the FDCA. Section 505(b)(2) would enable us to rely, in part, on the FDAs findings of safety and efficacy for an existing product, or published literature, in support of our NDA, which could expedite the development program of this implant by potentially decreasing the amount of clinical data that we would need to generate in order to obtain FDA approval.
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Steroid-Eluting Implant for Primary Disease Management in Office
We are also developing another steroid-eluting implant designed to fit the openings of the dependent sinuses following ostial dilation using balloon sinuplasty. This implant will allow treatment of patients, who have not yet had surgery, in the physician office setting. We believe this product will further expand the addressable patient population to those that are either indicated for sinus surgery and choose not to proceed or those with less severe disease that would otherwise be treated with medical management. A single center, non-randomized clinical study to assess the feasibility of this implant was recently initiated in the United States.
Other Products
Beyond chronic sinusitis, we plan to apply our drug-eluting bioabsorbable implant technology to a variety of other ENT conditions, such as conditions affecting the ear and throat. We believe there are many opportunities to replace medical management and improve current surgical interventions with targeted drug-eluting implants. We are in various stages of development for these potential new products.
In addition to building our product offering through internal product development efforts, we may selectively license or acquire complementary products and technologies, leveraging our experience at bringing new products to market and our commercial channel.
Research and Development
As of March 31, 2014, we had 26 employees in our research and development department, including eight employees responsible for clinical development, six for quality assurance and three for regulatory affairs. The primary focus of this group is to develop new steroid-eluting implants that leverage our drug-eluting bioabsorbable implant technology. Research and development expenses for 2012 and 2013 were $9.3 million and $9.5 million, respectively.
Clinical Results and Studies
PROPEL
The safety and efficacy of PROPEL has been studied in three prospective, multicenter clinical trials conducted in the United States enrolling a total of 205 patients. The principal safety and efficacy information is derived from the ADVANCE II randomized clinical trial and is supported by the ADVANCE clinical trial and an initial pilot study. A meta-analysis that pooled data from the ADVANCE II study and the initial pilot study provides further evidence of efficacy. In all three studies, implants were placed following ethmoid sinus surgery, or ethmoidectomy, which entails removal of the honeycomb-like partitions between the ethmoid sinuses in order to create larger sinus cavities. Based on the number of units shipped between the initial FDA approval in August 2011, and March 31, 2014, we estimate that physicians have treated over 25,000 patients with our steroid-eluting implants.
All three studies were designed to measure PROPELs ability to improve the outcomes of sinus surgery. This included measuring the need for postoperative interventions such as adhesion lysis, which is a procedure to separate scar tissue and adhesions within the sinus cavity, and the need to prescribe oral steroids to treat inflammation. The studies also measured the impact of PROPEL on other postoperative complications, such as occurrence of polyposis and middle turbinate lateralization. Prevention of these complications contributes to the long-term success of sinus surgery. Polyposis represents a higher level inflammatory disease. The middle turbinate is a bony structure in the middle of the sinus, responsible for filtration, heating, and humidification of nasal air flow. Middle turbinate lateralization is an undesired complication where this structure curves towards the outer, or lateral, wall of the nose resulting in blockage of the ethmoid sinus passage.
The ADVANCE II Study
We sponsored the ADVANCE II study, a prospective, multicenter, randomized, controlled, double-blind, pivotal study that enrolled 105 adult patients undergoing FESS with bilateral ethmoidectomy for treatment of chronic sinusitis refractory to medical management at 11 study centers in the United States between December 2009 and July 2010. The study utilized an intra-patient control design to minimize variability and allow for blinded assessment of the safety and efficacy of the drug-eluting implant compared to a non-drug-eluting control version of the implant. Patients received a drug-eluting implant on one randomized side and an identical non-drug-eluting
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control version of the implant on the contralateral side. During the initial 30-day follow-up, no oral or topical steroid sprays were permitted. The primary efficacy endpoint was the reduction in need for postoperative interventions at day 30, determined by grading of video-endoscopies from day 30 by a panel of three independent blinded sinus surgeons. Postoperative interventions were a composite endpoint defined as either surgical intervention required to separate an adhesion and/or oral steroid intervention to resolve recurrent ethmoid sinus inflammation. Additional efficacy endpoints were determined by endoscopic grading done by clinical investigators at the study centers.
Ocular safety was characterized by measurement of intraocular pressure, or IOP, at baseline through day 90 and lens examination for cataract formation or progression performed at baseline and day 90. The primary safety endpoint was defined as the absence of clinically significant IOP elevation through day 90.
Implants were successfully deployed in all 210 sinuses. Compared to the control implant, the drug-eluting implant provided a 29% relative reduction in postoperative interventions, a 52% relative reduction in adhesion lysis, and a 29% relative reduction in oral steroid intervention. The relative reduction in frank polyposis was 45%. The primary ocular safety endpoints were met as there were no clinically significant IOP increases and no clinically significant changes from baseline in lens opacities.
Principal Efficacy Results at Day 30 as graded by independent, blinded panel of physicians |
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Outcome Measure |
Evaluable Patients* |
Treatment Sides (n=105) No. (%) |
Control Sides (n=105) No. (%) |
Relative Reduction (%) |
P Value | |||||||||||||||
Postoperative intervention |
96 | 32 (33.3) | 45 (46.9) | -29 | 0.0280 | |||||||||||||||
Adhesion lysis |
100 | 14 (14.0) | 29 (29.0) | -52 | 0.0053 | |||||||||||||||
Oral steroid intervention |
86 | 20 (23.3) | 28 (32.6) | -29 | 0.0881 | |||||||||||||||
Frank polyposis |
85 | 16 (18.8) | 29 (34.1) | -45 | 0.0023 |
* | Evaluable subjects were those with gradable sinuses on both sides |
Meta-Analysis
Two prospective, multicenter, randomized, controlled, double-blind studies enrolled a total of 143 patients utilizing an intra-patient control design. The results of these two trials, the ADVANCE II study and the initial Pilot study, were then pooled for a meta-analysis, which represents the first and only Level 1a evidence for any devices used in sinus surgery today. Level 1a evidence is the highest level of evidence according to the criteria of the Centre for Evidence-Based Medicine at the University of Oxford. For evidence Level 1a, a meta-analysis of multiple randomized controlled trials is required.
Compared to the control implant, the drug-eluting implant provided a 35% relative reduction in postoperative interventions, a 51% relative reduction in adhesion lysis and a 40% relative reduction in oral steroid intervention. The relative reduction in frank polyposis was 46%. Additional efficacy endpoints of significant, or severe, adhesions and middle turbinate lateralization, determined by clinical investigators at the study centers, were reduced by 70% (p=0.0013) and 75% (p=0.0225), respectively.
Principal Efficacy Results at Day 30 as graded by independent, blinded panel of physicians |
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Outcome Measure |
Evaluable Patients* |
Treatment Sides (n=143) No. (%) |
Control Sides (n=143) No. (%) |
Relative Reduction (%) |
P Value | |||||||||||||||
Postoperative intervention |
128 | 42 (32.8) | 65 (50.8) | -35 | 0.0008 | |||||||||||||||
Adhesion lysis |
134 | 19 (14.2) | 39 (29.1) | -51 | 0.0016 | |||||||||||||||
Oral steroid intervention |
113 | 25 (22.1) | 42 (37.2) | -40 | 0.0023 | |||||||||||||||
Frank polyposis |
111 | 22 (19.8) | 41 (36.9) | -46 | <0.0001 |
* | Evaluable subjects were those with gradable sinuses on both sides |
The ADVANCE Study
We sponsored the ADVANCE study, a prospective, multicenter, single-cohort, open-label trial that enrolled 50 adult patients undergoing primary or revision FESS with either unilateral or bilateral ethmoidectomy for treatment of chronic sinusitis refractory to medical management at seven study centers in the United States between March 2009 and December 2009. At the end of the FESS procedure, drug-eluting implants were placed
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in the patients ethmoid sinus cavities. During the initial 30-day follow-up, no oral or topical steroid sprays were permitted. Follow-up assessments included endoscopic examination and scoring through 60 days, with patient symptom scoring done through six months. Patient symptom scoring was assessed using validated disease-specific symptom-scoring instruments, namely the Sinonasal Outcomes Test-22, or SNOT-22, a questionnaire that includes 22 symptoms related to sinusitis, and the Rhinosinusitis Disability Index, or RSDI, which is a validated measure of health-related quality of life in rhinitis or rhinosinusitis that contains 30 items that measure symptoms such as facial pain, congestion and sense of smell.
Local sinus safety was assessed by monitoring for device-related adverse events. Ocular safety was characterized by measurement of IOP at baseline through day 30 and lens examination for cataract formation or progression, performed at baseline and day 30.
Implants were successfully placed in all 90 sinuses. Mean inflammation scores were minimal at all time points. At one month, the prevalence of polypoid edema was nine of 90 sinuses (10.0%), frank polyposis occurred in two sinuses (2.2%), significant adhesion occurred in one sinus (1.1%), and middle turbinate lateralization occurred in four sinuses (4.4%). There were no clinically significant changes from baseline in lens opacities or IOP. The mean changes from baseline to day 60 and six months in total RSDI scores were -36.2 and -29.7, respectively, reflecting statistically significant improvement. The mean changes from baseline to day 60 and six months for the SNOT-22 scores were -1.9 and -1.7, respectively, reflecting statistically significant improvement.
PROPEL Pilot Study
We sponsored an initial pilot study, a prospective, multicenter, randomized, controlled, double-blind feasibility study that enrolled 50 adult patients undergoing FESS with bilateral ethmoidectomy for treatment of chronic sinusitis refractory to medical management at four study centers in the United States between March 2008 and February 2009. A total of 43 patients received the PROPEL and control implants. The other seven patients were the first patients enrolled in the study and received an earlier implant version that was subsequently discontinued. The study utilized an intra-patient control design to minimize variability and allow for blinded assessment of the efficacy of the drug-eluting implant compared to an identical non-drug-eluting control version of the implant. Thirty-eight patients received the drug-eluting implant on one randomized side and an identical non-drug-eluting control implant on the contralateral side. Five patients received bilateral drug-eluting implants to assess systemic safety. During the initial 30-day follow-up, no oral or topical steroid sprays were permitted.
Implants were successfully deployed in all 86 sinuses. Compared to the control implant, the drug-eluting implant provided a statistically significant reduction in ethmoid sinus inflammation from day 21 to 45. The drug-eluting implant reduced the frequency of middle turbinate lateralization, significant adhesion lysis, and frank polyposis through day 30, compared to the control implant. There was no evidence of systemic drug exposure. The steroid was not quantifiable systemically at any time point and there was no evidence of adrenal cortical suppression.
Principal Efficacy Results at Day 30 as graded by independent, blinded panel of physicians |
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Outcome Measure |
Evaluable Patients* |
Treatment Sides (n=38) No. (%) |
Control Sides (n=38) No. (%) |
Relative Reduction (%) |
P Value | |||||||||||||||
Postoperative intervention |
31 | 10 (32.3) | 20 (64.5) | -50 | 0.0063 | |||||||||||||||
Adhesion lysis |
34 | 5 (14.7) | 10 (29.4) | -50 | ns | |||||||||||||||
Oral steroid intervention |
27 | 5 (18.5) | 14 (51.9) | -64 | 0.0039 | |||||||||||||||
Frank polyposis |
26 | 6 (23.1) | 12 (46.2) | -50 | 0.0312 |
* | Evaluable subjects were those with gradable sinuses on both sides. |
Future Products
Steroid-Eluting Implant for Refractory Disease in Office
We are developing a steroid-eluting implant for refractory disease for the treatment of patients in the physician office setting. This product candidate has a primary mode of action of drug, and for this reason will require NDA approval from the FDA rather than PMA approval. We are sponsoring four studies of this product candidate, a pilot study, a pharmacokinetic study, RESOLVE and RESOLVE II in order to support an NDA application with the FDA.
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Pilot Study. We sponsored an initial pilot study which was a prospective, multicenter feasibility study that enrolled 12 adult patients who had prior FESS, but experienced recurrent polyposis refractory to medical management at four study sites in the United States in November 2011. Implants were delivered under topical or anesthesia in a physicians office. Reductions in mean bilateral polyp grade as well as patient reported symptoms were demonstrated over 30 days and were sustained through six months. At six months follow-up, 64% of patients were no longer revision FESS candidates. No serious adverse events occurred.
This study provided initial clinical evidence of the feasibility, safety, and efficacy of in-office drug-eluting implant placement in chronic sinusitis patients with recurrent polyposis after FESS. Based on these study results, we planned the RESOLVE study program.
Pharmacokinetic Study. A single-center pharmacokinetic study was conducted in 2013. The protocol required five patients to undergo serial blood sampling for one month following bilateral implant placement. The study demonstrated that there is negligible systemic exposure from the drug.
The RESOLVE Study Program. RESOLVE and RESOLVE II are randomized, controlled clinical trials. RESOLVE is a 100-patient, prospective, multicenter, randomized, controlled, double-blind, clinical study that follows patients through six months. As we had previously agreed with the FDA, the intent of RESOLVE was to direct the final study design and sample size required for the subsequent, larger RESOLVE II, Phase 3 study. Enrollment for the RESOLVE study was completed in November 2013 with primary outcome measurements at three months. The primary safety endpoints were met and no serious adverse events occurred. The study included endpoints designed to assess improvements in both patient-reported symptoms (sensation of nasal obstruction/congestion) and objective endoscopic outcomes determined by clinicians (sino-nasal polyp burden and the overall volume of sinus obstruction). The improvement from baseline in nasal obstruction/congestion score (co-primary endpoint) in the treatment group was clinically meaningful and was twice as large as that of the control group, although this finding did not achieve statistical significance due in part to higher than anticipated variability in the measure. In patients with greater polyp burden at baseline, representing approximately 75% of the study population, the improvement in nasal obstruction/congestion achieved statistical significance. Endoscopically, statistically significant reductions in nasal polyp burden and the overall volume of sinus obstruction were observed. We expect all analyses for the RESOLVE study, including the endoscopic grading by an independent panel (co-primary endpoint) and the 6-month data, to be available in September 2014. We believe RESOLVE provides important information with regard to sample size and other design elements and we plan to utilize the RESOLVE study results in determining the design of the Phase 3, RESOLVE II study.
Steroid-Eluting Implant for Primary Disease Management in Office
We are also developing another steroid-eluting implant designed to fit the openings of the dependent sinuses following ostial dilation using balloon sinuplasty. This implant will allow treatment of patients, who have not yet had surgery, in the physician office setting. A single center, non-randomized clinical study to assess the feasibility of this implant was recently initiated in the United States.
Sales and Marketing and Physician Training
Sales and Marketing
We market and sell our steroid-eluting implants through our direct sales and marketing organizations in the United States. As of March 31, 2014, our sales, marketing and reimbursement organizations consisted of 62 employees including 52 employees in sales, nine in marketing and customer service and one in reimbursement.
Of the approximately 10,000 ENT physicians in the United States, our target customer market consists of the approximately 7,500 ENT physicians who perform sinus surgery. We believe this makes for a well-defined physician customer base that is accessible by a direct sales organization. We are focused on developing strong relationships with our customers and educating physicians on the proper use and applications of our products and in identifying the appropriate patient candidates who could benefit from our products. While we sell directly to hospitals, the ENT physician typically drives the purchasing decision. In addition, we sell products to ambulatory surgery centers. We plan to increase the size of our commercial organization to expand the current customer account base and increase utilization of our steroid-eluting implants.
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Through education, training and research programs, we are supporting physicians to provide the best care for sinus surgery patients. Our physician education program, clinical studies and medical conferences are key means for generating product awareness, adoption and utilization.
Physician referrals and peer-to-peer education and training are important components of our strategy. We have marketing programs targeted at appropriately educating medical professionals who in many instances represent the primary point of contact with the patient. We plan to implement marketing initiatives targeted at increasing patient awareness of our products through direct-to-patient marketing programs. These efforts are currently focused on informing patients of local physicians trained in the use of our steroid-eluting implants through a physician locator application on our website.
Physician Training
We devote resources to training and educating ENT physicians and their support teams on the proper use of our steroid-eluting implants. We strongly believe proper physician preparation and training optimize the proper use of our products and improve surgical outcomes. We believe one of the most effective ways to introduce and build market demand for our products is by training ENT physicians.
We have designed our products to be ergonomically intuitive to an ENT physician so that their function and use is based on common sinus surgery techniques. Our training process consists of a presentation by one of our sales representatives at the physicians office to demonstrate the use of our products, without requiring physician attendance at a formal training course. Although we are not required to do so, we may have one of our field personnel present during the initial cases performed by a newly-trained ENT physician. Our efficient in-servicing process makes for a cost-effective method of training new physicians and staff.
As of March 31, 2014, we had trained over 1,000 ENT physicians in the proper use of our products. Physician users of our steroid-eluting implants frequently assist in our training efforts as we believe these physicians are instrumental in demonstrating the benefits of our products through peer-to-peer education. These educational events, conducted across the country, typically consist of instructional presentations, clinical study reviews and filmed case studies.
Competition
Our industry is highly competitive, subject to change and significantly affected by new product introductions and other activities of industry participants. Many of the companies developing or marketing ENT products are publicly traded or are divisions of publicly-traded companies, and these companies enjoy several competitive advantages, including:
| greater financial and human capital resources; |
| significantly greater name recognition; |
| established relationships with ENT physicians, referring physicians, customers and third-party payors; |
| additional lines of products, and the ability to offer rebates or bundle products to offer greater discounts or incentives to gain a competitive advantage; and |
| established sales, marketing and worldwide distribution networks. |
Because of the size of the market opportunity for the treatment of chronic sinusitis, potential competitors have historically dedicated and will continue to dedicate significant resources to aggressively promote their products or develop new products. New product developments that could compete with us more effectively are possible because of the prevalence of chronic sinusitis and the extensive research efforts and technological progress that exist within the market. Large medical device companies with ENT divisions, such as Medtronic, also have capability in drug-eluting stents. Though we are not aware of any such products to date, these or other companies may develop drug-eluting products that could compete with our products.
Our commercially available products are designed to be used following sinus surgery. If another company successfully develops a surgical approach to the treatment of sinusitis that would not benefit from the use of our
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steroid-eluting implants, if another company develops a device to treat the inflammation and scarring associated with sinus surgery that is more efficacious than our steroid-eluting implants or if a pharmaceutical company successfully develops a drug that addresses chronic sinusitis without the need for surgical intervention, sales of our products would be significantly and adversely affected.
The alternative to delivering steroids to the sinuses post-operatively with PROPEL is the prescription of oral steroids. While oral steroids prescribed postoperatively can be effective at addressing inflammation and scarring, the required doses are significant and can result in serious systemic side effects, including glaucoma, bone loss, weight gain, and psychosis. Further, oral steroids have restricted use in diabetic individuals, patients with glaucoma and some psychological disorders. We believe, as a result, only 20% of physicians prescribe them routinely after surgery. Additionally, there are commercially available packing materials on the market that provide a spacing function and are less expensive than PROPEL. During surgery, approximately 60% of ENT physicians place sinus packing materials, either absorbable or non-absorbable, into the ethmoid sinuses to physically separate tissues in an attempt to prevent scarring and adhesions. Sinus packing materials are not placed in the frontal sinuses. Following surgery, the sinus packing materials are removed by pulling or suctioning them from the newly opened cavity, a painful and time-consuming process, often necessitating pain medication. Despite the use of packing materials, scarring and adhesions are common, necessitating painful removal of additional tissue during postoperative treatments. Some physicians choose to soak these packing materials with steroid in liquid form in an effort to deliver steroid to the sinus. This practice is off-label and is not supported by clinical data. However, although we believe PROPEL and PROPEL mini have significant advantages over sinus packing materials and other treatment options, they are expensive relative to packing materials and may not be reimbursed by third-party payors. As a result, ENT physicians may choose to use oral steroid delivery or packing materials or a combination of the two, which are less expensive, in lieu of PROPEL or PROPEL mini.
We believe that our continued ability to compete favorably depends on:
| successfully expanding our commercial operations; |
| continuing to innovate and maintain scientifically-advanced technology; |
| developing technologies for applications in the sinuses and other areas of ENT; |
| attracting and retaining skilled personnel; |
| obtaining patents or other intellectual property protection for our products; and |
| conducting clinical studies and obtaining and maintaining regulatory approvals. |
Intellectual Property
As of March 31, 2014, we owned 41 issued patents globally, of which 24 were issued U.S. patents. As of March 31, 2014, we owned 41 patent applications pending globally, of which 13 were patent applications pending in the United States. Subject to payment of required maintenance fees, annuities and other charges, our issued U.S. patents have expiration dates between 2017 and 2030, with one of our issued U.S. patents expiring before 2020, 13 expiring between 2021 and 2025, and the remaining 10 expiring after 2025.
As of March 31, 2014, our trademark portfolio contained 20 trademark registrations, four of which were U.S. trademark registrations, as well as three pending foreign trademark applications.
We also rely upon trade secrets, know-how, continuing technological innovation, and may rely upon licensing opportunities in the future, to develop and maintain our competitive position. We protect our proprietary rights through a variety of methods, including confidentiality agreements and proprietary information agreements with suppliers, employees, consultants and others who may have access to proprietary information.
Manufacturing and Supply
We manufacture our steroid-eluting implants at our facility in Menlo Park, California with components supplied by external suppliers. We perform inspections of these components before use in our manufacturing operations. Using these components, we assemble, inspect, test and package our implants, and send them to a
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third-party sterilization vendor. After sterilization, we perform inspections of the finished implants internally and via third party laboratories to determine compliance with our specifications, release the lot to inventory and then ship the finished product to customers.
The active pharmaceutical ingredient, or API, and a number of our critical components used in our implants are supplied to us from single source suppliers. We rely on single source suppliers for some of our polymer materials, some extrusions and molded components, some off-the-shelf components and for finished goods testing. Our ability to commercially supply our products and to develop our product candidates depends, in part, on our ability to obtain successfully the API and polymer materials used in these products in accordance with regulatory requirements and in sufficient quantities for commercialization and clinical testing. We have entered into manufacturing, supply or quality agreements with a number of our single source suppliers pursuant to which they supply the API and components we need. We generally acquire our single source components pursuant to purchase orders placed in the ordinary course of business. However, we are not certain that our single source suppliers will be able to meet our demand for their products, whether because of the nature of our agreements with those suppliers, our limited experience with those suppliers or our relative importance as a customer to those suppliers. It may be difficult for us to assess their ability to timely meet our demand in the future based on past performance. To date, we have not experienced any significant supply constraints or delays in procuring components and materials and while our suppliers have generally met our demand for their products on a timely basis in the past, they may subordinate our needs in the future to the needs of their other customers.
We are currently improving our manufacturing capabilities and increasing capacity as we increase the extent of our commercialization efforts. We believe our manufacturing operations are in compliance with regulations mandated by the FDA. We are an FDA-registered medical device manufacturer and we were granted PMA approval for PROPEL in August 2011. Our manufacturing facilities and processes are subject to periodic inspections and audits by various federal, state and foreign regulatory agencies. For example, our facilities were inspected by the FDA in April and May 2011, December 2012 and March 2013. The State of California regulatory authority audited our manufacturing facility in connection with granting a California Device Manufacturing License to us in August 2009. Our facility was last inspected in October 2013 by the European Notified Body in Ireland, National Standards Authority of Ireland, and no major nonconformance reports were issued as a result of that inspection.
We have manufacturing, supply or quality agreements with a number of our single source suppliers:
| In April 2014, we entered into an agreement with Hovione Inter Ltd., or Hovione, pursuant to which we are required to purchase 80% of our API from Hovione, in quantities to be specified in 12-month forecasts provided by us and updated on a quarterly basis. This agreement extends until April 2019. Either we or Hovione may terminate the agreement prior to that date for uncured material breach by or insolvency of the other party. We may also terminate the agreement in the event Hovione loses any required FDA approval rendering it unable to fulfill its contractual obligations, or if Hovione is engaged in felonious or fraudulent activities. Either we or Hovione may terminate the Agreement in the event regulatory agencies require changes to the product specifications that materially affect Hoviones cost of production, and we are unable to reach an agreement with Hovione regarding an equitable pricing adjustment. |
| In January 2014, we entered into an agreement with AIM Plastics, Inc., or AIM, pursuant to which AIM provides us with injection molded components in quantities to be specified in rolling quarterly forecasts provided by us. The agreement extends for an initial period of one year from its effective date, with automatic one-year renewal periods applying thereafter unless we or AIM provide written notice of non-renewal at least 30 days prior to the end of the then-current term. Either we or AIM may terminate the agreement for an uncured material breach by the other party. We may also terminate the agreement upon 12 months written notice in the event of a change in control of AIM. |
| In November 2013, we entered into an agreement with Stephen Gould Corporation, or SGC, pursuant to which SGC supplies us with packaging components in accordance with a rolling quarterly forecast provided by us. The agreement extends for an initial period of two years from the effective date, with automatic one-year renewal periods applying thereafter unless we or SGC provide written notice of |
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intent not to renew at least 30 days prior to the end of the then-current term. Either we or SGC may terminate the agreement for uncured material breach by the other party. We may also terminate the agreement at will upon 90 days prior written notice to SGC, or upon 12 months prior written notice in the event of a change in control of SGC. |
| In December 2013, we entered into an agreement with Exova Group Limited, pursuant to which Exova supplies us with analytical testing services for our finished product. The agreement extends until December 2015. |
| In April 2014, we entered into an agreement with Polymer Solutions Incorporated, or PSI, pursuant to which PSI supplies us with analytical testing services for our API and polymer materials. The agreement has an indefinite term, but may be terminated by us at any time upon 30 days notice to PSI or immediately upon written notice in the event of an uncured material breach by PSI. |
Each of these suppliers manufactures the components they produce for us or tests our components and devices to our specifications. We expect to be able to negotiate new agreements with these vendors in advance of the expiration of the current agreements. We intend to maintain sufficient supplies of the API and components from these single source suppliers in the event that our agreements with one or more of these suppliers were to terminate to enable us to continue to manufacture our implants for a sufficient amount of time necessary to obtain another source of API or components.
Government Regulation
United States Regulation of Medical Devices and Drugs
Our products and product candidates are drug-eluting bioabsorbable implants that are regulated as combination products by the FDA. FDAs Office of Combination Products designates a primary mode of action for such drug-device combination products, with the respective primary Center within FDA leading the regulatory review for the product, in consultation with the secondary designated Center. FDA determined that the primary mode of action for PROPEL and PROPEL mini was that of a medical device, so these products have been approved and are regulated in the United States as medical devices. Our product candidate for the physician office setting, however, was designated as having a drug primary mode of action, and thus our RESOLVE trials are and will be conducted under an Investigational New Drug, or IND, application, and if successful, this product candidate will need to be approved under the NDA pathway.
The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval may subject an applicant or sponsor to a variety of administrative or judicial sanctions, including refusal by FDA to approve pending applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters and other types of letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement of profits, or civil or criminal investigations and penalties brought by FDA and the Department of Justice, or DOJ, or other governmental entities.
Medical Devices
Our PROPEL implants are regulated in the United States as Class III medical devices by the FDA under the Federal Food, Drug and Cosmetic Act, or FDCA. The FDA classifies medical devices into one of three classes based upon controls the FDA considers necessary to reasonably ensure their safety and effectiveness. Class I devices are subject to general controls such as labeling, adherence to good manufacturing practices and maintenance of product complaint records, but are usually exempt from premarket notification requirements. Class II devices are subject to the same general controls and also are subject to special controls such as performance standards, and FDA guidelines, and may also require clinical testing prior to approval. Class III devices are subject to the highest level of controls and require rigorous clinical testing prior to their approval and generally require a PMA, or a PMA supplement approval prior to their sale.
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Manufacturers must file an Investigational Device Exemption, or IDE, application if human clinical studies of a device are required and if the investigational use of the device represents a potential for significant risk to the patient. The IDE application must be supported by data, typically including the results of animal and engineering testing of the device. If the IDE application is approved by the FDA, human clinical studies may begin at a specific number of investigational sites with a maximum number of patients, as approved by the FDA. The clinical studies must be conducted under the review of an independent institutional review board to ensure the protection of the patients rights.
Generally, upon completion of these human clinical studies, a manufacturer seeks approval of a Class III medical device from the FDA by submitting a PMA application. A PMA application must be supported by extensive data, including the results of the clinical studies, as well as testing and literature to establish the safety and effectiveness of the device. PMA approval may be conditioned upon the conduct of certain post-approval studies, such as long term follow-up studies.
FDA regulations require us to register as a medical device manufacturer with the FDA. Additionally, the California Department of Health Services, or CDHS, requires us to register as a medical device manufacturer within the state. Because of this, the FDA and the CDHS inspect us on a routine basis for compliance with the current good manufacturing practice. These regulations require that we manufacture our products and maintain related documentation in a prescribed manner with respect to manufacturing, testing and control activities, and product release for distribution. We have undergone and expect to continue to undergo regular current good manufacturing practice inspections in connection with the manufacture of our products at our facility. Further, the FDA requires us to comply with various FDA regulations regarding labeling. Failure by us or by our suppliers to comply with applicable regulatory requirements can result in enforcement action by the FDA or state authorities, which may include any of the following sanctions:
| warning letters, fines, injunctions, consent decrees and civil penalties; |
| customer notifications, repair, replacement, refunds, recall or seizure of our products; |
| operating restrictions, partial suspension or total shutdown of production; |
| delay in processing marketing applications for new products or modifications to existing products; |
| mandatory product recalls; |
| withdrawing approvals that have already been granted; and |
| criminal prosecution. |
The Medical Device Reporting laws and regulations require us to provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of our devices, as well as product malfunctions that likely would cause or contribute to death or serious injury if the malfunction were to recur. In addition, the FDA prohibits an approved device from being marketed for off-label use. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability, including substantial monetary penalties and criminal prosecution.
Drugs
The clinical testing, manufacturing, labeling, storage, distribution, record keeping, advertising, promotion, import, export and marketing, among other things, of our product candidates that are subject to FDAs drug authority are governed by extensive regulation by governmental authorities in the United States and other countries. The FDA, under the FDCA, regulates pharmaceutical products in the United States. The steps required before a drug may be approved for marketing in the United States generally include:
| preclinical laboratory tests and animal tests conducted under Good Laboratory Practices, or GLP; |
| the submission to the FDA of an IND application for human clinical testing, which must become effective before human clinical trials commence; |
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| adequate and well-controlled human clinical trials to establish the safety and efficacy of the product and conducted in accordance with Good Clinical Practices, or GCP; |
| the submission to the FDA of an NDA; |
| FDA acceptance, review and approval of the NDA; and |
| satisfactory completion of an FDA inspection of the manufacturing facilities at which the product is made to assess compliance with current Good Manufacturing Practices, or cGMPs. |
The testing and approval process requires substantial time, effort and financial resources, and the receipt and timing of any approval is uncertain. The FDA may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.
Preclinical studies include laboratory evaluations of the product candidate, as well as animal studies to assess the potential safety and efficacy of the product candidate. The results of the preclinical studies, together with manufacturing information and analytical data, are submitted to the FDA as part of the IND, which must become effective before clinical trials may be commenced. The IND will become effective automatically 30 days after receipt by the FDA, unless the FDA raises concerns or questions about the conduct of the trials as outlined in the IND prior to that time. In this case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can proceed.
Each clinical trial must be reviewed and approved by an independent institutional review board, or IRB. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution.
Clinical trials are typically conducted in three sequential phases prior to approval, but the phases may overlap. These phases generally include the following:
Phase 1. Phase 1 clinical trials represent the initial introduction of a product candidate into human subjects, frequently healthy volunteers. In Phase 1, the product candidate is usually tested for safety, including adverse effects, dosage tolerance, absorption, distribution, metabolism, excretion and pharmacodynamics.
Phase 2. Phase 2 clinical trials usually involve studies in a limited patient population to (1) evaluate the efficacy of the product candidate for specific indications, (2) determine dosage tolerance and optimal dosage and (3) identify possible adverse effects and safety risks.
Phase 3. If a product candidate is found to be potentially effective and to have an acceptable safety profile in Phase 2 studies, the clinical trial program will be expanded to Phase 3 clinical trials to further demonstrate clinical efficacy, optimal dosage and safety within an expanded patient population at geographically dispersed clinical study sites.
Phase 4 clinical trials are conducted after approval to gain additional experience from the treatment of patients in the intended therapeutic indication and to document a clinical benefit in the case of drugs approved under accelerated approval regulations, or when otherwise requested by the FDA in the form of post-market requirements or commitments. Failure to promptly conduct any required Phase 4 clinical trials could result in withdrawal of approval.
The results of preclinical studies and clinical trials, together with detailed information on the manufacture, composition and quality of the product, are submitted to the FDA in the form of an NDA, requesting approval to market the product. The application must be accompanied by a significant user fee payment. The FDA has substantial discretion in the approval process and may refuse to accept any application or decide that the data is insufficient for approval and require additional preclinical, clinical or other studies.
Review of Application. Once the NDA has been accepted for filing, which occurs, if at all, 60 days after submission, the FDA sets a Prescription Drug User Fee Act date that informs the applicant of the specific date by which the FDA intends to complete its review. This is typically 10 months from the date of submission. The review process is often extended by FDA requests for additional information or clarification. The FDA reviews NDAs to determine, among other things, whether the proposed product is safe and effective for its intended use,
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and whether the product is being manufactured in accordance with cGMP to assure and preserve the products identity, strength, quality and purity. Before approving an NDA, the FDA may inspect the facilities at which the product is manufactured and will not approve the product unless the manufacturing facility complies with cGMPs and may also inspect clinical trial sites for integrity of data supporting safety and efficacy. During the approval process, the FDA also will determine whether a risk evaluation and mitigation strategy, or REMS, is necessary to assure the safe use of the product. If the FDA concludes a REMS is needed, the sponsor of the application must submit a proposed REMS; the FDA will not approve the application without an approved REMS, if required. A REMS can substantially increase the costs of obtaining approval. The FDA may also convene an advisory committee of external experts to provide input on certain review issues relating to risk, benefit and interpretation of clinical trial data. The FDA may delay approval of an NDA if applicable regulatory criteria are not satisfied or the FDA requires additional testing or information. The FDA may require post-marketing testing and surveillance to monitor safety or efficacy of a product. FDA will issue either an approval of the NDA or a Complete Response Letter, detailing the deficiencies and information required in order for reconsideration of the application.
Post-Approval Requirements. Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product distribution, advertising and promotion and reporting of adverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, some manufacturing and supplier changes are subject to prior FDA review and approval. There also are continuing, annual user fee requirements for the establishments at which such products are manufactured, as well as new application fees for certain supplemental applications.
The FDA may impose a number of post-approval requirements as a condition of approval of an PMA or NDA. For example, the FDA may require post-marketing testing, including phase 4 clinical trials, and surveillance to further assess and monitor the products safety and effectiveness after commercialization.
In addition, entities involved in the manufacture and distribution of approved devices or drugs are required to register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with QSR and cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from QSR or cGMP and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain QSR and cGMP compliance.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things:
| restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls; |
| fines, warning letters or holds on post-approval clinical trials; |
| refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of product license approvals; |
| product seizure or detention, or refusal to permit the import or export of products; or |
| injunctions or the imposition of civil or criminal penalties. |
The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Drugs may be promoted only for the approved indications and in accordance with the provisions of the
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approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.
The Hatch-Waxman Amendments. We are pursuing development of our steroid-eluting implant for refractory disease treated in office as a 505(b)(2) NDA. As an alternative path to FDA approval for modifications to formulations or uses of products previously approved by the FDA, an applicant may submit an NDA under 505(b)(2) of the FDCA. 505(b)(2) was enacted as part of the Hatch-Waxman Amendments and permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by, or for, the applicant and for which the applicant has not obtained a right of reference. If the 505(b)(2) applicant can establish that reliance on FDAs previous findings of safety and effectiveness is scientifically appropriate, it may eliminate the need to conduct certain preclinical or clinical studies of the new product. The FDA may also require companies to perform additional studies or measurements, including clinical trials, to support the change from the approved branded reference drug. The FDA may then approve the new product candidate for all, or some, of the label indications for which the branded reference drug has been approved, as well as for any new indication sought by the 505(b)(2) applicant.
Orange Book Listing. In seeking approval for a drug through an NDA, including an Abbreviated New Drug Application, or ANDA, or a 505(b)(2) NDA, applicants are required to list with the FDA certain patents whose claims cover the applicants product. Upon approval of an NDA, each of the patents listed in the application for the drug is then published in the Orange Book. Any applicant who files an ANDA seeking approval of a generic equivalent version of a drug listed in the Orange Book or a 505(b)(2) NDA referencing a drug listed in the Orange Book must certify to the FDA that: (1) no patent information on the drug product that is the subject of the application has been submitted to the FDA, a Paragraph I Certification; (2) such patent has expired, Paragraph II Certification; (3) the date on which such patent expires, a Paragraph III Certification; or (4) such patent is invalid or will not be infringed upon by the manufacture, use or sale of the drug product for which the application is submitted, a Paragraph IV Certification. The applicant may also elect to submit a section viii statement certifying that its proposed label does not contain, or carves out, any language regarding the patented method-of-use rather than certify to a listed method-of-use patent. An applicant submitting a Paragraph IV Certification must provide notice to each owner of the patent that is the subject of the certification and to the holder of the approved NDA to which the ANDA or 505(b)(2) application refers. If the reference NDA holder and patent owners assert a patent challenge directed to one of the Orange Book listed patents within 45 days of the receipt of the Paragraph IV Certification notice, the FDA is prohibited from approving the application until the earlier of 30 months from the receipt of the Paragraph IV Certification, expiration of the patent, settlement of the lawsuit, or a decision in the infringement case that is favorable to the applicant. We are currently evaluating whether we will file a Paragraph II Certification, Paragraph III Certification, Paragraph IV Certification, or section viii statement for our steroid-eluting implant for refractory disease treated in office.
The ANDA or 505(b)(2) application also will not be approved until any applicable non-patent exclusivity listed in the Orange Book for the branded reference drug has expired as described in further detail below.
Non-Patent Exclusivity. In addition to patent exclusivity, the holder of the NDA for the listed drug may be entitled to a period of non-patent exclusivity, during which the FDA cannot approve an ANDA or 505(b)(2) application that relies on the listed drug. For example, a pharmaceutical manufacturer may obtain five years of non-patent exclusivity upon NDA approval of a new chemical entity, or NCE, which is a drug that contains an active moiety that has not been approved by FDA in any other NDA. An active moiety is defined as the molecule or ion responsible for the drug substances physiological or pharmacologic action. During the five year exclusivity period, FDA cannot accept for filing any ANDA seeking approval of a generic version of that drug or any 505(b)(2) NDA for the same active moiety and that relies on the FDAs findings regarding that drug, except that FDA may accept an application for filing after four years if the follow-on applicant makes a paragraph IV certification.
A drug, including one approved under 505(b)(2), may obtain a three-year period of exclusivity for a particular condition of approval, or change to a marketed product, such as a new formulation for a previously approved product, if one or more new clinical studies, other than bioavailability or bioequivalence studies, was essential to the approval of the application and was conducted or sponsored by the applicant. Should this occur,
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the FDA would be precluded from approving any ANDA or 505(b)(2) application for the protected modification until after that three-year exclusivity period has run. However, unlike NCE exclusivity, the FDA can accept an application and begin the review process during the exclusivity period.
Foreign Regulation
In order to market any product outside of the United States, we would need to comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we would need to obtain the necessary approvals by the comparable foreign regulatory authorities before we can commence clinical trials or marketing of the product in foreign countries and jurisdictions. Although many of the issues discussed above with respect to the United States apply similarly in the context of the European Union and other geographies, the approval process varies between countries and jurisdictions and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries and jurisdictions might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country or jurisdiction does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country or jurisdiction may negatively impact the regulatory process in others.
Federal and State Fraud and Abuse, Data Privacy and Security and Transparency Laws
In addition to FDA restrictions on marketing and promotion of drugs and devices, other federal and state laws restrict our business practices. These laws include, without limitation, anti-kickback and false claims laws, data privacy and security laws, as well as transparency laws regarding payments or other items of value provided to healthcare providers.
The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, to induce or in return for purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any good, facility, item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federal healthcare programs. The term remuneration has been broadly interpreted to include anything of value. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all its facts and circumstances. Several courts have interpreted the statutes intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the Anti-Kickback Statute has been violated.
Additionally, the intent standard under the Anti-Kickback Statute was amended by the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, collectively the Affordable Care Act, to a stricter standard such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, the Affordable Care Act codified case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.
The federal civil False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment or approval to the federal government or knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government. A claim includes any request or demand for money or property presented to the U.S. government. The civil False Claims Act also applies to false submissions that cause the government to be paid less than the amount to which it is entitled, such as a rebate. Intent to deceive is
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not required to establish liability under the civil False Claims Act. Several pharmaceutical, device and other healthcare companies have been prosecuted under these laws for, among other things, allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have been prosecuted for causing false claims to be submitted because of the companies marketing of products for unapproved, and thus non-covered, uses.
The government may further prosecute conduct constituting a false claim under the criminal False Claims Act. The criminal False Claims Act prohibits the making or presenting of a claim to the government knowing such claim to be false, fictitious, or fraudulent and, unlike the civil False Claims Act, requires proof of intent to submit a false claim.
The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created new federal criminal statutes that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Like the Anti-Kickback Statute, the Affordable Care Act amended the intent standard for certain healthcare fraud under HIPAA such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
The civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.
Also, many states have similar fraud and abuse statutes or regulations that may be broader in scope and may apply regardless of payor, in addition to items and services reimbursed under Medicaid and other state programs.
Under HIPAA, the Department of Health and Human Services, or HHS, has issued regulations to protect the privacy and security of protected health information used or disclosed by covered entities including health care providers, such as us. HIPAA also regulates standardization of data content, codes and formats used in health care transactions and standardization of identifiers for health plans and providers. Penalties for violations of HIPAA regulations include civil and criminal penalties. We have developed and implemented processes designed to comply with these regulations, specifically in the training process for our field sales team. The requirements under these regulations may change periodically and could have an effect on our business operations if compliance becomes substantially more costly than under current requirements. Additionally, a breach of unsecured protected health information, such as by employee error or an attack by an outsider, could have an adverse effect on our business in terms of potential penalties and corrective action required. In addition to federal privacy regulations, there are a number of state laws governing confidentiality and security of health information that are applicable to our business. New laws governing privacy may be adopted in the future as well. We have taken steps to comply with health information privacy requirements to which we are aware that we are subject. However, we can provide no assurance that we are or will remain in compliance with diverse privacy requirements in all of the jurisdictions in which we do business. Failure to comply with privacy requirements could result in civil or criminal penalties, which could have a materially adverse effect on our business.
Additionally, there has been a recent trend of increased federal and state regulation of payments and transfers of value provided to healthcare professionals or entities. On February 8, 2013, the Centers for Medicare & Medicaid Services, or CMS, released its final rule implementing section 6002 of the Affordable Care Act known as the Physician Payment Sunshine Act that imposes new annual reporting requirements on device manufacturers for payments and other transfers of value provided by them, directly or indirectly, to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their family members. A manufacturers failure to submit timely, accurately and completely the required information for all payments, transfers of value or ownership or investment interests may result in civil monetary penalties of up to an aggregate of $150,000 per year, and up to an aggregate of $1 million per year for knowing failures. The period between August 1, 2013, and December 31, 2013, was the first reporting period, for which manufacturers were required to report aggregate payment data to CMS by March 31, 2014. Manufacturers also will be required
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to report to CMS detailed payment and transfers of value data and submit legal attestation to the completeness and accuracy of such data during Phase 2 of the program, which is expected to begin in May 2014 and extends for at least 30 days. Thereafter, manufacturers must submit reports by the 90th day of each subsequent calendar year. Any failure to comply could result in significant fines and penalties. Certain states, such as California and Connecticut, also mandate implementation of commercial compliance programs, and other states, such as Massachusetts and Vermont, impose restrictions on device manufacturer marketing practices and require tracking and reporting of gifts, compensation and other remuneration to healthcare professionals and entities. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance or reporting requirements in multiple jurisdictions increase the possibility that a healthcare company may fail to comply fully with one or more of these requirements.
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of our business activities, including certain sales and marketing practices and the provision of certain items and services to our customers, could be subject to challenge under one or more of such laws. If our operations are found to be in violation of any of the health regulatory laws described above or any other laws that apply to us, we may be subject to penalties, including potentially significant criminal and civil and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in government healthcare programs, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations. To the extent that any of our products are sold in a foreign country, we may be subject to similar foreign laws, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals.
Coverage and Reimbursement
Our currently approved products are commonly treated as general supplies utilized in sinus surgery and if covered by third-party payors, are paid for as part of the FESS procedure. We believe that establishment of reimbursement codes specific to the use of drug-eluting implants for chronic sinusitis is an important factor in expanding access to our products, especially in the physician office setting. Therefore, our strategy includes efforts to engage physician societies and encourage third-party payors to establish coverage, coding and payment that will facilitate access to our drug-eluting implants as we expand our commercialization efforts in the United States. Our success in these efforts depends in part on the extent to which governmental authorities, private health insurers and other third-party payors provide coverage for and establish adequate reimbursement levels for the procedures during which our products are used. Failure by physicians, hospitals, ambulatory surgery centers and other users of our products to obtain sufficient coverage and reimbursement from healthcare payors for procedures in which our products are used, or adverse changes in government and private third-party payors policies would have a material adverse effect on our business, financial condition, results of operations and future growth prospects.
In the United States, third-party payors continue to implement initiatives that restrict the use of certain technologies to those that meet certain clinical evidentiary requirements. We are aware of a number of third-party payors in the United States, including Aetna and some Blue Cross Blue Shield plans, that consider our products to be experimental or investigational. These payors have developed policies that deny coverage and separate payment for our products, but based on our experience to date, these payors generally reimburse for the surgical procedures in which our products are used, as long as the patient meets the established medical necessity criteria for surgery. In addition, some payors are moving toward a managed care system and control their health care costs by limiting authorizations for surgical procedures, including elective procedures using our devices. Failure to obtain favorable payor policies could have a material adverse effect on our business and operations.
In addition to uncertainties surrounding coverage policies, there are periodic changes to reimbursement. Third-party payors regularly update reimbursement amounts and also from time to time revise the methodologies used to determine reimbursement amounts. This includes annual updates to payments to physicians, hospitals and ambulatory surgery centers for procedures during which our products are used. Because the cost of our products generally is recovered by the healthcare provider as part of the payment for performing a procedure and not
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separately reimbursed, these updates could directly impact the demand for our products. An example of payment updates is the Medicare programs updates to hospital and physician payments, which are done on an annual basis using a prescribed statutory formula. In the past, when the application of the formula resulted in lower payment, Congress has passed interim legislation to prevent the reductions. Most recently, the Protecting Access to Medicare Act of 2014, signed into law in April 2014, provided for a 0.5% update from 2013 payment rates under the Medicare Physician Fee Schedule through 2014 and a 0% update from January 1 until April 1, 2015. If Congress fails to intervene to prevent the negative update factor in future years, the resulting decrease in payment may adversely affect our revenues and results of operations.
Any changes in coverage and reimbursement that further restricts coverage of our products or lowers reimbursement for procedures using our devices could materially affect our business.
Healthcare Reform
Current and future legislative proposals to further reform healthcare or reduce healthcare costs may result in lower reimbursement for our products, or for the procedures associated with the use of our products, or limit coverage of our products. The cost containment measures that payors and providers are instituting and the effect of any healthcare reform initiative implemented in the future could significantly reduce our revenues from the sale of our products. Alternatively, the shift away from fee-for-service agreements to capitated payment models supports the value of our products, as they have been proven to reduce longitudinal resource utilization, which can be cost saving-for both payors and providers.
The recent implementation of the Affordable Care Act is an example that has the potential to substantially change healthcare financing and delivery by both governmental and private insurers, and significantly impact the pharmaceutical and medical device industries.
The Affordable Care Act imposed, among other things, a new federal excise tax on the sale of certain medical devices, established an annual, nondeductible fee on any entity that manufactures or imports certain specified branded prescription drugs and biologic agents, revised the methodology by which rebates owed by manufacturers to the state and federal government for covered outpatient drugs under the Medicaid Drug Rebate Program are calculated, increased the minimum Medicaid rebates owed by most manufacturers under the Medicaid Drug Rebate Program, extended the Medicaid Drug Rebate program to utilization of prescriptions of individuals enrolled in Medicaid managed care organizations, and provided incentives to programs that increase the federal governments comparative effectiveness research. In addition, the Affordable Care Act implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models.
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. On August 2, 2011, President Obama signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislations automatic reduction to several government programs. This includes reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013, and will stay in effect through 2024 unless congressional action is taken. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or product candidates or additional pricing pressure.
The Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act, or the FCPA, prohibits any U.S. individual or business from paying, offering, or authorizing payment or offering of anything of value, directly or indirectly, to any foreign official,
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political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. Activities that violate the FCPA, even if they occur wholly outside the United States, can result in criminal and civil fines, imprisonment, disgorgement, oversight, and debarment from government contracts.
Research and Development
Our research and development expenses totaled $9.3 million and $9.5 million in the years ended December 31, 2012 and 2013, respectively, and $2.3 million and $2.6 million in the three months ended March 31, 2013 and 2014, respectively. For more information, see Managements Discussion and Analysis of Financial Condition and Results of Operations.
Employees
As of March 31, 2014, we had 146 employees, of whom 47 are in manufacturing, 26 are in research and development and 62 are in sales, marketing and reimbursement.
Properties
We occupy approximately 32,500 square feet of leased office and laboratory space located in Menlo Park, California. The term of our lease expires in June 2015. We believe that our facilities are sufficient to meet our current needs and that suitable additional space will be available as and when needed on acceptable terms.
Legal Proceedings
We are not currently a party to any material legal proceedings. We may at times be involved in litigation and other legal claims in the ordinary course of business. When appropriate in our estimation, we may record reserves in our financial statements for pending litigation and other claims.
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Executive Officers, Key Employees and Directors
The following table sets forth information regarding our executive officers, key employees and directors, as of June 4, 2014:
Name |
Age | Position(s) | ||||
Executive Officers and Key Employees |
||||||
Lisa D. Earnhardt |
44 | President, Chief Executive Officer and Director | ||||
Jeryl L. Hilleman |
56 | Chief Financial Officer | ||||
Richard E. Kaufman |
52 | Senior Vice President and Chief Operating Officer | ||||
Robert H. Binney, Jr. |
44 | Vice President, Sales | ||||
James Stambaugh |
44 | Vice President, Clinical and Reimbursement | ||||
Susan P. Stimson |
41 | Vice President, Marketing | ||||
Amy Wolbeck |
42 | Vice President, Regulatory Affairs and Quality | ||||
Non-Employee Directors |
||||||
Rick D. Anderson(1)(3) |
53 | Director | ||||
Casper L. de Clercq(1) |
50 | Director | ||||
Mark Fletcher |
57 | Director | ||||
Cynthia L. Lucchese(1)(3) |
54 | Director | ||||
Dana G. Mead, Jr.(2) |
55 | Director | ||||
Frederic H. Moll, MD(3) |
62 | Director | ||||
Casey M. Tansey(2) |
56 | Director |
(1) | Member of the audit committee. |
(2) | Member of the compensation committee. |
(3) | Member of the nominating and corporate governance committee. |
Executive Officers and Key Employees
Lisa D. Earnhardt has served as our President and Chief Executive Officer and as a member of our board of directors since March 2008. Prior to joining us, Ms. Earnhardt served as President of Boston Scientifics Cardiac Surgery division (formerly known as Guidant Corporation, or Guidant) from June 2006 to January 2008 until its sale to Getinge Group. From August 1996 to April 2006, Ms. Earnhardt worked at Guidant in a variety of sales and marketing leadership positions. Ms. Earnhardt served on the board of directors of Kensey Nash, a publicly traded company from 2011 until it was acquired by Royal DSM NA in 2012, where she served on the boards nominating and governance and audit committees. Ms. Earnhardt serves as the Chair of the Kellogg Alumni Council. Ms. Earnhardt holds an M.B.A. from Northwesterns Kellogg School of Management and a B.S. in Industrial Engineering from Stanford University. We believe Ms. Earnhardts experience in the industry, her role as our President and Chief Executive Officer and her knowledge of our company enables her to make valuable contributions to our board of directors.
Jeryl L. Hilleman has served as our Chief Financial Officer since June 2014. From September 2013 to May 2014, Ms. Hilleman served as Chief Financial Officer and Secretary of Ocera Therapeutics, Inc., a biopharmaceutical company, where she was responsible for managing Oceras financial and accounting operations. From 2012 to 2013, Ms. Hilleman provided independent financial and strategic consulting for biotech and cleantech companies. From 2008 to 2012, she served as Chief Financial Officer of Amyris, Inc., a multi-national, renewable products company based in California and Brazil, where she was responsible for managing Amyriss financial and accounting operations. Prior to Amyris, Ms. Hilleman served as Chief Financial Officer of Symyx Technologies, a public company selling instruments, software and research services to pharmaceutical and chemical companies, and led the finance function at two public biotechnology companies, Geron Corporation and Cytel Corporation. Ms. Hilleman is also a member of the board of directors and chair of the audit committee of XenoPort, Inc. Ms. Hilleman holds an A.B. from Brown University and an M.B.A. from the Wharton Graduate School of Business, University of Pennsylvania.
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Richard E. Kaufman has served as our Senior Vice President of R&D and Operations and Chief Operating Officer since January 2007. Prior to joining us, Mr. Kaufman was the Vice President and General Manager of Abbott Bioabsorbable Vascular Solutions. Mr. Kaufman held several R&D and Operations leadership positions at Guidant from 1998 through 2006. Previously Mr. Kaufman worked at McGhan Medical from 1993 to 1998 developing products for the plastic surgery field and at IMPRA from 1990 to 1993 developing products for orthopedics and vascular grafts. Mr. Kaufman holds a B.S. in Biomedical Engineering from Arizona State University.
Robert H. Binney, Jr. has served as our Vice President of Sales since July 2011. From June 2007 to July 2011, Mr. Binney served as Director of Sales for AccessClosure, Inc., a privately-held medical device company, where he was responsible for eastern United States sales. From June 2004 to June 2007, Mr. Binney served as Peripheral Sales Representative at Boston Scientifics Peripheral Division. Mr. Binney holds a B.A. in Communications from the University of North Carolina at Chapel Hill.
James Stambaugh has served as our Vice President of Clinical and Reimbursement since October 2006. Prior to joining us, Mr. Stambaugh served as Director of Clinical Operations at Guidants Vascular Intervention division, from March 2005 to October 2006. Prior to serving as Director of Clinical Operations Mr. Stambaugh held various positions at Guidant within the pre-clinical, clinical and regulatory environment. Mr. Stambaugh holds a B.S. in Chemistry from the University of California at Davis.
Susan P. Stimson has served as our Vice President of Marketing since March 2010 and served as our Director of Marketing Development from April 2007 to March 2010. Prior to joining us, Ms. Stimson served as Director of Marketing and Clinical Research at Mitralign, Inc., from October 2003 to December 2006. From February 1997 to September 2003, Ms. Stimson worked within multiple areas and divisions of Guidant. Ms. Stimson holds a B.S. in Biomedical Engineering from Marquette University, Milwaukee, Wisconsin.
Amy Wolbeck has served as our Vice President, Regulatory Affairs and Quality since January 2011 and served as our Director of Regulatory Affairs from January 2009 to January 2011. Prior to joining us, Ms. Wolbeck was the Director of Regulatory Affairs and Quality Assurance at Sonoma Orthopedic Products. Ms. Wolbeck served in various roles at Medtronic from 1998-2007, including Director of Regulatory Affairs within Medtronics Cardiovascular Division and Director of Quality for Medtronic Vascular. Ms. Wolbeck holds a B.S. in Mechanical Engineering from the University of Massachusetts at Amherst.
Non-Employee Directors
Rick D. Anderson has served as a member of our Board of Directors since April 2012. Mr. Anderson has served as a Managing Director of PTV Healthcare Capital, a venture capital firm since January 2008. From September 2008 to August 2011, Mr. Anderson served as a member of the board of directors of InSite Vision, a publicly traded company, where he was the chair of the boards nominating and governance committee and a member of the audit committee. From April 2008 to June 2012, Mr. Anderson served as a member of the board of directors of Cameron Health until its acquisition by Boston Scientific. From July 2009 to August 2013, Mr. Anderson served as Chairman of the board of directors for IDEV Technologies, until its acquisition by Abbott. Currently, Mr. Anderson also serves as a member of the board of directors for several private companies. Mr. Anderson holds a B.B.A. in Marketing from Mississippi State University. He served five years in the U.S. Army where he obtained the rank of captain. Mr. Anderson is a member of the Economic Advisory Board of Mississippi State University and a consultant member of the Society for Cardiovascular Angiography and Interventions. He participates in the AdvaMed Venture Capital Advisory Council and the Dartmouth Device Development Symposium Executive Committee, and he is a Director for the Heart Rhythm Society Consulting Services and a member of the Accelerated Innovation Program Working Group for the National Heart Lung and Blood Institute. We believe Mr. Andersons experience in the industry and his knowledge of our company enables him to make valuable contributions to our board of directors.
Casper de Clercq has served as a member of our Board of Directors since February 2013. Mr. de Clercq has been a partner at Norwest Venture Partners, a venture capital firm, since January 2011. Prior to joining Norwest Venture Partners, Mr. de Clercq was a Partner at U.S. Venture Partners, a venture capital firm, from August 2004 to January 2011. He currently serves on the boards of directors of several privately held companies and was
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previously on the board of directors of Basis Science, Inc. prior to its acquisition by Intel, and Ilypsa, Inc. prior to its acquisition by Amgen. Mr. de Clercq holds a B.A. in biochemistry from Dartmouth College, an M.S. in biological science from Stanford University, and a M.B.A. from Stanford University Graduate School of Business. We believe Mr. de Clercqs experience in the industry and his knowledge of our company enables him to make valuable contributions to our board of directors.
Mark Fletcher has served as a member of our Board of Directors since November 2010. Mr. Fletcher has served as the Senior Vice-President of Medtronic, Inc. and the President of its Surgical Technologies Division, consisting of four business segments including ENT, Neurosurgery, Advanced Energy and Global Services since May 2011. Prior to this position, Mr. Fletcher served as the President of Medtronics ENT Division from 1999 to 2011. Mr. Fletcher also serves on the board of Inspire Medical, an early-stage ENT technology company. Mr. Fletcher holds a B.S. in Finance from St. Marys University. We believe Mr. Fletchers experience in the industry and his knowledge of our company enables him to make valuable contributions to our board of directors.
Cynthia L. Lucchese was appointed as a member of our board of directors in July 2014. From August 2009 to October, 2012, Ms. Lucchese served as a member of the board of directors of Brightpoint Inc., a publicly traded company, where she was the chair of the boards audit committee and a member of the nominating and governance committee. From February 2008 to March 2014, Ms. Lucchese served as Senior Vice President and Chief Financial Officer of Hillenbrand, Inc., a manufacturing company. From 2005 to 2007, she served as Senior Vice President and Chief Financial Officer for Thoratec Corporation, a medical device company. From 1994 to 2005 she worked for Guidant Corporation, now a part of Boston Scientific Corporation, in a variety of finance roles, including Vice President, Treasurer and Chief Accounting Officer. Ms. Lucchese serves on the Deans Council of the Indiana University Kelley School of Business, and the Board of the Indiana Sport Corporation as treasurer. Ms. Lucchese is a Certified Public Accountant and holds a B.S. with distinction in Accounting and an MBA in Finance from the Indiana University Kelley School of Business. We believe Ms. Luccheses experience in the industry with publicly traded companies enables her to make valuable contributions to our board of directors.
Dana G. Mead, Jr. has served as a member of our Board of Directors since June 2007. Mr. Mead has been a Partner at Kleiner Perkins Caufield & Byers since May 2005. Mr. Mead currently serves on the boards of several privately held Kleiner Perkins Caufield & Byers portfolio companies. From 1992 to 2005, Mr. Mead worked for Guidant where he held numerous positions including, most recently, President of Guidant Vascular Intervention. Mr. Mead received his B.A. from Lafayette College and holds an M.B.A. from the University of Southern California. We believe Mr. Meads experience with medical device companies and role in the venture capital industry enables him to make valuable contributions to our board of directors.
Frederic H. Moll, M.D. has served as a member of our Board of Directors since March 2006. From September 2002 until May 2012, Dr. Moll served as a member of the Board of Directors of Hansen Medical, Inc., including its Executive Chairman of the Board from June 2010 until December 2011. Dr. Moll also served as the Chief Executive Officer of Hansen Medical, Inc. from September 2002 until June 2010 and its President from March 2009 until June 2010. Dr. Moll has served as the Chairman of the Board of Auris Surgical Robotics, Inc. since June 2011 and as its Chief Executive Officer since August 2012. In November 1995, Dr. Moll co-founded Intuitive Surgical, Inc., a medical device company, and served as its first Chief Executive Officer and later, its Vice President and Medical Director until September 2003. In 1989, Dr. Moll co-founded Origin Medsystems, Inc., a medical device company, which later became an operating company within Guidant Corporation following its acquisition by Eli Lilly in 1992. Dr. Moll served as Medical Director of Guidants surgical device division until November 1995. Dr. Moll also serves on the board of directors of MAKO Surgical Corp. and Restoration Robotics. Dr. Moll holds a B.A. from the University of California, Berkeley, an M.S. from Stanford University and an M.D. from the University of Washington School of Medicine. We believe Dr. Molls experience as a physician, chief executive officer of medical technology companies, familiarity with serving on the boards of public companies and his knowledge of our company enables him to make valuable contributions to our board of directors.
Casey M. Tansey has served as a member of our Board of Directors since March 2006. Mr. Tansey has served as a General Partner of U.S. Venture Partners since April 2005. From September 2001 to December 2004, Mr. Tansey served as President and Chief Executive Officer of Epicor Medical, Inc., until its acquisition by
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St. Jude Medical. From June 1999 to May 2001, Mr. Tansey served as President, CEO and Director of Heartport Inc., a publicly traded company that was acquired by Johnson & Johnson. Mr. Tansey joined Heartport as Vice President of Sales and Marketing in December 1995. Mr. Tansey currently serves on the Board of Directors for several privately held U.S. Venture Partners portfolio companies. Mr. Tansey holds a B.S. and M.B.A. from the College of Notre Dame. We believe Mr. Tanseys experience in the industry and his knowledge of our company enables him to make valuable contributions to our board of directors.
Family Relationships
There are no family relationships among any of our directors or executive officers.
Board Composition
The primary responsibilities of our board of directors are to provide oversight, strategic guidance, counseling and direction to our management. Our board of directors meets on a regular basis and additionally as required. Our board of directors currently consists of seven directors. The members of our board of directors were elected in compliance with the provisions of our amended and restated certificate of incorporation and a voting agreement among certain of our stockholders. The voting agreement will terminate upon the closing of this offering and none of our stockholders will have any special rights regarding the election or designation of members of our board of directors. Our amended and restated certificate of incorporation to become effective upon the completion of this offering, or the amended and restated certificate of incorporation, will permit our board of directors to establish by resolution the authorized number of directors. Each director serves until the expiration of the term for which such director was elected or appointed, or until such directors earlier death, resignation or removal. At each annual meeting of stockholders, directors whose terms then expire will be elected to serve from the time of election and qualification until the next annual meeting following election. Our amended and restated certificate of incorporation provides that the authorized number of directors may be changed only by resolution of the board of directors.
Director Independence
Upon the completion of this offering, we anticipate that our common stock will be listed on The Nasdaq Global Market. Under the listing requirements and rules of The Nasdaq Global Market, independent directors must compose a majority of a listed companys board of directors within 12 months after its initial public offering. In addition, the rules of The Nasdaq Global Market require that, subject to specified exceptions and phase in periods following its initial public offering, each member of a listed companys audit and compensation, nominating and governance committee be independent. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the rules of The Nasdaq Global Market, a director will only qualify as an independent director if, in the opinion of that companys board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
To be considered to be independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of our audit committee, our board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.
Our board of directors has undertaken a review of its composition, the composition of its committees, and the independence of each director. Based upon information requested from and provided by each director concerning his or her background, employment, and affiliations, including family relationships, our board of directors has determined that all of our board of directors except Lisa D. Earnhardt do not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is independent as that term is defined under the applicable rules and regulations of the SEC, and the listing requirements and rules of The Nasdaq Global Market. In making this determination, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director. Our board
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of directors also determined that Casper L. de Clercq and Rick D. Anderson and Cynthia L. Lucchese, who compose our audit committee, upon the completion of this offering, satisfy the independence standards for the audit committee established by applicable Securities and Exchange Commission, or SEC, rules and the listing standards of The Nasdaq Global Market and Rule 10A-3 of the Exchange Act. Our board of directors has determined that Messrs. Mead and Tansey who compose our compensation committee, upon the completion of this offering, are outside directors as that term is defined in Section 162(m) of the Internal Revenue Code of 1986, as amended, or Section 162(m). Each member of the nominating and corporate governance committee is independent within the meaning of the applicable NASDAQ listing standards, is a non-employee director and is free from any relationship that would interfere with the exercise of his or her independent judgment.
Board Committees
Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. Our board of directors may establish other committees to facilitate the management of our business. The composition and functions of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board of directors.
Audit Committee
Our audit committee consists of Casper L. de Clercq, Rick D. Anderson and Cynthia L. Lucchese. The chair of our audit committee is Ms. Lucchese, who our board of directors has determined is an audit committee financial expert as that term is defined under the SEC rules implementing Section 407 of the Sarbanes-Oxley Act of 2002, and possesses financial sophistication, as defined under the listing standards of The Nasdaq Global Market. Our board of directors has also determined that each member of our audit committee can read and understand fundamental financial statements in accordance with applicable requirements. In arriving at these determinations, the board of directors has examined each audit committee members scope of experience and the nature of their experience in the corporate finance sector.
The primary purpose of the audit committee is to discharge the responsibilities of our board of directors with respect to our accounting, financial and other reporting and internal control practices and to oversee our independent registered public accounting firm. Specific responsibilities of our audit committee include:
| selecting a qualified firm to serve as the independent registered public accounting firm to audit our financial statements; |
| helping to ensure the independence and performance of the independent registered public accounting firm; |
| discussing the scope and results of the audit with the independent registered public accounting firm and reviewing, with management and the independent accountants, our interim and year-end operating results; |
| developing procedures for employees to submit concerns anonymously about questionable accounting or audit matters; |
| reviewing our financial statements and critical accounting policies and estimates; |
| reviewing the adequacy and effectiveness of our internal controls; |
| reviewing our policies on risk assessment and risk management; |
| reviewing related-party transactions; |
| obtaining and reviewing a report by the independent registered public accounting firm, at least annually, that describes our internal quality-control procedures, any material issues with such procedures and any steps taken to deal with such issues when required by applicable law; and |
| approving (or, as permitted, pre-approving) all audit and all permissible non-audit services, other than de minimis non-audit services, to be performed by the independent registered public accounting firm. |
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Compensation Committee
Our compensation committee consists of Dana G. Mead, Jr. and Casey M. Tansey. The chair of our compensation committee is Dana G. Mead, Jr.
The primary purpose of our compensation committee is to discharge the responsibilities of our board of directors to oversee our compensation policies, plans and programs and to review and determine the compensation to be paid to our executive officers, directors and other senior management, as appropriate. Specific responsibilities of our compensation committee include:
| reviewing and approving, or recommending that our board of directors approve, the compensation of our executive officers; |
| reviewing and recommending to our board of directors the compensation of our directors; |
| reviewing and approving, or recommending that our board of directors approve, the terms of compensatory arrangements with our executive officers; |
| administering our stock and equity incentive plans; |
| selecting independent compensation consultants and assessing whether there are any conflicts of interest with any of the committees compensation advisers; |
| reviewing and approving, or recommending that our board of directors approve, incentive compensation and equity plans, severance agreements, change-of-control protections and any other compensatory arrangements for our executive officers and other senior management, as appropriate; and |
| reviewing and establishing general policies relating to compensation and benefits of our employees and reviewing our overall compensation philosophy. |
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee consists of Rick D. Anderson, Frederic H. Moll and Cynthia L. Lucchese. The chair of our nominating and corporate governance committee is Rick D. Anderson. Specific responsibilities of our nominating and corporate governance committee include:
| identifying, evaluating and selecting, or recommending that our board of directors approve, nominees for election to our board of directors; |
| evaluating the performance of our board of directors and of individual directors; |
| considering and making recommendations to our board of directors regarding the composition of the committees of the board of directors; |
| reviewing developments in corporate governance practices; |
| evaluating the adequacy of our corporate governance practices and reporting; |
| reviewing management succession plans; |
| developing and making recommendations to our board of directors regarding corporate governance guidelines and matters; and |
| overseeing an annual evaluation of the board of directors performance. |
Role of the Board in Risk Oversight
The audit committee of the board of directors is primarily responsible for overseeing our risk management processes on behalf of the board of directors. Going forward, we expect that the audit committee will receive reports from management on at least a quarterly basis regarding our assessment of risks. In addition, the audit committee reports regularly to the board of directors, which also considers our risk profile. The audit committee and the board of directors focus on the most significant risks we face and our general risk management strategies. While the board of directors oversees our risk management, management is responsible for day-to-day risk management processes. Our
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board of directors expects management to consider risk and risk management in each business decision, to proactively develop and monitor risk management strategies and processes for day-to-day activities and to effectively implement risk management strategies adopted by the audit committee and the board of directors. We believe this division of responsibilities is the most effective approach for addressing the risks we face and that our board of directors leadership structure, which also emphasizes the independence of the board of directors in its oversight of its business and affairs, supports this approach.
Code of Business Conduct and Ethics
Effective upon the closing of this offering, we have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. Following the closing of this offering, the code of business conduct and ethics will be available on our website at www.intersectent.com. We intend to disclose any amendments to the code, or any waivers of its requirements, on our website to the extent required by the applicable rules and exchange requirements. The inclusion of our website address in this prospectus does not incorporate by reference the information on or accessible through our website into this prospectus.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee has ever been an officer or employee of the company. None of our executive officers serve, or have served during the last fiscal year, as a member of the board of directors, compensation committee or other board committee performing equivalent functions of any entity that has one or more executive officers serving as one of our directors or on our compensation committee.
Director Compensation
We have a policy of reimbursing our directors for their reasonable out-of-pocket expenses in connection with attending board of directors and committee meetings. From time to time, we have granted stock options to certain of our non-employee directors as compensation for their services. None of our non-employee directors were granted a stock option during the year ended December 31, 2013. Dr. Moll and Ms. Lucchese are our only non-employee directors who hold options to purchase our common stock. As of December 31, 2013, Dr. Moll held options to purchase 25,000 shares of our common stock. In July 2014, our board of directors granted Ms. Lucchese an option to purchase 25,000 shares of our common stock, vesting monthly over four years.
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Compensation
Summary Compensation Table
The following summary compensation table shows information regarding the compensation awarded to, earned by or paid to our named executive officers during the year ended December 31, 2013.
Name and Principal Position |
Year | Salary | Stock Options(1) |
Non-Equity Incentive Plan Compensation |
All Other Compensation |
Total | ||||||||||||||||||
Lisa D. Earnhardt |
2013 | $ | 334,750 | $ | 210,688 | $ | 109,195 | (2) | $ | 343 | (4) | $ | 654,976 | |||||||||||
President and Chief Executive Officer |
||||||||||||||||||||||||
Richard E. Kaufman |
2013 | 293,150 | 20,795 | 68,304 | (2) | 100,000 | (5) | 482,249 | ||||||||||||||||
Senior Vice President and Chief Operating Officer |
||||||||||||||||||||||||
Robert H. Binney, Jr. |
2013 | 154,500 | 51,076 | 154,583 | (3) | 14,400 | (6) | 374,559 | ||||||||||||||||
Vice President, Sales |
(1) | The amounts included in the Stock Options column represent the grant date fair value of stock options granted, calculated in accordance with ASC Topic 718. For a discussion of the assumptions made in the valuations reflected in this column, see Note 10 of the Financial Statements included elsewhere in this prospectus. |
(2) | Represents payments pursuant to our corporate bonus plan. At the beginning of each year, the compensation committee approves specific company performance milestones. Bonuses are determined at year-end by the compensation committee based upon the level of achievement of the milestones. Approve bonuses are paid in March of the following year. |
(3) | Consists of (a) $33,333 paid pursuant to our management business objectives bonus plan and (b) $121,250 pursuant to our sales commission plan. |
(4) | Represents life insurance premiums paid by us. |
(5) | Represents the portion of a loan to Mr. Kaufman forgiven by us. |
(6) | Represents a car allowance paid by us. |
Outstanding Equity Awards as of December 31, 2013
The following table shows stock options outstanding for each of our named executive officers as of December 31, 2013.
Name |
Vesting Commencement Date |
Number of Securities Underlying Unexercised Options(1) |
Option Exercise Price |
Option Expiration Date |
||||||||||||||||
Exercisable | Unexercisable | |||||||||||||||||||
Lisa D. Earnhardt |
04/23/13 | 89,375 | (2) | | $ | 1.20 | 04/22/23 | |||||||||||||
11/30/13 | 144,374 | (3) | | $ | 1.20 | 04/22/23 | ||||||||||||||
Richard E. Kaufman |
04/23/13 | 14,250 | (4) | | $ | 1.20 | 04/22/23 | |||||||||||||
11/30/13 | 14,250 | (3) | | $ | 1.20 | 04/22/23 | ||||||||||||||
Robert H. Binney, Jr. |
07/18/11 | 87,500 | (5) | | $ | 1.08 | 09/21/21 | |||||||||||||
04/23/13 | 35,000 | (4) | | $ | 1.20 | 04/22/23 | ||||||||||||||
11/30/13 | 35,000 | (3) | | $ | 1.20 | 04/22/23 |
(1) | The outstanding stock options are exercisable prior to vesting. |
(2) | None of the shares subject to this option were vested as of December 31, 2013, and the remainder vest in equal increments on monthly basis from November 23, 2014, through April 23, 2017. |
(3) | Approximately 2.0% of the shares subject to this option were vested as of December 31, 2013, and the remainder vest in equal increments on a monthly basis thereafter through November 30, 2017. |
(4) | Approximately 16.6% of the shares subject to this option were vested as of December 31, 2013, and the remainder vest in equal increments on a monthly basis thereafter through April 23, 2017. |
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(5) | Approximately 60.4% of the shares subject to this option were vested as of December 31, 2013, and the remainder vest in equal increments on a monthly basis thereafter through July 18, 2015. |
Each of the options reflected in the table above were granted with an exercise price equal to the fair value of our common stock on the date of grant, and may be exercised prior to vesting. Stock issued upon exercise of unvested options will be subject to repurchase by the company until vested.
Employee Benefits
We provide standard employee benefits to our full- and part-time employees, including our named executive officers, in the United States (in the case of part-time, those that work 30 or more hours per week), including health, disability and life insurance and a 401(k) plan as a means of attracting and retaining our executives and employees.
Tax Considerations
Our Board has considered the potential future effects of Section 162(m) of the Internal Revenue Code on the compensation paid to our named executive officers. Section 162(m) disallows a tax deduction for any publicly held corporation for individual compensation exceeding $1.0 million in any taxable year for our chief executive officer and each of the other named executive officers (other than our chief financial officer), unless compensation is performance-based. As we only recently became publicly-traded, our Board has not previously taken the deductibility limit imposed by Section 162(m) into consideration in setting compensation.
Pension Benefits
We do not maintain any defined benefit pension plans.
Non-qualified Deferred Compensation
We do not maintain any non-qualified deferred compensation plans.
Limitation on Liability and Indemnification
Upon the closing of this offering, our amended and restated certificate of incorporation will contain provisions that limit the liability of our current and former directors for monetary damages to the fullest extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for any breach of fiduciary duties as directors, except liability for:
| any breach of the directors duty of loyalty to the corporation or its stockholders; |
| any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law; |
| unlawful payments of dividends or unlawful stock repurchases or redemptions; or |
| any transaction from which the director derived an improper personal benefit. |
Such limitation of liability does not apply to liabilities arising under federal securities laws and does not affect the availability of equitable remedies, such as injunctive relief or rescission. Our amended and restated certificate of incorporation and our amended and restated bylaws will provide that we are required to indemnify our directors to the fullest extent permitted by Delaware law. Our amended and restated bylaws will also provide that, upon satisfaction of certain conditions, we shall advance expenses incurred by a director in advance of the final disposition of any action or proceeding, and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether we would otherwise be permitted to indemnify him or her under the provisions of Delaware law. Our amended and restated certificate of incorporation and amended and restated bylaws will also provide our board of directors with discretion to indemnify our officers and employees when determined appropriate by the board. We have entered and expect to continue to enter into agreements to indemnify our directors and executive officers. With certain exceptions, these agreements provide for indemnification for related expenses including, among other things, attorneys fees, judgments, fines and settlement amounts incurred by any of these individuals in any
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action or proceeding. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain customary directors and officers liability insurance.
The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholders investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought and we are not aware of any threatened litigation that may result in claims for indemnification.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, may be permitted for directors, executive officers or persons controlling us, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Offer Letters and Bonus Plan
We extended offer letters to each of our named executive officers in connection with their employment. The letters generally provide for at-will employment and set forth the named executive officers initial base salary, initial equity grant amount and eligibility for employee benefits. In addition, each of our named executive officers has executed a form of our standard confidential information and invention assignment agreement. The key terms of the offer letters extended to our named executive officers that continue to be in effect are described below.
Lisa D. Earnhardt
In January 2008, we extended an offer letter to Ms. Earnhardt to be our President and Chief Executive Officer. The letter was subsequently amended in July 2013. Pursuant to her offer letter, as amended, if, within 12 months following a change of control, Ms. Earnhardts employment is terminated without cause or she resigns for good reason, all unvested shares subject to her outstanding options shall accelerate in full. In addition, in the event of Ms. Earnhardts death, permanent disability, resignation for good reason or termination without cause, (1) all unvested shares subject to her outstanding options shall accelerate in full, (2) she shall receive a lump sum payment equal to her annual target bonus and (3) she shall receive 12 months of her base salary, to be paid monthly.
Pursuant to our corporate bonus plan, Ms. Earnhardt is eligible to receive a bonus of up to 35% of her annual base salary upon our achievement of milestones established by the compensation committee for the particular year.
Robert H. Binney, Jr.
In June 2011, we extended an offer letter to Mr. Binney to be our Vice President of Sales. The letter was subsequently amended in November 2013. Pursuant to his offer letter, as amended, upon the occurrence of a change of control, all outstanding stock options held by Mr. Binney shall be accelerated such that 50% of the unvested shares shall be fully vested. In addition, if, within 12 months following a change of control, Mr. Binneys employment is terminated without cause or he resigns for good reason, and provided such termination is in connection with the change of control and constitutes a separation from service, (1) all unvested shares subject to his outstanding options shall accelerate in full, (2) he shall receive a prorated, lump sum payment equal to his annual target bonus and (3) he shall receive six months of his base salary, to be paid monthly.
As a member of our sales team, Mr. Binney is a participant in (1) our sales commission plan, which provides for quarterly commissions based on the sales teams achievement of its quotas and (2) our management business objectives bonus plan, which provides for a quarterly bonus upon the achievement of management targets established by the compensation committee for the particular year.
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Richard E. Kaufman
In December 2006, we extended an offer letter to Mr. Kaufman to be our Vice President and Chief Operating Officer. The letter was subsequently amended in November 2013. Pursuant to his offer letter, as amended, upon the occurrence of a change of control, all outstanding stock options held by Mr. Kaufman shall be accelerated such that 50% of the unvested shares shall be fully vested. In addition, if, within 12 months following a change of control, Mr. Kaufmans employment is terminated without cause or he resigns for good reason, and provided such termination is in connection with such change of control and constitutes a separation from service, (1) all unvested shares subject to his outstanding options shall accelerate in full, (2) he shall receive a prorated, lump sum payment equal to his annual target bonus and (3) he shall receive six months of his base salary, to be paid monthly.
Pursuant to our corporate bonus plan, Mr. Kaufman is eligible to receive a bonus of up to 25% of his annual base salary, upon the achievement of certain milestones established by the compensation committee for the particular year.
As set forth in these offer letters: (1) cause includes commissions of crimes or other material acts of dishonesty, engagement in any activity the executive officer knows could materially harm our business or reputation, material failure to adhere to our corporate codes, policies or procedures, material violation of any statutory, contractual, or common law duty or obligation to us or material breach of the executive officers confidentiality agreement with us, or the failure to substantially perform assigned duties or responsibilities after notice and opportunity to cure; and (2) good reason includes a relocation of the office where the executive officer is assigned to a location of more than 35 miles away (50 miles in the case of Ms. Earnhardt), a material decrease in base salary (except for salary decreases generally applicable to our other executive employees), or a material reduction in the scope of duties or responsibilities, in each case without the executive officers written consent; provided, however, that, in the case of Mr. Binney and Mr. Kaufmann, to resign for Good Reason the executive officer must provide notice to us and give us 30 days to cure the event giving rise to Good Reason, and if not cured then must resign within 90 days of the expiration of the cure period.
Stock Plans
The principal features of our equity incentive plans and our 401(k) plan are summarized below. These summaries are qualified in their entirety by reference to the actual text of the plans, which, other than the 401(k) plan, are filed as exhibits to the registration statement of which this prospectus is a part.
2014 Equity Incentive Plan
Our board of directors adopted our 2014 Equity Incentive Plan, or the 2014 Plan, in July, 2014, and our stockholders subsequently approved the 2014 Plan in July, 2014. The 2014 Plan will become effective on the date the registration statement of which this prospectus forms a part is declared effective by the SEC. Once the 2014 Plan becomes effective, no further grants will be made under our 2013 Equity Incentive Plan, which is described below.
Our 2014 Plan provides for the grant of incentive stock options, or ISOs, within the meaning of Section 422 of the Code, to our employees and our parent and subsidiary corporations employees, and for the grant of nonstatutory stock options, or NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards, and other forms of equity compensation to our employees, directors and consultants. Addition, our 2014 Plan provides for the grant of performance cash awards to our employees, directors and consultants.
Authorized Shares. The maximum number of shares of our common stock that may be issued under our 2014 Plan is 4,750,000. The number of shares of our common stock reserved for issuance under our 2014 Plan will automatically increase on January 1 of each year, beginning on January 1, 2015, and continuing through and including January 1, 2024, by 3% of the total number of shares of our capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by our board of directors. The maximum number of shares that may be issued upon the exercise of ISOs under our 2014 Plan is 10,000,000.
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Shares issued under our 2014 Plan will be authorized but unissued or reacquired shares of our common stock. Shares subject to stock awards granted under our 2014 Plan that expire or terminate without being exercised in full, or that are paid out in cash rather than in shares, will not reduce the number of shares available for issuance under our 2014 Plan. Additionally, shares issued pursuant to stock awards under our 2014 Plan that we repurchase or that are forfeited, as well as shares used to pay the exercise price of a stock award or to satisfy the tax withholding obligations related to a stock award, will become available for future grant under our 2014 Plan.
Plan Administration. Our board of directors, or a duly authorized committee of our board of directors, will administer our 2014 Plan. Our board of directors may also delegate to one or more of our officers the authority to (1) designate employees (other than officers) to receive specified stock awards, and (2) determine the number of shares subject to such stock awards. Subject to the terms of our 2014 Plan, the board of directors has the authority to determine the terms of awards, including recipients, the exercise, purchase or strike price of stock awards, if any, the number of shares subject to each stock award, the fair market value of a share of our common stock, the vesting schedule applicable to the awards, together with any vesting acceleration, and the form of consideration, if any, payable upon exercise or settlement of the award and the terms of the award agreements for use under our 2014 Plan.
Our board of directors has the power to modify outstanding awards under our 2014 Plan. Our board of directors has the authority to reprice any outstanding option or stock appreciation right, cancel any outstanding stock award in exchange for new stock awards, cash or other consideration, or take any other action that is treated as a repricing under generally accepted accounting principles, with the consent of any adversely affected participant.
Section 162(m) Limits. At such time as necessary for compliance with Section 162(m) of the Code, no participant may be granted stock awards covering more than 1,000,000 shares of our common stock under our 2014 Plan during any calendar year pursuant to stock options, stock appreciation rights and other stock awards whose value is determined by reference to an increase over an exercise price or strike price of at least 100% of the fair market value of our common stock on the date of grant. Additionally, no participant may be granted in a calendar year a performance stock award covering more than 1,000,000 shares of our common stock or a performance cash award having a maximum value in excess of $1,000,000 under our 2014 Plan. These limitations are designed to allow us to grant compensation that will not be subject to the $1,000,000 annual limitation on the income tax deductibility of compensation paid per covered executive officer imposed by Section 162(m) of the Code.
Performance Awards. Our 2014 Plan permits the grant of performance-based stock and cash awards that may qualify as performance-based compensation that is not subject to the $1,000,000 limitation on the income tax deductibility of compensation paid per covered executive officer imposed by Section 162(m) of the Code. Our compensation committee can structure such awards so that the stock or cash will be issued or paid pursuant to such award only following the achievement of certain pre-established performance goals during a designated performance period.
Our compensation committee may establish performance goals by selecting from one or more of the following performance criteria: (1) earnings (including earnings per share and net earnings); (2) earnings before interest, taxes and depreciation; (3) earnings before interest, taxes, depreciation and amortization; (4) earnings before interest, taxes, depreciation, amortization and legal settlements; (5) earnings before interest, taxes, depreciation, amortization, legal settlements and other income (expense); (6) earnings before interest, taxes, depreciation, amortization, legal settlements, other income (expense) and stock-based compensation; (7) earnings before interest, taxes, depreciation, amortization, legal settlements, other income (expense), stock-based compensation and changes in deferred revenue; (8) total stockholder return; (9) return on equity or average stockholders equity; (10) return on assets, investment, or capital employed; (11) stock price; (12) margin (including gross margin); (13) income (before or after taxes); (14) operating income; (15) operating income after taxes; (16) pre-tax profit; (17) operating cash flow; (18) sales or revenue targets; (19) increases in revenue or product revenue; (20) expenses and cost reduction goals; (21) improvement in or attainment of working capital levels; (22) economic value added (or an equivalent metric); (23) market share; (24) cash flow; (25) cash flow per share; (26) share price performance; (27) debt reduction; (28) implementation or completion of projects or processes; (29) user satisfaction; (30) stockholders equity; (31) capital expenditures; (32) debt levels; (33) operating profit or net operating profit; (34) workforce diversity; (35) growth of net income or operating
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income; (36) billings; (37) bookings; (38) the number of users, including but not limited to unique users; (39) employee retention; and (40) to the extent that an Award is not intended to comply with Section 162(m) of the Code, other measures of performance selected by the Board.
Our compensation committee may establish performance goals on a company-wide basis, with respect to one or more business units, divisions, affiliates, or business segments, and in either absolute terms or relative to the performance of one or more comparable companies or the performance of one or more relevant indices. Unless specified otherwise (1) in the award agreement at the time the award is granted or (2) in such other document setting forth the performance goals at the time the goals are established, our compensation committee will appropriately make adjustments in the method of calculating the attainment of the performance goals as follows: (a) to exclude restructuring or other nonrecurring charges; (b) to exclude exchange rate effects; (c) to exclude the effects of changes to generally accepted accounting principles; (d) to exclude the effects of any statutory adjustments to corporate tax rates; and (e) to exclude the effects of any extraordinary items as determined under generally accepted accounting principles; (f) to exclude the dilutive effects of acquisitions or joint ventures; (g) to assume that any business divested achieved performance objectives at targeted levels during the balance of a Performance Period following such divestiture; (h) to exclude the effect of any change in the outstanding shares of our common stock by reason of any stock dividend or split, stock repurchase, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distributions to common stockholders other than regular cash dividends; (i) to exclude the effects of stock based compensation and the award of bonuses under our bonus plans; (j) to exclude costs incurred in connection with potential acquisitions or divestitures that are required to be expensed under generally accepted accounting principles; (k) to exclude the goodwill and intangible asset impairment charges that are required to be recorded under generally accepted accounting principles; and (l) to exclude the effect of any other unusual, non-recurring gain or loss or other extraordinary item.
Corporate Transactions. Our 2014 Plan provides that in the event of certain specified significant corporate transactions, as defined under our 2014 Plan, each outstanding award will be treated as the administrator determines. The administrator may (1) arrange for the assumption, continuation or substitution of a stock award by a successor corporation; (2) arrange for the assignment of any reacquisition or repurchase rights held by us to a successor corporation; (3) accelerate the vesting, in whole or in part, of the stock award and provide for its termination prior to the transaction; (4) arrange for the lapse, in whole or in part, of any reacquisition or repurchase rights held by us; or (5) cancel or arrange for the cancellation of the stock award prior to the transaction in exchange for a cash payment, if any, determined by the board. The plan administrator is not obligated to treat all stock awards or portions of stock awards, even those that are of the same type, in the same manner.
Transferability. A participant may not transfer stock awards under our 2014 Plan other than by will, the laws of descent and distribution or as otherwise provided under our 2014 Plan.
Plan Amendment or Termination. Our board of directors has the authority to amend, suspend, or terminate our 2014 Plan, provided that such action does not materially impair the existing rights of any participant without such participants written consent. No ISOs may be granted after the tenth anniversary of the date our board of directors adopted our 2014 Plan.
2014 Employee Stock Purchase Plan
Our board of directors adopted our 2014 Employee Stock Purchase Plan, or the ESPP, in July 2014, and our stockholders subsequently approved the ESPP in July, 2014. The ESPP will become effective immediately upon the execution and delivery of the underwriting agreement related to this offering. The purpose of the ESPP is to secure the services of new employees, to retain the services of existing employees and to provide incentives for such individuals to exert maximum efforts toward our success and that of our affiliates. The ESPP is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code. The maximum aggregate number of shares of our common stock that may be issued under our ESPP is shares.
Authorized Shares. The maximum aggregate number of shares of our common stock that may be issued under our ESPP is 496,092 shares. Additionally, the number of shares of our common stock reserved for issuance under our ESPP will increase automatically each year, beginning on January 1, 2015, and continuing through and including
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January 1, 2024, by the lesser of (1) 1% of the total number of shares of our common stock outstanding on December 31 of the preceding calendar year; or (2) such lesser number as determined by our board of directors. Shares subject to purchase rights granted under our ESPP that terminate without having been exercised in full will not reduce the number of shares available for issuance under our ESPP.
Administration. Our board of directors, or a duly authorized committee thereof, will administer our ESPP. Our board of directors has delegated concurrent authority to administer our ESPP to our compensation committee under the terms of the compensation committees charter. The ESPP is implemented through a series of offerings under which eligible employees are granted purchase rights to purchase shares of our common stock on specified dates during such offerings. Under the ESPP, we may specify offerings with durations of not more than 27 months, and may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which shares of our common stock will be purchased for employees participating in the offering. An offering under the ESPP may be terminated under certain circumstances.
Payroll Deductions. Generally, all regular employees, including executive officers, employed by us or by any of our designated affiliates, may participate in the ESPP and may contribute, normally through payroll deductions, up to 15% of their earnings (as defined in the ESPP) for the purchase of our common stock under the ESPP. Unless otherwise determined by our board of directors, common stock will be purchased for the accounts of employees participating in the ESPP at a price per share equal to the lower of (a) 85% of the fair market value of a share of our common stock on the first date of an offering or (b) 85% of the fair market value of a share of our common stock on the date of purchase. For the initial offering, which we expect will commence upon the execution and delivery of the underwriting agreement relating to this offering, the fair market value on the first day of the initial offering will be the price at which shares are first sold to the public.
Limitations. Our employees, including executive officers, or any of our designated affiliates may have to satisfy one or more of the following service requirements before participating in our ESPP, as determined by the administrator: (1) customary employment with us or one of our affiliates for more than 20 hours per week and more than five months per calendar year, or (2) continuous employment with us or one of our affiliates for a minimum period of time, not to exceed two years, prior to the first date of an offering. An employee may not be granted rights to purchase stock under our ESPP if such employee (1) immediately after the grant would own stock possessing 5% or more of the total combined voting power or value of our common stock, or (2) holds rights to purchase stock under our ESPP that would accrue at a rate that exceeds $25,000 worth of our stock for each calendar year that the rights remain outstanding.
Changes to Capital Structure. In the event that there occurs a change in our capital structure through such actions as a stock split, merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, large nonrecurring cash dividend, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or similar transaction, the board of directors will make appropriate adjustments to (1) the number of shares reserved under the ESPP, (2) the maximum number of shares by which the share reserve may increase automatically each year, (3) the number of shares and purchase price of all outstanding purchase rights and (4) the number of shares that are subject to purchase limits under ongoing offerings.
Corporate Transactions. In the event of certain significant corporate transactions, as defined in the ESPP, any then-outstanding rights to purchase our stock under the ESPP may be assumed, continued or substituted for by any surviving or acquiring entity (or its parent company). If the surviving or acquiring entity (or its parent company) elects not to assume, continue or substitute for such purchase rights, then the participants accumulated payroll contributions will be used to purchase shares of our common stock within 10 business days prior to such corporate transaction, and such purchase rights will terminate immediately.
ESPP Amendments, Termination. Our board of directors has the authority to amend or terminate our ESPP, provided that except in certain circumstances such amendment or termination may not materially impair any outstanding purchase rights without the holders consent. We will obtain stockholder approval of any amendment to our ESPP as required by applicable law or listing requirements.
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2013 Equity Incentive Plan
Our board of directors adopted and our stockholders approved our 2013 Equity Incentive Plan, or the 2013 Plan, in September 2013. The 2013 Plan provides for the discretionary grant of ISOs, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, and other stock awards to our employees, directors and consultants or our affiliates. ISOs may be granted only to our employees or employees of our affiliates.
The 2013 Plan will be terminated on the date the 2014 Plan becomes effective. However, any outstanding options granted under the 2014 Plan will remain outstanding, subject to the terms of our 2013 Plan and stock option agreements, until such outstanding options are exercised or until they terminate or expire by their terms.
Authorized Shares. The maximum number of shares of our common stock that may be issued under our 2013 Plan is 596,817, plus any shares subject to stock options or other stock awards granted under the 2003 Equity Incentive Plan, described below, that would have otherwise returned to our 2003 Plan (such as upon the expiration or termination of a stock award prior to vesting). The maximum number of shares that may be issued upon the exercise of ISOs under our 2013 Plan is two (2) times the 2013 Plan share reserve.
Plan Administration. Our board of directors or a duly authorized committee of our board of directors administers our 2013 Plan and the stock awards granted under it. Our board of directors may also delegate to one or more of our officers the authority to (1) designate officers and employees to receive specified stock awards and (2) determine the number of shares subject to such stock awards. Subject to the terms of our 2013 Plan, the board of directors has the authority to determine and amend the terms of awards, including recipients, the exercise, purchase or strike price of stock awards, if any, the number of shares subject to each stock award, the fair market value of a share of our common stock, the vesting schedule applicable to the awards, together with any vesting acceleration, and the form of consideration, if any, payable upon exercise or settlement of the award and the terms of the award agreements for use under our 2013 Plan.
Our board of directors has the power to modify outstanding awards under our 2013 Plan. Our board of directors has the authority to reprice any outstanding option or stock appreciation right, cancel any outstanding stock award in exchange for new stock awards, cash or other consideration, or take any other action that is treated as a repricing under generally accepted accounting principles, with the consent of any adversely affected participant.
Corporate Transactions. Our 2013 Plan provides that in the event of certain specified significant corporate transactions, as defined under our 2013 Plan, each outstanding award will be treated as the administrator determines. The administrator may (1) arrange for the assumption, continuation or substitution of a stock award by a successor corporation, or the acquiring corporations parent company; (2) arrange for the assignment of any reacquisition or repurchase rights held by us to a successor corporation, or the acquiring corporations parent company; (3) accelerate the vesting, in whole or in part, of the stock award and provide for its termination prior to the transaction; (4) arrange for the lapse, in whole or in part, of any reacquisition or repurchase rights held by us; (5) cancel or arrange for the cancellation of the stock award prior to the transaction in exchange for a cash payment, if any, determined by the board; or (6) make a payment in such form as determined by the board of directors equal to the excess of the value of the property that would have been received and the exercise price. The plan administrator is not obligated to treat all stock awards or portions of stock awards, even those that are of the same type, in the same manner.
Transferability. A participant may not transfer stock awards under our 2013 Plan other than by will, the laws of descent and distribution, or as otherwise provided under our 2013 Plan.
Plan Amendment or Termination. Our board of directors has the authority to amend, suspend or terminate our 2013 Plan, provided that such action is approved by our stockholders to the extent stockholder approval is necessary and that such action does not impair the existing rights of any participant without such participants written consent. As described above, our 2013 Plan will be terminated upon the effective date of this offering and no future stock awards will be granted thereunder.
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2003 Equity Incentive Plan
Our board of directors adopted and our stockholders approved our 2003 Equity Incentive, or the 2003 Plan, in October 2003. The 2003 Plan was last amended in February 2013. The 2003 Plan provides for the discretionary grant of ISOs, nonstatutory stock options, stock bonuses, and rights to acquire restricted stock to our employees, directors and consultants or our affiliates. ISOs may be granted only to our employees or employees of our affiliates.
The 2003 Plan was terminated on the date the 2013 Plan became effective. However, any outstanding options granted under the 2003 Plan remain outstanding, subject to the terms of our 2003 Plan and stock option agreements, until such outstanding options are exercised or until they terminate or expire by their terms.
Authorized Shares. The maximum number of shares of our common stock that may be issued under our 2003 Plan is 3,774,005.
Plan Administration. Our board of directors or a duly authorized committee of our board of directors administers our 2003 Plan and the stock awards granted under it. Our board of directors has the power to modify outstanding awards under our 2003 Plan, with the consent of any adversely affected participant.
Corporate Transactions. Our 2003 Plan provides that in the event of certain specified significant corporate transactions, as defined under our 2003 Plan, the surviving or acquiring corporation may assume, continue or substitute similar stock awards for outstanding stock awards under the 2003 Plan and any reacquisition or repurchase rights held by us may be assigned to the surviving or acquiring corporation. In the event that outstanding stock awards are not so assumed, continued or substituted, the vesting and, if applicable, exercisability of any such stock awards held by participants whose continuous service has not terminated prior to the effective time of the corporate transaction will be accelerated in full to a date prior to the effective time of such corporate transaction, and such stock awards will terminate if not exercised (if applicable) at or prior to the effective time of such corporation transaction, and any reacquisition or repurchase rights held by us will lapse, contingent upon the effectiveness of such corporate transaction. With respect to any other outstanding stock awards that are not so assumed, continued or substituted, the vesting and, if applicable, exercisability of any such stock awards will not be accelerated, unless otherwise provided in a written agreement between us and the participant, and all such stock awards will terminate if not exercised (if applicable) prior to the effective time of the corporate transaction.
Transferability. A participant may not transfer stock awards under our 2003 Plan other than by will, the laws of descent and distribution, or as otherwise provided under our 2003 Plan.
Plan Amendment or Termination. Our board of directors has the authority to amend, suspend or terminate our 2003 Plan, provided that such action does not impair the existing rights of any participant without such participants written consent. As described above, our 2003 Plan terminated upon the effective date of the 2013 Plan.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following is a description of transactions since January 1, 2011, to which we have been a party, in which the amount involved exceeds $120,000, and in which any of our directors, executive officers or beneficial holders of more than 5% of our common stock, or an affiliate or immediate family member thereof, had or will have a direct or indirect material interest.
Each agreement described below is filed as an exhibit to the registration statement of which this prospectus forms a part, and the following descriptions are qualified by reference to such agreements.
Compensation arrangements for our directors and named executive officers are described in this prospectus under the section entitled Executive Compensation.
Sale of Series C Convertible Preferred Stock
In August 2011, we completed the closing of the sale of an aggregate of 2,655,698 shares of our Series C convertible preferred stock at a purchase price of $5.84 per share for an aggregate purchase price of $15,509,288. Our Series C convertible preferred stock will convert on a one-for-one basis into common stock immediately prior to the closing of this offering. The following table summarizes purchases of shares of our Series C convertible preferred stock by our executive officers, directors and holders of more than 5% of our capital stock.
Name |
Series C Convertible Preferred Stock |
Aggregate Purchase Price |
||||||
U.S. Venture Partners IX, L.P.(1) |
646,108 | $ | 3,773,272 | |||||
KPCB Holdings, Inc., as nominee(2) |
646,108 | 3,773,272 | ||||||
PTV Sciences II, L.P.(3) |
599,315 | 3,500,000 | ||||||
Medtronic, Inc.(4) |
505,137 | 2,950,000 | ||||||
Entities affiliated with DAG Ventures(5) |
135,363 | 790,516 | ||||||
Frederic H. Moll(6) |
42,808 | 249,999 |
(1) | Mr. Tansey, a member of our board of directors, is affiliated with U.S. Venture Partners IX, L.P. |
(2) | Mr. Mead, a member of our board of directors, is affiliated with KPCB Holdings, Inc., as nominee. |
(3) | Mr. Anderson, a member of our board of directors, is affiliated with PTV Sciences II, L.P. |
(4) | Mr. Fletcher, a member of our board of directors, is affiliated with Medtronic, Inc. |
(5) | Includes (a) 123,613 shares held by DAG Ventures III-QP, (b) 11,627 shares held by DAG Ventures III, L.P. and (c) 121 shares held by DAG Ventures GP Fund III, LLC |
(6) | Dr. Moll is a member of our board of directors. |
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Sale of Series D Convertible Preferred Stock
In February and March 2013, we completed the initial closings of the sale of an aggregate of 3,026,765 shares of our Series D convertible preferred stock at a purchase price of $6.89 per share for an aggregate purchase price of $20,860,554, or the initial closings. In October 2013, we completed the second closing of the sale of an aggregate of 1,369,008 shares of our Series D convertible preferred stock at a purchase price of $6.89 per share for an aggregate purchase price of $9,435,213, or the second closing. Our Series D convertible preferred stock will convert on a one-for-one basis into common stock immediately prior to the closing of this offering. The following table summarizes purchases of shares of our Series D convertible preferred stock by our executive officers, directors and holders of more than 5% of our capital stock in each of the initial closings and the second closing.
Name |
Initial Closings Shares of Series D Convertible Preferred Stock |
Initial Closings Aggregate Purchase Price |
Second Closing Shares of Series D Convertible Preferred Stock |
Second Closing Aggregate Purchase Price |
||||||||||||
Norwest Venture Partners XI, LP(1) |
1,538,015 | $ | 10,599,999 | 710,969 | $ | 4,900,000 | ||||||||||
U.S. Venture Partners IX, L.P.(2) |
509,375 | 3,510,613 | 236,679 | 1,631,195 | ||||||||||||
PTV Sciences II, L.P.(3) |
276,047 | 1,902,518 | 128,264 | 883,999 | ||||||||||||
KPCB Holdings, Inc., as nominee(4) |
217,943 | 1,502,068 | 101,267 | 697,930 | ||||||||||||
Medtronic, Inc.(5) |
128,360 | 884,661 | 59,642 | 411,054 | ||||||||||||
Entities affiliated with DAG Ventures(6) |
85,961 | 592,445 | 39,942 | 275,280 | ||||||||||||
Frederic H. Moll(7) |
17,558 | 121,012 | 8,158 | 56,228 | ||||||||||||
Monika A. De Martini(8) |
16,299 | 112,338 | | | ||||||||||||
Robert H. Binney, Jr.(9) |
4,352 | 29,999 | | | ||||||||||||
Richard E. Kaufman(10) |
16,299 | 112,338 | | | ||||||||||||
Amy Wolbeck(11) |
2,901 | 19,999 | | |
(1) | Mr. de Clercq, a member of our board of directors, is affiliated with Norwest Venture Partners XI, LP. |
(2) | Mr. Tansey, a member of our board of directors, is affiliated with U.S. Venture Partners IX, L.P. |
(3) | Mr. Anderson, a member of our board of directors, is affiliated with PTV Sciences II, L.P. |
(4) | Mr. Mead, a member of our board of directors, is affiliated with KPCB Holdings, Inc., as nominee. |
(5) | Mr. Fletcher, a member of our board of directors, is affiliated with Medtronic, Inc. |
(6) | Includes (a) 114,975 shares held by DAG Ventures III-QP, (b) 10,815 shares held by DAG Ventures III, L.P. and (c) 113 shares held by DAG Ventures GP Fund III, LLC. |
(7) | Dr. Moll is a member of our board of directors. |
(8) | Shares held in the David P. and Monika A. De Martini Living Trust dated 11/16/2004. Ms. De Martini is our former Chief Financial Officer. |
(9) | Mr. Binney is our Vice President, Sales. |
(10) | Mr. Kaufman is our Senior Vice President and Chief Operating Officer. |
(11) | Ms. Wolbeck is our Vice President, Regulatory Affairs and Quality. |
Employee Loans
In May 2013, we loaned Lisa Earnhardt, our President and Chief Executive Officer, $499,854 in connection with her exercise of options to purchase 586,575 shares of our common stock, or the Exercise Shares. The loan was evidenced by full recourse promissory notes, accrued interest on the outstanding principal amount at the rate of 1% per annum and was secured by a pledge of the Exercise Shares. The promissory notes provided that the loan would be forgiven at a rate of one-fourth of the original principal amount and all accrued and unpaid interest on each anniversary of the loan. The entire principal amount and all accrued and unpaid interest of the loan was forgiven in full in June 2014.
In February 2007, we loaned Richard E. Kaufman, our Senior Vice President and Chief Operating Officer, $286,050. In February 2011, our board of directors approved the forgiveness of Mr. Kaufmans loan over a
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period of three years, provided that he remained employed with us and in good standing. The loan to Mr. Kaufman was forgiven in full in January 2014.
Indemnification Agreements
Our amended and restated certificate of incorporation, which will be effective upon the closing of this offering, will contain provisions limiting the liability of directors, and our amended and restated bylaws will provide that we will indemnify each of our directors to the fullest extent permitted under Delaware law. Our amended and restated certificate of incorporation and amended and restated bylaws will also provide our board of directors with discretion to indemnify our officers and employees when determined appropriate by the board. In addition, we have entered and expect to continue to enter into agreements to indemnify our directors and executive officers. For more information regarding these agreements, see the section of this prospectus entitled Executive CompensationLimitation on Liability and Indemnification.
Investor Rights Agreement
We are party to an investor rights agreement that provides holders of our convertible preferred stock, including certain holders of 5% of our capital stock and entities affiliated with certain of our directors, with certain registration rights, including the right to demand that we file a registration statement or request that their shares be covered by a registration statement that we are otherwise filing. The investor rights agreement also provides for a right of first refusal in favor of certain holders of our stock with regard to certain issuances of our capital stock. The rights of first refusal will not apply to, and will terminate upon, closing of this offering. For a more detailed description of these registration rights, see the section of this prospectus entitled Description of Capital StockRegistration Rights.
Voting Agreement
We are party to a voting agreement under which certain holders of our capital stock, including certain holders of 5% of our capital stock and entities affiliated with certain of our directors, have agreed to vote in a certain way on certain matters, including with respect to the election of directors. Pursuant to the voting agreement, each of U.S. Venture Partners IX, L.P., Kleiner Perkins Caufield & Byers, PTV Sciences II, L.P., Medtronic, Inc. and Norwest Venture Partners XI, LP had the right to designate one member of our board of directors. Casey M. Tansey, Dana G. Mead, Jr., Rick D. Anderson, Mark Fletcher and Casper L. de Clercq were designated by U.S. Venture Partners IX, L.P., Kleiner Perkins Caufield & Byers, PTV Sciences II, L.P., Medtronic, Inc. and Norwest Venture Partners XI, LP, respectively, under the voting agreement. The voting agreement and rights regarding the election or designation of members of our board of directors will terminate upon the closing of this offering and none of our stockholders will have any special rights regarding the election or designation of members of our board of directors.
Right of First Refusal and Co-Sale Agreement
We are party to a right of first refusal and co-sale agreement with holders of our convertible preferred stock and our founders, including certain holders of 5% of our capital stock and entities affiliated with certain of our directors, pursuant to which the holders of convertible preferred stock have a right of first refusal and co-sale in respect of certain sales of securities by our founders. The right of first refusal and co-sale agreement will terminate upon the closing of this offering.
Employment Arrangements
We have extended offer letters to our executive officers in connection with their employment as described in greater detail in the section of this prospectus titled Executive CompensationOffer Letters and Bonus Plan.
Policies and Procedures for Related Party Transactions
Our board of directors has adopted a written related-person transaction policy setting forth the policies and procedures for the review and approval or ratification of related person transactions. This policy covers, with
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certain exceptions set forth in Item 404 of Regulation S-K under the Securities Act, any transaction, arrangement or relationship, or any series of similar or related transactions, arrangements or relationships in which we were or are to be a participant, where the amount involved exceeds $120,000 and a related person had or will have a direct or indirect material interest, including, without limitation, purchases of goods or services by or from the related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness and employment by us of a related person.
In addition, under our code of conduct, our employees and directors have an affirmative responsibility to disclose any transaction or relationship that reasonably could be expected to give rise to a conflict of interest to our legal department, or, if the employee is an executive officer, to our board of directors.
In considering related-person transactions, our audit committee (or other independent body of our board of directors) will take into account the relevant available facts and circumstances including, but not limited to, the risks, costs and benefits to us, the terms of the transaction, the availability of other sources for comparable services or products and, if applicable the impact on a directors independence in the event that the related person is a director, immediate family member of a director or an entity with which a director is affiliated.
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The following table presents information as to the beneficial ownership of our common stock as of March 31, 2014, for:
| each person, or group of affiliated persons, known by us to beneficially own more than 5% of our common stock; |
| each named executive officer; |
| each of our directors; and |
| all executive officers and directors as a group. |
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Common stock subject to options that are currently exercisable or exercisable within 60 days of March 31, 2014, are deemed to be outstanding and to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
Percentage ownership of our common stock prior to this offering in the table is based on 17,501,808 shares of common stock issued and outstanding as of March 31, 2014, adjusted for the automatic conversion of all outstanding shares of convertible preferred stock into shares of common stock upon the completion of this offering. Percentage ownership of our common stock after this offering in the table is based on 22,501,808 shares of common stock issued and outstanding on March 31, 2014, which gives effect to the issuance of 5,000,000 shares of common stock in this offering and assumes no exercise of the underwriters option to purchase additional shares. Unless otherwise indicated, the address of each of the individuals and entities named below is c/o Intersect ENT, Inc., 1555 Adams Drive, California 94025.
Percentage of Shares Beneficially Owned |
||||||||||||||||||||
Name and Address of Shares Beneficially Owned |
Shares Beneficially Owned(1) |
Shares Exercisable Within 60 days |
Total
Shares Beneficially Owned |
Before the Offering |
After the Offering |
|||||||||||||||
5% Stockholders: |
||||||||||||||||||||
U.S. Venture Partners IX, L.P.(2) 2735 Sand Hill Road Menlo Park, CA 94025 |
3,975,433 | | 3,975,433 | 22.7 | % | 17.7 | % | |||||||||||||
KPCB Holdings, Inc., as nominee(3) 2750 Sand Hill Road Menlo Park, CA 94025 |
3,548,589 | | 3,548,589 | 20.3 | % | 15.8 | % | |||||||||||||
PTV Sciences II, L.P.(4) 3600 N. Capital of Texas Highway Building B, Suite 180 Austin, TX 78746 |
2,576,966 | | 2,576,966 | 14.7 | % | 11.5 | % | |||||||||||||
Entities affiliated with Norwest Venture Partners(5) 525 University Ave, Suite 800 Palo Alto, CA 94301 |
2,248,984 | | 2,248,984 | 12.9 | % | 10.0 | % | |||||||||||||
Medtronic, Inc.(6) 710 Medtronic Parkway Mail Stop: L100 Minneapolis, MN 55432 |
1,198,276 | | 1,198,276 | 6.8 | % | 5.3 | % |
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Outstanding Shares Beneficially Owned(1) |
Shares Exercisable Within 60 days |
Total
Shares Beneficially Owned |
Percentage of Shares Beneficially Owned |
|||||||||||||||||
Name and Address of Shares Beneficially Owned |
Before the Offering |
After the Offering |
||||||||||||||||||
Directors and Named Executive Officers: |
||||||||||||||||||||
Rick D. Anderson(4) |
2,576,966 | | 2,576,966 | 14.7 | % | 11.5 | % | |||||||||||||
Casper L. de Clercq(5) |
2,248,984 | | 2,248,984 | 12.8 | % | 10.0 | % | |||||||||||||
Mark Fletcher(6) |
1,198,276 | | 1,198,276 | 6.8 | % | 5.3 | % | |||||||||||||
Cynthia L. Lucchese |
| | | * | * | |||||||||||||||
Dana G. Mead, Jr.(3) |
3,548,589 | | 3,548,589 | 20.3 | % | 15.8 | % | |||||||||||||
Frederic H. Moll, MD |
276,178 | 37,083 | 313,261 | 1.8 | % | 1.4 | % | |||||||||||||
Casey M. Tansey(2) |
3,975,433 | | 3,975,433 | 22.7 | % | 17.7 | % | |||||||||||||
Lisa D. Earnhardt(7) |
751,050 | 233,749 | 984,799 | 5.6 | % | 4.3 | % | |||||||||||||
Richard E. Kaufman(8) |
224,189 | 28,500 | 252,689 | 1.4 | % | 1.1 | % | |||||||||||||
Robert H. Binney, Jr. |
4,352 | 157,500 | 161,852 | * | * | % | ||||||||||||||
All directors and named executive officers as a group (13 persons)(9) |
14,834,732 | 941,803 | 15,776,535 | 85.5 | % | 67.3 | % |
* | Represents beneficial ownership of less than one percent of the outstanding common stock, adjusted for the automatic conversion of all outstanding shares of convertible preferred stock into 15,703,875 shares of common stock upon the completion of this offering. |
(1) | Represents shares of common stock held by such individuals. Includes shares held in the beneficial owners name or jointly with others, or in the name of a bank, nominee or trustee for the beneficial owners account. |
(2) | Presidio Management Group IX, L.L.C., or PMG IX, is the general partner of U.S. Venture Partners IX, L.P., or USVP IX, and may be deemed to have sole voting and dispositive power over the shares held by USVP IX. Casey M. Tansey, one of our directors, and each of Irwin Federman, Steven M. Krausz, David E. Liddle, Paul A. Matteucci, Jonathan D. Root, and Philip M. Young are managing members of PMG IX, and may be deemed to share voting and dispositive power over the shares held by USVP IX. Such persons and entities disclaim beneficial ownership of shares held by USVP IX, except to the extent of any proportionate pecuniary interest therein. |
(3) | Shares beneficially owned consist of (a) 3,112,232 shares held by Kleiner Perkins Caufield & Byers XI-A, L.P., or KPCB XI-A, (b) 72,272 shares held by Kleiner Perkins Caufield & Byers XI-B, L.P., or KPCB XI-B, and (c) 364,085 shares held by individuals and entities associated with Kleiner Perkins Caufield & Byers. All shares are held for convenience in the name of KPCB Holdings, Inc. as nominee, for the accounts of such individuals and entities who each exercise their own voting and dispositive power over such shares. The general partner of KPCB XI-A and KPCB XI-B is KPCB XI Associates, LLC. Brook H. Byers, L. John Doerr, Raymond J. Lane and Theodore E. Schlein, the managers of KPCB XI Associates, exercise shared voting and dispositive power over the shares directly held by KPCB XI-A and KPCB XI-B. |
(4) | Pinto Technology Ventures GP II, L.P., or PTV GP II, is the general partner of PTV Sciences II, L.P., or PTVS II. Pinto TV GP Company LLC, or TV GP, is the general partner of PTV GP II. Each of Matthew Crawford and Rick Anderson, one of our directors, is a manager of TV GP and may be deemed to have beneficial ownership of the shares held by PTVS II. Such persons and entities disclaim beneficial ownership of shares held by PTVS II, except to the extent of any proportionate pecuniary interest therein. |
(5) | Shares beneficially owned reflect a transfer subsequent to March 31, 2014 and consist of (a) 1,124,492 shares held by Norwest Venture Partners XI, L.P., or NVP XI, and (b) 1,124,492 shares held by Norwest Venture Partners XII, L.P., or NVP XII. Genesis VC Partners XI, LLC, or Genesis XI, is the general partner of NVP XI and may be deemed to have sole voting and dispositive power over the shares held by NVP XI. Genesis VC Partners XII, LLC, or Genesis XII, is the general partner of NVP XII and may be deemed to have sole voting and dispositive power over the shares held by NVP XII. NVP Associates, LLC, and each of Promod Haque, Jeffrey Crowe and Matthew Howard, the managing members of Genesis XI and Genesis XII may be deemed to share voting and dispositive power over the shares held by NVP XI and NVP XII. Such persons and entities disclaim beneficial ownership of shares held by NVP XI and NVP XII, except to the extent of any proportionate pecuniary interest therein. |
(6) | Shares beneficially owned consist of shares held by Medtronic, Inc. Mr. Fletcher, President of Surgical Technologies of Medtronic, Inc. may be deemed to share voting and investment power with respect to the shares held by Medtronic. Mr. Fletcher disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. |
(7) | Shares beneficially owned reflect a stock transfer subsequent to March 31, 2014 and consist of (a) 724,868 shares of common stock held directly by Ms. Earnhardt of which 148,724 shares may be repurchased by us at the original exercise price within 60 days of March 31, 2014, and (b) 26,182 shares of common stock held by Ms. Earnhardt as custodian for her son. |
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(8) | Shares beneficially owned consist of (a) 207,890 shares of common stock of which 24,557 shares may be repurchased by us at the original exercise price within 60 days of March 31, 2014, and (b) 16,299 shares of convertible preferred stock. |
(9) | Consists of (a) 1,286,484 shares held by the current directors and executive officers, of which 173,281 shares may be repurchased by us at the original exercise price within 60 days of March 31, 2014, and (b) 13,548,248 shares held by entities affiliated with certain of our directors. |
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Capital Structure
The following description of our capital stock and certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws are summaries and are qualified by reference to the amended and restated certificate of incorporation and the amended and restated bylaws that will be in effect upon the closing of this offering. Copies of these documents will be filed with the SEC as exhibits to our registration statement, of which this prospectus forms a part. The descriptions of our common stock and convertible preferred stock reflect changes to our capital structure that will occur upon the closing of this offering.
General
Upon the closing of this offering, our authorized capital stock will consist of 260,000,000 shares, all with a par value of $0.001 per share, of which:
| 250,000,000 shares are designated as common stock; and |
| 10,000,000 shares are designated as preferred stock. |
Common stock
As of March 31, 2014, after giving effect to the conversion of all outstanding shares of convertible preferred stock into 15,703,875 shares of common stock immediately prior to the closing of this offering, we had outstanding 17,501,808 shares of common stock held of record by 90 stockholders.
Voting Rights. Each holder of our common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders, except as otherwise expressly provided in our amended and restated certificate of incorporation or required by applicable law. Cumulative voting for the election of directors is not provided for in our amended and restated certificate of incorporation, which means that the holders of a majority of our shares of common stock can elect all of the directors then standing for election.
Dividends and Distributions. Subject to preferences that may apply to any shares of convertible preferred stock outstanding at the time, the holders of outstanding shares of our common stock are entitled to receive dividends out of funds legally available at the times and in the amounts that our board of directors may determine.
Liquidation Rights. Upon our liquidation, dissolution or winding-up, the assets legally available for distribution to our stockholders would be distributable ratably among the holders of our common stock and any participating convertible preferred stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding shares of convertible preferred stock and payment of other claims of creditors.
The rights, preferences, and privileges of holders of our common stock are subject to, and may be adversely affected by, the rights of holders of shares of any series of convertible preferred stock that we may designate and issue in the future.
Preemptive or Similar Rights. Our common stock is not entitled to preemptive rights and is not subject to conversion, redemption or sinking fund provisions.
Convertible Preferred Stock
As of March 31, 2014, there were 15,703,875 shares of our convertible preferred stock outstanding. Immediately prior to the closing of this offering, all outstanding shares of our convertible preferred stock will convert into 15,703,875 shares of our common stock.
Upon the closing of this offering, our board of directors may, without further action by our stockholders, fix the rights, preferences, privileges and restrictions of up to an aggregate of 10,000,000 shares of preferred stock in one or more series and authorize their issuance. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than
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the rights of our common stock. The issuance of our preferred stock could adversely affect the voting power of holders of our common stock and the likelihood that these holders will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change of control or other corporate action. Upon the closing of this offering, no shares of preferred stock will be outstanding, and we have no present plan to issue any shares of preferred stock.
Warrants
As of March 31, 2014, we had warrants to purchase an aggregate of 47,554 shares of our Series A convertible preferred stock outstanding with an exercise price of $3.68 per share. Unless earlier exercised, these warrants will expire in November 2017. Upon the closing of this offering, these warrants will become exercisable for 47,554 shares of our common stock with an exercise price of $3.68 per share.
As of March 31, 2014, we had a warrant to purchase an aggregate of up to 20,313 shares of our Series D convertible preferred stock outstanding with an exercise price of $6.89 per share. As of March 31, 2014, the warrant was exercisable for 5,803 shares of our Series D convertible preferred stock and may become exercisable for additional shares if we make draw downs under our credit facility. Unless earlier exercised, these warrants will expire in August 2023. Upon the closing of this offering, these warrants will become exercisable for up to 20,313 shares of our common stock with an exercise price of $6.89 per share.
Registration Rights
We are party to an investor rights agreement that provides that holders of our convertible preferred stock and certain holders of common stock that received the common stock upon conversion of convertible preferred stock have certain registration rights. This investor rights agreement was entered into in March 2006 and has been amended or amended and restated from time to time in connection with our convertible preferred stock financings. The registration of shares of our common stock pursuant to the exercise of registration rights described below would enable the holders who have these rights to sell these shares without restriction under the Securities Act when the applicable registration statement is declared effective. We will pay the registration expenses, other than underwriting discounts and commissions, of the shares registered pursuant to the demand, piggyback and Form S-3 registrations described below.
Generally, in an underwritten offering, the managing underwriter, if any, has the right, subject to specified conditions and limitations, to limit the number of shares the registration rights holders participating in any offering may include in any particular registration. The demand, piggyback and Form S-3 registration rights described below will expire on the earlier of (1) the date that is five years after the closing of this offering or (2) with respect to each stockholder following the closing of this offering, at such time as such stockholder can sell all of its shares pursuant to Rule 144 of the Securities Act during any three month period.
Demand registration rights. The holders of an aggregate of 15,771,742 shares of our common stock (including shares previously issued upon conversion of convertible preferred stock, shares issuable upon conversion of outstanding convertible preferred stock and shares issuable upon conversion of shares of convertible preferred stock issuable upon the exercise or, in certain cases, net exercise of outstanding warrants) are entitled to certain demand registration rights. At any time beginning six months after the closing of this offering, the holders of not less than 30% of these shares may, on not more than two occasions, request that we file a registration statement having an aggregate offering price to the public of not less than $10,000,000 to register at least 20% of their shares.
Piggyback registration rights. In connection with this offering, the holders of an aggregate of 15,771,742 shares of our common stock previously issued upon conversion of convertible preferred stock and common stock issuable upon conversion of outstanding convertible preferred stock and shares of convertible preferred stock issuable upon the exercise or, in certain cases, net exercise of outstanding warrants, were entitled to, and the necessary percentage of holders waived, rights to include their shares of registrable securities in this offering. In the event that we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders, the holders of these shares will be entitled to certain piggyback registration rights allowing them to include their shares in such registration, subject to certain marketing and
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other limitations. As a result, whenever we propose to file a registration statement under the Securities Act other than with respect to a demand registration or a registration statement on Form S-3, S-4 or S-8, the holders of these shares are entitled to notice of the registration and have the right, subject to limitations that the underwriters may impose on the number of shares included in the registration, to include their shares in the registration.
Form S-3 registration rights. The holders of an aggregate of 15,771,742 shares of our common stock previously issued upon conversion of convertible preferred stock and common stock issuable upon conversion of outstanding convertible preferred stock and shares of convertible preferred stock issuable upon the exercise or, in certain cases, net exercise of outstanding warrants will be entitled to certain Form S-3 registration rights. Such holders may make a request that we register their shares on Form S-3 if we are qualified to file a registration statement on Form S-3.
Anti-Takeover Provisions
Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws
Because our stockholders do not have cumulative voting rights, our stockholders holding a majority of the voting power of our shares of common stock outstanding will be able to elect all of our directors. Our amended and restated certificate of incorporation and amended and restated bylaws to be effective upon the closing of this offering will provide that all stockholder actions must be effected at a duly called meeting of stockholders and not by consent in writing. A special meeting of stockholders may be called only by a majority of our whole board of directors, the chair of our board of directors, or our chief executive officer.
Our amended and restated certificate of incorporation will further provide that, immediately after this offering, the affirmative vote of holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of voting stock, voting as a single class, will be required to amend certain provisions of our certificate of incorporation, including provisions relating to the size of the board, removal of directors, special meetings, actions by written consent and cumulative voting. The affirmative vote of holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of voting stock, voting as a single class, will be required to amend or repeal our bylaws, although our bylaws may be amended by a simple majority vote of our board of directors.
The foregoing provisions will make it more difficult for our existing stockholders to replace our board of directors as well as for another party to obtain control of our company by replacing our board of directors. Since our board of directors has the power to retain and discharge our officers, these provisions could also make it more difficult for existing stockholders or another party to effect a change in management. In addition, the authorization of undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change the control of our company.
These provisions are intended to enhance the likelihood of continued stability in the composition of our board of directors and its policies and to discourage certain types of transactions that may involve an actual or threatened acquisition of our company. These provisions are also designed to reduce our vulnerability to an unsolicited acquisition proposal and to discourage certain tactics that may be used in proxy rights. However, these provisions could have the effect of discouraging others from making tender offers for our shares and may have the effect of deterring hostile takeovers or delaying changes in control of our company or our management. As a consequence, these provisions also may inhibit fluctuations in the market price of our stock that could result from actual or rumored takeover attempts.
Section 203 of the Delaware General Corporation Law
We are subject to Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years after the date that such stockholder became an interested stockholder, with the following exceptions:
| before such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; |
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| upon closing of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction began, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned by (1) persons who are directors and also officers and (2) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or |
| on or after such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of the stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. |
In general, Section 203 defines business combination to include the following:
| any merger or consolidation involving the corporation and the interested stockholder; |
| any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; |
| subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; |
| any transaction involving the corporation that has the effect of increasing the proportionate share of the stock or any class or series of the corporation beneficially owned by the interested stockholder; or |
| the receipt by the interested stockholder of the benefit of any loss, advances, guarantees, pledges or other financial benefits by or through the corporation. |
In general, Section 203 defines an interested stockholder as an entity or person who, together with the persons affiliates and associates, beneficially owns, or within three years prior to the time of determination of interested stockholder status did own, 15% or more of the outstanding voting stock of the corporation.
Limitations on Liability and Indemnification
See the section of this prospectus titled Executive CompensationLimitation on Liability and Indemnification.
Listing
We have applied to have our common stock listed on The Nasdaq Global Market under the trading symbol XENT.
Transfer Agent and Registrar
Upon the closing of this offering, the transfer agent and registrar for our common stock will be Computershare Trust Company, N.A.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of our common stock in the public market, or the availability of such shares for sale in the public market, could adversely affect market prices prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to contractual and legal restrictions on resale. Nevertheless, sales of our common stock in the public market after such restrictions lapse, or the perception that those sales may occur, could adversely affect the prevailing market price at such time and our ability to raise equity capital in the future.
Based on the number of shares outstanding as of March 31, 2014, and after giving effect to the conversion of our outstanding convertible preferred stock into an aggregate of 15,703,875 shares of common stock upon the completion of this offering, 22,501,808 shares of common stock will be outstanding, or 23,251,808 shares of common stock if the underwriters exercise their option to purchase additional shares in full. All of the 5,000,000 shares sold in this offering will be freely tradable unless purchased by our affiliates, as that term is defined in Rule 144 under the Securities Act. The remaining outstanding shares of our common stock will be restricted securities as that term is defined under Rule 144 of the Securities Act.
As a result of the lock-up agreements and the provisions of Rules 144 and 701 under the Securities Act, the shares of common stock that will be deemed restricted securities after this offering will be available for sale in the public market as follows:
| no shares will be available for sale until 180 days after the date of this prospectus, subject to certain limited exceptions provided for in the lock-up agreements; and |
| 17,501,808 shares will be eligible for sale beginning more than 180 days after the date of this prospectus, subject, in the case of shares held by our affiliates, to the volume limitations under Rule 144. |
Rule 144
In general, under Rule 144, beginning 90 days after the date of this prospectus, a person who has beneficially owned restricted shares for at least six months would be entitled to sell those securities provided that (1) such person is not deemed to have been one of our affiliates at the time of, or at any time during the 90 days preceding, a sale and (2) we have been subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale and are current in filing our periodic reports. Persons who have beneficially owned restricted shares of common stock for at least six months but who are our affiliates at the time of, or any time during the 90 days preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed 1% of the number of our common stock then outstanding, which will equal approximately 225,018 shares immediately after this offering, based on the number of shares of common stock outstanding as of March 31, 2014. Such sales by affiliates must also comply with the manner of sale and notice provisions of Rule 144 and to the availability of current public information about us.
Rule 701
Rule 701 under the Securities Act, as in effect on the date of this prospectus, permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions of Rule 144, including the holding period requirement. Most of our employees, executive officers or directors who purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701, but all holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling their shares. However, substantially all Rule 701 shares are subject to lock-up agreements as described below and will become eligible for sale upon the expiration of the restrictions set forth in those agreements.
Lock-Up Agreements
We, our executive officers and directors and all of our stockholders have agreed, with certain limited exceptions, that for a period of 180 days from the date of this prospectus, we and they will not, without the prior
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written consent of J.P. Morgan Securities LLC and Piper Jaffray & Co., dispose of or hedge any shares or any securities convertible into or exchangeable for our common stock. J.P. Morgan Securities LLC and Piper Jaffray & Co. in their sole discretion may release any of the securities subject to these lock-up agreements at any time. These agreements are described in the section of this prospectus captioned Underwriting.
J.P. Morgan Securities LLC and Piper Jaffray & Co. have advised us that they have no present intent or arrangement to release any common stock subject to a lock-up, and will consider the release of any lock-up on a case-by-case basis. Upon a request to release any shares of common stock subject to a lock-up, J.P. Morgan Securities LLC and Piper Jaffray & Co. would consider the particular circumstances surrounding the request, including, but not limited to, the length of time before the lock-up expires, the number of shares of common stock requested to be released, the reasons for the request, the possible impact on the market for our common stock and whether the holder of our common stock requesting the release is an officer, director or other affiliate of ours.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
TO NON-U.S. HOLDERS
The following is a discussion of the material U.S. federal income tax considerations applicable to non-U.S. holders (as defined below) with respect to their ownership and disposition of shares of our common stock issued pursuant to this offering, but does not purport to be a complete analysis of all potential tax effects. All prospective non-U.S. holders of our common stock should consult their own tax advisors with respect to the U.S. federal income tax consequences of the purchase, ownership and disposition of our common stock, as well as any consequences arising under the laws of any other taxing jurisdiction, including any state, local and non-U.S. tax consequences and any U.S. federal non-income tax consequences. In general, a non-U.S. holder means a beneficial owner of our common stock (other than a partnership or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) that is not, for U.S. federal income tax purposes:
| an individual who is a citizen or resident of the United States; |
| a corporation, or an entity treated as a corporation for U.S. federal income tax purposes, created or organized in the United States or under the laws of the United States or of any state thereof or the District of Columbia; |
| an estate, the income of which is subject to U.S. federal income tax regardless of its source; or |
| a trust if (1) a U.S. court can exercise primary supervision over the trusts administration and one or more U.S. persons have the authority to control all of the trusts substantial decisions or (2) the trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person. |
This discussion is based on current provisions of the U.S. Internal Revenue Code of 1986, as amended, which we refer to as the Code, existing U.S. Treasury Regulations promulgated thereunder, published administrative rulings and judicial decisions, all as in effect as of the date of this prospectus. These laws are subject to change and to differing interpretation, possibly with retroactive effect. Any change or differing interpretation could alter the tax consequences to non-U.S. holders described in this prospectus.
This discussion is limited to non-U.S. holders that hold shares of our common stock as a capital asset within the meaning of Section 1221 of the Code (generally, for investment). This discussion does not address all aspects of U.S. federal income taxation that may be relevant to a particular non-U.S. holder in light of that non-U.S. holders individual circumstances, nor does it address any aspects of U.S. estate or gift tax, or any state, local or non-U.S. taxes. This discussion also does not consider any specific facts or circumstances that may apply to a non-U.S. holder and does not address the special tax rules applicable to particular non-U.S. holders, such as holders that own, or are deemed to own, more than 5% of our capital stock (except to the extent specifically set forth below), corporations that accumulate earnings to avoid U.S. federal income tax, tax-exempt organizations, banks, financial institutions, insurance companies, brokers, dealers or traders in securities, commodities or currencies, tax-qualified retirement plans, holders subject to the alternative minimum tax or Medicare contribution tax, holders who hold or receive our common stock pursuant to the exercise of employee stock options or otherwise as compensation, holders holding our common stock as part of a hedge, straddle or other risk reduction strategy, conversion transaction or other integrated investment, holders deemed to sell our common stock under the constructive sale provisions of the Code, controlled foreign corporations, passive foreign investment companies, corporations that accumulate earnings to avoid U.S. federal income tax, and U.S. expatriates and certain former citizens or long-term residents of the United States.
In addition, this discussion does not address the tax treatment of partnerships (or entities or arrangements that are treated as partnerships for U.S. federal income tax purposes) or persons that hold their common stock through such partnerships or such entities or arrangements. If a partnership, including any entity or arrangement treated as a partnership for U.S. federal income tax purposes, holds shares of our common stock, the U.S. federal income tax treatment of a partner in such partnership will generally depend upon the status of the partner, the activities of the partnership and certain determinations made at the partner level. Such partners and partnerships should consult their own tax advisors regarding the tax consequences of the purchase, ownership and disposition of our common stock.
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There can be no assurance that the Internal Revenue Service, which we refer to as the IRS, will not challenge one or more of the tax consequences described herein, and we have not obtained, nor do we intend to obtain, a ruling with respect to the U.S. federal income tax consequences with respect to the matters discussed below.
Distributions on Our Common Stock
Distributions, if any, on our common stock generally will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. If a distribution exceeds our current and accumulated earnings and profits, the excess will be treated as a tax-free return of the non-U.S. holders investment, up to such holders adjusted tax basis in the common stock. Any remaining excess will be treated as capital gain from the sale or exchange of such common stock, subject to the tax treatment described below in Gain on Sale, Exchange or Other Disposition of Our Common Stock.
Subject to the discussion below regarding backup withholding and foreign accounts, dividends paid to a non-U.S. holder will generally be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. A non-U.S. holder that is eligible for a reduced rate of U.S. withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. A non-U.S. holder of our common stock who claims the benefit of an applicable income tax treaty generally will be required to provide a properly executed IRS Form W-8BEN (or successor form) and satisfy relevant certification and other requirements. Non-U.S. holders are urged to consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty.
Dividends that are treated as effectively connected with a trade or business conducted by a non-U.S. holder within the United States and, if an applicable income tax treaty so provides, that are attributable to a permanent establishment or a fixed base maintained by the non-U.S. holder within the United States, are generally exempt from the 30% withholding tax if the non-U.S. holder satisfies applicable certification and disclosure requirements. To claim the exemption, the non-U.S. holder must furnish to us or our paying agent a valid IRS Form W-8ECI (or applicable successor form), certifying that the dividends are effectively connected with the non-U.S. holders conduct of a trade or business within the United States. However, such U.S. effectively connected income, net of specified deductions and credits, is taxed at the same graduated U.S. federal income tax rates applicable to U.S. persons (as defined in the Code), unless a specific treaty exemption applies. Any U.S. effectively connected income received by a non-U.S. holder that is a corporation may also, under certain circumstances, be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
Gain on Sale, Exchange or Other Disposition of Our Common Stock
Subject to the discussion below regarding backup withholding and foreign accounts, in general, a non-U.S. holder will not be subject to any U.S. federal income tax on any gain realized upon such holders sale, exchange or other disposition of shares of our common stock unless:
| the gain is effectively connected with a U.S. trade or business of the non-U.S. holder and, if an applicable income tax treaty so provides, is attributable to a permanent establishment or a fixed base maintained in the United States by such non-U.S. holder, in which case the non-U.S. holder generally will be taxed at the graduated U.S. federal income tax rates applicable to U.S. persons (as defined in the Code) and, if the non-U.S. holder is a foreign corporation, the branch profits tax described above in Distributions on Our Common Stock may also apply; |
| the non-U.S. holder is a nonresident alien individual who is present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met, in which case the non-U.S. holder will be subject to a 30% tax (or such lower rate as may be specified by an applicable income tax treaty) on the net gain derived from the disposition, which may be offset by U.S. source capital losses of the non-U.S. holder, if any (even though the individual is not considered a resident of |
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the United States) provided the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses; or |
| our common stock constitutes a U.S. real property interest because we are, or have been, at any time during the five-year period preceding such disposition (or the non-U.S. holders holding period, if shorter) a U.S. real property holding corporation. Even if we are or become a U.S. real property holding corporation, provided that our common stock is regularly traded on an established securities market, our common stock will be treated as a U.S. real property interest only with respect to a non-U.S. holder that holds more than 5% of our outstanding common stock, directly or indirectly, actually or constructively, during the shorter of the 5-year period ending on the date of the disposition or the period that the non-U.S. holder held our common stock. In such case, such non-U.S. holder generally will be taxed on its net gain derived from the disposition at the graduated U.S. federal income tax rates applicable to U.S. persons (as defined in the Code). Generally, a corporation is a U.S. real property holding corporation only if the fair market value of its U.S. real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. Although there can be no assurance, we do not believe that we are, or have been, a U.S. real property holding corporation, or that we are likely to become one in the future. No assurance can be provided that our common stock will be regularly traded on an established securities market for purposes of the rules described above. |
Backup Withholding and Information Reporting
We must report annually to the IRS and to each non-U.S. holder the gross amount of the dividends on our common stock paid to such holder and the tax withheld, if any, with respect to such dividends. Non-U.S. holders will have to comply with specific certification procedures to establish that the holder is not a U.S. person (as defined in the Code) in order to avoid backup withholding at the applicable rate with respect to dividends on our common stock. U.S. backup withholding generally will not apply to a Non-U.S. holder who provides a properly executed IRS Form W-8BEN or otherwise establishes an exemption.
Information reporting and backup withholding will generally apply to the proceeds of a disposition of our common stock by a non-U.S. holder effected by or through the U.S. office of any broker, U.S. or foreign, unless the holder certifies its status as a non-U.S. holder and satisfies certain other requirements, or otherwise establishes an exemption. Generally, information reporting and backup withholding will not apply to a payment of disposition proceeds to a non-U.S. holder where the transaction is effected outside the United States through a non-U.S. office of a broker. However, for information reporting purposes, dispositions effected through a non-U.S. office of a broker with substantial U.S. ownership or operations generally will be treated in a manner similar to dispositions effected through a U.S. office of a broker. Non-U.S. holders should consult their own tax advisors regarding the application of the information reporting and backup withholding rules to them.
Copies of information returns may be made available to the tax authorities of the country in which the non-U.S. holder resides or is incorporated under the provisions of a specific treaty or agreement.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a non-U.S. holder may be allowed as a credit against the non-U.S. holders U.S. federal income tax liability, if any, and may entitle such holder to a refund, provided that the required information is timely furnished to the IRS.
Foreign Accounts
The Code generally imposes a U.S. federal withholding tax of 30% on dividends and the gross proceeds of a disposition of our common stock paid to a foreign financial institution or a non-financial foreign entity (as specifically defined for this purpose), unless (1) the foreign financial institution undertakes certain diligence and reporting obligations, (2) the non-financial foreign entity either certifies it does not have any substantial United States owners (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (3) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the foreign financial institution is subject to the diligence and reporting
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requirements, such institution must enter into an agreement with the U.S. government to, among other things, withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which may include certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners). Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing these withholding and reporting requirements may be subject to different rules. This U.S. federal withholding tax of 30% also applies to dividends and the gross proceeds of a disposition of our common stock paid to a non-financial foreign entity, unless such entity provides the withholding agent with either a certification that it does not have any substantial direct or indirect U.S. owners or provides information regarding substantial direct and indirect U.S. owners of the entity. The withholding tax described above will not apply if the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from the rules. The withholding provisions described above will generally apply to dividends on our common stock paid on or after July 1, 2014, and with respect to gross proceeds of a sale or other disposition of our common stock on or after January 1, 2017. Under certain circumstances, a non-U.S. holder might be eligible for refunds or credits of such taxes. Non-U.S. holders are encouraged to consult with their own tax advisors regarding the possible implications of the legislation on their investment in our common stock.
EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAW, AS WELL AS TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL, NON-U.S. OR U.S. FEDERAL NON-INCOME TAX LAWS.
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We are offering the shares of common stock described in this prospectus through a number of underwriters. J.P. Morgan Securities LLC and Piper Jaffray & Co. are acting as joint bookrunning managers of the offering and as representatives of the underwriters. We have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters, and each underwriter has severally agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of shares of common stock listed next to its name in the following table:
Name |
Number of Shares |
|||
J.P. Morgan Securities LLC |
||||
Piper Jaffray & Co. |
||||
Leerink Partners LLC |
||||
Wedbush Securities Inc. |
||||
|
|
|||
Total |
5,000,000 | |||
|
|
The underwriters are committed to purchase all the common stock offered by us if they purchase any shares. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may also be increased or the offering may be terminated.
The underwriters propose to offer the common stock directly to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $ per share. Any such dealers may resell shares to certain other brokers or dealers at a discount of up to $ per share from the initial public offering price. After the initial public offering of the shares, the offering price and other selling terms may be changed by the underwriters. Sales of shares made outside of the United States may be made by affiliates of the underwriters.
The underwriters have an option to purchase up to 750,000 additional shares of common stock from us to cover sales of shares by the underwriters which exceed the number of shares specified in the table above. The underwriters have 30 days from the date of this prospectus to exercise this option to purchase additional shares. If any shares are purchased with this option to purchase additional shares, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional shares of common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.
The underwriting fee is equal to the public offering price per share of common stock less the amount paid by the underwriters to us per share of common stock. The underwriting fee is $ per share. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters assuming both no exercise and full exercise of the underwriters option to purchase additional shares.
Without exercise of option to purchase additional shares exercise |
With
full exercise of option to purchase additional shares exercise |
|||||||
Per Share |
$ | $ | ||||||
Total |
$ | $ |
We estimate that the total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the underwriting discounts and commissions, will be approximately $3,000,000. We have also agreed to reimburse the underwriters for certain of their expenses in an amount up to $35,000.
A prospectus in electronic format may be made available on the websites maintained by one or more underwriters, or selling group members, if any, participating in the offering. The underwriters may agree to
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allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters and selling group members that may make Internet distributions on the same basis as other allocations.
We have agreed that we will not (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act of 1933, or the Securities Act, relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, or (2) enter into any swap or other agreement that transfers all or a portion of the economic consequences associated with the ownership of any shares of common stock or any such other securities (regardless of whether any of these transactions are to be settled by the delivery of shares of common stock or such other securities, in cash or otherwise), in each case without the prior written consent of J.P. Morgan Securities LLC and Piper Jaffray & Co. for a period of 180 days after the date of this prospectus.
Our directors and executive officers and all holders of our common stock and securities exercisable for or convertible into our common stock outstanding immediately prior to this offering have entered into lock-up agreements with the underwriters prior to the commencement of this offering pursuant to which each of these persons or entities, with limited exceptions, for a period of 180 days after the date of this prospectus, may not, without the prior written consent of J.P. Morgan Securities LLC and Piper Jaffray & Co., (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock (including, without limitation, common stock or such other securities which may be deemed to be beneficially owned by such directors, executive officers, managers and members in accordance with the rules and regulations of the SEC and securities which may be issued upon exercise of a stock option or warrant) or publicly disclose the intention to make any offer, sale, pledge or disposition, or (2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock or such other securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of common stock or such other securities, in cash or otherwise, or (3) make any demand for or exercise any right with respect to the registration of any shares of our common stock or any security convertible into or exercisable or exchangeable for our common stock.
In the case of our directors, executive officers and holders of our common stock, subject to certain qualifications, the foregoing restrictions shall not apply to:
| transfers of shares of our common stock or any securities convertible into or exercisable or exchangeable for common stock (1) to any relationship by blood, marriage, domestic partnership or adoption, no more remote than a first cousin, or a trust formed for the exclusive benefit of the security holder or an immediate family member in a transaction not involving a distribution for value, (2) by bona fide gift, will or intestacy, (3) that occurs by operation of law, such as rules of descent and distribution, or pursuant to a qualified domestic order or in connection with a divorce settlement, (4) if the security holder is a corporation, partnership or other business entity, to an Affiliate (as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act), in a transaction not involving a distribution for value, or (5) if the security holder is a trust, to a trustor or beneficiary of the trust or (6) to the security holders estate; |
| distributions of shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock to members, partners or stockholders of the security holder; |
| shares of our common stock or securities convertible into or exercisable or exchangeable for our common stock acquired in open market transactions after the completion of this offering; |
| entering into a written plan pursuant to Rule 10b5-1 under the Exchange Act; or |
| the cash exercise of options to purchase shares of our common stock and the net or cashless exercise of options to purchase shares of our common stock and the transfer of our common stock to us upon the exercise of any options to cover tax withholding obligations in connection with such exercise. |
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We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.
We will apply to have our common stock approved for listing on The Nasdaq Global Market under the symbol XENT.
In connection with this offering, the underwriters may engage in stabilizing transactions, which involves making bids for, purchasing and selling shares of common stock in the open market for the purpose of preventing or retarding a decline in the market price of the common stock while this offering is in progress. These stabilizing transactions may include making short sales of the common stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering, and purchasing shares of common stock on the open market to cover positions created by short sales. Short sales may be covered shorts, which are short positions in an amount not greater than the underwriters option to purchase additional shares referred to above, or may be naked shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising their option to purchase additional shares, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares through the option to purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchase in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.
The underwriters have advised us that, pursuant to Regulation M of the Securities Act, they may also engage in other activities that stabilize, maintain or otherwise affect the price of the common stock, including the imposition of penalty bids. This means that if the representatives of the underwriters purchase common stock in the open market in stabilizing transactions or to cover short sales, the representatives can require the underwriters that sold those shares as part of this offering to repay the underwriting discount received by them.
These activities may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock, and, as a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters may carry out these transactions on The Nasdaq Global Market, in the over-the-counter market or otherwise.
Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters. In determining the initial public offering price, we and the representatives of the underwriters expect to consider a number of factors including:
| the information set forth in this prospectus and otherwise available to the representatives; |
| our prospects and the history and prospects for the industry in which we compete; |
| an assessment of our management; |
| our prospects for future earnings; |
| the general condition of the securities markets at the time of this offering; |
| the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and |
| other factors deemed relevant by the underwriters and us. |
Neither we nor the underwriters can assure investors that an active trading market will develop for our common stock, or that the shares will trade in the public market at or above the initial public offering price.
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Relationships with Underwriters
The underwriters and their respective affiliates are full-service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The underwriters and their affiliates have not, during the 180-day period preceding the date of the initial filing of the Registration Statement on Form S-1 of which this prospectus forms a part, but may, in the future, provide from time to time certain commercial banking, financial advisory, investment banking and other services for us and such affiliates in the ordinary course of their business, for which they may receive customary fees and commissions. Except as disclosed in this prospectus, we have no present arrangements with any of the underwriters for any further services. In addition, from time to time, certain of the underwriters and their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future.
Selling Restrictions Outside the United States
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
This document is only being distributed to and is only directed at (1) persons who are outside the United Kingdom or (2) to investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order) or (3) high net worth entities, and other persons to whom it may lawfully be communicated, falling with Article 49(2)(a) to (d) of the Order (all such persons together being referred to as relevant persons). The securities are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such securities will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.
Notice to Prospective Investors in the European Economic Area
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State), from and including the date on which the European Union Prospectus Directive (the EU Prospectus Directive) was implemented in that Relevant Member State (the Relevant Implementation Date) an offer of securities described in this prospectus may not be made to the public in that Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the EU Prospectus Directive, except that, with effect from and including the Relevant Implementation Date, an offer of securities described in this prospectus may be made to the public in that Relevant Member State at any time:
| to any legal entity which is a qualified investor as defined under the EU Prospectus Directive; |
| to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150 natural or legal persons (other than qualified investors as defined in the EU Prospectus Directive); or |
| in any other circumstances falling within Article 3(2) of the EU Prospectus Directive, provided that no such offer of securities described in this prospectus shall result in a requirement for the publication by us of a prospectus pursuant to Article 3 of the EU Prospectus Directive. |
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For the purposes of this provision, the expression an offer of securities to the public in relation to any securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe for the securities, as the same may be varied in that Member State by any measure implementing the EU Prospectus Directive in that Member State. The expression EU Prospectus Directive means Directive 2003/71/EC (and any amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State) and includes any relevant implementing measure in each Relevant Member State, and the expression 2010 PD Amending Directive means Directive 2010/73/EU.
Notice to Prospective Investors in the United Kingdom
Each underwriter has represented and agreed that:
| it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the shares in circumstances in which Section 21(1) of the FSMA does not apply to the Issuer; and |
| it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom. |
Notice to Prospective Investors in Australia
No prospectus or other disclosure document (as defined in the Corporations Act 2001 (Cth) of Australia, or Corporations Act) in relation to the common stock has been or will be lodged with the Australian Securities & Investments Commission, or ASIC. This document has not been lodged with ASIC and is only directed to certain categories of exempt persons. Accordingly, if you receive this document in Australia:
| you confirm and warrant that you are either: |
a. | a sophisticated investor under section 708(8)(a) or (b) of the Corporations Act; |
b. | a sophisticated investor under section 708(8)(c) or (d) of the Corporations Act and that you have provided an accountants certificate to us which complies with the requirements of section 708(8)(c)(i) or (ii) of the Corporations Act and related regulations before the offer has been made; |
c. | a person associated with the company under section 708(12) of the Corporations Act; or |
d. | a professional investor within the meaning of section 708(11)(a) or (b) of the Corporations Act, and to the extent that you are unable to confirm or warrant that you are an exempt sophisticated investor, associated person or professional investor under the Corporations Act any offer made to you under this document is void and incapable of acceptance; and |
| you warrant and agree that you will not offer any of the common stock for resale in Australia within 12 months of that common stock being issued unless any such resale offer is exempt from the requirement to issue a disclosure document under section 708 of the Corporations Act. |
Notice to Prospective Investors in France
We and the underwriters have not offered or sold and will not offer or sell, directly or indirectly, shares to the public in France, and have not distributed or caused to be distributed and will not distribute or cause to be distributed to the public in France, this prospectus or any other offering material relating to the shares. Offers, sales and distributions that have been and will be made in France have been and will be made only to (a) providers of the investment service of portfolio management for the account of third parties, and (b) qualified investors (investisseurs qualifi´es), other than individuals, all as defined in, and in accordance with, Articles L. 411-1, L. 411-2, and D. 411-1 of the French Code mon´etaire et financier.
Shares may be resold directly or indirectly only in compliance with Article L. 411-1, L. 411-2, L. 412-1 and L. 621-8 to L. 621-8-3 of the French Code mon´etaire et financier.
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Neither this prospectus prepared in connection with the shares nor any other offering material relating to the shares has been submitted to the clearance procedures of the Autorit´e des march´es financiers or notified to the Autorit´e des march´es financiers by the competent authority of another member state of the European Economic Area.
Notice to Prospective Investors in Germany
The shares offered by this prospectus have not been and will not be offered to the public within the meaning of the German Securities Prospectus Act (Wertpapierprospektgesetz). No securities prospectus pursuant to the German Securities Prospectus Act has been or will be published or circulated in Germany or filed with the German Federal Financial Supervisory Authority (Bundesanstalt f¨ur Finanzdienstleistungsaufsicht). This prospectus does not constitute an offer to the public in Germany, and it does not serve for public distribution of the shares in Germany. Neither this prospectus, nor any other document issued in connection with this offering, may be issued or distributed to any person in Germany except under circumstances that do not constitute an offer to the public under the German Securities Prospectus Act. Prospective Investors should consult with their legal or tax advisor before investing into the shares.
Notice to Prospective Investors in Ireland
This prospectus and any other material in relation to the shares described herein is only being distributed in Ireland:
| in circumstances which do not require the publication of a prospectus pursuant to Article 3(2) of Directive 2003/71/EC as amended by Directive 2010/73/EC; |
| in compliance with the provisions of the Irish Companies Acts 1963-2009; and |
| in compliance with the provisions of the European Communities (Markets in Financial Instruments) Regulations 2007 (S.I. No. 60 of 2007) (as amended), and in accordance with any codes or rules of conduct and any conditions or requirements, or any other enactment, imposed or approved by the Central Bank of Ireland with respect to anything done by them in relation to the shares. |
Notice to Prospective Investors in Italy
The offering of the shares has not been registered pursuant to Italian securities legislation and, accordingly, no shares may be offered, sold or delivered, nor may copies of the prospectus or of any other document relating to the shares be distributed in the Republic of Italy, except:
1. | to qualified investors (investitori qualificati), as defined pursuant to Article 100 of Legislative Decree No. 58 of 24 February 1998, as amended (the Financial Services Act) and Article 34-ter, first paragraph, letter b) of CONSOB Regulation No. 11971 of 14 May 1999, as amended from time to time (Regulation No. 11971); or |
2. | in other circumstances which are exempted from the rules on public offerings pursuant to Article 100 of the Financial Services Act and Article 34-ter of Regulation No. 11971. |
Any offer, sale or delivery of the shares or distribution of copies of the prospectus or any other document relating to the shares in the Republic of Italy under (1) or (2) above must be:
a. | made by an investment firm, bank or financial intermediary permitted to conduct such activities in the Republic of Italy in accordance with the Financial Services Act, CONSOB Regulation No. 16190 of 29 October 2007 (as amended from time to time) and Legislative Decree No. 385 of 1 September 1993, as amended (the Banking Act); and |
b. | in compliance with Article 129 of the Banking Act, as amended, and the implementing guidelines of the Bank of Italy, as amended from time to time, pursuant to which the Bank of Italy may request information on the issue or the offer of shares in the Republic of Italy; and |
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c. | in compliance with any other applicable laws and regulations or requirement imposed by CONSOB or other Italian authority. Please note that in accordance with Article 100-bis of the Financial Services Act, where no exemption from the rules on public offerings applies under (1) and (2) above, the subsequent distribution of the shares on the secondary market in Italy must be made in compliance with the public offer and the prospectus requirement rules provided under the Financial Services Act and Regulation No. 11971. Failure to comply with such rules may result in the sale of such shares being declared null and void and in the liability of the intermediary transferring the shares for any damages suffered by the investors. |
Notice to Prospective Investors in the Netherlands
The shares will not be offered or sold, directly or indirectly, in the Netherlands, other than:
| with a minimum denomination of 50,000 or the equivalent in another currency per investor; |
| for a minimum consideration of 50,000 or the equivalent in another currency per investor; |
| to fewer than 100 individuals or legal entities other than Qualified Investors (see below); or |
| solely to Qualified Investors, all within the meaning of Article 4 of the Financial Supervision Act Exemption Regulation (Vrijstellingsregeling Wet op het financieel toezicht) and Article 1:12 and Article 5:3 of the Financial Supervision Act (Wet op het financieel toezicht, FSA). |
Notice to Prospective Investors in Switzerland
The shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange, or the SIX, or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this prospectus nor any other offering or marketing material relating to the shares or the offering may be publicly distributed or otherwise made publicly available in Switzerland. Neither this prospectus nor any other offering or marketing material relating to the offering, the Company, the shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA, and the offer of shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes, or the CISA. The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of shares.
Notice to Prospective Investors in Hong Kong
The shares may not be offered or sold by means of any document other than (1) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), or (2) to professional investors within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (3) in other circumstances which do not result in the document being a prospectus within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to professional investors within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.
Notice to Prospective Investors in Singapore
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or
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invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (1) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore, or the SFA, (2) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (3) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where the shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired the shares under Section 275 except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.
Notice to Prospective Investors in Japan
The securities have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (the Financial Instruments and Exchange Law) and each underwriter has agreed that it will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.
130
The validity of the issuance of our common stock offered in this prospectus will be passed upon for us by Cooley LLP, Palo Alto, California. Latham & Watkins LLP, Costa Mesa, California, is acting as counsel for the underwriters in connection with this offering.
The financial statements of Intersect ENT, Inc. at December 31, 2012 and 2013, and for each of the two years in the period ended December 31, 2013, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, an independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules filed therewith. For further information with respect to Intersect ENT, Inc. and the shares of common stock offered hereby, reference is made to the registration statement and the exhibits and schedules filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules filed therewith may be inspected without charge at the public reference room maintained by the SEC, located at 100 F Street N.E., Room 1580, Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from such offices upon the payment of the fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address is www.sec.gov.
We maintain a website at www.intersectent.com. The reference to our website address does not constitute incorporation by reference of the information contained on our website, and you should not consider the contents of our website in making an investment decision with respect to our common stock.
You may also request a copy of these filings, at no cost to you, by writing or telephoning us at the following address:
Intersect ENT, Inc.
1555 Adams Drive
Menlo Park, CA 94025
Attention: Chief Financial Officer
(650) 641-2100
131
INTERSECT ENT, INC.
Years ended December 31, 2012 and 2013 (audited) and
Three month periods ended March 31, 2013 and 2014 (unaudited)
Page | ||||
F-2 | ||||
Financial Statements: |
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F-3 | ||||
F-4 | ||||
Statements of Convertible Preferred Stock and Stockholders (Deficit) Equity |
F-5 | |||
F-6 | ||||
F-7 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Intersect ENT, Inc.
We have audited the accompanying balance sheets of Intersect ENT, Inc. as of December 31, 2012, and 2013, and the related statements of operations and comprehensive loss, convertible preferred stock and stockholders deficit and cash flows for each of the two years in the period ended December 31, 2013. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Intersect ENT, Inc. at December 31, 2012 and 2013, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young
Redwood City, California
May 1, 2014, except for Note 17, as to which the date is July 11, 2014
F-2
INTERSECT ENT, INC.
(in thousands, except per share data)
December 31, | March
31, 2014 |
March
31, 2014 Pro Forma Stockholders Equity |
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2012 | 2013 | |||||||||||||||
(unaudited) | ||||||||||||||||
Assets | ||||||||||||||||
Current assets |
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Cash and cash equivalents |
$ | 2,060 | $ | 12,294 | $ | 7,478 | ||||||||||
Accounts receivable, net |
1,299 | 4,200 | 4,382 | |||||||||||||
Inventory |
1,375 | 2,197 | 2,463 | |||||||||||||
Restricted cash |
62 | 62 | | |||||||||||||
Prepaid expenses and other current assets |
452 | 449 | 507 | |||||||||||||
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Total current assets |
5,248 | 19,202 | 14,830 | |||||||||||||
Property and equipment, net |
1,755 | 1,707 | 1,716 | |||||||||||||
Note receivable from related party |
100 | | | |||||||||||||
Other non-current assets |
124 | 126 | 221 | |||||||||||||
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Total assets |
$ | 7,227 | $ | 21,035 | $ | 16,767 | ||||||||||
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Liabilities, Convertible Preferred Stock and Stockholders (Deficit) Equity | ||||||||||||||||
Current liabilities |
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Accounts payable |
$ | 1,074 | $ | 1,451 | $ | 1,647 | ||||||||||
Accrued compensation |
1,904 | 2,955 | 2,409 | |||||||||||||
Equipment loans current portion |
636 | 696 | 705 | |||||||||||||
Preferred stock warrant liability |
93 | 237 | 494 | $ | | |||||||||||
Other current liabilities |
389 | 745 | 932 | |||||||||||||
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Total current liabilities |
4,096 | 6,084 | 6,187 | |||||||||||||
Equipment loans non-current portion |
1,364 | 756 | 575 | |||||||||||||
Other non-current liabilities |
167 | 52 | 21 | |||||||||||||
Commitments and contingencies (see note 11) |
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Convertible preferred stock issuable in series, $0.001 par value; |
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15,907 shares authorized at December 31, 2013 and March 31, 2014, actual, none pro forma; 11,283, 15,701 and 15,704 issued and outstanding at December 31, 2012 and 2013 and March 31, 2014, respectively, actual, none pro forma; aggregate liquidation preference: $91,433 and $91,441 at December 31, 2013 and March 31, 2014, respectively, actual, none pro forma |
60,320 | 90,760 | 90,789 | | ||||||||||||
Stockholders (deficit) equity |
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Preferred stock, $0.001 par value; no shares authorized, issued and outstanding, actual; 10,000 shares authorized; no shares issued or outstanding pro forma |
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Common stock, $0.001 par value; |
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150,000 authorized at December 31, 2013 and March 31, 2014, actual; 1,021, 1,761 and 1,798 issued and outstanding at December 31, 2012 and 2013 and March 31, 2014, respectively, actual; 150,000 shares authorized, 17,502 issued and outstanding pro forma |
1 | 2 | 2 | 18 | ||||||||||||
Additional paid-in capital |
1,169 | 1,859 | 2,065 | 93,332 | ||||||||||||
Notes receivable from related party |
| (219 | ) | (204 | ) | |||||||||||
Accumulated deficit |
(59,890 | ) | (78,259 | ) | (82,668 | ) | ||||||||||
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Total stockholders (deficit) equity |
(58,720 | ) | (76,617 | ) | (80,805 | ) | 10,478 | |||||||||
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Total liabilities, convertible preferred stock and stockholders (deficit) equity |
$ | 7,227 | $ | 21,035 | $ | 16,767 | $ | 16,767 | ||||||||
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See accompanying notes to financial statements.
F-3
INTERSECT ENT, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||
2012 | 2013 | 2013 | 2014 | |||||||||||||
(unaudited) | ||||||||||||||||
Revenue |
$ | 5,863 | $ | 17,931 | $ | 2,744 | $ | 7,497 | ||||||||
Cost of sales |
3,837 | 8,150 | 1,949 | 2,360 | ||||||||||||
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Gross profit |
2,026 | 9,781 | 795 | 5,137 | ||||||||||||
Operating expenses: |
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Selling, general and administrative |
9,251 | 18,229 | 3,350 | 6,658 | ||||||||||||
Research and development |
9,260 | 9,518 | 2,256 | 2,577 | ||||||||||||
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Total operating expenses |
18,511 | 27,747 | 5,606 | 9,235 | ||||||||||||
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Loss from operations |
(16,485 | ) | (17,966 | ) | (4,811 | ) | (4,098 | ) | ||||||||
Other income (expense), net: |
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Interest and other income |
156 | 86 | 82 | 1 | ||||||||||||
Interest and other expense |
(36 | ) | (489 | ) | (24 | ) | (312 | ) | ||||||||
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Total other income (expense), net |
120 | (403 | ) | 58 | (311 | ) | ||||||||||
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Net loss |
$ | (16,365 | ) | $ | (18,369 | ) | $ | (4,753 | ) | $ | (4,409 | ) | ||||
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Other comprehensive income: |
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Unrealized gain on short-term investments |
7 | | | | ||||||||||||
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Comprehensive loss |
$ | (16,358 | ) | $ | (18,369 | ) | $ | (4,753 | ) | $ | (4,409 | ) | ||||
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Net loss per share, basic and diluted |
$ | (16.38 | ) | $ | (12.57 | ) | $ | (4.57 | ) | $ | (2.49 | ) | ||||
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Weighted average common shares used to compute net loss per share, basic and diluted |
999 | 1,461 | 1,039 | 1,773 | ||||||||||||
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Pro forma net loss per share, basic and diluted (unaudited) |
$ | (1.17 | ) | $ | (0.25 | ) | ||||||||||
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Weighted average common shares used to compute pro forma net loss per share, basic and diluted (unaudited) |
15,655 | 17,474 | ||||||||||||||
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See accompanying notes to financial statements.
F-4
INTERSECT ENT, INC.
STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS (DEFICIT) EQUITY
(in thousands)
Convertible Preferred Stock |
Common Stock | Additional Paid-in Capital |
Note Receivable From Related Party |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Total Stockholders (Deficit) Equity |
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Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||
Balance at December 31, 2011 |
11,226 | $ | 60,107 | 907 | $ | 1 | $ | 928 | $ | | $ | (7 | ) | $ | (43,525 | ) | $ | (42,603 | ) | |||||||||||||||||||
Issuance of Series A convertible preferred stock upon exercise of warrants |
57 | 213 | | | | | | | | |||||||||||||||||||||||||||||
Issuance common stock upon exercise of stock options |
| | 115 | | 89 | | | | 89 | |||||||||||||||||||||||||||||
Stock-based compensation expense |
| | | | 152 | | | | 152 | |||||||||||||||||||||||||||||
Unrealized gain on short-term investments |
| | | | | | 7 | | 7 | |||||||||||||||||||||||||||||
Net loss |
| | | | | | | (16,365 | ) | (16,365 | ) | |||||||||||||||||||||||||||
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Balance at December 31, 2012 |
11,283 | 60,320 | 1,022 | 1 | 1,169 | | | (59,890 | ) | (58,720 | ) | |||||||||||||||||||||||||||
Issuance of Series A convertible preferred stock upon exercise of warrants |
22 | 82 | | | | | | | | |||||||||||||||||||||||||||||
Issuance of Series D convertible preferred stock, net of issuance cost and preferred stock financing option |
4,396 | 30,358 | | | | | | | | |||||||||||||||||||||||||||||
Issuance common stock upon exercise of stock options |
| | 740 | 1 | 364 | | | | 365 | |||||||||||||||||||||||||||||
Notes receivable from related party |
| | | | | (275 | ) | | | (275 | ) | |||||||||||||||||||||||||||
Stock-based compensation expense |
| | | | 326 | 56 | | | 382 | |||||||||||||||||||||||||||||
Net loss |
| | | | | | | (18,369 | ) | (18,369 | ) | |||||||||||||||||||||||||||
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Balance at December 31, 2013 |
15,701 | 90,760 | 1,762 | 2 | 1,859 | (219 | ) | | (78,259 | ) | (76,617 | ) | ||||||||||||||||||||||||||
Issuance of Series A convertible preferred stock upon exercise of warrants (unaudited) |
3 | 29 | | | | | | | | |||||||||||||||||||||||||||||
Issuance common stock upon exercise of stock options (unaudited) |
| | 36 | | 39 | | | | 39 | |||||||||||||||||||||||||||||
Stock-based compensation expense (unaudited) |
| | | | 167 | 15 | | | 182 | |||||||||||||||||||||||||||||
Net loss (unaudited) |
| | | | | | | (4,409 | ) | (4,409 | ) | |||||||||||||||||||||||||||
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Balance at March 31, 2014 (unaudited) |
15,704 | $ | 90,789 | 1,798 | $ | 2 | $ | 2,065 | $ | (204 | ) | $ | | $ | (82,668 | ) | $ | (80,805 | ) | |||||||||||||||||||
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Pro forma: |
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Conversion of convertible preferred stock to common stock (unaudited) |
(15,704 | ) | (90,789 | ) | 15,704 | 16 | 90,773 | | | | 90,789 | |||||||||||||||||||||||||||
Conversion of convertible preferred stock warrants to common stock warrants (unaudited) |
| | | | 494 | | | | 494 | |||||||||||||||||||||||||||||
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Balance at March 31, 2014 (unaudited) |
| $ | | 17,502 | $ | 18 | $ | 93,332 | $ | (204 | ) | $ | | $ | (82,668 | ) | $ | 10,478 | ||||||||||||||||||||
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See accompanying notes to financial statements.
F-5
INTERSECT ENT, INC.
(in thousands)
Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||
2012 | 2013 | 2013 | 2014 | |||||||||||||
(unaudited) | ||||||||||||||||
Cash flows from operating activities: |
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Net loss |
$ | (16,365 | ) | $ | (18,369 | ) | $ | (4,753 | ) | $ | (4,409 | ) | ||||
Adjustments to reconcile net loss to cash used in operating activities: |
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Depreciation and amortization |
351 | 505 | 124 | 135 | ||||||||||||
Amortization of net investment premium paid |
83 | | | | ||||||||||||
Stock-based compensation expense |
152 | 382 | 38 | 182 | ||||||||||||
Change in fair value of convertible preferred stock warrants |
(128 | ) | 134 | | 286 | |||||||||||
Change in fair value of convertible preferred stock financing option |
| 212 | | | ||||||||||||
Forgiveness of notes receivable from related party |
116 | 100 | 100 | 100 | ||||||||||||
Loss on disposal of fixed assets |
33 | 26 | | | ||||||||||||
Changes in operating assets and liabilities: |
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Accounts receivable, net |
(1,011 | ) | (2,901 | ) | (398 | ) | (182 | ) | ||||||||
Inventory |
(1,004 | ) | (822 | ) | (341 | ) | (266 | ) | ||||||||
Prepaid expenses and other current assets |
(241 | ) | 3 | 15 | (96 | ) | ||||||||||
Other non-current assets |
(90 | ) | (2 | ) | | (95 | ) | |||||||||
Accounts payable |
331 | 360 | (234 | ) | 189 | |||||||||||
Accrued compensation |
1,271 | 1,051 | (741 | ) | (546 | ) | ||||||||||
Other liabilities |
354 | 220 | 72 | 156 | ||||||||||||
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Net cash used in operating activities |
(16,148 | ) | (19,101 | ) | (6,118 | ) | (4,546 | ) | ||||||||
Cash flows from investing activities: |
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Purchases of short-term investments |
(1,324 | ) | | | | |||||||||||
Sales of short-term investments |
8,622 | | | | ||||||||||||
Purchases of property and equipment |
(1,413 | ) | (467 | ) | (52 | ) | (136 | ) | ||||||||
Proceeds from disposal of fixed assets |
4 | | | | ||||||||||||
Change in restricted cash and deposits |
67 | | | | ||||||||||||
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Net cash provided by (used in) investing activities |
5,956 | (467 | ) | (52 | ) | (136 | ) | |||||||||
Cash flows from financing activities: |
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Proceeds from issuance of common stock |
89 | 122 | 36 | 36 | ||||||||||||
Proceeds from equipment loan |
2,000 | | | | ||||||||||||
Proceeds from capital lease financing |
| 106 | | | ||||||||||||
Repayments related to equipment loans |
| (636 | ) | (160 | ) | (163 | ) | |||||||||
Repayments related to capital lease financing |
| (18 | ) | | (7 | ) | ||||||||||
Proceeds from the exercise of Series A convertible preferred warrants |
213 | 82 | 82 | | ||||||||||||
Proceeds from issuance of Series D convertible preferred stock net of issuance costs |
| 30,146 | 20,716 | | ||||||||||||
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Net cash provided by (used in) financing activities |
2,302 | 29,802 | 20,674 | (134 | ) | |||||||||||
Net (decrease) increase in cash and cash equivalents |
(7,890 | ) | 10,234 | 14,504 | (4,816 | ) | ||||||||||
Cash and cash equivalents |
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Beginning of the period |
9,950 | 2,060 | 2,060 | 12,294 | ||||||||||||
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End of the period |
$ | 2,060 | $ | 12,294 | $ | 16,564 | $ | 7,478 | ||||||||
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Supplemental cash flow information |
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Interest paid |
$ | | $ | 93 | $ | 20 | $ | 20 | ||||||||
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Noncash investing and financing activities |
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Warrants issued for growth capital facility |
$ | | $ | 10 | $ | | $ | | ||||||||
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Property and equipment included in accounts payable |
$ | | $ | 17 | $ | | $ | 7 | ||||||||
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Notes issued to related party for the exercise of stock options |
$ | | $ | 500 | $ | | $ | | ||||||||
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See accompanying notes to financial statements.
F-6
INTERSECT ENT, INC.
1. | Organization |
Description of Business
Intersect ENT, Inc. (the Company) was incorporated as Sinexus, Inc. in the state of Delaware in October 2003 (inception) and its facilities are located in Menlo Park, California. By written consent of the stockholders, the Company changed its name from Sinexus, Inc. to Intersect ENT, Inc., effective November 2009. The Company is a commercial stage drug-device company committed to improving the quality of life for patients with ear, nose and throat conditions. The Companys sole commercial products are the PROPEL and PROPEL mini drug-eluting implants for patients undergoing sinus surgery to treat chronic sinusitis. The Company received approval from the U.S. Food and Drug Administration (FDA) for PROPEL, in August 2011 and for PROPEL mini, in November 2012. In the first half of 2013, the Company began scaling its U.S. direct commercial presence and currently markets its products only in the United States.
Liquidity and Business Risks
As of March 31, 2014, the Company had cash and cash equivalents of $7.5 million, and an accumulated deficit of $82.7 million. The Company has financed its operations with a combination of debt and equity financing arrangements. As of March 31, 2014, the Company expects its cash and cash equivalents, revenue and available debt financing arrangements will be sufficient to fund its operations through at least December 31, 2014. However, the Company expects to continue to incur additional substantial losses in 2014 as a result of its commercialization and research and development activities. If these sources are insufficient to satisfy our liquidity requirements, the Company may seek to sell additional equity or debt securities or obtain an additional credit facility. Debt financing, if available, may involve covenants restricting the Companys operations or its ability to incur additional debt. Any debt financing or additional equity that the Company raises may contain terms that are not favorable to it or its stockholders. Additional financing may not be available at all, or in amounts or on terms unacceptable to the Company. If the Company is unable to obtain additional financing, it may be required to delay the development, commercialization and marketing of its products.
2. | Summary of Significant Accounting Policies |
Basis of Preparation
The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC).
Certain amounts in the financial statements have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements. Management uses significant judgment when making estimates related to its common stock valuation and related stock-based compensation, the valuations of the convertible preferred stock warrant liability, convertible preferred stock financing option, clinical trial accruals, as well as certain accrued liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Unaudited Interim Financial Statements
The accompanying balance sheet as of March 31, 2014, the statements of operations and comprehensive loss and cash flows for the three months ended March 31, 2013 and 2014, and the statements of convertible preferred
F-7
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. | Summary of Significant Accounting Policies (Continued) |
stock and stockholders deficit as of March 31, 2014, are unaudited. The financial data and other information disclosed in these notes to the financial statements related to March 31, 2014, and the three months ended March 31, 2013 and 2014, are also unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Companys financial position as of March 31, 2014, and the results of its operations and cash flows for the three months ended March 31, 2013 and 2014. The results for the three months ended March 31, 2014, are not necessarily indicative of results to be expected for the year ending December 31, 2014, or for any other interim period or for any future year.
Unaudited Pro Forma Stockholders Equity
Pro forma basic and diluted net loss per share has been computed to give effect to: (1) the assumed conversion of the 15,701,481 and 15,703,912 shares of convertible preferred stock outstanding as of December 31, 2013 and March 31, 2014, respectively, into the same number of common stock in connection with the Companys proposed initial public offering, or IPO; (2) the conversion of all warrants exercisable for convertible preferred stock outstanding as of December 31, 2013 into warrants exercisable for shares of common stock, resulting in the reclassification of the related convertible preferred stock warrant liabilities to additional paid-in capital, which when added to the existing 1,761,167 and 1,797,933 shares of common stock outstanding as of December 31, 2013 and March 31, 2014, respectively, results in a total of 17,462,647 and 17,501,808 shares of common stock outstanding, respectively; and (3) the effectiveness of the Companys amended and restated certificate of incorporation. The pro forma net loss per share does not include the shares expected to be sold and related proceeds to be received from the IPO. For purposes of pro forma basic and diluted net loss per share, all shares of convertible preferred stock have been treated as though they had been converted to common stock in all periods in which such shares were outstanding.
Cash and Cash Equivalents
The Company considers all highly liquid securities, readily convertible to cash, that mature within three months or less from the original date of purchase to be cash equivalents.
Cash equivalents are considered available-for-sale marketable securities and are recorded at fair value, based on quoted market prices. Unrealized gains and losses are recorded in other comprehensive income (loss) and included as a separate component of stockholders deficit. As of December 31, 2012 and 2013, and March 31, 2014, the Companys cash and cash equivalents were entirely composed of bank deposits, cash, and investments in money market funds.
Fair Value of Financial Instruments
Available-for-sale marketable securities are recorded at fair value in the Companys balance sheets and are categorized based upon the level of judgment associated with the inputs used to measure their fair value. ASC Subtopic 820-10 defines a three-level valuation hierarchy for disclosure of fair value measurements.
F-8
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. | Summary of Significant Accounting Policies (Continued) |
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, the convertible preferred stock warrant liability and the convertible preferred stock financing option. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
Level 1 | Observable inputs such as quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
Level 2 | Include other inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and credit ratings. | |
Level 3 | Unobservable inputs that are supported by little or no market activities, which would require the Company to develop its own assumptions. |
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
As of December 31, 2012 and 2013, and March 31, 2014, cash equivalents were all categorized as Level 1 and primarily consisted of money market funds, and convertible preferred stock warrant liabilities and convertible preferred stock financing option were categorized as Level 3.
There were no transfers in and out of Level 1 and Level 2 fair value measurements during the years ended December 31, 2012 and 2013, and the three months ended March 31, 2014.
Convertible Preferred Stock Warrants
The following table sets forth a summary of the changes in the estimated fair value of the Companys convertible preferred stock warrants, which represents financial instruments with valuations classified as Level 3. When a determination is made to classify a financial instrument within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable inputs, observable inputs (that is, components that are actively quoted and can be validated to external sources). Accordingly, the expense in the table below includes changes in fair value due in part to observable factors that are part of the Level 3 methodology (in thousands):
Year Ended December 31, | Three Months Ended March 31, |
|||||||||||||||
2012 | 2013 | 2013 | 2014 | |||||||||||||
(unaudited) | ||||||||||||||||
Beginning of the period |
$ | 221 | $ | 93 | $ | 93 | $ | 237 | ||||||||
Issued |
| 10 | | | ||||||||||||
Exercised |
| | | (29 | ) | |||||||||||
Expired |
| | | | ||||||||||||
Change in fair value |
(128 | ) | 134 | | 286 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
End of the period |
$ | 93 | $ | 237 | $ | 93 | $ | 494 | ||||||||
|
|
|
|
|
|
|
|
F-9
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. | Summary of Significant Accounting Policies (Continued) |
The fair value of the convertible preferred stock warrants was determined using the option pricing method or the probability weighted expected return method using the following assumptions:
Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||
2012 | 2013 | 2013 | 2014 | |||||||||||||
(unaudited) | ||||||||||||||||
Expected life (years) |
3.0 | 2.0 | 3.0 | 2.0 | ||||||||||||
Expected volatility |
58 | % | 45 | % | 58 | % | 46 | % | ||||||||
Risk-free interest rate |
0.4 | % | 0.4 | % | 0.4 | % | 0.5 | % | ||||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % |
Series D Convertible Preferred Stock Financing Option
The Series D convertible preferred stock contained a provision that obligated the investors to purchase additional shares (convertible preferred stock financing option) at the same price as the initial closing upon notification by the Company that it had achieved an annualized revenue rate of at least $16.0 million over a trailing three month period. This convertible preferred stock financing option to purchase Series D convertible preferred stock in the future tranche was considered to be a freestanding financial instrument for accounting purposes. Therefore, in February 2013, the Company recorded a financing liability of $0.9 million representing the fair value of this convertible preferred stock financing option at the time of issuance. In October 2013, shortly after achieving the annualized revenue rate, the Company issued the additional 1,369,009 shares of Series D convertible preferred stock to the investors for net proceeds of $9.4 million. Since the convertible preferred stock financing option expired in October 2013 as a result of the issuance of Series D convertible preferred stock, the carrying and fair value of the convertible preferred stock financing option of $1.1 million was reclassified from liability to Series D convertible preferred stock. The Company recorded a charge related to the change in fair value in 2013 of $0.2 million related to this financing option liability.
The following table sets forth a summary of the changes in the estimated fair value of the Companys convertible preferred stock financing option, which represents financial instruments with valuations classified as Level 3 (in thousands):
Year Ended December 31, | Three Months Ended March 31, |
|||||||||||||||
2012 | 2013 | 2013 | 2014 | |||||||||||||
(unaudited) | ||||||||||||||||
Beginning of the period |
$ | | $ | | $ | | $ | | ||||||||
Issued |
| 885 | 885 | | ||||||||||||
Exercised |
| (1,097 | ) | | | |||||||||||
Expired |
| | | | ||||||||||||
Change in fair value |
| 212 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
End of the period |
$ | | $ | | $ | 885 | $ | | ||||||||
|
|
|
|
|
|
|
|
The fair value of the convertible preferred stock financing liability was determined using the present value methodology with the following assumptions which are categorized as Level 3:
February 2013 |
October 2013 |
|||||||
Total consideration per share |
$ | 1.72 | $ | 1.72 | ||||
Additional investment per share |
1.72 | 1.72 | ||||||
Discount rate |
20.0 | % | 20.0 | % | ||||
Probability of achievement |
95.0 | % | 95.0 | % | ||||
Years until milestone achieved |
0.5 | 0.7 |
F-10
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. | Summary of Significant Accounting Policies (Continued) |
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash equivalents and accounts receivable. The Company believes that the credit risk in its accounts receivable is mitigated by its credit evaluation process, relatively short collection terms and dispersion of its customer base. The Company generally does not require collateral and losses on accounts receivable have historically been within managements expectations.
The Companys investment policy limits investments to certain types of debt securities issued by the U.S. government, its agencies, and institutions with investment-grade credit ratings, as well as corporate debt or commercial paper issued by the highest quality financial and non-financial companies, and places restrictions on maturities and concentration by type and issuer. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash and cash equivalents and issuers of investments to the extent recorded on the balance sheets. However, as of December 31, 2012 and 2013, and March 31, 2014, the Company has limited its credit risk associated with cash and cash equivalents by placing its investments with banks it believes are highly creditworthy and with highly rated money market funds.
Allowance for Doubtful Accounts
The Company will provide for uncollectible accounts receivable by recording an allowance for doubtful accounts for accounts receivable deemed uncollectible. The Company evaluates the collectibility of its accounts receivable based on known collection risks and historical experience. In circumstances where the Company is aware of a specific customers inability to meet its financial obligations to the Company (e.g., bankruptcy filings, substantial downgrading of credit ratings), the Company records a specific allowance for bad debts against amounts due to reduce the carrying amount of accounts receivable to the amount it reasonably believes will be collected.
If circumstances change, such as higher-than-expected defaults or an unexpected material adverse change in a major customers ability to meet its financial obligations, the Companys estimates of the recoverability of the amounts due could be reduced by a significant amount. Based on the high creditworthiness of the customers that the Company sells to, the Company has experienced no significant collection issues. Therefore, the Company does not have an allowance for doubtful accounts established as of December 31, 2012 and 2013, and March 31, 2014.
Inventory
Inventory is valued at the lower of cost or market, computed on a first-in, first out basis, or net realizable value. The Company estimates the recoverability of its inventory by reference to internal estimates of future demands and product life cycles, including expiration of inventory prior to sale.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is determined using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the term of the lease. Amortization of assets under capital leases is included in depreciation and amortization expense. Maintenance and repairs are charged to operations as incurred.
Impairment of Long-lived Assets
Long-lived assets consists primarily of property and equipment and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require that a long-lived asset be tested for possible impairment, the Company compares the undiscounted cash flows expected to be generated by the asset to the carrying amount of the asset. If the carrying amount of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is
F-11
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. | Summary of Significant Accounting Policies (Continued) |
recognized to the extent that the carrying amount exceeds its fair value. The Company determines fair value using the income approach based on the present value of expected future cash flows or other appropriate measures of estimated fair value. The Companys cash flow assumptions consider historical and forecasted revenue and operating costs and other relevant factors. Since inception, the Company has not recorded impairment charges on long-lived assets.
Convertible Preferred Stock Warrant Liability
For a warrant classified as a derivative liability, the fair value of that warrant is recorded on the balance sheet at the inception of such classification and adjusted to fair value at each financial reporting date. The changes in the fair value of the warrants are recorded in the statement of operations as a component of interest and other income or expense as appropriate. The Company will continue to adjust the carrying value of the convertible preferred stock warrant liability for changes in the fair value of the warrants until the earlier of: the exercise of the warrants, at which time the liability will be reclassified to temporary equity; the conversion of the underlying convertible preferred stock into common stock, at which time the liability will be reclassified to stockholders deficit; or the expiration of the warrant, at which time the entire amount would be reversed and reflected in the statement of operations.
Convertible Preferred Stock Financing Option
For a freestanding option to purchase in a future round of financing, the fair value of that option is recorded on the balance sheet at the inception of such classification and adjusted to fair value at each financial reporting date. The change in the fair value of the convertible preferred stock financing option is recorded in the statement of operations as a component of interest and other income or expense as appropriate. The Company adjusts the carrying value of the convertible preferred stock financing option liability for changes in the fair value of the option and continues to do so until the earlier of when the convertible preferred stock financing option has been exercised or expired.
Revenue Recognition
Revenue is derived from the sale of PROPEL and PROPEL mini to hospitals and ambulatory surgery centers in the United States. Revenue is recognized when the following revenue recognition criteria are met:
| Persuasive evidence of an arrangement exists. The Company considers this criterion satisfied when it has an agreement or contract with the customer in place. |
| Delivery has occurred or services rendered. The Company principally determines this criterion to be satisfied when it ships the product to the customer. |
| The fee is fixed or determinable and collectibility is reasonably assured. Determination of the satisfaction of these criteria is based on the Companys judgment regarding the nature of the fee charged for products, contractual agreements entered into, and the collectibility of those fees under any contract or agreement. |
The Company must make significant assumptions regarding the future collectibility of amounts receivable from customers to determine whether revenue recognition criteria have been met. If collectibility is not assured at the time of shipment, the Company will defer revenue until such criteria have been met. The Companys standard terms and conditions of sale do not allow for product returns and it generally does not allow product returns, except in the case of damaged goods, and it has not experienced any significant returns of its products. The Company expenses shipping and handling costs as incurred and includes them in the cost of sales. In those cases where the Company bills shipping and handling costs to customers, it will classify the amounts billed as a component of revenue.
F-12
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. | Summary of Significant Accounting Policies (Continued) |
Cost of Sales
Cost of sales consists primarily of manufacturing overhead costs, material costs and direct labor. A significant portion of the Companys cost of sales currently consists of manufacturing overhead costs. These overhead costs include the cost of quality assurance, material procurement, inventory control, facilities, equipment and operations supervision and management. Cost of sales also includes depreciation expense for production equipment and certain direct costs such as shipping costs.
Research and Development
Research and development expenses consist primarily of engineering, product development, clinical and regulatory affairs, consulting services, materials, depreciation and other costs associated with products and technologies in development. These expenses include employee and non-employee compensation, including stock-based compensation, supplies, materials, consulting, related travel expenses and facility costs. Clinical expenses include clinical trial design, clinical site reimbursement, data management and travel expenses, and the cost of manufacturing products for clinical trials.
Common Stock Valuation and Stock-based Compensation
The Company maintains a payment equity incentive plan to provide long-term incentives for employees, consultants and members of the board of directors. The plan allows for the issuance of non-statutory and incentive stock options to employees and non-statutory stock options to consultants and non-employee directors.
The Company is required to determine the fair value of equity incentive awards and recognize compensation expense for all equity incentive awards made to employees and directors, including employee stock options. Such expense is recognized over the requisite service period. In addition, stock-based compensation expense recognized in the statements of operations and comprehensive loss is based on awards expected to vest and therefore the amount of expense has been reduced for estimated forfeitures. The Company uses the straight-line method for expense attribution, except for awards issued with performance-based conditions which require an accelerated attribution method over the requisite performance and service periods.
Under the applicable accounting guidance for equity incentive awards issued to non-employees, the date at which the fair value of such awards is measured is equal to the earlier of: 1) the date at which a commitment for performance by the counterparty to earn the equity instrument is reached; or 2) the date at which the counterpartys performance is complete. The Company recognizes stock-based compensation expense for the fair value of the vested portion of the non-employee awards in the statements of operations and comprehensive loss. The fair value of options granted to non-employees is remeasured as the options vest.
The valuation model used for calculating the fair value of awards for stock-based compensation expense is the Black-Scholes option-pricing model (the Black-Scholes model). The Black-Scholes model requires the Company to make assumptions and judgments about the variables used in the calculation, including the expected term (weighted average period of time that the options granted are expected to be outstanding), the volatility of common stock, an assumed risk-free interest rate and an estimated forfeiture rate. The Company uses the simplified method to determine the expected term of the stock option. Volatility is based on an average of the historical volatilities of the common stock of publicly-traded companies with characteristics similar to those of the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the option. Potential forfeitures of awards are estimated based on the Companys historical forfeiture experience and an analysis of similar companies. The estimate of forfeitures will be adjusted over the service period to the extent that actual forfeitures differ, or are expected to differ, from prior estimates.
F-13
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. | Summary of Significant Accounting Policies (Continued) |
Deferred Rent
Rent expense is recognized on a straight-line basis over the non-cancelable term of the Companys operating lease and, accordingly, the Company records the difference between cash rent payments and the recognition of rent expense as a deferred rent liability. The Company also records lessor-funded lease incentives, such as reimbursable leasehold improvements, as a deferred rent liability, which is amortized as a reduction of rent expense over the non-cancelable term of its operating lease.
Advertising Expenses
The Company expenses the costs of advertising, including promotional expenses, as incurred. Advertising expenses were $23,000 and $46,000 during the years ended December 31, 2012 and 2013, respectively and $11,000 and $19,000 during the three months ended March 31, 2013 and 2014, respectively.
Income Taxes
The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. Valuation allowances against deferred tax assets are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Currently, the Company has recorded a full valuation allowance against its deferred tax assets and there is no provision for income taxes, as the Company has incurred operating losses to date. The Companys policy is to record interest and penalties expense related to uncertain tax positions as other expense in the statement of operations.
Net Loss and Unaudited Pro Forma Net Loss per Share
Basic net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and dilutive potential shares of common stock outstanding during the period. Because the Company has reported a net loss for all periods presented, diluted net loss per share is the same as basic net loss per share for those periods as all potentially dilutive shares consisting of convertible preferred stock, stock options and warrants were antidilutive in those periods.
The Company allocates no loss to participating securities because they have no contractual obligation to share in the losses of the Company. The shares of the Companys convertible preferred stock participate in any dividends declared by the Company and are therefore considered to be participating securities.
Net loss per share was determined as follows (in thousands, except per share amounts):
Year Ended December 31, | Three Months Ended March 31, |
|||||||||||||||
2012 | 2013 | 2013 | 2014 | |||||||||||||
(unaudited) | ||||||||||||||||
Net loss |
$ | (16,365 | ) | $ | (18,369 | ) | $ | (4,753 | ) | $ | (4,409 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average common stock outstanding |
999 | 1,461 | 1,039 | 1,773 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss per share, basic and diluted |
$ | (16.38 | ) | $ | (12.57 | ) | $ | (4.57 | ) | $ | (2.49 | ) | ||||
|
|
|
|
|
|
|
|
F-14
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. | Summary of Significant Accounting Policies (Continued) |
The following potentially dilutive securities outstanding have been excluded from the computations of diluted weighted average shares outstanding because such securities have an antidilutive impact due to losses reported, in common stock equivalent shares (in thousands):
December 31, | March 31, | |||||||||||||||
2012 | 2013 | 2013 | 2014 | |||||||||||||
(unaudited) | ||||||||||||||||
Convertible preferred stock outstanding |
11,283 | 15,704 | 14,332 | 15,704 | ||||||||||||
Convertible preferred stock warrants |
74 | 57 | 51 | 53 | ||||||||||||
Common stock options |
1,594 | 1,928 | 1,538 | 1,965 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
12,951 | 17,689 | 15,921 | 17,722 | |||||||||||||
|
|
|
|
|
|
|
|
The unaudited pro forma basic and diluted net loss per share for the year ended December 31, 2013, and the three months ended March 31, 2014, have been computed using the weighted average number of shares of common stock outstanding after giving pro forma effect to the assumed conversion of all shares of convertible preferred stock upon an IPO by treating all shares of convertible preferred stock as if they had been converted to common stock in all periods in which such shares were actually outstanding.
The following table sets forth the computation of the Companys unaudited pro forma basic and diluted net loss per share during the year ended December 31, 2013, and three months ended March 31, 2014 (in thousands, except for per share amounts):
Year Ended December 31, 2013 |
Three Months Ended March 31, 2014 |
|||||||
(unaudited) | (unaudited) | |||||||
Net loss |
$ | (18,369 | ) | $ | (4,409 | ) | ||
|
|
|
|
|||||
Pro forma net loss |
$ | (18,369 | ) | $ | (4,409 | ) | ||
|
|
|
|
|||||
Weighted average common stock outstanding |
1,461 | 1,773 | ||||||
Pro forma weighted average convertible preferred stock outstanding |
14,194 | 15,701 | ||||||
|
|
|
|
|||||
Pro forma weighted average common shares used to compute net loss per share, basic and diluted |
15,655 | 17,474 | ||||||
|
|
|
|
|||||
Pro forma net loss per share, basic and diluted |
$ | (1.17 | ) | $ | (0.25 | ) | ||
|
|
|
|
Comprehensive Loss
Comprehensive loss consists of net loss and changes in unrealized gains and losses on available-for-sale marketable securities. Accumulated other comprehensive income (loss) is presented in the accompanying balance sheets, when applicable.
Segment, Geographical and Customer Concentration
The Company operates in one segment. All of the Companys assets and revenue are based in the U.S. and no single customer accounted for more than 6% of its revenue during the years ended December 31, 2012 and 2013 and the three months ended March 31, 2013 and 2014.
JOBS Act Accounting Election
As an emerging growth company under the Jumpstart Our Business Startups Act (JOBS Act), unlike many other public companies, the Company is eligible to take advantage of certain exemptions from various
F-15
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. | Summary of Significant Accounting Policies (Continued) |
reporting requirements that are applicable to other public companies that are not emerging growth companies. The Company has elected to take advantage of the extended transition period for adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies. There have been no new accounting pronouncements or changes to accounting pronouncements that are of significance or potential significance to the Company.
3. | Composition of Certain Financial Statement Items |
Inventory (in thousands):
December 31, | March
31, 2014 |
|||||||||||
2012 | 2013 | |||||||||||
(unaudited) | ||||||||||||
Raw materials |
$ | 334 | $ | 472 | $ | 667 | ||||||
Work-in-process |
111 | 241 | 187 | |||||||||
Finished goods |
930 | 1,484 | 1,609 | |||||||||
|
|
|
|
|
|
|||||||
$ | 1,375 | $ | 2,197 | $ | 2,463 | |||||||
|
|
|
|
|
|
Property and Equipment (in thousands):
December 31, | March
31, 2014 |
|||||||||||
2012 | 2013 | |||||||||||
(unaudited) | ||||||||||||
Computer equipment and software |
$ | 337 | $ | 398 | $ | 446 | ||||||
Furniture and office equipment |
135 | 252 | 255 | |||||||||
Laboratory equipment |
2,176 | 2,262 | 2,350 | |||||||||
Leasehold improvements |
228 | 124 | 128 | |||||||||
|
|
|
|
|
|
|||||||
2,876 | 3,036 | 3,179 | ||||||||||
Less: accumulated depreciation and amortization |
(1,121 | ) | (1,329 | ) | (1,463 | ) | ||||||
|
|
|
|
|
|
|||||||
$ | 1,755 | $ | 1,707 | $ | 1,716 | |||||||
|
|
|
|
|
|
Depreciation and leasehold improvements and capital lease amortization expenses were $0.4 million and $0.5 million during the years ended December 31, 2012 and 2013, respectively, and $0.1 million during each of the three months ended March 31, 2013 and 2014. Amortization for the office equipment purchased on a capital lease entered into in April 2013 was $11,000 and $5,000 during the year ended December 31, 2013 and the three months ended March 31, 2014, respectively.
Prepaid Expenses and Other Current and Non-current Assets (in thousands):
December 31, | March
31, 2014 |
|||||||||||
2012 | 2013 | |||||||||||
(unaudited) | ||||||||||||
Prepaid expenses |
$ | 204 | $ | 349 | $ | 507 | ||||||
Note receivable from related party |
100 | 100 | | |||||||||
Other |
148 | | | |||||||||
|
|
|
|
|
|
|||||||
Prepaid expenses and other current assets |
$ | 452 | $ | 449 | $ | 507 | ||||||
|
|
|
|
|
|
F-16
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
3. | Composition of Certain Financial Statement Items (Continued) |
As of December 31, 2012 and 2013, and March 31, 2014, other non-current assets consist of two-thirds of the security deposit on the Companys operating lease for its headquarters in Menlo Park, California of $0.1 million.
Other Current and Non-Current Liabilities (in thousands):
December 31, | March
31, 2014 |
|||||||||||
2012 | 2013 | |||||||||||
(unaudited) | ||||||||||||
Manufacturing expenses |
$ | 206 | $ | 267 | $ | 451 | ||||||
Deferred rent |
50 | 115 | 121 | |||||||||
Sales and use tax |
32 | 104 | 165 | |||||||||
Facilities expenses |
25 | 104 | 113 | |||||||||
Other |
76 | 155 | 82 | |||||||||
|
|
|
|
|
|
|||||||
Other current liabilities |
$ | 389 | $ | 745 | $ | 932 | ||||||
|
|
|
|
|
|
Other non-current liabilities consist of deferred rent as of December 31, 2012 and 2013, and March 31, 2014.
Interest and Other Income (in thousands):
Year Ended December 31, | Three Months Ended March 31, |
|||||||||||||||
2012 | 2013 | 2013 | 2014 | |||||||||||||
(unaudited) | ||||||||||||||||
Interest income |
$ | 27 | $ | 7 | $ | 3 | $ | 1 | ||||||||
Decrease in fair value of convertible preferred stock warrant |
128 | | | | ||||||||||||
Other |
1 | 79 | 79 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 156 | $ | 86 | $ | 82 | $ | 1 | |||||||||
|
|
|
|
|
|
|
|
Interest and Other Expense (in thousands):
Year Ended December 31, | Three Months Ended March 31, |
|||||||||||||||
2012 | 2013 | 2013 | 2014 | |||||||||||||
(unaudited) | ||||||||||||||||
Interest expense |
$ | 4 | $ | 117 | $ | 24 | $ | 26 | ||||||||
Loss on disposal of assets |
32 | 26 | | | ||||||||||||
Increase in fair value of convertible preferred stock warrant |
| 134 | | 286 | ||||||||||||
Increase in fair value of convertible preferred stock financing option |
| 212 | | | ||||||||||||
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$ | 36 | $ | 489 | $ | 24 | $ | 312 | |||||||||
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4. | Notes Receivable from Related Parties |
In April 2013, options held by the President and Chief Executive Officer, Ms. Earnhardt, a related party, were modified to permit exercise with promissory notes of up to $0.5 million. The promissory notes were issued in May 2013 for $0.5 million. Under the terms of the notes, one quarter of the principal and interest will be forgiven on each anniversary date of the note as long as Ms. Earnhardt remains the Companys Chief Executive Officer. In addition, the entire principal and interest of the notes will be forgiven on the earlier of an initial public offering or the closing of a liquidation event (as defined in the articles of incorporation) in each case where total
F-17
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. | Notes Receivable from Related Parties (Continued) |
proceeds payable to the Company or its stockholders is greater than $200.0 million. The Company has the option to accelerate the maturity date if, at the Companys reasonable discretion, such acceleration may be necessary due to any applicable law, rule or regulation, including, without limitation, the Sarbanes-Oxley Act of 2002. The full recourse promissory notes are secured by a pledge of the exercised shares.
In January 2007, the Company loaned amounts to its Chief Operation Officer, Mr. Kaufman, a related party, and another employee in connection with the commencement of their employment with the Company. The loans were evidenced by promissory notes for $0.3 million from Mr. Kaufman and $0.1 million from the other employee. These notes bore interest at the applicable federal rate and interest was determined in accordance with Section 7872 of the Internal Revenue Code and has been reflected as income to the employee.
Pursuant to the terms of the promissory notes, provided the individuals remained continuous, full-time employees of the Company, repayment of the notes was to begin after the third year of employment when 50% of the employees annual bonus would have been applied to the loan balance until the loan was paid in full. The notes mature and become immediately due and payable within 30 days following the date on which the employee ceases, voluntarily or involuntarily, to be employed by the Company. In August 2009, management agreed to forgive the $0.1 million loan, provided the individual remained employed by the Company, at the rate of one-third annually in February 2010, 2011 and 2012. This note was fully forgiven as of December 31, 2012. For Mr. Kaufmans loan, no payment was received in the year ended December 31, 2011, since the Company did not pay an annual bonus in that year. In February 2011, the Company agreed to forgive Mr. Kaufmans loan over three years, provided Mr. Kaufman remained employed by the Company, with $0.1 million forgiven in January 2012, $0.1 million in January 2013 and $0.1 million in January 2014. The notes are secured by any stock and options the employees hold in the Company. The note receivable balance outstanding at December 31, 2012 and 2013 was $0.2 million and $0.1 million, respectively. Mr. Kaufmans note was fully forgiven as of March 31, 2014.
5. | Loan and Security Agreement |
In August 2013, the Company entered into a loan and security agreement (Loan Agreement) with Silicon Valley Bank (SVB) for a total commitment of $12.0 million. The commitment consists of an $8.0 million growth capital facility and a $4.0 million revolving accounts receivable line of credit.
The $8.0 million growth capital facility consists of two $4.0 million tranches. The first $4.0 million tranche was available immediately upon execution of the Loan Agreement and will continue to be available until October 31, 2014. The second $4.0 million tranche was contingent upon the Company achieving a trailing three-month revenue of at least $7.0 million. The Company achieved that condition as of January 31, 2014, and therefore the second tranche will be available until March 31, 2015. Payment under both tranches will be interest-only until March 31, 2015, at which time the outstanding balance will convert to a 30-month fully amortizing loan. The interest rate will be fixed at the time of advance and will be the greater of 3.65% or the three-year U.S. Treasury note plus 3%. At the end of the amortization period, the Company will make a final payment of 3.9% of the advanced amounts. There is a prepayment penalty of 2% of the prepaid principal during the first year, 1% during the second year and no prepayment penalty during the third year.
In addition, the Company issued a warrant to SVB to purchase up to 20,313 shares of the Companys Series D convertible preferred stock for an aggregate exercise price of 0.5% of the total growth capital facility commitment, or $40,000. As of March 31, 2014, this warrant was exercisable for 5,803 shares of the Companys Series D convertible preferred stock at an exercise price of $6.89 per share as of December 31, 2013, and March 31, 2014. Following any draw-downs under the growth capital facility, the warrant will become exercisable for additional shares of Series D convertible preferred stock equal to 1.25% of the advanced amounts under tranche one and two divided by $6.89. The initial value of the warrants issued was $10,000 and has been recognized as convertible preferred stock warrant liability and interest expense.
F-18
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
5. | Loan and Security Agreement (Continued) |
The $4.0 million revolving accounts receivable line of credit will expire in three years. Advances will be made for up to 80% of eligible accounts receivable. An annual loan fee of 0.75% will be paid at the beginning of each of the three years. The interest will be the greater of 4.25% or SVB Prime Rate plus 0.25%.
As of March 31, 2014, the Company had not received any advances under the Loan Agreement.
6. | Equipment Loans |
In September 2012, the Company entered into an equipment loan with an aggregate principal amount of $2.0 million, all of which was drawn down in December 2012. Payments will be made in monthly installments over a 36-month period with an annual interest rate of 5.1%. A total of $4,000 and $0.1 million was recorded as interest expense during the years ended December 31, 2012 and 2013, respectively, and $24,000 and $16,000 during the three months ended March 31, 2013 and 2014, respectively. The amounts outstanding under this loan at December 31, 2012 and 2013, and March 31, 2014, were $2.0 million, $1.4 million and $1.2 million, respectively.
In April 2013, the Company entered into an equipment loan for a principal amount of $0.1 million. Payments will be made in monthly installments over a 38-month period with an interest rate of 14.88%. A total of $11,000 was recorded as interest expense during the year ended December 31, 2013, and $3,000 during the three months ended March 31, 2014. The amounts outstanding under this loan at December 31, 2013, and March 31, 2014, were $87,000 and $80,000, respectively.
At December 31, 2013 and March 31, 2014, future minimum payments under these equipment loans are as follows (in thousands):
Year Ending December 31, |
December 31, 2013 |
March 31, 2014 |
||||||
(unaudited) | ||||||||
2014 (remaining) |
$ | 761 | $ | 570 | ||||
2015 |
761 | 761 | ||||||
2016 |
21 | 21 | ||||||
Thereafter |
| | ||||||
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|
|||||
Total minimum payments |
1,543 | 1,352 | ||||||
Less: amount representing interest |
(91 | ) | (72 | ) | ||||
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|||||
Present value of future payments |
1,452 | 1,280 | ||||||
Less: current portion |
(696 | ) | (705 | ) | ||||
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Non-current portion |
$ | 756 | $ | 575 | ||||
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7. | Convertible Preferred Stock Warrant Liability |
As of December 31, 2012 and 2013, and March 31, 2014, the following warrants to purchase shares of convertible preferred stock were outstanding and exercisable (in thousands, except per share data):
In Connection |
Series |
Exercise Price |
Shares Outstanding at | Initial Value |
Fair Value at | |||||||||||||||||||||||||||||||||
Dates |
December 31, | March
31, 2014 |
December 31, | March
31, 2014 |
||||||||||||||||||||||||||||||||||
Issuance |
Expiration |
2012 | 2013 | 2012 | 2013 | |||||||||||||||||||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||||||||||||||||||
Jan to Mar 2006 |
Jan to Mar 2013 | Convertible notes | A | $ | 3.68 | 22,417 | | | $ | 2 | $ | | $ | | $ | | ||||||||||||||||||||||
Mar 2007 |
Mar 2014 | Equipment loan | A | 3.68 | 4,076 | 4,076 | | 4 | 7 | 17 | | |||||||||||||||||||||||||||
Nov 2007 |
Nov 2017 | Venture loan | A | 3.68 | 47,554 | 47,554 | 47,554 | 63 | 86 | 200 | 447 | |||||||||||||||||||||||||||
Aug 2013 |
Aug 2023 | Loan Agreement | D | 6.89 | | 5,803 | 5,803 | 10 | | 20 | 47 | |||||||||||||||||||||||||||
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74,047 | 57,433 | 53,357 | $ | 93 | $ | 237 | $ | 494 | ||||||||||||||||||||||||||||||
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F-19
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. | Convertible Preferred Stock Warrant Liability (Continued) |
During the years ended December 31, 2012 and 2013, warrants to purchase 57,744 and 22,418 shares, respectively, of Series A convertible preferred stock were exercised at a price of $3.68 per share. During the year ended December 31, 2012, warrants to purchase 13,587 shares of Series A convertible preferred stock expired unexercised. During the three months ended March 31, 2013, warrants to purchase 22,418 shares of Series A convertible preferred stock were exercised at a price of $3.68 per share. During the three months ended March 31, 2014, warrants to purchase 4,076 shares of Series A convertible preferred stock were exercised though a cashless exercise provision. Net shares of 2,431 were issued and the remaining 1,645 shares were withheld for the exercise price.
In connection with the execution of the Loan Agreement, warrants were issued to purchase the Companys Series D convertible preferred stock. The warrants may currently be exercised for 5,803 shares of Series D convertible preferred stock at an exercise price of $6.89 per share. Alternatively, the bank has the option to exercise the warrants to purchase shares of the class of equity sold to investors in a future round of equity financing with proceeds of at least $5.0 million. The exercise price would be the price paid by the lead investor in the new financing and the number of shares exercisable would be based on an aggregate exercise price of $40,000, representing 0.5% of the total growth capital facility. This represents a warrant for 5,803 shares at an exercise price of $6.89 per share as of December 31, 2013, and March 31, 2014. The warrants expire in August 2023 or upon the occurrence of an acquisition of the Company in exchange for cash or marketable securities. Following any draw-downs under the growth capital facility, the warrant will become exercisable for additional shares of Series D convertible preferred stock equal to 1.25% of the advanced amounts under tranche one and two divided by $6.89.
8. | Convertible Preferred Stock |
A summary of the Companys convertible preferred stock is as follows:
December 31, 2012 | December 31, 2013 | March 31, 2014 | ||||||||||||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||||||||||
Series |
Shares Authorized |
Shares Issued and Outstanding |
Carrying Value (in thousands) |
Shares Authorized |
Shares Issued and Outstanding |
Carrying Value (in thousands) |
Shares Authorized |
Shares Issued and Outstanding |
Carrying Value (in thousands) |
|||||||||||||||||||||||||||
A |
2,809,846 | 2,722,201 | $ | 9,905 | 2,796,259 | 2,744,629 | $ | 9,987 | 2,796,259 | 2,747,060 | $ | 10,016 | ||||||||||||||||||||||||
B |
3,249,662 | 3,249,663 | 19,894 | 3,249,662 | 3,249,663 | 19,894 | 3,249,662 | 3,249,663 | 19,894 | |||||||||||||||||||||||||||
C |
5,687,500 | 5,311,402 | 30,521 | 5,311,401 | 5,311,402 | 30,521 | 5,311,401 | 5,311,402 | 30,521 | |||||||||||||||||||||||||||
D |
| | | 4,550,000 | 4,395,788 | 30,358 | 4,550,000 | 4,395,788 | 30,358 | |||||||||||||||||||||||||||
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11,747,008 | 11,283,253 | $ | 60,320 | 15,907,322 | 15,701,444 | $ | 90,760 | 15,907,322 | 15,703,875 | $ | 90,789 | |||||||||||||||||||||||||
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A summary of the Companys convertible preferred stock terms is as follows:
Series |
Liquidation Preference Per Share |
8% Dividend Per Share |
||||||
A |
$ | 3.68 | $ | 0.2944 | ||||
B |
6.16 | 0.4928 | ||||||
C |
5.84 | 0.4672 | ||||||
D |
6.89 | 0.5514 |
The Company recorded its convertible preferred stock at fair value on the dates of issuance, net of issuance costs. A redemption event will only occur upon the liquidation or winding up of the Company, a greater than 50% change in control, or sale of substantially all of the assets of the Company. As the redemption event is outside the control of the Company, all shares of convertible preferred stock have been presented outside of permanent equity. Further, the Company has also elected not to adjust the carrying values of the convertible preferred stock to the redemption value of such shares, since it is uncertain whether or when a redemption event
F-20
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
8. | Convertible Preferred Stock (Continued) |
will occur. Subsequent adjustments to increase the carrying value to the redemption values will be made when it becomes probable that such redemption will occur. As of December 31, 2012 and 2013, and March 31, 2013, it was not probable that such redemption would occur.
Series D Convertible Preferred Stock
In February 2013, the Company completed the initial closing of the Series D convertible preferred stock financings. The total net cash proceeds from this initial closing totaled $18.2 million and 2,656,638 shares of Series D convertible preferred stock were issued. In March 2013, the Company completed an additional closing of the Series D convertible preferred stock financings. The total net cash proceeds from this additional closing totaled $2.5 million and 370,140 shares of Series D convertible preferred stock were issued. The March 2013 closing included 72,548 shares purchased by certain employees of the Company for $0.5 million.
The Series D convertible preferred stock financing contained a provision that obligated the investors to purchase additional shares (convertible preferred stock financing option) at the same price as the initial closing upon notification by the Company that it had achieved an annualized revenue rate of at least $16.0 million over a trailing three-month period. This convertible preferred stock financing option to purchase Series D convertible preferred stock in the future tranche was considered to be a freestanding financial instrument for accounting purposes. Therefore, in February 2013, the Company recorded a financing liability of $0.9 million representing the fair value of this convertible preferred stock financing option at the time of issuance. In October 2013, shortly after achieving the annualized revenue rate, the Company issued the additional 1,369,070 shares of Series D convertible preferred stock to the investors for net proceeds of $9.4 million. Since the convertible preferred stock financing option expired in October 2013 as a result of the issuance of Series D convertible preferred stock, the carrying and fair value of the convertible preferred stock financing option of $1.1 million was reclassified from liability to Series D convertible preferred stock. The Company recorded a charge related to the change in fair value in October 2013 of $0.2 million related to this financing option liability.
Dividends
The holders of Series A, B, C and D convertible preferred stock are entitled to receive dividends (as determined on a per annum basis and on an as-converted basis), from any assets legally available, prior and in preference to any declaration or payment of any dividend to the common stockholders. No dividends other than those payable solely in common stock shall be paid on any common stock, Series A or Series B convertible preferred stock until they are paid on each outstanding share of Series C and D convertible preferred stock. Such dividends are payable when and if declared by the Board of Directors and are not cumulative. No dividends have been declared through December 31, 2013.
Liquidation
In the event of any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary (Liquidation Event), the holders of Series C and D convertible preferred stock are entitled to receive their liquidation preferences, prior to and in preference of any distribution of any assets of the Company to the holders of common stock, Series A or Series B convertible preferred stock, as adjusted for any stock splits, combinations, reorganizations, or similar transactions, plus any declared and unpaid dividends. If, upon the occurrence of such an event, the proceeds thus distributed among the holders of Series C and D convertible preferred stock shall be insufficient to permit the payment to such holders of the full preferential amounts, then the entire amount legally available for distribution shall be distributed among the holders of Series C and D convertible preferred stock in proportion to the full preferential amount that each such holder is otherwise entitled to receive had such proceeds been available.
After payment in full of the Series C and D convertible preferred stock liquidation preference, Series A and B convertible preferred stock liquidation preferences will be paid, as adjusted for any stock splits, combinations,
F-21
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
8. | Convertible Preferred Stock (Continued) |
reorganizations, or similar transactions. If, upon the occurrence of such an event, the proceeds thus distributed among the holders of Series A and B convertible preferred stock shall be insufficient to permit the payment to such holders of the full preferential amounts, then the entire amount legally available for distribution (after payment in full of the Series C and D convertible preferred stock liquidation preference) shall be distributed among the holders of Series A and B convertible preferred stock in proportion to the full preferential amount that each such holder is otherwise entitled to receive had such proceeds been available.
After liquidation preference payments have been made to the holders of the convertible preferred stock as described above, any remaining assets and funds of the Company are to be distributed ratably among the holders of common stock and Series A, B, C and D convertible preferred stock, assuming conversion of all shares of convertible preferred stock.
Prior to the Liquidation Event, the holders of all series of preferred stock may convert their preferred stock to common stock at the then-applicable conversion rate. Distribution of the Companys assets to the new and existing common stockholders would then be made pro rata according to the number of shares held by each investor.
If convertible preferred stock is not converted to common stock prior to the Liquidation Event, the holders of Series C and D convertible preferred stock are entitled to receive their liquidation preferences, prior to and in preference of distribution of any assets of the Company to the holders of common stock, Series A and Series B convertible preferred stock, by reason of their ownership (as adjusted for any stock splits, combinations, reorganizations, or similar transactions), plus any declared but unpaid dividends on such shares. The holders of Series A and B convertible preferred stock are entitled to receive their liquidation preferences, prior to and in preference of distribution of any assets of the Company to the holders of common stock, by reason of their ownership (as adjusted for any stock splits, combinations, reorganizations, or similar transactions), plus any declared but unpaid dividends on such shares.
Voting
Except as otherwise required by law, the holders of common and convertible preferred stock vote together as a single class. The holders of the convertible preferred stock are entitled to the number of votes equal to the number of shares of common stock into which the convertible preferred stock could be converted on the record date for the vote, or upon the written consent of the stockholders.
Redemption
The convertible preferred shares are not redeemable.
Conversion
Each share of Series A, B, C and D convertible preferred stock, at the option of the holder and at any time after the date of issuance, is convertible into shares of common stock, subject to certain anti-dilution adjustments, in accordance with the conversion formula provided in the Companys Articles of Incorporation (currently 1-for-1). In the event of a stock split, the conversion price in effect immediately prior to such split will be proportionately decreased. Conversion is automatic at the conversion rate: (1) immediately upon the closing of a firm commitment, underwritten initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, in which the public offering price reflects a pre-money valuation of at least $200.0 million and with net proceeds raised of at least $40.0 million or (2) at the election of the holders of at least 70% of the then outstanding shares of such series of preferred stock, the election of the holders of at least 65% of the Series C convertible preferred stock and the election of the holders of at least 52% of the Series D convertible preferred stock, voting as a separate class. The convertible preferred stock warrants become exercisable for common stock.
F-22
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
9. | Stockholders Equity |
Founders Restricted Stock Agreements
The Company and the founders entered into restricted stock agreements in October 2003 for 142,500 shares of common stock, in June 2005 for 50,000 shares of common stock and in October 2005 for 57,500 shares of common stock.
The 2003 restricted stock was issued for cash consideration of $0.001 per share. The 2005 restricted stock was issued for cash consideration of $0.02 per share. The restricted stock issued was subject to a Company repurchase option at the original exercise price in the event of termination of a founders services with the Company. All 250,000 shares related to founders stock agreements are issued and outstanding and are included within common stock at December 31, 2012 and 2013, and March 31, 2014. None of these shares are subject to repurchase as of December 31, 2012 and 2013, and March 31, 2014.
2013 Equity Incentive Plan
Under the 2013 Equity Incentive Plan (the 2013 Plan) approved by the Companys Board of Directors in September 2013, 2,216,396 shares of common stock have been reserved for the issuance of incentive stock options (ISOs), non-statutory stock options (NSOs), stock bonuses and rights to acquire restricted stock to employees, officers, directors and consultants of the Company as of December 31, 2012. ISOs and NSOs may be granted with exercise prices at no less than 100% and 85%, respectively, of the fair value of the common stock on the date of grant. Options granted to a 10% stockholder shall be at no less than 110% of the fair value and ISO stock option grants to such 10% stockholders expire five years from the date of grant. ISOs granted under the 2013 Plan generally vest 25% after the completion of 12 months of service and the balance vests in equal monthly installments over the next 36 months of service and expire 10 years from the grant date, unless subject to provisions regarding 10% stockholders. NSOs vest per the specific agreement and expire 10 years from the date of grant. There were no options issued with 100% of the shares vested as of the date of grant during the years ended December 31, 2012 and 2013, and the three months ended March 31, 2013 and 2014. New shares are issued upon exercise of options under the stock plan.
The 2013 Plan is the successor to the 2003 Equity Incentive Plan (2003 Plan) which expired in September 2013. Options available for grant under the 2003 Plan of 1,702,916 were incorporated into the 2013 Plan. Options outstanding under the 2003 Plan will be returned to the 2013 Plan upon forfeiture.
A summary of the Companys stock option activity and related information is as follows (options in thousands):
Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||||||||||
2012 | 2013 | 2014 | ||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Options | Price | Options | Price | Options | Price | |||||||||||||||||||
Outstanding, beginning of period |
1,425 | $ | 0.80 | 1,594 | $ | 0.88 | 1,928 | $ | 1.08 | |||||||||||||||
Grantedat fair market value |
296 | 1.16 | 1,033 | 1.20 | 104 | 6.20 | ||||||||||||||||||
Grantedbelow fair market value |
| | 94 | 1.32 | | | ||||||||||||||||||
Exercised |
(115 | ) | 0.76 | (740 | ) | 0.84 | (37 | ) | .96 | |||||||||||||||
Forfeited |
(12 | ) | 0.88 | (53 | ) | 1.08 | (30 | ) | 1.08 | |||||||||||||||
Expired |
| | | | | | ||||||||||||||||||
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Outstanding, end of period |
1,594 | 0.88 | 1,928 | 1.08 | 1,965 | 1.34 | ||||||||||||||||||
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Vested and expected to vest |
1,461 | 0.84 | 1,752 | 1.08 | 1,791 | 1.34 | ||||||||||||||||||
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Exercisable |
1,206 | 0.80 | 1,314 | 1.00 | 1,337 | 1.08 | ||||||||||||||||||
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F-23
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
9. | Stockholders Equity (Continued) |
The following is a further breakdown of the options outstanding at December 31, 2013 and March 31, 2014 (options in thousands):
December 31, 2013 |
||||||||||||||||||||
Range of Prices |
Options Outstanding |
Weighted Average Remaining Contractual Life (years) |
Weighted Average Exercise Price |
Options Exercisable |
Weighted Average Exercise Price |
|||||||||||||||
$0.02-$0.48 |
129 | 3.1 | $ | 0.48 | 129 | $ | 0.48 | |||||||||||||
0.72-0.76 |
261 | 7.0 | 0.72 | 232 | 0.72 | |||||||||||||||
1.00-1.08 |
327 | 7.2 | 1.04 | 253 | 1.04 | |||||||||||||||
1.20-1.32 |
1,211 | 9.3 | 1.20 | 700 | 1.20 | |||||||||||||||
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|
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$0.02-$1.32 |
1,928 | 8.2 | 1.08 | 1,314 | 1.01 | |||||||||||||||
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March 31, 2014 |
||||||||||||||||||||
(unaudited) | ||||||||||||||||||||
Range of Prices |
Options Outstanding |
Weighted Average Remaining Contractual Life (years) |
Weighted Average Exercise Price |
Options Exercisable |
Weighted Average Exercise Price |
|||||||||||||||
$0.02-$0.48 |
125 | 2.9 | $ | 0.48 | 125 | $ | 0.48 | |||||||||||||
0.72-0.76 |
244 | 6.7 | 0.72 | 225 | 0.72 | |||||||||||||||
1.00-1.08 |
323 | 7.0 | 1.04 | 263 | 1.04 | |||||||||||||||
1.20-1.32 |
1,170 | 9.1 | 1.20 | 713 | 1.20 | |||||||||||||||
6.20-6.20 |
103 | 9.9 | 6.20 | 11 | 6.20 | |||||||||||||||
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|
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$0.02-$6.20 |
1,965 | 8.1 | 1.34 | 1,337 | 1.06 | |||||||||||||||
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As of December 31, 2013 and March 31, 2014, the aggregate pre-tax intrinsic value of options outstanding and exercisable was $4.2 million and $13.5 million, respectively, and options outstanding were $6.1 million and $19.2 million, respectively. The aggregate pre-tax intrinsic value of options exercised was $37,000 and $0.3 million during the years ended December 31, 2012 and 2013, respectively, and $23,000 and $0.2 million during the three months ended March 31, 2013 and 2014, respectively. The aggregate pre-tax intrinsic value was calculated as the difference between the exercise prices of the underlying options and the estimated fair value of the common stock on the date of exercise. The total cash received upon the exercise of options was $0.1 million and $0.6 million during the years ended December 31, 2012 and 2013, respectively, and $36,000 during each of the three months ended March 31, 2013 and 2014.
Early Exercise of Stock Options
Stock options granted under the Plan may provide option holders the right to elect to exercise unvested options in exchange for restricted common stock. During the year ended December 31, 2013, employees exercised options with 69,037 unvested shares. As of December 31, 2013 and March 31, 2014, 53,796 and 47,470 shares, respectively, remained subject to a repurchase right held by the Company at the original issuance price in the event the optionees service is voluntarily or involuntarily terminated. As of December 31, 2013 and March 31, 2014, the related liability was $31,000 and $28,000, respectively. There were no shares subject to repurchase at December 31, 2012.
F-24
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
9. | Stockholders Equity (Continued) |
Reserved Shares
The Company is required to reserve and keep available out of its authorized but unissued shares of common stock a number of shares sufficient to effect the conversion of all outstanding shares of convertible preferred stock (and preferred stock warrants), plus options granted and available for grant under the incentive stock plan.
The number of such shares of common stock reserved for the conversion, exercise and issuance of the following options and shares outstanding as of December 31, 2013 and March 31, 2014, are as follows (in thousands):
December 31, 2013 |
March 31, 2014 |
|||||||
(unaudited) | ||||||||
Convertible preferred stock: |
||||||||
Series A: |
||||||||
Outstanding |
2,745 | 2,747 | ||||||
Warrants issued in connection with: |
||||||||
Equipment loans |
4 | | ||||||
Venture loan financing |
48 | 48 | ||||||
Series B outstanding |
3,250 | 3,250 | ||||||
Series C outstanding |
5,311 | 5,311 | ||||||
Series D: |
||||||||
Outstanding |
4,396 | 4,396 | ||||||
Warrants issued in connection with the Loan Agreement |
6 | 6 | ||||||
2003 Equity Incentive Plan, options outstanding |
1,747 | 1,683 | ||||||
2013 Equity Incentive Plan: |
||||||||
Options outstanding |
181 | 282 | ||||||
Options available for future grant |
260 | 187 | ||||||
|
|
|
|
|||||
17,948 | 17,910 | |||||||
|
|
|
|
10. | Stock-Based Compensation Expense |
Total stock-based compensation recognized, before taxes, during the years ended December 31, 2012 and 2013 and the three months ended March 31, 2013 and 2014, are as follows (in thousands):
Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||
2012 | 2013 | 2013 | 2014 | |||||||||||||
(unaudited) | ||||||||||||||||
Cost of sales |
$ | 10 | $ | 21 | $ | 3 | $ | 9 | ||||||||
Sales and marketing |
36 | 94 | 11 | 45 | ||||||||||||
General and administrative |
67 | 179 | 14 | 99 | ||||||||||||
Research and development |
39 | 88 | 10 | 29 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stock-based compensation |
$ | 152 | $ | 382 | $ | 38 | $ | 182 | ||||||||
|
|
|
|
|
|
|
|
The amount of unearned stock-based compensation currently estimated to be expensed from now through the year 2017 related to unvested employee stock-based payment awards as of December 31, 2013 and March 31, 2014 is $1.5 million and $1.4 million, respectively. The weighted average period over which the unearned stock-based compensation is expected to be recognized as of December 31, 2013 and March 31, 2014, is 3.2 years and 3.1 years, respectively. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that the Company grants additional share-based payments.
F-25
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
10. | Stock-Based Compensation Expense (Continued) |
The Company estimates the fair value of stock-based compensation on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model determines the fair value of stock-based payment awards based on the fair market value of the Companys common stock on the date of grant and is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the fair market value of the Companys common stock, volatility over the expected term of the awards and actual and projected employee stock option exercise behaviors. The Company has opted to use the simplified method for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option. Due to the Companys limited operating history and a lack of company specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. When selecting these public companies on which it has based its expected stock price volatility, the Company generally selected companies with comparable characteristics to it, including enterprise value, stages of clinical development, risk profiles, position within the industry and with historical share price information sufficient to meet the expected life of the stock-based awards. The historical volatility data was computed using the daily closing prices for the selected companies shares during the equivalent period of the calculated expected term of the share-based payments. The Company will continue to analyze the historical stock price volatility and expected term assumptions as more historical data for the Companys common stock becomes available. The risk-free rate assumption is based on the U.S. Treasury instruments with maturities similar to the expected term of the Companys stock options. The expected dividend assumption is based on the Companys history of not paying dividends and its expectation that it will not declare dividends for the foreseeable future.
As stock-based compensation expense recognized in the financial statements is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. Forfeitures are estimated based on estimated future employee turnover and historical experience.
The fair value of the options granted to employees or directors during the years ended December 31, 2012 and 2013, and the three months ended March 31, 2013 and 2014, was estimated as of the grant date using the Black-Scholes model assuming the weighted average assumptions listed in the following table:
Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||
2012 | 2013 | 2013(1) | 2014 | |||||||||||||
(unaudited) | ||||||||||||||||
Expected life (years) |
6.0 | 6.0 | | 6.0 | ||||||||||||
Expected volatility |
66 | % | 67 | % | | 60 | % | |||||||||
Risk-free interest rate |
0.9 | % | 1.6 | % | | 1.8 | % | |||||||||
Dividend yield |
0.0 | % | 0.0 | % | | 0.0 | % | |||||||||
Expected forfeitures |
7 | % | 5 | % | | 5 | % | |||||||||
Weighted average fair value |
$ | 0.68 | $ | 0.96 | | $ | 3.44 |
(1) | No options were granted during the period |
Option Modification
In April 2013, options held by the President and Chief Executive Officer, Ms. Earnhardt, a related party, were modified to permit exercise with promissory notes of up to $0.5 million. Under the terms of the notes, one quarter of the principal and interest will be forgiven on each anniversary date of the note as long as Ms. Earnhardt remains the Companys Chief Executive Officer. In addition, the entire principal and interest of the notes will be forgiven on the earlier of an initial public offering or the closing of a liquidation event (as defined in the articles of incorporation), in each case where total proceeds payable to the Company or its stockholders is greater than $200.0 million. The Company has the option to accelerate the maturity date if, at the
F-26
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
10. | Stock-Based Compensation Expense (Continued) |
Companys reasonable discretion, such acceleration may be necessary due to any applicable law, rule or regulation, including, without limitation, the Sarbanes-Oxley Act of 2002. The economic effect of the modification was equivalent to converting options to purchase 0.6 million shares to a grant of restricted stock with four-year vesting and a contingent vesting acceleration provision. The incremental cost of the modification was $0.3 million, of which $50,000 and $13,000 was recognized in the year ended December 31, 2013, and three months ended March 31, 2014, respectively.
Performance-Based Options
Options issued during the year ended December 31, 2011, included grants to certain employees totaling 289,253 shares that contained vesting conditions contingent on the achievement of certain milestones. Assuming continued service by the employee, the vesting would begin on the date both milestones were achieved and vest monthly thereafter over the following four years. At December 31, 2011, the Company determined that it was probable that both milestones would be achieved and therefore began recording stock-based compensation expense related to these options in the year ended December 31, 2011. The milestones were achieved by the year ended December 31, 2013, and therefore began vesting accordingly. Stock-based compensation expense totaling $29,000 and $30,000 was recorded during the years ended December 31, 2012 and 2013, respectively, and $8,000 and $5,000 during the three months ended March 31, 2013 and 2014, respectively.
Options issued during the year ended December 31, 2013, included grants to certain employees totaling 363,000 shares that contained vesting conditions contingent on the achievement of certain milestones. Assuming continued service by the employee, the vesting would begin on the date both milestones were achieved and vest monthly over the following four years. As of December 31, 2013, the Company determined it was probable that both milestones would be achieved and therefore began recording stock-based compensation expense related to these options in the year ended December 31, 2013. The milestones were achieved by the year ended December 31, 2013, and therefore began vesting accordingly. Stock-based compensation expense totaling $0.1 million and $27,000 were recorded during the year ended December 31, 2013, and the three months ended March 31, 2014, respectively.
Options Issued to Consultants
During the years ended December 31, 2012 and 2013, non-statutory options were issued to non-employees to purchase 15,000 and 5,000 shares of common stock, respectively, for current and future services at weighted-average exercise prices of $0.96 and $1.20 per share, respectively. There were no options were issued to non-employees during the three months ended March 31, 2013 and 2014. The options were valued using the Black-Scholes model based on the following weighted average assumptions:
Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||
2012 | 2013 | 2013 | 2014 | |||||||||||||
(unaudited) | ||||||||||||||||
Expected life (years) |
10.0 | 9.0 | 9.0 | 8.0 | ||||||||||||
Expected volatility |
66 | % | 66 | % | 66 | % | 65 | % | ||||||||
Risk-free interest rate |
1.8 | % | 2.4 | % | 2.0 | % | 2.8 | % | ||||||||
Dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % |
The fair value of these options is expensed over the vesting period, which ranges from five months to three years. Stock-based compensation expense was $7,000 and $15,000 during the years ended December 31, 2012 and 2013, respectively, and $2,000 and $17,000 during the three months ended March 31, 2013 and 2014, respectively, related to consultants was charged to expense in the statements of operations and comprehensive loss.
F-27
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
11. | Commitments and Contingencies |
Building Lease
As of December 31, 2013 and March 31, 2014, the Company has one leased facility under an operating lease agreement. Rental payments on operating leases are charged to expense on a straight-line basis over the period of the lease. The Company entered into this 36-month lease in March 2012, effective June 1, 2012, for a facility with larger production and office space. The lease agreement requires the Company to pay executory costs such as real estate taxes, insurance and repairs, and includes a renewal provision allowing the Company to extend this lease for an additional three years at 95% of the then-current fair market rental rate.
Future minimum annual operating lease payments are as follows (in thousands):
Year Ending December 31, |
December 31, 2013 |
March 31, 2014 |
||||||
(unaudited) | ||||||||
2014 (remaining) |
$ | 928 | $ | 699 | ||||
2015 |
390 | 390 | ||||||
Thereafter |
| | ||||||
|
|
|
|
|||||
1,318 | 1,089 | |||||||
|
|
|
|
As of December 31, 2012 and 2013, and March 31, 2014, two-thirds of the Companys security deposit is recorded in other non-current assets and the remaining one-third is restricted cash.
Rent expense was $0.6 million and $1.4 million during the years ended December 31, 2012 and 2013, respectively, and $0.3 million during each of the three months ended March 31, 2013 and 2014, respectively.
Purchase Commitments
The Company had commitments to suppliers for purchases totaling $0.5 million and $0.7 million as of December 31, 2013 and March 31, 2014, respectively.
12. | Employee Retirement Plan |
In January 2007, the Company established a qualified retirement plan under section 401(k) of the Internal Revenue Code (IRC) under which participants may contribute up to 100% of their eligible compensation, subject to maximum deferral limits specified by the IRC. The Company may make a discretionary profit sharing contribution to each eligible employee, subject to limits specified by the IRC, on an annual basis, provided the employee is employed with the Company on the last day of the plan year which is December 31. In addition, the Company may also make a matching contribution of up to 3% of an employees eligible compensation on a quarterly basis. The Companys contributions will vest 25% per year over four years. As of December 31, 2013 and March 31, 2014, the Company has not made any profit sharing or matching contributions.
13. | Income Taxes |
The Company has a history of losses and therefore has made no provision for income taxes. All losses result from domestic operations.
F-28
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
13. | Income Taxes (Continued) |
The amount computed by applying the federal statutory rate to income before taxes reconciles to the provision for income taxes is as follows (in thousands):
Year Ended December 31, | ||||||||
2012 | 2013 | |||||||
Tax at federal statutory rate |
$ | (5,564 | ) | $ | (6,245 | ) | ||
State, net of federal benefit |
(1,131 | ) | (826 | ) | ||||
Permanent items |
59 | 368 | ||||||
R&D tax credit |
| (584 | ) | |||||
Other |
(3 | ) | (2 | ) | ||||
Change in valuation allowance |
6,639 | 7,289 | ||||||
|
|
|
|
|||||
$ | | $ | | |||||
|
|
|
|
Significant components of net deferred tax assets are as follows (in thousands):
December 31, | ||||||||
2012 | 2013 | |||||||
Deferred tax assets: |
||||||||
Net operating losses |
$ | 21,719 | $ | 28,236 | ||||
R&D tax credit |
1,642 | 2,394 | ||||||
Accruals and other |
1,259 | 1,279 | ||||||
|
|
|
|
|||||
24,620 | 31,909 | |||||||
Valuation allowance |
(24,620 | ) | (31,909 | ) | ||||
|
|
|
|
|||||
$ | | $ | | |||||
|
|
|
|
The Company had deferred tax assets of $24.6 million and $31.9 million as of December 31, 2012 and 2013, respectively. Deferred income taxes reflect the tax effects of net operating loss and tax credit carryforwards and the net temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Realization of the deferred tax assets is dependent upon the generation of future taxable income, if any, the amount and timing of which are uncertain. Based on available objective evidence, management believes it is more likely than not that the deferred tax assets are not recognizable and will not be recognizable until the Company has sufficient taxable income. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $6.6 million and $7.3 million during the years ended December 31, 2012 and 2013, respectively.
As of December 31, 2013, the Companys federal net operating loss carryforwards of $71.6 million will expire at various dates beginning in 2026, if not utilized. Federal research and development tax credits of $1.9 million will begin to expire in 2026. In addition, net operating loss carryforwards for state income tax purposes of $49.2 million will begin to expire in 2016 and state research and development tax credits of $1.7 million do not expire.
Utilization of the net operating loss carryforwards may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of the net operating loss before utilization.
The Company had unrecognized tax benefit of $0.5 million and $0.7 million as of and December 31, 2012 and 2013, respectively, all of which is offset by a full valuation allowance. These unrecognized tax benefits, if recognized, would not affect the effective tax rate. There was no interest or penalties accrued at the adoption date and at December 31, 2013.
F-29
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
13. | Income Taxes (Continued) |
A reconciliation of the change in the unrecognized tax benefit during the year is as follows (in thousands):
December 31, | ||||||||
2012 | 2013 | |||||||
Beginning of year |
$ | 442 | $ | 505 | ||||
Additions for tax positions related to: |
||||||||
Current year |
63 | 210 | ||||||
Prior years |
| | ||||||
|
|
|
|
|||||
End of year |
$ | 505 | $ | 715 | ||||
|
|
|
|
The Company does not expect a significant change to its unrecognized tax benefits over the next twelve months. The unrecognized tax benefits may increase or change during the next twelve months for items that arise in the ordinary course of business.
The Company files income tax returns in the U.S. federal and various state jurisdictions. Tax years beginning in 2003 through 2013, remain open to examination by the major taxing authorities to which the Company is subject to. The Companys policy is to record interest related to uncertain tax positions as interest and any penalties as other expense in its statement of operations. As of the date of adoption of ASC Topic No. 740 and through December 31, 2013, the Company did not have any interest or penalties associated with unrecognized tax benefits.
14. | Related Parties |
In April 2013, options held by the President and Chief Executive Officer, Ms. Earnhardt, a related party, were modified to permit exercise with promissory notes of up to $0.5 million. The promissory notes were issued in May 2013 for $0.5 million. Under the terms of the notes, one quarter of the principal and interest will be forgiven on each anniversary date of the note as long as Ms. Earnhardt remains the Companys Chief Executive Officer. In addition, the entire principal and interest of the notes will be forgiven on the earlier of an initial public offering or the closing of a liquidation event (as defined in the articles of incorporation), where the proceeds to the Company or its stockholders is greater than $200.0 million. The Company has the option to accelerate the maturity date if, at the Companys reasonable discretion, such acceleration may be necessary due to any applicable law, rule or regulation, including, without limitation, the Sarbanes-Oxley Act of 2002. The promissory notes are secured by the shares received upon exercise with the promissory notes.
In January 2007, the Company loaned amounts to its Chief Operation Officer, Mr. Kaufman, a related party, in connection with the commencement of his employment with the Company. The loans were evidenced by promissory notes for $0.3 million. This note bore interest at the applicable federal rate and interest was determined in accordance with Section 7872 of the Internal Revenue Code and has been reflected as income to Mr. Kaufman.
Pursuant to the terms of the promissory note, provided Mr. Kaufman remained a continuous, full-time employee of the Company, repayment of the notes was to begin after the third year of employment when 50% of his annual bonus would have been applied to the loan balance until the loan was paid in full. The note matures and becomes immediately due and payable within 30 days following the date on which Mr. Kaufman ceases, voluntarily or involuntarily, to be employed by the Company. No payment was received in the year ended December 31, 2011, since the Company did not pay an annual bonus in that year. In February 2011, the Company agreed to forgive Mr. Kaufmans loan over three years, provided Mr. Kaufman remained employed by the Company, with $0.1 million forgiven in January 2012, $0.1 million in January 2013 and $0.1 million in January 2014. The note is secured by any stock and options Mr. Kaufman holds in the Company. The note receivable balance outstanding at December 31, 2012 and 2013 was $0.2 million and $0.1 million, respectively. Mr. Kaufmans note was fully forgiven as of March 31, 2014.
F-30
INTERSECT ENT, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
14. | Related Parties (Continued) |
In March 2009, the Company purchased three sinus irrigation tool patents from Medilyfe Inc., a Canadian corporation. A member of the Companys Medical Advisory Board holds an executive-level position with Medilyfe Inc. The agreement calls for a $40,000 milestone payment upon execution of the agreement and an additional $35,000 upon the first anniversary of the agreements effective date in addition to the issuance of a warrant to purchase 47,350 shares of the Companys common stock at $1.00 per share.
The warrant vested fully upon grant and will expire April 7, 2019. The value of the warrant was $30,000 determined using the Black-Scholes model. The cost of the patents is included in research and development expense, since substantial research and development efforts will be required prior to commercialization and there is no alternative future use of the technology rights. A $35,000 cash payment was made in 2012, since one additional patent claim was allowed by the U.S. Patent Office. The Company recorded $35,000 in research and development expense related to this agreement for the year ended December 31, 2012. An additional $80,000 cash payment will be due upon the first achievement of net sales of products incorporating this technology exceeding $1.0 million in a given calendar year. Such additional payment was not owed as of December 31, 2013, since this technology is unrelated to the Companys current activities.
15. | Subsequent Events |
For the audited financial statements, management has reviewed and evaluated material subsequent events from the balance sheet date of December 31, 2013, through the financial statements issue date of May 1, 2014. No subsequent events have been identified for disclosure.
16. | Subsequent Events (unaudited) |
For the interim condensed financial statements as of March 31, 2014, and for the three months then ended, the Company has evaluated events through June 23, 2014, which is the date the financial statements were available to be issued. No subsequent events have been identified for disclosure other than as noted below. The promissory notes of $0.5 million issued to the Companys Chief Executive Officer in May 2013 for the exercise of stock options were fully forgiven by the Company in June 2014. In connection with the forgiveness of the note in June 2014, the unamortized modification cost relating to the vested options of $0.2 million was immediately recognized. The remaining unamortized modification cost of $0.1 million will be amortized over the remaining vesting period.
17. | Subsequent Events |
On July 11, 2014, the Board of Directors and stockholders approved, and the Company filed, an amended and restated certificate of incorporation effecting a 1-for-4 reverse stock split of common stock and all convertible preferred stock. The par value of the common and convertible preferred stock was not adjusted as a result of the reverse stock split. All issued and outstanding common stock, convertible preferred stock, warrants for preferred stock, and per share amounts contained in the financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.
F-31
intersect®
ENT
ADVANCING CLINICALLY PROVEN
THERAPEUTIC SOLUTIONS
FOR PATIENTS WITH CHRONIC SINUSITIS
5,000,000 Shares
Common Stock
PROSPECTUS
J.P. Morgan | Piper Jaffray | |||
Leerink Partners | Wedbush PacGrow Life Sciences |
, 2014
PART II
Information Not Required in Prospectus
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than the underwriting discounts and commissions, payable by the registrant in connection with the sale of common stock being registered. All amounts are estimates except for the Securities and Exchange Commission, or SEC, registration fee, the FINRA filing fee and The Nasdaq Global Market listing fee.
Item |
Amount to be paid |
|||
SEC registration fee |
9,628 | |||
FINRA filing fee |
12,500 | |||
The Nasdaq Global Market Listing fee |
125,000 | |||
Printing and engraving expenses |
250,000 | |||
Legal fees and expenses |
1,300,000 | |||
Accounting fees and expenses |
1,200,000 | |||
Transfer Agent fees and expenses |
2,500 | |||
Miscellaneous expenses |
100,372 | |||
|
|
|||
Total |
$ | 3,000,000 | ||
|
|
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporations board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act of 1933, as amended, or the Securities Act. Our amended and restated certificate of incorporation to be in effect upon the completion of this offering provides for indemnification of our directors, officers, employees and other agents to the maximum extent permitted the Delaware General Corporation Law, and our amended and restated bylaws to be in effect upon the completion of this offering provide for indemnification of our directors, officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law. In addition, we have entered into indemnification agreements with our directors, officers and some employees containing provisions that may be in some respects broader than the specific indemnification provisions contained in the Delaware General Corporation Law. The indemnification agreements may require us, among other things, to indemnify our directors against certain liabilities that may arise by reason of their status or service as directors, officers and employees and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified.
We maintain a directors and officers insurance policy.
The underwriting agreement to be entered into in connection with this offering will provide that the underwriters will indemnify us, our directors and certain of our officers against liabilities resulting from information furnished by or on behalf of the underwriters specifically for use in the Registration Statement.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Please read Item 17. Undertakings for more information on the SECs position regarding such indemnification provisions.
II-1
Item 15. Recent Sales of Unregistered Securities.
Since January 1, 2011, we have made sales of the following unregistered securities (does not give retroactive effect to the 1-for-4 reverse stock split that occurred on July 11, 2014):
| We granted stock options under our 2003 Equity Incentive Plan and 2013 Equity Incentive Plan to purchase an aggregate of 10,932,448 shares of our common stock at a weighted average exercise price of $0.67 to a total of 186 employees, directors and consultants. Of these, stock options to purchase an aggregate of 558,295 shares have been cancelled without being exercised, 2,356,029 have been exercised and 8,018,124 remain outstanding. |
| We issued and sold an aggregate of 4,048,373 shares of our common stock to employees, directors and consultants at a weighted average exercise price of $0.29 upon the exercise of stock options granted under our 2003 Equity Incentive Plan and 2013 Equity Incentive Plan. Of these, none have been repurchased and all shares remain outstanding. |
| In August 2011, we issued an aggregate of 10,622,800 shares of our Series C convertible preferred stock to 17 accredited investors at a per share price of $1.46, for aggregate consideration of approximately $15,509,288. |
| In February 2013, we issued an aggregate of 10,626,550 shares of our Series D convertible preferred stock to 8 accredited investors at a per share price of $1.72, for aggregate consideration of approximately $18,309,546. |
| In March 2013, we issued an aggregate of 1,480,562 shares of our Series D convertible preferred stock to 27 accredited investors at a per share price of $1.72, for aggregate consideration of approximately $2,551,008. |
| In October 2013, we issued an aggregate of 5,476,038 shares of our Series D convertible preferred stock to 18 accredited investors at a per share price of $1.72, for aggregate consideration of approximately $9,435,214. |
| In March 2014, we issued an aggregate of 9,725 shares of our Series A convertible preferred stock to 1 accredited investor at a per share price of $0.92 upon the net exercise of preferred stock warrants, for aggregate consideration of approximately $8,947. |
Unless otherwise stated, the sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving any public offering or pursuant to benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were placed upon the stock certificates issued in these transactions.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits. See the Exhibit Index attached to this registration statement, which is incorporated by reference herein.
(b) Financial Statement Schedules. Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the Financial Statements or notes thereto.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise,
II-2
the Registration has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) | For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
(2) | For purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 2 to the Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in Menlo Park, California, on July 11, 2014.
Intersect ENT, Inc. | ||||
Date: July 11, 2014 | By: | /S/ LISA D. EARNHARDT | ||
Lisa D. Earnhardt President and Chief Executive Officer | ||||
Date: July 11, 2014 | By: | /S/ JERYL L. HILLEMAN | ||
Jeryl L. Hilleman Chief Financial Officer |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name |
Title |
Date | ||
/S/ LISA D. EARNHARDT Lisa D. Earnhardt |
President and Chief Executive Officer (Principal Executive Officer) and Director |
July 11, 2014 | ||
/S/ JERYL L. HILLEMAN Jeryl L. Hilleman |
Chief Financial Officer (Principal Financial and Accounting Officer) |
July 11, 2014 | ||
* Rick D. Anderson |
Director | July 11, 2014 | ||
* Casper L. de Clercq |
Director | July 11, 2014 | ||
* Mark Fletcher |
Director | July 11, 2014 | ||
/S/ CYNTHIA L. LUCCHESE Cynthia L. Lucchese |
Director | July 11, 2014 | ||
* Dana G. Mead, Jr. |
Director | July 11, 2014 | ||
* Frederic H. Moll |
Director | July 11, 2014 | ||
* Casey M. Tansey |
Director | July 11, 2014 |
* Pursuant to Power of Attorney | ||
By: | /S/ JERYL L. HILLEMAN | |
Jeryl L. Hilleman Attorney-in-Fact |
II-4
EXHIBIT INDEX
Exhibit |
Description | |
1.1 | Form of Underwriting Agreement. | |
3.1 | Amended and Restated Certificate of Incorporation as currently in effect. | |
3.2 | Form of Amended and Restated Certificate of Incorporation to become effective upon closing of this offering. | |
3.3 | Bylaws, as currently in effect and Certificate of Amendment of Bylaws, dated September 5, 2013. | |
3.4 | Form of Amended and Restated Bylaws to become effective upon closing of this offering. | |
4.1 | Form of Common Stock Certificate of the Registrant. | |
5.1 | Opinion of Cooley LLP. | |
10.1 | Form of Indemnity Agreement between the Registrant and its directors and officers. | |
10.2 | 2003 Equity Incentive Plan, as amended, and Form of Stock Option Grant Notice, Option Agreement and Form of Notice of Exercise. | |
10.3 | 2013 Equity Incentive Plan and Form of Stock Option Grant Notice, Option Agreement and Form of Notice of Exercise. | |
10.4 | 2014 Equity Incentive Plan and Form of Stock Option Grant Notice, Option Agreement and Form of Notice of Exercise. | |
10.5 | 2014 Employee Stock Purchase Plan. | |
10.6 | Third Amended and Restated Investor Rights Agreement, dated as of February 15, 2013, by and among the registrant and certain of its stockholders. | |
10.7 | Lease by and between the registrant and Menlo Business Park, LLC, dated as of March 2, 2012. | |
10.8 | Offer Letter by and between the registrant and Lisa Earnhardt, dated as of January 28, 2008, as amended. | |
10.9 | Offer Letter by and between the registrant and Robert Binney, dated as of June 23, 2011, as amended. | |
10.10 | Offer Letter by and between the registrant and Jeryl L. Hilleman, dated as of May 15, 2014. | |
10.11 | Offer Letter by and between the registrant and Richard Kaufman, dated as of December 6, 2006, as amended. | |
10.12 | Offer Letter by and between the registrant and James Stambaugh, dated as of September 15, 2006, as amended. | |
10.13 | Offer Letter by and between the registrant and Susan Stimson, dated as of January 30, 2007, as amended. | |
10.14 | Offer Letter by and between the registrant and Amy Conuel Wolbeck, dated as of November 24, 2008, as amended. | |
10.15 | Loan and Security Agreement by and between the registrant and Silicon Valley Bank, dated as of August 30, 2013. | |
10.16# | Supply Agreement by and between the registrant and HOVIONE Inter Ltd, dated as of April 14, 2014. | |
10.17# | Supply Agreement by and between the registrant and AIM Plastics Inc., dated as of Supply January 28, 2014. |
Exhibit |
Description | |
10.18# | Supply Agreement by and between the registrant and Stephen Gould Corporation, dated as of November 14, 2013. | |
10.19# | Analytical Testing Partnership Program 2014-2015 by and between the registrant and Exova, dated as of December 6, 2013. | |
10.20# | Master Services Agreement by and between the registrant and Polymer Solutions Corporation, dated as of April 9, 2014. | |
23.1 | Consent of Independent Registered Public Accounting Firm. | |
23.2 | Consent of Cooley LLP. Reference is made to Exhibit 5.1. | |
24.1 | Power of Attorney (see signature page hereto). |
| Previously filed. |
# | Confidential Treatment Requested. |
Exhibit 3.1
INTERSECT ENT, INC.
RESTATED CERTIFICATE OF INCORPORATION
Intersect ENT, Inc., a corporation organized and existing under and by virtue of the Delaware General Corporation Law, hereby certifies as follows:
The name of this corporation is Intersect ENT, Inc., and the original Certificate of Incorporation of the corporation was filed with the Secretary of State of the State of Delaware on October 6, 2003. The original name of this corporation was Sinexus, Inc.
The Restated Certificate of Incorporation in the form of Exhibit A attached hereto has been duly adopted in accordance with the provisions of Sections 242, 245 and 228 of the General Corporation Law of the State of Delaware (Delaware Corporate Law).
The text of the Certificate of Incorporation is hereby restated and further amended to read in its entirety as set forth in Exhibit A attached hereto.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been signed this 11th day of July, 2014.
Intersect ENT, Inc. | ||
By: | /s/ Lisa D. Earnhardt | |
Lisa D. Earnhardt | ||
President and Chief Executive Officer |
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EXHIBIT A
RESTATED CERTIFICATE OF INCORPORATION
OF
INTERSECT ENT, INC.
FIRST
The name of this corporation is Intersect ENT, Inc. (the Company).
SECOND
The address of the Companys registered office in the State of Delaware is 160 Greentree Drive, Suite 101, City of Dover, County of Kent. The name of its registered agent at such address is National Registered Agents, Inc.
THIRD
The purpose of this corporation is to engage in the lawful act or activity for which a corporation may be organized under Delaware Corporate Law.
FOURTH
A. The aggregate number of shares that the Company shall have authority to issue is 165,907,322, divided into 150,000,000 shares of Common Stock, par value of $0.001 per share (the Common Stock), and 15,907,322 shares of Preferred Stock, par value of $0.001 per share (the Preferred Stock). The Preferred Stock may be issued in one or more series. The first series shall consist of 2,796,259 shares and is designated the Series A Preferred. The second series shall consist of 3,249,662 shares and is designated the Series B Preferred. The third series shall consist of 5,311,401 shares and is designated Series C Preferred. The fourth series shall consist of 4,550,000 shares and is designated Series D Preferred. The Series A Preferred, the Series B Preferred, the Series C Preferred and the Series D Preferred together shall be the Series Preferred.
B. Effective upon the date of filing (the Filing Date) of this Amended and Restated Certificate of Incorporation (this Restated Certificate) with the Secretary of State of the State of Delaware:
1. Each four (4) shares of Common Stock issued and outstanding shall, automatically and without any action on the part of the respective holders thereof and whether or not the certificates representing such shares are surrendered to the Company or its transfer agent, be combined and converted into one (1) share of Common Stock of the Company. All shares of Common Stock (including fractions thereof) held by a holder thereof shall be aggregated into the maximum number of resulting whole shares. For any remaining fraction of a share, the Company shall, in lieu of issuing a fractional share, pay cash to such holder equal to the product of such fraction multiplied by the fair market value of one share of Common Stock (after giving effect to the foregoing reverse stock split) as determined by the Companys Board of Directors (the Board).
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2. Each four (4) shares of Series A Preferred issued and outstanding shall, automatically and without any action on the part of the respective holders thereof and whether or not the certificates representing such shares are surrendered to the Company or its transfer agent, be combined and converted into one (1) share of Series A Preferred of the Company. All shares of Series A Preferred (including fractions thereof) held by a holder thereof shall be aggregated into the maximum number of resulting whole shares. For any remaining fraction of a share, the Company shall, in lieu of issuing a fractional share, pay cash to such holder equal to the product of such fraction multiplied by the fair market value of one share of Series A Preferred (after giving effect to the foregoing reverse stock split) as determined by the Board.
3. Each four (4) shares of Series B Preferred issued and outstanding shall, automatically and without any action on the part of the respective holders thereof and whether or not the certificates representing such shares are surrendered to the Company or its transfer agent, be combined and converted into one (1) share of Series B Preferred of the Company. All shares of Series B Preferred (including fractions thereof) held by a holder thereof shall be aggregated into the maximum number of resulting whole shares. For any remaining fraction of a share, the Company shall, in lieu of issuing a fractional share, pay cash to such holder equal to the product of such fraction multiplied by the fair market value of one share of Series B Preferred (after giving effect to the foregoing reverse stock split) as determined by the Board.
4. Each four (4) shares of Series C Preferred issued and outstanding shall, automatically and without any action on the part of the respective holders thereof and whether or not the certificates representing such shares are surrendered to the Company or its transfer agent, be combined and converted into one (1) share of Series C Preferred of the Company. All shares of Series C Preferred (including fractions thereof) held by a holder thereof shall be aggregated into the maximum number of resulting whole shares. For any remaining fraction of a share, the Company shall, in lieu of issuing a fractional share, pay cash to such holder equal to the product of such fraction multiplied by the fair market value of one share of Series C Preferred (after giving effect to the foregoing reverse stock split) as determined by the Board.
5. Each four (4) shares of Series D Preferred issued and outstanding shall, automatically and without any action on the part of the respective holders thereof and whether or not the certificates representing such shares are surrendered to the Company or its transfer agent, be combined and converted into one (1) share of Series D Preferred of the Company. All shares of Series D Preferred (including fractions thereof) held by a holder thereof shall be aggregated into the maximum number of resulting whole shares. For any remaining fraction of a share, the Company shall, in lieu of issuing a fractional share, pay cash to such holder equal to the product of such fraction multiplied by the fair market value of one share of Series D Preferred (after giving effect to the foregoing reverse stock split) as determined by the Board.
The spits made pursuant to subsections 1-5 above are referred to herein as the Reverse Stock Split. Unless otherwise specifically noted in this Amended and Restated Certificate of Incorporation, all share numbers and prices per share have been adjusted to reflect the Reverse Stock Split.
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C. The terms and provisions of the Series Preferred are as follows:
1. Dividends.
(a) Treatment of Series Preferred. The Series Preferred shall be entitled to receive dividends of $0.2944 per share of Series A Preferred (as adjusted for stock splits, combinations, reorganizations and the like, other than the Reverse Stock Split) per annum, $0.4928 per share of Series B Preferred (as adjusted for stock splits, combinations, reorganizations and the like, other than the Reverse Stock Split) per annum, $0.4672 per share of Series C Preferred (as adjusted for stock splits, combinations, reorganizations and the like, other than the Reverse Stock Split) per annum, and $0.5512 per share of Series D Preferred (as adjusted for stock splits, combinations, reorganizations and the like) per annum out of any assets at the time legally available therefore, when, as and if declared by the Companys Board of Directors (the Board of Directors), prior and in preference to the Common Stock. No dividends other than those payable solely in Common Stock shall be paid on any Common Stock, Series A Preferred or Series B Preferred unless and until the aforementioned dividends are paid on each outstanding share of Series C Preferred and Series D Preferred (together, the Senior Preferred). After payment in full of the aforementioned dividend on each outstanding share of Senior Preferred, no dividends other than those payable solely in Common Stock shall be paid on any Common Stock unless and until (i) the aforementioned dividends are paid on each outstanding share of Series A Preferred and Series B Preferred, and (ii) a dividend is paid with respect to all outstanding shares of Series Preferred in an amount equal to or greater than the aggregate amount of dividends which would be payable to a holder of Series Preferred if, immediately prior to such dividend payment on Common Stock, such share of Series Preferred had been converted into Common Stock. The Board of Directors is under no obligation to declare dividends, no rights shall accrue to the holders of Series Preferred if dividends are not declared, and any dividends declared shall be noncumulative. The Company shall make no Distribution (as defined below) to the holders of shares of Common Stock except in accordance with this Section 1(a).
(b) Distribution. Distribution means the transfer of cash or property without consideration or for consideration that is less than fair market value, whether by way of dividend or otherwise, or the purchase of shares of the Company (other than in connection with the repurchase of shares of Common Stock issued to or held by employees, consultants, officers or directors at a price not greater than the amount paid by such persons for such shares upon termination of their employment or services pursuant to agreements providing for the right of said repurchase) for cash or property.
(c) Consent to Certain Repurchases. A Distribution to the Companys stockholders solely in connection with the repurchase of shares of Common Stock issued to or held by employees, consultants, officers or directors at a price not greater than the amount paid by such persons for such shares upon termination of their employment or services pursuant to agreements providing for the right of said repurchase may be made without regard to the preferential dividend arrears amount or any preferential rights amount (each as determined under applicable law).
2. Liquidation Rights.
(a) Liquidation Preference.
(i) In the event of any Liquidation (as defined below), either voluntary or involuntary, each share of Senior Preferred shall be converted into a right to receive, out of the assets of the Company, the Senior Liquidation Preference Amount, before any payment shall be made or any assets distributed to the holders of Common Stock, Series A Preferred or Series B Preferred (the
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Senior Liquidation Preference). If, upon the Liquidation, the assets to be distributed among the holders of the Senior Preferred are insufficient to permit the payment to such holders of the full Senior Liquidation Preference for their shares, then the entire assets of the Company legally available for distribution shall be distributed with equal priority and pro rata among the holders of the Senior Preferred in proportion to the full aforesaid preferential amount to which each such holder is entitled. Senior Liquidation Preference Amount shall mean, (i) with respect to a share of Series C Preferred, $5.84 per share (as adjusted for stock splits, combinations, reorganizations and the like, other than the Reverse Stock Split) plus declared or accumulated but unpaid dividends on such share and (ii) with respect to a share of Series D Preferred, $6.892 per share (as adjusted for stock splits, combinations, reorganizations and the like, other than the Reverse Stock Split) plus declared or accumulated but unpaid dividends on such share.
(ii) After payment in full of the Senior Liquidation Preference, each share of Series A Preferred and Series B Preferred shall be converted into a right to receive, out of the assets of the Company, the Junior Preferred Liquidation Preference, before any payment shall be made or any assets distributed to the holders of Common Stock. Junior Preferred Liquidation Preference shall mean, with respect to a share of Series A Preferred, $3.68 per share (as adjusted for stock splits, combinations, reorganizations and the like, other than the Reverse Stock Split) plus declared or accumulated but unpaid dividends on such share and, with respect to a share of Series B Preferred, $6.16 per share (as adjusted for stock splits, combinations, reorganizations and the like, other than the Reverse Stock Split) plus declared or accumulated but unpaid dividends on such share. If, upon the Liquidation, the assets to be distributed among the holders of the Series A Preferred and Series B Preferred are insufficient to permit the payment to such holders of the full Junior Preferred Liquidation Preference for their shares, then the entire assets of the Company legally available for distribution (after payment in full of the Senior Liquidation Preference) shall be distributed with equal priority and pro rata among the holders of the Series A Preferred and Series B Preferred in proportion to the full aforesaid preferential amount to which each such holder is entitled.
(b) Remaining Assets. After the payment to the holders of Series Preferred of the full preferential amount specified above, any remaining assets of the Company shall be distributed with equal priority and pro rata among the holders of the Series Preferred and the Common Stock, treating in such circumstances each share of Series Preferred as if it had been converted into Common Stock at the then-applicable conversion rate.
(c) Liquidation. A Liquidation shall be deemed to be occasioned by, or to include, (i) the liquidation, dissolution or winding up of the Company; (ii) the acquisition of the Company by another entity by means of any transaction or series of related transactions (including, without limitation, any stock acquisition, reorganization, merger or consolidation but excluding any sale of stock for capital raising purposes) other than by means of a transaction or series of transactions in which the holders of the voting securities of the Company outstanding immediately prior to such transaction continue to retain (either by such voting securities remaining outstanding or by such voting securities being converted into voting securities of the surviving entity), as a result of shares in the Company held by such holders prior to such transaction, at least 50% of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such transaction or series of transactions, and (iii) a sale, exclusive license or other conveyance of all or substantially all of the assets of the Company, by means of a transaction or series of transactions.
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(e) Shares not Treated as Both Series Preferred and Common Stock in any Distribution. Solely to the extent any shares of Series Preferred are converted into shares of Common Stock, such shares of Series Preferred shall not be entitled to be converted into shares of Common Stock in order to participate in any distribution or series of related distributions, as shares of Common Stock, without first foregoing participation in the distribution or series of related distributions as shares of Series Preferred.
(f) Determination of Value if Proceeds Other than Cash. In any Liquidation, if the proceeds received by the Company or its stockholders are other than cash, its value will be deemed its fair market value. Any securities shall be valued as follows:
(i) Securities not subject to investment letter or other similar restrictions on free marketability covered by (ii) below:
(A) If traded on a securities exchange, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the 20 trading-day period ending three trading days prior to the closing of the Liquidation;
(B) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the 20 trading-day period ending three trading days prior to the closing of the Liquidation; and
(C) If there is no active public market, the value shall be the fair market value thereof, as determined by the Board of Directors.
(ii) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholders status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (i) (A), (B) or (C) to reflect the approximate fair market value thereof, as determined by the Board of Directors.
3. Conversion. The Series Preferred shall have conversion rights as follows:
(a) Right to Convert. Each share of Series Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Company or any transfer agent for the Series Preferred. Each share of Series A Preferred shall be convertible into that number of fully-paid and nonassessable shares of Common Stock that is equal to $3.68 (as adjusted for stock splits, combinations, reorganizations and the like, other than the Reverse Stock Split) divided by the applicable Conversion Price (as set forth below). Each share of Series B Preferred shall be convertible into that number of fully-paid and nonassessable shares of Common Stock that is equal to $6.16 (as adjusted for stock splits, combinations, reorganizations and the like, other than the Reverse Stock Split) divided by the applicable Conversion Price. Each share of Series C Preferred shall be convertible into that number of fully-paid and nonassessable shares of Common Stock that is equal to $5.84 (as adjusted for stock splits, combinations, reorganizations and the like, other than the Reverse Stock Split) divided by the applicable Conversion Price. Each share of Series D Preferred shall be convertible into that number of fully-paid and nonassessable shares of Common Stock that is equal to $6.892 (as adjusted for stock splits, combinations, reorganizations and the like, other than the Reverse Stock Split) divided by the applicable Conversion Price. The Conversion Price applicable to the Series A Preferred shall initially be $3.68, the Conversion Price applicable
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to the Series B Preferred shall initially be $6.16, the Conversion Price applicable to the Series C Preferred shall initially be $5.84 and the Conversion Price applicable to the Series D Preferred shall initially be $6.892, each shall be subject to adjustment as provided herein.
(b) Automatic Conversion. Each share of Series Preferred shall automatically be converted into shares of Common Stock at the then effective Conversion Price for such share immediately upon (1) the affirmative vote of the holders of at least 70% of the Series Preferred, voting together as a single class and the affirmative vote of the holders of at least 52% of the Series D Preferred, voting as a separate class, or (2) the consummation of a firmly underwritten public offering pursuant to an effective registration statement on Form S-1 (or any successor form) under the Securities Act of 1933, as amended (the Securities Act), at a per share price to the public reflecting a pre-money valuation of the Company of at least $200,000,000 and with net proceeds to the Company of at least $40,000,000 (after deducting underwriting commissions and offering expenses) (a Qualified Public Offering).
(c) Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of Series Preferred. In lieu of any fractional shares to which the holder would otherwise be entitled, the Company shall pay the fair market value cash equivalent of such fractional share as determined by the Board of Directors. For such purpose, all shares of Series Preferred held by each holder shall be aggregated, and any resulting fractional share of Common Stock shall be paid in cash. Before any holder of Series Preferred shall be entitled to convert the same into full shares of Common Stock, and to receive certificate(s) therefor, it shall surrender the Series Preferred certificate or certificates, duly endorsed, at the office of the Company or of any transfer agent for the Series Preferred, and shall give written notice to the Company at such office that such holder elects to convert such shares; provided, however, that in the event of an automatic conversion pursuant to paragraph 3(b) above, the outstanding shares of Series Preferred shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Company or its transfer agent; provided further, however, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless either the certificates evidencing such shares of Series Preferred are delivered to the Company or its transfer agent as provided above, or the holder notifies the Company or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such certificates.
The Company shall, as soon as practicable after delivery of the Series Preferred certificate(s), issue and deliver at such office to such holder of Series Preferred, a certificate or certificates for the number of shares of Common Stock to which he, she or it shall be entitled and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock, plus any declared or accumulated but unpaid dividends on the converted Series Preferred. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series Preferred to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date; provided, however, that if the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act, the conversion may, at the option of any holder tendering Series Preferred for conversion, be conditioned upon the closing of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of the Series Preferred shall not be deemed to have converted such Series Preferred until immediately prior to the closing of the sale of such securities.
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(d) Adjustments for Subdivisions or Combinations of Common. After the date of the filing of this Restated Certificate of Incorporation, if the outstanding shares of Common Stock shall be subdivided (by stock split, stock dividend or otherwise), into a greater number of shares of Common Stock, the Conversion Price in effect immediately prior to such subdivision shall, concurrently with the effectiveness of such subdivision, be proportionately decreased. After the date of the filing of this Restated Certificate of Incorporation, if the outstanding shares of Common Stock shall be combined (by reclassification or otherwise) into a lesser number of shares of Common Stock, other than the Reverse Stock Split, the Conversion Price in effect immediately prior to such combination shall, concurrently with the effectiveness of such combination, be proportionately increased.
(e) Adjustments for Reclassification, Exchange and Substitution. If the Common Stock issuable upon conversion of the Series Preferred shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for above), concurrently with the effectiveness of such reorganization or reclassification, the Series Preferred shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Series Preferred immediately before that change.
(f) Adjustments for Reorganization, Merger, Consolidation or Sale of Assets. If the Common Stock issuable upon conversion of the Series Preferred shall be changed into the same or a different number of shares of any other class or classes of stock, whether by a merger or consolidation of this Company with or into another entity, or the sale of all or substantially all of this Companys properties and assets to any other person or entity (other than as provided for elsewhere in this Section 3 or a transaction subject to Section 2 above) then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the holders of Series Preferred shall thereafter be entitled to receive upon conversion of the then outstanding Series Preferred, the number of shares of stock or other securities or property of the Company, or of the successor entity resulting from such merger or consolidation or sale, to which a holder of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation or sale. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the holders of the then outstanding Series Preferred after the reorganization, merger, consolidation or sale to the end that the provisions of this Section 3 (including adjustments of the applicable Conversion Price then in effect and the number of shares purchasable upon conversion of the Series Preferred) shall be applicable after that event as nearly equivalent as may be practicable.
(g) Adjustments for Dilutive Issuances.
(i) After the date of the filing of this Restated Certificate of Incorporation, if the Company shall issue or sell any shares of Common Stock (as actually issued or, pursuant to paragraph (iii) below, deemed to be issued) for a consideration per share less than the applicable Conversion Price of a series of Series Preferred, in effect immediately prior to such issue or sale, then immediately upon such issue or sale the Conversion Price of such series of Series
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Preferred shall be reduced to a price (calculated to the nearest one-thousandth of a cent) determined by multiplying such prior Conversion Price by a fraction, the numerator of which shall be the number of shares of Calculated Securities (defined below) outstanding immediately prior to such issue or sale plus the number of shares of Common Stock that the aggregate consideration received by the Company for the total number of shares of Common Stock so issued or sold would purchase at such prior Conversion Price, and the denominator of which shall be the number of shares of Calculated Securities outstanding immediately prior to such issue or sale plus the number of shares of Common Stock so issued or sold. Calculated Securities means (A) all shares of Common Stock actually outstanding and (B) all Convertible Securities (as defined below) on an as-exercised, as converted to Common Stock basis. Convertible Securities shall mean any actually outstanding bonds, debentures, notes or other evidences of indebtedness, options, warrants, shares (including, but not limited to, shares of Series A Preferred, Series B Preferred, Series C Preferred or Series D Preferred) or any other securities convertible into, exercisable for, or exchangeable for Common Stock.
(ii) For the purposes of paragraph (i) above, none of the following issuances shall be considered the issuance or sale of Common Stock (collectively known as Excluded Securities):
(A) The issuance of any Common Stock or Convertible Securities (and the Common Stock issued upon conversion and/or exercise thereof) as a result of a stock split or as a dividend on the Companys capital stock.
(B) The issuance of up to 3,774,005 shares (including against such number any shares issued prior to the filing of this Restated Certificate of Incorporation) of Common Stock (and options to purchase such shares, including exercised, outstanding and available options and stock purchase rights), or such larger number as is approved by the Board of Directors, including at least three of the Preferred Directors (as defined below), to employees, consultants or directors pursuant to any arrangement or plan approved by the Board of Directors.
(C) The issuance of shares of Common Stock or Convertible Securities (and the Common Stock issued upon conversion and/or exercise thereof) to financial institutions in connection with equipment financing arrangements approved by the Board of Directors, including at least three of the Preferred Directors (as defined below).
(D) The issuance of shares of Common Stock or Convertible Securities (and the Common Stock issued upon conversion and/or exercise thereof) pursuant to a transaction primarily for the purpose of licensing technology that is approved by the Board of Directors including all Preferred Directors.
(E) The issuance of Common Stock or Convertible Securities pursuant to the acquisition of: (i) another entity by the Company by merger, purchase of substantially all of the assets or shares, or other reorganization whereby such other entity or its stockholders own not less than a majority of the voting power of the surviving or successor entity, or (ii) technology or other intellectual property by outright purchase or exclusive license, in each case as approved by the Board of Directors, including at least three Preferred Directors (as defined below).
(F) The issuance of Common Stock issued or issuable upon conversion of the Series Preferred or as dividends or distributions on the Series Preferred.
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(iii) For the purposes of paragraph (i) above, the following subparagraphs (A) to (C), inclusive, shall also be applicable:
(A) In case at any time the Company shall grant any rights to subscribe for, or any rights or options to purchase, Convertible Securities, whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (x) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of such rights or options, plus, in the case of any such rights or options which relate to such Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the Conversion Price in effect immediately prior to the time of the granting of such rights or options, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to be outstanding and to have been issued for such price per share.
(B) In case at any time the Company shall issue or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (x) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Conversion Price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, provided that if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the conversion price have been or are to be made pursuant to other provisions of this paragraph (iii), no further adjustment of the conversion price shall be made by reason of such issue or sale.
(C) In case at any time any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock, or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined by the Board of Directors. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued in connection with any merger of another corporation into the Company, the amount of consideration therefor shall be deemed to be the fair value of the assets of such merged corporation as determined by the Board of Directors after deducting therefrom all cash and other consideration (if any) paid by the Company in connection with such merger.
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(h) No Impairment. The Company will not, through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action taken, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in carrying out of all the provision of this Section 3 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series Preferred against impairment.
(i) Certificate of Adjustments. Upon the occurrence of each adjustment of the Conversion Price pursuant to this Section 3, the Company at its expense shall promptly compute such adjustment and furnish to each holder of Series Preferred a certificate setting forth such adjustment and showing in detail the facts upon which such adjustment is based. The Company shall, upon the written request at any time of any holder of Series Preferred, furnish to such holder a like certificate setting forth (i) any and all adjustments made to the Series Preferred since the date of filing of this Restated Certificate of Incorporation, (ii) the Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of Series Preferred.
(j) Notices of Record Date. In the event that the Company shall propose at any time (i) to declare any dividend; (ii) to effect any reclassification or recapitalization; or (iii) to effect a Liquidation; then, in connection with each such event, the Company shall send to the holders of the Series Preferred at least 20 days prior written notice of the date on which a record shall be taken for such dividend, Distribution or subscription rights (and specifying the date on which the holders of stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in clauses (iii) and (iv) above.
(k) Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series Preferred, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding shares of the Series Preferred; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series Preferred, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose.
4. Voting.
(a) Except as otherwise expressly provided herein or as required by law, the holders of the Series Preferred and Common Stock shall vote together and not as separate classes.
(b) Series Preferred. Each holder of shares of Series Preferred shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Series Preferred held by such holder could then be converted. The holders of the Series Preferred shall be entitled to notice of any stockholders meeting in accordance with the bylaws of the Company. Fractional votes shall not, however, be permitted, and any fractional voting rights resulting from the above formula (after aggregating all shares of Common Stock into which shares of Series Preferred held by each holder could be converted), shall be disregarded.
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(c) Common Stock. The holder of each share of Common Stock shall have the right to one vote for each such share and shall be entitled to notice of any stockholders meeting in accordance with the bylaws of this Company, and shall be entitled to vote upon such matters and in such manner as may be provided by law. The number of authorized shares of Common 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 stock of this Company entitled to vote, irrespective of the provisions of Section 242(b)(2) of the Delaware General Corporate Law.
(d) Election of Directors.
(i) The holders of the Series A Preferred, voting together as a separate class, shall be entitled to elect two members of the Board of Directors (the Series A Directors) at each meeting or pursuant to each consent of the Companys stockholders for the election of directors, and to remove from office a Series A Director and to fill any vacancy caused by the resignation, death or removal of a Series A Director;
(ii) The holders of the Series B Preferred, voting together as a separate class, shall be entitled to elect one member of the Board of Directors (the Series B Director) at each meeting or pursuant to each consent of the Companys stockholders for the election of directors, and to remove from office the Series B Director and to fill any vacancy caused by the resignation, death or removal of the Series B Director;
(iv) The holders of the Series C Preferred, voting together as a separate class, shall be entitled to elect one member of the Board of Directors (the Series C Director) at each meeting or pursuant to each consent of the Companys stockholders for the election of directors, and to remove from office the Series C Director and to fill any vacancy caused by the resignation, death or removal of the Series C Director;
(v) The holders of the Series D Preferred, voting together as a separate class, shall be entitled to elect one member of the Board of Directors (the Series D Director and together with the Series A Directors, the Series B Director and the Series C Director, the Preferred Directors) at each meeting or pursuant to each consent of the Companys stockholders for the election of directors, and to remove from office the Series D Director and to fill any vacancy caused by the resignation, death or removal of the Series D Director;
(vi) The holders of the Common Stock, voting together as a separate class, shall be entitled to elect one member of the Board of Directors (the Common Director) at each meeting or pursuant to each consent of the Companys stockholders for the election of directors, and to remove from office the Common Director and to fill any vacancy caused by the resignation, death or removal of the Common Director; and
(vii) The holders of Common Stock and Series Preferred, voting together as a single class on an as-if-converted basis, shall be entitled to elect all remaining members of the Board of Directors at each meeting or pursuant to each consent of the Companys stockholders for the election of directors, and to remove from office such directors and to fill any vacancy caused by the resignation, death or removal of such directors.
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5. Amendments and Changes.
(a) Approval by Series Preferred. Notwithstanding Section 4 above, the Company shall not, without first obtaining the approval (by vote or written consent as provided by law) of at least seventy percent (70%) of the Series Preferred then outstanding, voting together as a single, separate class:
(i) amend or waive any provision of (directly or indirectly, by merger or otherwise) this Restated Certificate of Incorporation or the bylaws of the Company;
(ii) increase or decrease the number of shares of Series Preferred that the Company shall have the authority to issue;
(iii) create or issue (directly or indirectly, by reclassification or otherwise) any new class or series of securities having rights, preferences or privileges which are senior to, or pari passu with, the rights of the Series D Preferred;
(iv) consummate any Liquidation or reorganization;
(v) acquire all of the equity securities of another entity, or all or substantially all of the assets of another entity, in exchange for equity securities of the Company;
(vi) change the authorized number of directors of the Company;
(vii) pay or declare a dividend on any shares of the Companys capital stock other than a stock dividend on the Common Stock;
(viii) repurchase or redeem shares of the Companys stock, except in connection with the repurchase of shares of Common Stock issued to or held by employees, consultants or directors at a price not greater than the amount paid by such persons upon termination of their employment or services pursuant to agreements providing for the right of said repurchase; or
(ix) alter or change the rights, preferences, or privileges of the Series Preferred.
(b) Separate Approval by Series D Preferred. Notwithstanding Section 4 above, the Company shall not, without first obtaining the approval (by vote or written consent as provided by law) of at least 52% of the Series D Preferred then outstanding, voting together as a single, separate class:
(i) increase or decrease the number of shares of Series D Preferred that the Company shall have the authority to issue;
(ii) amend, alter or repeal any provision of this Restated Certificate of Incorporation if such action would adversely alter, in a manner different than the entire class of Series Preferred, the rights, preferences, privileges or powers of, or restrictions provided for the benefit of the Series D Preferred; or
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(iii) Until December 31, 2013, enter into any agreement with respect to or consummate any equity or debt financing, except (a) the incurrence of indebtedness of the Company in an amount not to exceed $12,000,000 in the aggregate for all indebtedness incurred after the date of the filing of this Restated Certificate of Incorporation (including the issuance of any warrants to purchase Series D Preferred issued in connection with the incurrence of such indebtedness) and (b) the sale of authorized but unissued shares of Series D Preferred pursuant to that certain Series D Preferred Stock Purchase Agreement dated on or about the filing date of this Restated Certificate of Incorporation in accordance with the allocations set forth in Exhibit A-1 thereto.
(c) Separate Approval by Series C Preferred. Notwithstanding Section 4 above, the Company shall not, without first obtaining the approval (by vote or written consent as provided by law) of at least sixty-five percent (65%) of the Series C Preferred then outstanding, voting together as a single, separate class:
(i) increase or decrease the number of shares of Series C Preferred that the Company shall have the authority to issue; or
(ii) amend, alter or repeal any provision of this Restated Certificate of Incorporation if such action would adversely alter, in a manner different than the entire class of Series Preferred, the rights, preferences, privileges or powers of, or restrictions provided for the benefit of the Series C Preferred.
(d) Separate Approval by Series B Preferred. Notwithstanding Section 4 above, the Company shall not, without first obtaining the approval (by vote or written consent as provided by law) of at least seventy-five percent (75%) of the Series B Preferred then outstanding, voting together as a single, separate class:
(i) increase or decrease the number of shares of Series B Preferred that the Company shall have the authority to issue; or
(ii) amend, alter or repeal any provision of this Restated Certificate of Incorporation if such action would adversely alter, in a manner different than the entire class of Series Preferred, the rights, preferences, privileges or powers of, or restrictions provided for the benefit of the Series B Preferred.
(e) Separate Approval by Series A Preferred. Notwithstanding Section 4 above, the Company shall not, without first obtaining the approval (by vote or written consent as provided by law) of at least two-thirds (2/3) of the Series A Preferred then outstanding, voting together as a single, separate class:
(i) increase or decrease the number of shares of Series A Preferred that the Company shall have the authority to issue; or
(ii) amend, alter or repeal any provision of this Restated Certificate of Incorporation if such action would adversely alter, in a manner different than the entire class of Series Preferred, the rights, preferences, privileges or powers of, or restrictions provided for the benefit of the Series A Preferred.
7. Redemption. The Series Preferred is not redeemable.
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8. Notices. Any notice required by the provisions of this Article FOURTH to be given to the holders of Series Preferred shall be deemed given if deposited in the United States mail, postage prepaid, if deposited with a nationally recognized overnight courier, or if personally delivered, and addressed to each holder of record at such holders address appearing on the books of the Company.
FIFTH
The Board of Directors shall have the power to adopt, amend and repeal the bylaws of the Company (except insofar as the bylaws of the Company as adopted by action of the stockholders of the Company shall otherwise provide). Any bylaws made by the directors under the powers conferred hereby may be amended or repealed by the directors or by the stockholders, and the powers conferred in this Article FIFTH shall not abrogate the right of the stockholders to adopt, amend and repeal bylaws.
SIXTH
Election of directors need not be by written ballot unless the bylaws of the Company shall so provide.
SEVENTH
Unless the Company consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (A) any derivative action or proceeding brought on behalf of the Company; (B) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Company to the Company or the Companys stockholders; (C) any action asserting a claim against the Company arising pursuant to any provision of the DGCL, this Amended and Restated Certificate of Incorporation or the Amended and Restated Bylaws of the Company; or (D) any action asserting a claim against the Company governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Company shall be deemed to have notice of and to have consented to the provisions of this Article SEVENTH.
EIGHTH
Subject to Article FOURTH, Subsection B.5., the Company reserves the right to amend the provisions in this Restated Certificate of Incorporation and in any certificate amendatory hereof in the manner now or hereafter prescribed by law, and all rights conferred on stockholders or others hereunder or thereunder are granted subject to such reservation.
NINTH
A. To the fullest extent permitted by the Delaware General Corporation Law as the same exists or as may hereafter be amended, no director of the Company shall be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. If the Delaware General Corporation Law is amended after the filing of this Restated Certificate of Incorporation to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Company shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law as so amended.
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B. The Company shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding whether criminal, civil, administrative or investigative, by reason of the fact that he/she, his/her testator or intestate is or was a director, officer or employee of the Company or any predecessor of the Company or serves or served at any other enterprise as a director, officer or employee at the request of the Company or any predecessor to the Company to the same extent as permitted by law.
C. Neither any amendment nor repeal of this Article NINTH, nor the adoption of any provision of the Companys Certificate of Incorporation inconsistent with this Article NINTH, shall eliminate or reduce the effect of this Article NINTH in respect of any matter occurring or any action or proceeding accruing or arising or that, but for this Article NINTH, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision.
D. The Company may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Company or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Company would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law.
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Exhibit 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INTERSECT ENT, INC.
ONE: The name of the Company is Intersect ENT, Inc.
TWO: The date on which the Certificate of Incorporation of the Company was originally filed with the Secretary of State of the State of Delaware is October 6, 2003. The Company was originally incorporated under the name Sinexus, Inc.
THREE: The Amended and Restated Certificate of Incorporation of this company is hereby amended and restated in its entirety to read as follows:
I.
The name of this corporation is Intersect ENT, Inc., (the Company).
II.
The address of the registered office of the Company in the State of Delaware is 160 Greentree Drive, Suite 101, City of Dover, County of Kent, Zip Code 19901 and the name of the registered agent of this Company is National Registered Agents, Inc.
III.
The purpose of the Company is to engage in any lawful act or activity for which a corporation may be organized under the Delaware General Corporation Law (DGCL).
IV.
A. The Company is authorized to issue two classes of stock to be designated, respectively, Common Stock and Preferred Stock. The total number of shares which the Company is authorized to issue is one hundred and sixty million (160,000,000) shares. One hundred and fifty million (150,000,000) shares shall be Common Stock, each having a par value of one-tenth of one cent ($0.001). Ten million (10,000,000) shares shall be Preferred Stock, each having a par value of one-tenth of one cent ($0.001).
B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Company (the Board) is hereby expressly authorized to provide for the issue of all of any of the shares of the Preferred Stock in one or more series, and to fix the number of shares and to determine or alter for each such series, such voting powers, full or limited, or no voting powers, and such designation, preferences, and relative, participating, optional, or other rights and such qualifications, limitations, or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such shares and as may be permitted by the DGCL. The Board of Directors is also expressly authorized to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. 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 stock of the Company entitled to vote thereon, without a separate vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the terms of any certificate of designation filed with respect to any series of Preferred Stock.
1.
V.
For the management of the business and for the conduct of the affairs of the Company, and in further definition, limitation and regulation of the powers of the Company, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that:
A.
1. The management of the business and the conduct of the affairs of the Company shall be vested in its Board of Directors. The number of directors which shall constitute the Board of Directors shall be fixed exclusively by resolutions adopted by a majority of the authorized number of directors constituting the Board of Directors.
2. BOARD OF DIRECTORS
a. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, directors shall be elected at each annual meeting of stockholders for a term of one year. Each director shall serve until his successor is duly elected and qualified or until his earlier death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.
b. No stockholder entitled to vote at an election for directors may cumulate votes to which such stockholder is entitled unless required by applicable law at the time of such election.
3. REMOVAL OF DIRECTORS.
a. Subject to the rights of any series of Preferred Stock to elect additional directors under specified circumstances, neither the Board of Directors nor any individual director may be removed without cause.
b. Subject to any limitations imposed by applicable law, any individual director or directors may be removed with cause by the affirmative vote of the holders of a majority of the voting power of all then-outstanding shares of capital stock of the corporation entitled to vote generally at an election of directors.
4. VACANCIES. Subject to any limitations imposed by applicable law and subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders and except as otherwise provided by applicable law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such directors successor shall have been elected and qualified.
B.
1. BYLAW AMENDMENTS. The Board of Directors is expressly empowered to adopt, amend or repeal the Bylaws of the Company. The stockholders shall also have power to adopt, amend or repeal the Bylaws of the Company; provided, however, that, in addition to any vote of the holders of any class or series of stock of the Company required by law or by this Certificate of Incorporation, such action by stockholders shall require the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then-outstanding shares of the capital stock of the Company entitled to vote generally in the election of directors, voting together as a single class.
2. The directors of the Company need not be elected by written ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of the Company except at an annual or special meeting of stockholders called in accordance with the Bylaws, and no action shall be taken by the stockholders by written consent or electronic transmission.
2.
4. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Company shall be given in the manner provided in the Bylaws of the Company.
VI.
A. The liability of the directors for monetary damages shall be eliminated to the fullest extent under applicable law.
B. To the fullest extent permitted by applicable law, the Company is authorized to provide indemnification of (and advancement of expenses to) directors, officers and agents of the Company (and any other persons to which applicable law permits the Company to provide indemnification) through Bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise in excess of the indemnification and advancement otherwise permitted by such applicable law. If applicable law is amended after approval by the stockholders of this Article VI to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director to the company shall be eliminated or limited to the fullest extent permitted by applicable law as so amended.
C. Any repeal or modification of this Article VI shall only be prospective and shall not affect the rights or protections or increase the liability of any director under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification.
VII.
Unless the Company consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (A) any derivative action or proceeding brought on behalf of the Company; (B) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Company to the Company or the Companys stockholders; (C) any action asserting a claim against the Company arising pursuant to any provision of the DGCL, this Amended and Restated Certificate of Incorporation or the Amended and Restated Bylaws of the Company; or (D) any action asserting a claim against the Company governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Company shall be deemed to have notice of and to have consented to the provisions of this Article VII.
VIII.
A. The Company reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph B. of this Article VIII, and all rights conferred upon the stockholders herein are granted subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Company required by law or by this Certificate of Incorporation or any certificate of designation filed with respect to a series of Preferred Stock, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of capital stock of the Company entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend or repeal Articles V, VI, VII or VIII.
* * * *
FOUR: This Amended and Restated Certificate of Incorporation has been duly approved by the Board of Directors of the Company.
3.
FIVE: This Amended and Restated Certificate of Incorporation was approved by the requisite number of shares of the Company in accordance with Section 228 of the DGCL. This Amended and Restated Certificate of Incorporation has been duly adopted in accordance with the provisions of Sections 242 and 245 of the DGCL by the stockholders of the Company.
[Signature Page Follows]
4.
IN WITNESS WHEREOF, Intersect ENT, Inc. has caused this Amended and Restated Certificate of Incorporation to be signed by its Chief Executive Officer this day of , 2014.
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Lisa D. Earnhardt Chief Executive Officer |
5.
Exhibit 4.1
Common stock
This certificate is transferable in canton, ma, jersey city, nj and college station, tx
shares
common stock
par value $0.001
certificate number zq00000000
this certifies that mr. sample & mrs. sample & mr. sample & mrs. sample is the owner of ***zero hundred thousand zero hundred and zero***
intersect ent, inc. incorporated under the laws of the state of delaware
fully-paid and non-assessable shares of common stock of
intersect ent, inc. (hereinafter called the company), transferable on the books of the company in person or by duly authorized attorney, upon surrender of this certificate properly endorsed. this certificate and the shares represented hereby, are issued and shall be held subject to all of the provisions of the certificate of incorporation, as amended, and the bylaws, as amended, of the company (copies of which are on file with the company and with the transfer agent), to all of which each holder, by acceptance hereof, assents. this certificate is not valid unless countersigned and registered by the transfer agent and registrar.
witness the facsimile seal of the company and the facsimile signatures of its duly authorized officers
dated dd-mmm-yyyy countersigned and registered: computershare trust company, n.a. transfer agent and registrar, president and chief executive officer secretary security instructions on reverse by authorized signature
-----------------------------------------------------------------------------------------------------------------------------------------------------------------
INTERSECT ENT, INC.
THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO REQUESTS, A SUMMARY OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OF THE COMPANY AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND RIGHTS, AND THE VARIATIONS IN RIGHTS, PREFERENCES AND LIMITATIONS DETERMINED FOR EACH SERIES, WHICH ARE FIXED BY THE ARTICLES OF INCORPORATION OF THE COMPANY, AS AMENDED, AND THE RESOLUTIONS OF THE BOARD OF DIRECTORS OF THE COMPANY, AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO DETERMINE VARIATIONS FOR FUTURE SERIES. SUCH REQUEST MAY BE MADE TO THE OFFICE OF THE SECRETARY OF THE COMPANY OR TO THE TRANSFER AGENT. THE BOARD OF DIRECTORS MAY REQUIRE THE OWNER OF A LOST OR DESTROYED STOCK CERTIFICATE, OR HIS LEGAL REPRESENTATIVES, TO GIVE THE COMPANY A BOND TO INDEMNIFY IT AND ITS TRANSFER AGENTS AND REGISTRARS AGAINST ANY CLAIM THAT MAY BE MADE AGAINST THEM ON ACCOUNT OF THE ALLEGED LOSS OR DESTRUCTION OF ANY SUCH CERTIFICATE.
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: | ||||||
TEN COM | - as tenants in common | UNIF GIFT MIN ACT | - .. ......... .. Custodian ............................................... | |||
(Cust) (Minor) | ||||||
TEN ENT | - as tenants by the entireties | under Uniform Gifts to Minors Act ................................................ | ||||
(State) | ||||||
JT TEN | - as joint tenants with right of survivorship and not as tenants in common | UNIF TRF MIN ACT | - .............. Custodian (until age.................................... ) | |||
(Cust) | ||||||
........................under Uniform Transfers to Minors Act ................... | ||||||
(Minor) (State) | ||||||
Additional abbreviations may also be used though not in the above list.
|
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE | ||
For value received, hereby sell, assign and transfer unto
|
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE)
Shares | ||
of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint |
||
Attorney | ||
to transfer the said stock on the books of the within-named Company with full power of substitution in the premises. |
Dated: 20 |
Signature(s) Guaranteed: Medallion Guarantee Stamp
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM, PURSUANT TO S.E.C. RULE 17Ad-15. | |
Signature: |
||
Signature: |
||
Notice: The signature to this assignment must correspond with the name as written upon the face of the certificate, in every particular, without alteration or enlargement, or any change whatever. |
||
Exhibit 5.1
Matthew B. Hemington
T: +1 650 843 5062
hemingtonmb@cooley.com
July 11, 2014
Intersect ENT, Inc.
1555 Adams Drive
Menlo Park, CA 94025
Ladies and Gentlemen:
We have acted as counsel to Intersect ENT, Inc., a Delaware corporation (the Company), and you have requested our opinion in connection with the filing of a registration statement of a Registration Statement (No. 333-196974) on Form S-1, as amended from time to time (the Registration Statement) with the Securities and Exchange Commission, including a related prospectus filed with the Registration Statement (the Prospectus), covering an underwritten public offering of up to 5,750,000 shares (the Shares) of the Companys common stock, par value $0.001, which includes up to 5,000,000 Shares to be sold by the Company (the Company Shares) and up to 750,000 Shares of common stock of the Company that may be sold by the Company pursuant to the exercise of an option to purchase additional shares granted to the underwriters (the Optional Shares).
In connection with this opinion, we have examined and relied upon (a) the Registration Statement and related Prospectus, (b) the Companys Amended and Restated Certificate of Incorporation and Bylaws, as amended, as currently in effect, (c) the Companys Amended and Restated Certificate of Incorporation, filed as Exhibit 3.2 to the Registration Statement and the Companys Amended and Restated Bylaws, filed as Exhibit 3.4 to the Registration Statement, each of which will be in effect upon the closing of the offering contemplated by the Registration Statement, and (d) the originals or copies certified to our satisfaction of such other records, documents, certificates, memoranda and other instruments as we deem necessary or appropriate to enable us to render the opinion expressed below. We have assumed the genuineness and authenticity of all documents submitted to us as originals, and the conformity to originals of all documents. As to certain factual matters, we have relied upon a certificate of officers of the Company and have not sought to independently verify such matters. Our opinion is expressed only with respect to the General Corporation Law of the State of Delaware.
On the basis of the foregoing, and in reliance thereon, we are of the opinion that the Company Shares and the Optional Shares, when sold and issued as described in the Registration Statement and the related Prospectus, will be validly issued, fully paid and non-assessable.
FIVE PALO ALTO SQUARE, 3000 EL CAMINO REAL, PALO ALTO, CA 94306-2155 T: (650) 843-5000 F: (650) 849-7400 WWW.COOLEY.COM
Intersect ENT, Inc.
July 11, 2014
Page Two
We consent to the reference to our firm under the caption Legal Matters in the Prospectus included in the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement.
Sincerely, |
/s/ Matthew B. Hemington |
Matthew B. Hemington |
FIVE PALO ALTO SQUARE, 3000 EL CAMINO REAL, PALO ALTO, CA 94306-2155 T: (650) 843-5000 F: (650) 849-7400 WWW.COOLEY.COM
Exhibit 10.2
INTERSECT ENT, INC.
2003 EQUITY INCENTIVE PLAN
ADOPTED: OCTOBER 8, 2003
APPROVED BY STOCKHOLDERS: OCTOBER 30, 2003
AMENDED: JANUARY 24, 2006
APPROVED BY STOCKHOLDERS: MARCH 23, 2006
AMENDED JANUARY 26, 2007
AMENDED MARCH 16, 2007
APPROVED BY STOCKHOLDERS: JULY 3, 2007
AMENDED JANUARY 18, 2008
AMENDED APRIL 2, 2008
AMENDED MAY 28, 2008
APPROVED BY STOCKHOLDERS: MAY 28, 2008
AMENDED OCTOBER 28, 2010
APPROVED BY STOCKHOLDERS: OCTOBER 28, 2010
AMENDED SEPTEMBER 25, 2012
AMENDED NOVEMBER 27, 2012
AMENDED FEBRUARY 14, 2013
APPROVED BY STOCKHOLDERS: FEBRUARY 14, 2013
TERMINATION DATE: OCTOBER 7, 2013
1. | PURPOSES. |
(a) Eligible Stock Award Recipients. The persons eligible to receive Stock Awards are Employees, Directors and Consultants.
(b) Available Stock Awards. The purpose of the Plan is to provide a means by which eligible recipients of Stock Awards may be given an opportunity to benefit from increases in value of the Common Stock through the granting of the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses and (iv) rights to acquire restricted stock.
(c) General Purpose. The Company, by means of the Plan, seeks to retain the services of the group of persons eligible to receive Stock Awards, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates.
2. | DEFINITIONS. |
(a) Affiliate means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code.
(b) Board means the Board of Directors of the Company.
(c) Capitalization Adjustment has the meaning ascribed to that term in Section 11(a).
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(d) Change in Control means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:
(i) any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Companys then outstanding securities other than by virtue of a merger, consolidation or similar transaction. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur (A) on account of the acquisition of securities of the Company by any institutional investor, any affiliate thereof or any other Exchange Act Person that acquires the Companys securities in a transaction or series of related transactions that are primarily a private financing transaction for the Company or (B) solely because the level of Ownership held by any Exchange Act Person (the Subject Person) exceeds the designated percentage threshold of the outstanding voting securities as a result of a repurchase or other acquisition of voting securities by the Company reducing the number of shares outstanding, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, and after such share acquisition, the Subject Person becomes the Owner of any additional voting securities that, assuming the repurchase or other acquisition had not occurred, increases the percentage of the then outstanding voting securities Owned by the Subject Person over the designated percentage threshold, then a Change in Control shall be deemed to occur;
(ii) there is consummated a merger, consolidation or similar transaction involving (directly or indirectly) the Company if, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Company immediately prior thereto do not Own, directly or indirectly, either (A) outstanding voting securities representing more than fifty percent (50%) of the combined outstanding voting power of the surviving Entity in such merger, consolidation or similar transaction or (B) more than fifty percent (50%) of the combined outstanding voting power of the parent of the surviving Entity in such merger, consolidation or similar transaction;
(iii) the stockholders of the Company approve or the Board approves a plan of complete dissolution or liquidation of the Company, or a complete dissolution or liquidation of the Company shall otherwise occur; or
(iv) there is consummated a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries to an Entity, more than fifty percent (50%) of the combined voting power of the voting securities of which are Owned by stockholders of the Company in substantially the same proportion as their Ownership of the Company immediately prior to such sale, lease, license or other disposition.
The term Change in Control shall not include a sale of assets, merger or other transaction effected exclusively for the purpose of changing the domicile of the Company.
Notwithstanding the foregoing or any other provision of this Plan, the definition of Change in Control (or any analogous term) in an individual written agreement between the Company or any Affiliate and the Participant shall supersede the foregoing definition with respect to Stock Awards subject to such agreement (it being understood, however, that if no definition of Change in Control or any analogous term is set forth in such an individual written agreement, the foregoing definition shall apply).
(e) Code means the Internal Revenue Code of 1986, as amended.
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(f) Committee means a committee of one or more members of the Board appointed by the Board in accordance with Section 3(c).
(g) Common Stock means the common stock of the Company.
(h) Company means Intersect ENT, Inc., formerly Sinexus, Inc., a Delaware corporation.
(i) Consultant means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services or (ii) serving as a member of the Board of Directors of an Affiliate and who is compensated for such services. However, the term Consultant shall not include Directors who are not compensated by the Company for their services as Directors, and the payment of a directors fee by the Company for services as a Director shall not cause a Director to be considered a Consultant for purposes of the Plan.
(j) Continuous Service means that the Participants service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. A change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participants service with the Company or an Affiliate, shall not terminate a Participants Continuous Service. For example, a change in status from an employee of the Company to a consultant to an Affiliate or to a Director shall not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that partys sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. Notwithstanding the foregoing, a leave of absence shall be treated as Continuous Service for purposes of vesting in a Stock Award only to such extent as may be provided in the Companys leave of absence policy or in the written terms of the Participants leave of absence.
(k) Corporate Transaction means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:
(i) a sale or other disposition of all or substantially all, as determined by the Board in its discretion, of the consolidated assets of the Company and its Subsidiaries;
(ii) a sale or other disposition of at least ninety percent (90%) of the outstanding securities of the Company;
(iii) a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or
(iv) a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise.
(l) Director means a member of the Board.
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(m) Disability means the inability of a person, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of that persons position with the Company or an Affiliate because of the sickness or injury of the person.
(n) Employee means any person employed by the Company or an Affiliate. Service as a Director or payment of a directors fee by the Company for such service or for service as a member of the Board of Directors of an Affiliate shall not be sufficient to constitute employment by the Company or an Affiliate.
(o) Entity means a corporation, partnership or other entity.
(p) Exchange Act means the Securities Exchange Act of 1934, as amended.
(q) Exchange Act Person means any natural person, Entity or group (within the meaning of Section 13(d) or 14(d) of the Exchange Act), except that Exchange Act Person shall not include (A) the Company or any Subsidiary of the Company, (B) any employee benefit plan of the Company or any Subsidiary of the Company or any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary of the Company, (C) an underwriter temporarily holding securities pursuant to an offering of such securities, or (D) an Entity Owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their Ownership of stock of the Company.
(r) Fair Market Value means, as of any date, the value of the Common Stock determined in good faith by the Board, and in a manner consistent with Section 260.140.50 of Title 10 of the California Code of Regulations.
(s) Incentive Stock Option means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.
(t) Nonstatutory Stock Option means an Option not intended to qualify as an Incentive Stock Option.
(u) Officer means any person designated by the Company as an officer.
(v) Option means an Incentive Stock Option or a Nonstatutory Stock Option granted pursuant to the Plan.
(w) Option Agreement means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan.
(x) Optionholder means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option.
(y) Own, Owned, Owner, Ownership A person or Entity shall be deemed to Own, to have Owned, to be the Owner of, or to have acquired Ownership of securities if such person or Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities.
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(z) Participant means a person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award.
(aa) Plan means this Intersect ENT, Inc. 2003 Equity Incentive Plan.
(bb) Securities Act means the Securities Act of 1933, as amended.
(cc) Stock Award means any right granted under the Plan, including an Option, a stock bonus and a right to acquire restricted stock.
(dd) Stock Award Agreement means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan.
(ee) Subsidiary means, with respect to the Company, (i) any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or capital contribution) of more than fifty percent (50%).
(ff) Ten Percent Stockholder means a person who Owns (or is deemed to Own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates.
3. | ADMINISTRATION. |
(a) Administration by Board. The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in Section 3(c).
(b) Powers of Board. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; what type or combination of types of Stock Award shall be granted; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive Common Stock pursuant to a Stock Award; and the number of shares of Common Stock with respect to which a Stock Award shall be granted to each such person.
(ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.
(iii) To amend the Plan or a Stock Award as provided in Section 12.
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(iv) To terminate or suspend the Plan as provided in Section 13.
(v) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and that are not in conflict with the provisions of the Plan.
(c) Delegation to Committee. The Board may delegate administration of the Plan to a Committee or Committees of one (1) or more members of the Board, and the term Committee shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan.
(d) Effect of Boards Decision. All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons.
(e) Arbitration. Any dispute or claim concerning any Stock Awards granted (or not granted) pursuant to the Plan or any disputes or claims relating to or arising out of the Plan shall be fully, finally and exclusively resolved by binding and confidential arbitration conducted pursuant to the rules of Judicial Arbitration and Mediation Services, Inc. (JAMS) in California. The Company shall pay all arbitration fees. In addition to any other relief, the arbitrator may award to the prevailing party recovery of its attorneys fees and costs. By accepting a Stock Award, Participants and the Company waive their respective rights to have any such disputes or claims tried by a judge or jury.
4. | SHARES SUBJECT TO THE PLAN. |
(a) Share Reserve. Subject to the provisions of Section 11(a) relating to Capitalization Adjustments, the Common Stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate fifteen million ninety-six thousand twenty-two (3,774,005) shares of Common Stock.
(b) Reversion of Shares to the Share Reserve. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, or if any shares of Common Stock issued to a Participant pursuant to a Stock Award are forfeited back to or repurchased by the Company because of or in connection with the failure to meet a contingency or condition required to vest such shares in the Participant, the shares of Common Stock not acquired, such Stock Award or the shares of Common Stock forfeited or repurchased under such Stock Award shall revert to and again become available for issuance under the Plan; provided, however, that subject to the provisions of Section 11(a) relating to Capitalization Adjustments, the aggregate maximum number of shares of Common Stock that may be issued as Incentive Stock Options shall equal two (2) times the Share Reserve.
(c) Source of Shares. The shares of Common Stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise.
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(d) Share Reserve Limitation. To the extent required by Section 260.140.45 of Title 10 of the California Code of Regulations, the total number of shares of Common Stock issuable upon exercise of all outstanding Options and the total number of shares of Common Stock provided for under any stock bonus or similar plan of the Company shall not exceed the applicable percentage as calculated in accordance with the conditions and exclusions of Section 260.140.45 of Title 10 of the California Code of Regulations, based on the shares of Common Stock of the Company that are outstanding at the time the calculation is made.
5. | ELIGIBILITY. |
(a) Eligibility for Specific Stock Awards. Incentive Stock Options may be granted only to Employees. Stock Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants.
(b) Ten Percent Stockholders.
(i) A Ten Percent Stockholder shall not be granted an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock on the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant.
(ii) A Ten Percent Stockholder shall not be granted a Nonstatutory Stock Option unless the exercise price of such Option is at least (i) one hundred ten percent (110%) of the Fair Market Value of the Common Stock on the date of grant or (ii) such lower percentage of the Fair Market Value of the Common Stock on the date of grant as is permitted by Section 260.140.41 of Title 10 of the California Code of Regulations at the time of the grant of the Option.
(iii) A Ten Percent Stockholder shall not be granted a restricted stock award unless the purchase price of the restricted stock is at least (i) one hundred percent (100%) of the Fair Market Value of the Common Stock on the date of grant or (ii) such lower percentage of the Fair Market Value of the Common Stock on the date of grant as is permitted by Section 260.140.42 of Title 10 of the California Code of Regulations at the time of the grant of the restricted stock award.
(c) Consultants. A Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, either the offer or the sale of the Companys securities to such Consultant is not exempt under Rule 701 of the Securities Act (Rule 701) because of the nature of the services that the Consultant is providing to the Company, because the Consultant is not a natural person, or because of some other provision of Rule 701, unless the Company determines that such grant need not comply with the requirements of Rule 701 and will satisfy another exemption under the Securities Act as well as comply with the securities laws of all other relevant jurisdictions.
6. | OPTION PROVISIONS. |
Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates shall be issued for shares of Common Stock purchased on exercise of each type of Option. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions:
(a) Term. Subject to the provisions of Section 5(b) regarding Ten Percent Stockholders, no Option shall be exercisable after the expiration of ten (10) years from the date it was granted.
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(b) Exercise Price of an Incentive Stock Option. Subject to the provisions of Section 5(b) regarding Ten Percent Stockholders, the exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, an Incentive Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code.
(c) Exercise Price of a Nonstatutory Stock Option. Subject to the provisions of Section 5(b) regarding Ten Percent Stockholders, the exercise price of each Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code.
(d) Consideration. The purchase price of Common Stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised or (ii) at the discretion of the Board at the time of the grant of the Option (or subsequently in the case of a Nonstatutory Stock Option) (1) by delivery to the Company of other Common Stock, (2) according to a deferred payment or other similar arrangement with the Optionholder or (3) in any other form of legal consideration that may be acceptable to the Board. Unless otherwise specifically provided in the Option, the purchase price of Common Stock acquired pursuant to an Option that is paid by delivery to the Company of other Common Stock acquired, directly or indirectly from the Company, shall be paid only by shares of the Common Stock of the Company that have been held for more than six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes). At any time that the Company is incorporated in Delaware, payment of the Common Stocks par value, as defined in the Delaware General Corporation Law, shall not be made by deferred payment.
In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid (1) the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement and (2) the treatment of the Option as a variable award for financial accounting purposes.
(e) Transferability of an Incentive Stock Option. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option.
(f) Transferability of a Nonstatutory Stock Option. A Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution and, to the extent provided in the Option Agreement, to such further extent as permitted by Section 260.140.41(d) of Title 10 of the
8.
California Code of Regulations at the time of the grant of the Option, and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. If the Nonstatutory Stock Option does not provide for transferability, then the Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option.
(g) Vesting Generally. The total number of shares of Common Stock subject to an Option may, but need not, vest and therefore become exercisable in periodic installments that may, but need not, be equal. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this Section 6(g) are subject to any Option provisions governing the minimum number of shares of Common Stock as to which an Option may be exercised.
(h) Minimum Vesting. Notwithstanding the foregoing Section 6(g), to the extent that the following restrictions on vesting are required by Section 260.140.41(f) of Title 10 of the California Code of Regulations at the time of the grant of the Option, then:
(i) Options granted to an Employee who is not an Officer, Director or Consultant shall provide for vesting of the total number of shares of Common Stock at a rate of at least twenty percent (20%) per year over five (5) years from the date the Option was granted, subject to reasonable conditions such as continued employment; and
(ii) Options granted to Officers, Directors or Consultants may be made fully exercisable, subject to reasonable conditions such as continued employment, at any time or during any period established by the Company.
(i) Termination of Continuous Service. In the event that an Optionholders Continuous Service terminates (other than upon the Optionholders death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholders Continuous Service (or such longer or shorter period specified in the Option Agreement, which period shall not be less than thirty (30) days unless such termination is for cause), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate.
(j) Extension of Termination Date. An Optionholders Option Agreement may also provide that if the exercise of the Option following the termination of the Optionholders Continuous Service (other than upon the Optionholders death or Disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in Section 6(a) or (ii) the expiration of a period of three (3) months after the termination of the Optionholders Continuous Service during which the exercise of the Option would not be in violation of such registration requirements.
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(k) Disability of Optionholder. In the event that an Optionholders Continuous Service terminates as a result of the Optionholders Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement, which period shall not be less than six (6) months) or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate.
(l) Death of Optionholder. In the event that (i) an Optionholders Continuous Service terminates as a result of the Optionholders death or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholders Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholders estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionholders death pursuant to Section 6(e) or 6(f), but only within the period ending on the earlier of (1) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement, which period shall not be less than six (6) months) or (2) the expiration of the term of such Option as set forth in the Option Agreement. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate.
(m) Early Exercise. The Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholders Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Subject to the Repurchase Limitation in Section 10(h), any unvested shares of Common Stock so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate. Provided that the Repurchase Limitation in Section 10(h) is not violated, the Company will not exercise its repurchase option until at least six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes) have elapsed following exercise of the Option unless the Board otherwise specifically provides in the Option.
(n) Right of Repurchase. Subject to the Repurchase Limitation in Section 10(h), the Option may, but need not, include a provision whereby the Company may elect to repurchase all or any part of the vested shares of Common Stock acquired by the Optionholder pursuant to the exercise of the Option. Provided that the Repurchase Limitation in Section 10(h) is not violated, the Company will not exercise its repurchase option until at least six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes) have elapsed following exercise of the Option unless otherwise specifically provided in the Option.
(o) Right of First Refusal. The Option may, but need not, include a provision whereby the Company may elect to exercise a right of first refusal following receipt of notice from the Optionholder of the intent to transfer all or any part of the shares of Common Stock received upon the exercise of the Option. Except as expressly provided in this Section 6(o) or in the Stock Award Agreement for the Option, such right of first refusal shall otherwise comply with any applicable provisions of the Bylaws of the Company. The Company will not exercise its right of first refusal until at least six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes) have elapsed following the exercise of the Option unless otherwise specifically provided in the Option.
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7. | PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS. |
(a) Stock Bonus Awards. Each stock bonus agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of stock bonus agreements may change from time to time, and the terms and conditions of separate stock bonus agreements need not be identical, but each stock bonus agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:
(i) Consideration. A stock bonus may be awarded in consideration for past services actually rendered to the Company or an Affiliate for its benefit.
(ii) Vesting. Subject to the Repurchase Limitation in Section 10(h), shares of Common Stock awarded under the stock bonus agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board.
(iii) Termination of Participants Continuous Service. Subject to the Repurchase Limitation in Section 10(h), in the event that a Participants Continuous Service terminates, the Company may reacquire any or all of the shares of Common Stock held by the Participant that have not vested as of the date of termination under the terms of the stock bonus agreement. Provided that the Repurchase Limitation in Section 10(h) is not violated, the Company will not exercise its repurchase option until at least six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes) have elapsed following receipt of the stock bonus unless otherwise specifically provided in the stock bonus agreement.
(iv) Transferability. Rights to acquire shares of Common Stock under the stock bonus agreement shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Participant only by the Participant.
(b) Restricted Stock Awards. Each restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of the restricted stock purchase agreements may change from time to time, and the terms and conditions of separate restricted stock purchase agreements need not be identical, but each restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:
(i) Purchase Price. Subject to the provisions of Section 5(b) regarding Ten Percent Stockholders, the purchase price of restricted stock awards shall not be less than eighty-five percent (85%) of the Common Stocks Fair Market Value on the date such award is made or at the time the purchase is consummated.
(ii) Consideration. The purchase price of Common Stock acquired pursuant to the restricted stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board, according to a deferred payment or other similar arrangement with the Participant; or (iii) in any other form of legal consideration that may be acceptable to the Board in its discretion; provided, however, that at any time that the Company is incorporated in Delaware, then payment of the Common Stocks par value, as defined in the Delaware General Corporation Law, shall not be made by deferred payment.
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(iii) Vesting. Subject to the Repurchase Limitation in Section 10(h), shares of Common Stock acquired under the restricted stock purchase agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board.
(iv) Termination of Participants Continuous Service. Subject to the Repurchase Limitation in Section 10(h), in the event that a Participants Continuous Service terminates, the Company may repurchase or otherwise reacquire any or all of the shares of Common Stock held by the Participant that have not vested as of the date of termination under the terms of the restricted stock purchase agreement. Provided that the Repurchase Limitation in Section 10(h) is not violated, the Company will not exercise its repurchase option until at least six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes) have elapsed following the purchase of the restricted stock unless otherwise specifically provided in the restricted stock purchase agreement.
(v) Transferability. Rights to acquire shares of Common Stock under the restricted stock purchase agreement shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Participant only by the Participant.
8. | COVENANTS OF THE COMPANY. |
(a) Availability of Shares. During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Stock Awards.
(b) Securities Law Compliance. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained.
9. | USE OF PROCEEDS FROM STOCK. |
Proceeds from the sale of Common Stock pursuant to Stock Awards shall constitute general funds of the Company.
10. | MISCELLANEOUS. |
(a) Acceleration of Exercisability and Vesting. The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest.
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(b) Stockholder Rights. No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Stock Award unless and until such Participant has satisfied all requirements for exercise of the Stock Award pursuant to its terms.
(c) No Employment or other Service Rights. Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultants agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be.
(d) Incentive Stock Option $100,000 Limitation. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or portions thereof that exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options, notwithstanding any contrary provision of a Stock Award Agreement.
(e) Investment Assurances. The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participants knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participants own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (1) the issuance of the shares of Common Stock upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act or (2) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock.
(f) Withholding Obligations. To the extent provided by the terms of a Stock Award Agreement, the Participant may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of Common Stock under a Stock Award by any of the following means (in addition to the Companys right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable to the Participant as a result of the exercise or acquisition of Common Stock under the Stock Award; provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax required to be withheld by law (or such lower amount as may be necessary to avoid variable award accounting); or (iii) delivering to the Company owned and unencumbered shares of Common Stock.
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(g) Information Obligation. To the extent required by Section 260.140.46 of Title 10 of the California Code of Regulations, the Company shall deliver financial statements to Participants at least annually. This Section 10(g) shall not apply to key Employees whose duties in connection with the Company assure them access to equivalent information.
(h) Repurchase Limitation. The terms of any repurchase option shall be specified in the Stock Award, and the repurchase price may be either the Fair Market Value of the shares of Common Stock on the date of termination of Continuous Service or the lower of (i) the Fair Market Value of the shares of Common Stock on the date of repurchase or (ii) their original purchase price. To the extent required by Section 260.140.41 and Section 260.140.42 of Title 10 of the California Code of Regulations at the time a Stock Award is made, any repurchase option contained in a Stock Award granted to a person who is not an Officer, Director or Consultant shall be upon the terms described below:
(i) Fair Market Value. If the repurchase option gives the Company the right to repurchase the shares of Common Stock upon termination of Continuous Service at not less than the Fair Market Value of the shares of Common Stock to be purchased on the date of termination of Continuous Service, then (i) the right to repurchase shall be exercised for cash or cancellation of purchase money indebtedness for the shares of Common Stock within ninety (90) days of termination of Continuous Service (or in the case of shares of Common Stock issued upon exercise of Stock Awards after such date of termination, within ninety (90) days after the date of the exercise) or such longer period as may be agreed to by the Company and the Participant (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Code regarding qualified small business stock) and (ii) the right terminates when the shares of Common Stock become publicly traded.
(ii) Original Purchase Price. If the repurchase option gives the Company the right to repurchase the shares of Common Stock upon termination of Continuous Service at the lower of (i) the Fair Market Value of the shares of Common Stock on the date of repurchase or (ii) their original purchase price, then (x) the right to repurchase at the original purchase price shall lapse at the rate of at least twenty percent (20%) of the shares of Common Stock per year over five (5) years from the date the Stock Award is granted (without respect to the date the Stock Award was exercised or became exercisable) and (y) the right to repurchase shall be exercised for cash or cancellation of purchase money indebtedness for the shares of Common Stock within ninety (90) days of termination of Continuous Service (or in the case of shares of Common Stock issued upon exercise of Options after such date of termination, within ninety (90) days after the date of the exercise) or such longer period as may be agreed to by the Company and the Participant (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Code regarding qualified small business stock).
11. | ADJUSTMENTS UPON CHANGES IN STOCK. |
(a) Capitalization Adjustments. If any change is made in, or other event occurs with respect to, the Common Stock subject to the Plan or subject to any Stock Award without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company (each a Capitalization Adjustment), the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject to the Plan pursuant
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to Sections 4(a) and 4(b) and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of securities and price per share of Common Stock subject to such outstanding Stock Awards. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction without receipt of consideration by the Company.)
(b) Dissolution or Liquidation. In the event of a dissolution or liquidation of the Company, then all outstanding Options shall terminate immediately prior to the completion of such dissolution or liquidation, and shares of Common Stock subject to the Companys repurchase option may be repurchased by the Company notwithstanding the fact that the holder of such stock is still in Continuous Service.
(c) Corporate Transaction. In the event of a Corporate Transaction, any surviving corporation or acquiring corporation may assume or continue any or all Stock Awards outstanding under the Plan or may substitute similar stock awards for Stock Awards outstanding under the Plan (it being understood that similar stock awards include, but are not limited to, awards to acquire the same consideration paid to the stockholders or the Company, as the case may be, pursuant to the Corporate Transaction), and any reacquisition or repurchase rights held by the Company in respect of Common Stock issued pursuant to Stock Awards may be assigned by the Company to the successor of the Company (or such successors parent company), if any, in connection with such Corporate Transaction. In the event that any surviving corporation or acquiring corporation does not assume or continue any or all such outstanding Stock Awards or substitute similar stock awards for such outstanding Stock Awards, then with respect to Stock Awards that have not been assumed, continued or substituted and that are held by Participants whose Continuous Service has not terminated prior to the effective time of the Corporate Transaction, the vesting of such Stock Awards (and, if applicable, the time at which such Stock Awards may be exercised) shall (contingent upon the effectiveness of the Corporate Transaction) be accelerated in full to a date prior to the effective time of such Corporate Transaction as the Board shall determine (or, if the Board shall not determine such a date, to the date that is five (5) days prior to the effective time of the Corporate Transaction), the Stock Awards shall terminate if not exercised (if applicable) at or prior to such effective time, and any reacquisition or repurchase rights held by the Company with respect to such Stock Awards held by Participants whose Continuous Service has not terminated shall (contingent upon the effectiveness of the Corporate Transaction) lapse. With respect to any other Stock Awards outstanding under the Plan that have not been assumed, continued or substituted, the vesting of such Stock Awards (and, if applicable, the time at which such Stock Award may be exercised) shall not be accelerated, unless otherwise provided in a written agreement between the Company or any Affiliate and the holder of such Stock Award, and such Stock Awards shall terminate if not exercised (if applicable) prior to the effective time of the Corporate Transaction.
(d) Change in Control. A Stock Award held by any Participant whose Continuous Service has not terminated prior to the effective time of a Change in Control may be subject to additional acceleration of vesting and exercisability upon or after such event as may be provided in the Stock Award Agreement for such Stock Award or as may be provided in any other written agreement between the Company or any Affiliate and the Participant, but in the absence of such provision, no such acceleration shall occur.
12. | AMENDMENT OF THE PLAN AND STOCK AWARDS. |
(a) Amendment of Plan. The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 11(a) relating to Capitalization Adjustments, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary to satisfy the requirements of Section 422 of the Code.
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(b) Stockholder Approval. The Board, in its sole discretion, may submit any other amendment to the Plan for stockholder approval.
(c) Contemplated Amendments. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith.
(d) No Impairment of Rights. Rights under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing.
(e) Amendment of Stock Awards. The Board at any time, and from time to time, may amend the terms of any one or more Stock Awards; provided, however, that the rights under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing.
13. | TERMINATION OR SUSPENSION OF THE PLAN. |
(a) Plan Term. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated.
(b) No Impairment of Rights. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the Participant.
14. | EFFECTIVE DATE OF PLAN. |
The Plan shall become effective as determined by the Board, but no Stock Award shall be exercised (or, in the case of a stock bonus, shall be granted) unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board.
15. | CHOICE OF LAW. |
The law of the State of California shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such states conflict of laws rules.
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INTERSECT ENT, INC.
STOCK OPTION GRANT NOTICE
(2003 EQUITY INCENTIVE PLAN)
Intersect ENT, Inc. (the Company), pursuant to its 2003 Equity Incentive Plan (the Plan), hereby grants to Optionholder an option to purchase the number of shares of the Companys Common Stock set forth below. This option is subject to all of the terms and conditions as set forth herein and in the Stock Option Agreement, the Plan and the Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety.
Optionholder: | «Optionholder» | |
Date of Grant: | «GrantDate» | |
Vesting Commencement Date: | «VCD» | |
Number of Shares Subject to Option: | «Shares» | |
Exercise Price (Per Share): | $«ExercisePrice» | |
Total Exercise Price: | $«TotalExercisePrice» | |
Expiration Date: | «Expiration» |
Type of Grant: | x Incentive Stock Option1 | ¨ Nonstatutory Stock Option | ||
Exercise Schedule: | x Same as Vesting Schedule | ¨ Early Exercise Permitted | ||
Vesting Schedule: | 1/4th of the shares vest one year after the Vesting Commencement Date. | |||
1/48th of the shares vest monthly thereafter over the next three years. | ||||
Payment: | By one or a combination of the following items (described in the Stock Option Agreement): | |||
By cash or check | ||||
Pursuant to a Regulation T Program if the Shares are publicly traded | ||||
By delivery of already-owned shares if the Shares are publicly traded |
Additional Terms/Acknowledgements: The undersigned Optionholder acknowledges receipt of, and understands and agrees to, this Stock Option Grant Notice, the Stock Option Agreement and the Plan. Optionholder further acknowledges that as of the Date of Grant, this Stock Option Grant Notice, the Stock Option Agreement and the Plan set forth the entire understanding between Optionholder and the Company regarding the acquisition of stock in the Company and supersede all prior oral and written agreements on that subject with the exception of (i) options previously granted and delivered to Optionholder under the Plan, and (ii) the following agreements only:
OTHER AGREEMENTS: |
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INTERSECT ENT, INC. | «OPTIONHOLDER» | |||||
By: |
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Lisa D. Earnhardt | Signature | |||||
President & Chief Executive Officer |
ATTACHMENTS: Stock Option Agreement, 2003 Equity Incentive Plan and Notice of Exercise
1 | If this is an Incentive Stock Option, it (plus other outstanding Incentive Stock Options) cannot be first exercisable for more than $100,000 in value (measured by exercise price) in any calendar year. Any excess over $100,000 is a Nonstatutory Stock Option. |
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INTERSECT ENT, INC.
2003 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
(INCENTIVE STOCK OPTION OR NONSTATUTORY STOCK OPTION)
Pursuant to your Stock Option Grant Notice (Grant Notice) and this Stock Option Agreement, INTERSECT ENT, INC. (the Company) has granted you an option under its 2003 Equity Incentive Plan (the Plan) to purchase the number of shares of the Companys Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the Plan.
The details of your option are as follows:
1. VESTING. Subject to the limitations contained herein, your option will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service.
2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your option and your exercise price per share referenced in your Grant Notice may be adjusted from time to time for Capitalization Adjustments.
3. EXERCISE PRIOR TO VESTING (EARLY EXERCISE). If permitted in your Grant Notice (i.e., the Exercise Schedule indicates that Early Exercise of your option is permitted) and subject to the provisions of your option, you may elect at any time that is both (i) during the period of your Continuous Service and (ii) during the term of your option, to exercise all or part of your option, including the nonvested portion of your option; provided, however, that:
a. a partial exercise of your option shall be deemed to cover first vested shares of Common Stock and then the earliest vesting installment of unvested shares of Common Stock;
b. any shares of Common Stock so purchased from installments that have not vested as of the date of exercise shall be subject to the purchase option in favor of the Company as described in the Companys form of Early Exercise Stock Purchase Agreement;
c. you shall enter into the Companys form of Early Exercise Stock Purchase Agreement with a vesting schedule that will result in the same vesting as if no early exercise had occurred; and
d. if your option is an Incentive Stock Option, then, to the extent that the aggregate Fair Market Value (determined at the time of grant) of the shares of Common Stock with respect to which your option plus all other Incentive Stock Options you hold are exercisable
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for the first time by you during any calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), your option(s) or portions thereof that exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options.
4. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of your option. You may elect to make payment of the exercise price in cash or by check or in any other manner permitted by your Grant Notice, which may include one or more of the following:
a. In the Companys sole discretion at the time your option is exercised and provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds.
b. Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, by delivery of already-owned shares of Common Stock either that you have held for the period required to avoid a charge to the Companys reported earnings (generally six (6) months) or that you did not acquire, directly or indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise. Delivery for these purposes, in the sole discretion of the Company at the time you exercise your option, shall include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. Notwithstanding the foregoing, you may not exercise your option by tender to the Company of Common Stock to the extent such tender would violate the provisions of any law, regulation or agreement restricting the redemption of the Companys stock.
5. WHOLE SHARES. You may exercise your option only for whole shares of Common Stock.
6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not exercise your option unless the shares of Common Stock issuable upon such exercise are then registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option also must comply with other applicable laws and regulations governing your option, and you may not exercise your option if the Company determines that such exercise would not be in material compliance with such laws and regulations.
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7. TERM. You may not exercise your option before the commencement or after the expiration of its term. The term of your option commences on the Date of Grant and expires upon the earliest of the following:
a. three (3) months after the termination of your Continuous Service for any reason other than your Disability or death, provided that if during any part of such three (3) month period your option is not exercisable solely because of the condition set forth in Section 6, your option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service;
b. twelve (12) months after the termination of your Continuous Service due to your Disability;
c. eighteen (18) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates;
d. the Expiration Date indicated in your Grant Notice; or
e. the day before the tenth (10th) anniversary of the Date of Grant.
If your option is an Incentive Stock Option, note that to obtain the federal income tax advantages associated with an Incentive Stock Option, the Code requires that at all times beginning on the date of grant of your option and ending on the day three (3) months before the date of your options exercise, you must be an employee of the Company or an Affiliate, except in the event of your death or your permanent and total disability, as defined in Section 22(e) of the Code. (The definition of disability in Section 22(e) of the Code is different from the definition of the Disability under the Plan). The Company has provided for extended exercisability of your option under certain circumstances for your benefit but cannot guarantee that your option will necessarily be treated as an Incentive Stock Option if you continue to provide services to the Company or an Affiliate as a Consultant or Director after your employment terminates or if you otherwise exercise your option more than three (3) months after the date your employment with the Company or an Affiliate terminates.
8. EXERCISE.
a. You may exercise the vested portion of your option (and the unvested portion of your option if your Grant Notice so permits) during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require.
b. By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are subject at the time of exercise, or (3) the disposition of shares of Common Stock acquired upon such exercise.
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c. If your option is an Incentive Stock Option, by exercising your option you agree that you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of your option that occurs within two (2) years after the date of your option grant or within one (1) year after such shares of Common Stock are transferred upon exercise of your option.
d. By exercising your option you agree that you shall not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any shares of Common Stock or other securities of the Company held by you, for a period of time specified by the managing underwriter(s) (not to exceed one hundred eighty (180) days) following the effective date of a registration statement of the Company filed under the Securities Act (the Lock Up Period); provided, however, that nothing contained in this section shall prevent the exercise of a repurchase option, if any, in favor of the Company during the Lock Up Period. You further agree to execute and deliver such other agreements as may be reasonably requested by the Company and/or the underwriter(s) that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to your shares of Common Stock until the end of such period. The underwriters of the Companys stock are intended third party beneficiaries of this Section 8(d) and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto.
9. TRANSFERABILITY. Your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your option.
10. RIGHT OF FIRST REFUSAL. Shares of Common Stock that you acquire upon exercise of your option are subject to any right of first refusal that may be described in the Companys bylaws in effect at such time the Company elects to exercise its right; provided, however, that if your option is an Incentive Stock Option and the right of first refusal described in the Companys bylaws in effect at the time the Company elects to exercise its right is more beneficial to you than the right of first refusal described in the Companys bylaws on the Date of Grant, then the right of first refusal described in the Companys bylaws on the Date of Grant shall apply. The Companys right of first refusal shall expire on the Listing Date. For purposes of this Agreement, Listing Date shall mean the first date upon which any security of the Company is listed (or approved for listing) upon notice of issuance on a national securities exchange or on the National Market System of the Nasdaq Stock Market (or any successor to that entity).
11. RIGHT OF REPURCHASE. To the extent provided in the Companys bylaws in effect at such time the Company elects to exercise its right, the Company shall have the right to repurchase all or any part of the shares of Common Stock you acquire pursuant to the exercise of your option.
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12. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option shall obligate the Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate.
13. WITHHOLDING OBLIGATIONS.
a. At the time you exercise your option, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a cashless exercise pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with the exercise of your option.
b. Upon your request and subject to approval by the Company, in its sole discretion, and compliance with any applicable legal conditions or restrictions, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law (or such lower amount as may be necessary to avoid variable award accounting). If the date of determination of any tax withholding obligation is deferred to a date later than the date of exercise of your option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date of exercise of your option. Notwithstanding the filing of such election, shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined as of the date of exercise of your option that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility.
c. You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company shall have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein unless such obligations are satisfied.
14. NOTICES. Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company.
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15. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations, which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of the Plan, the provisions of the Plan shall control.
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NOTICE OF EXERCISE
Intersect ENT, Inc. | ||||
1555 Adams Drive | ||||
Menlo Park, CA 94025 | Date of Exercise: |
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Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase the number of shares for the price set forth below.
Type of option (check one): | Incentive ¨ | Nonstatutory ¨ | ||
Stock option dated: |
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Number of shares as to which option is exercised: |
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Certificates to be issued in name of: |
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Total exercise price: | $ |
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Cash payment delivered herewith: | $ |
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By this exercise, I agree (i) to provide such additional documents as you may require pursuant to the terms of the 2003 Equity Incentive Plan, (ii) to provide for the payment by me to you (in the manner designated by you) of your withholding obligation, if any, relating to the exercise of this option, and (iii) if this exercise relates to an incentive stock option, to notify you in writing within fifteen (15) days after the date of any disposition of any of the shares of Common Stock issued upon exercise of this option that occurs within two (2) years after the date of grant of this option or within one (1) year after such shares of Common Stock are issued upon exercise of this option.
I hereby make the following certifications and representations with respect to the number of shares of Common Stock of the Company listed above (the Shares), which are being acquired by me for my own account upon exercise of the Option as set forth above:
I acknowledge that the Shares have not been registered under the Securities Act of 1933, as amended (the Securities Act), and are deemed to constitute restricted securities under Rule 701 and control securities under Rule 144 promulgated under the Securities Act. I warrant and represent to the Company that I have no present intention of distributing or selling said Shares, except as permitted under the Securities Act and any applicable state securities laws.
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I further acknowledge that I will not be able to resell the Shares for at least ninety days (90) after the stock of the Company becomes publicly traded (i.e., subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934) under Rule 701 and that more restrictive conditions apply to affiliates of the Company under Rule 144.
I further acknowledge that all certificates representing any of the Shares subject to the provisions of the Option shall have endorsed thereon appropriate legends reflecting the foregoing limitations, as well as any legends reflecting restrictions pursuant to the Companys Articles of Incorporation, Bylaws and/or applicable securities laws.
I further agree that, if required by the Company (or a representative of the underwriters) in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act, I will not sell or otherwise transfer or dispose of any shares of Common Stock or other securities of the Company during such period (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the Securities Act as may be requested by the Company or the representative of the underwriters. I further agree that the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period.
Very truly yours, | ||
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Signature | ||
Print Name: |
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Address: |
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Social Security No.:
25.
Exhibit 10.3
INTERSECT ENT, INC.
2013 EQUITY INCENTIVE PLAN
ADOPTED BY THE BOARD OF DIRECTORS: SEPTEMBER 5, 2013
APPROVED BY THE STOCKHOLDERS: SEPTEMBER 23, 2013
AMENDED BY THE BOARD OF DIRECTORS: JUNE 11, 2014
AMENDED BY THE BOARD OF DIRECTORS: JULY 7, 2014
APPROVED BY THE STOCKHOLDERS: JULY 10, 2014
TERMINATION DATE: SEPTEMBER 4, 2023
1. GENERAL.
(a) Successor to and Continuation of Prior Plan. The Plan is intended as the successor to and continuation of the Intersect ENT, Inc. 2003 Equity Incentive Plan (the Prior Plan). Following the Effective Date, no additional stock awards may be granted under the Prior Plan. Any unallocated shares remaining available for issuance pursuant to the exercise of options or issuance or settlement of stock awards not previously granted under the Prior Plan as of 12:01 a.m. Pacific time on the Effective Date (the Prior Plans Available Reserve) will cease to be available under the Prior Plan at such time and will be added to the Share Reserve (as further described in Section 3(a) below) and be then immediately available for issuance pursuant to Stock Awards granted hereunder. In addition, from and after 12:01 a.m. Pacific time on the Effective Date, all outstanding stock awards granted under the Prior Plan will remain subject to the terms of the Prior Plan; provided, however, that any shares subject to outstanding stock awards granted under the Prior Plan that (i) expire or terminate for any reason prior to exercise or settlement; (ii) are forfeited, cancelled or otherwise returned to the Company because of the failure to meet a contingency or condition required to vest such shares; or (iii) are reacquired, withheld (or not issued) to satisfy a tax withholding obligation in connection with an award or to satisfy the purchase price or exercise price of a stock award (the Returning Shares) will immediately be added to the Share Reserve (as further described in Section 3(a) below) as and when such shares become Returning Shares, and become available for issuance pursuant to Stock Awards granted hereunder. All Stock Awards granted on or after 12:01 a.m. Pacific time on the Effective Date will be subject to the terms of this Plan.
(b) Eligible Stock Award Recipients. Employees, Directors and Consultants are eligible to receive Stock Awards.
(c) Available Stock Awards. The Plan provides for the grant of the following types of Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) Stock Appreciation Rights, (iv) Restricted Stock Awards, (v) Restricted Stock Unit Awards and (vi) Other Stock Awards.
(d) Purpose. The Plan, through the granting of Stock Awards, is intended to help the Company secure and retain the services of eligible award recipients, provide incentives for such persons to exert maximum efforts for the success of the Company and any Affiliate and provide a means by which the eligible recipients may benefit from increases in value of the Common Stock.
2. ADMINISTRATION.
(a) Administration by Board. The Board will administer the Plan. The Board may delegate administration of the Plan to a Committee or Committees, as provided in Section 2(c).
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(b) Powers of Board. The Board will have the power, subject to, and within the limitations of, the express provisions of the Plan:
(i) To determine (A) who will be granted Stock Awards; (B) when and how each Stock Award will be granted; (C) what type of Stock Award will be granted; (D) the provisions of each Stock Award (which need not be identical), including when a person will be permitted to exercise or otherwise receive cash or Common Stock under the Stock Award; (E) the number of shares of Common Stock subject to a Stock Award; and (F) the Fair Market Value applicable to a Stock Award.
(ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for administration of the Plan and Stock Awards. The Board, in the exercise of these powers, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it will deem necessary or expedient to make the Plan or Stock Award fully effective.
(iii) To settle all controversies regarding the Plan and Stock Awards granted under it.
(iv) To accelerate, in whole or in part, the time at which a Stock Award may be exercised or vest (or at which cash or shares of Common Stock may be issued).
(v) To suspend or terminate the Plan at any time. Except as otherwise provided in the Plan or a Stock Award Agreement, suspension or termination of the Plan will not impair a Participants rights under his or her then-outstanding Stock Award without his or her written consent except as provided in subsection (viii) below.
(vi) To amend the Plan in any respect the Board deems necessary or advisable, including, without limitation, by adopting amendments relating to Incentive Stock Options and certain nonqualified deferred compensation under Section 409A of the Code and/or to make the Plan or Stock Awards granted under the Plan compliant with the requirements for Incentive Stock Options or exempt from or compliant with the requirements for nonqualified deferred compensation under Section 409A of the Code, subject to the limitations, if any, of applicable law. However, if required by applicable law, and except as provided in Section 9(a) relating to Capitalization Adjustments, the Company will seek stockholder approval of any amendment of the Plan that (A) materially increases the number of shares of Common Stock available for issuance under the Plan, (B) materially expands the class of individuals eligible to receive Stock Awards under the Plan, (C) materially increases the benefits accruing to Participants under the Plan, (D) materially reduces the price at which shares of Common Stock may be issued or purchased under the Plan, (E) materially extends the term of the Plan, or (F) materially expands the types of Stock Awards available for issuance under the Plan. Except as provided in the Plan (including subsection (viii) below) or a Stock Award Agreement, no amendment of the Plan will impair a Participants rights under an outstanding Stock Award unless (1) the Company requests the consent of the affected Participant, and (2) such Participant consents in writing.
(vii) To submit any amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 422 of the Code regarding Incentive Stock Options.
(viii) To approve forms of Stock Award Agreements for use under the Plan and to amend the terms of any one or more Stock Awards, including, but not limited to, amendments to provide terms more favorable to the Participant than previously provided in the Stock Award Agreement, subject to any specified limits in the Plan that are not subject to Board discretion; provided however, that a Participants rights under any Stock Award will not be impaired by any such amendment unless (A) the Company requests the consent of the affected Participant, and (B) such Participant consents in writing.
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Notwithstanding the foregoing, (1) a Participants rights will not be deemed to have been impaired by any such amendment if the Board, in its sole discretion, determines that the amendment, taken as a whole, does not materially impair the Participants rights, and (2) subject to the limitations of applicable law, if any, the Board may amend the terms of any one or more Stock Awards without the affected Participants consent (A) to maintain the qualified status of the Stock Award as an Incentive Stock Option under Section 422 of the Code; (B) to change the terms of an Incentive Stock Option, if such change results in impairment of the Award solely because it impairs the qualified status of the Award as an Incentive Stock Option under Section 422 of the Code; (C) to clarify the manner of exemption from, or to bring the Stock Award into compliance with, Section 409A of the Code; or (D) to comply with other applicable laws.
(ix) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and that are not in conflict with the provisions of the Plan or Stock Awards.
(x) To adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the Plan by Employees, Directors or Consultants who are foreign nationals or employed outside the United States (provided that Board approval will not be necessary for immaterial modifications to the Plan or any Stock Award Agreement that are required for compliance with the laws of the relevant foreign jurisdiction).
(xi) To effect, with the consent of any adversely affected Participant, (A) the reduction of the exercise, purchase or strike price of any outstanding Stock Award; (B) the cancellation of any outstanding Stock Award and the grant in substitution therefor of a new (1) Option or SAR, (2) Restricted Stock Award, (3) Restricted Stock Unit Award, (4) Other Stock Award, (5) cash and/or (6) other valuable consideration determined by the Board, in its sole discretion, with any such substituted award (x) covering the same or a different number of shares of Common Stock as the cancelled Stock Award and (y) granted under the Plan or another equity or compensatory plan of the Company; or (C) any other action that is treated as a repricing under generally accepted accounting principles.
(c) Delegation to Committee. The Board may delegate some or all of the administration of the Plan to a Committee or Committees. If administration of the Plan is delegated to a Committee, the Committee will have, in connection with the administration of the Plan, the powers theretofore possessed by the Board that have been delegated to the Committee, including the power to delegate to a subcommittee of the Committee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board will thereafter be to the Committee or subcommittee). Any delegation of administrative powers will be reflected in resolutions, not inconsistent with the provisions of the Plan, adopted from time to time by the Board or Committee (as applicable). The Committee may, at any time, abolish the subcommittee and/or revest in the Committee any powers delegated to the subcommittee. The Board may retain the authority to concurrently administer the Plan with the Committee and may, at any time, revest in the Board some or all of the powers previously delegated.
(d) Delegation to an Officer. The Board may delegate to one (1) or more Officers the authority to do one or both of the following: (i) designate Employees who are not Officers to be recipients of Options and SARs (and, to the extent permitted by applicable law, other Stock Awards) and, to the extent permitted by applicable law, the terms of such Stock Awards, and (ii) determine the number of shares of Common Stock to be subject to such Stock Awards granted to such Employees; provided, however, that the Board resolutions regarding such delegation will specify the total number of shares of Common Stock that may be subject to the Stock Awards granted by such Officer and that such Officer may not grant a Stock Award to himself or herself. Any such Stock Awards will be granted on the form
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of Stock Award Agreement most recently approved for use by the Committee or the Board, unless otherwise provided in the resolutions approving the delegation authority. The Board may not delegate authority to an Officer who is acting solely in the capacity of an Officer (and not also as a Director) to determine the Fair Market Value pursuant to Section 13(u) below.
(e) Effect of Boards Decision. All determinations, interpretations and constructions made by the Board in good faith will not be subject to review by any person and will be final, binding and conclusive on all persons.
3. SHARES SUBJECT TO THE PLAN.
(a) Share Reserve.
(i) Subject to Section 9(a) relating to Capitalization Adjustments, the aggregate number of shares of Common Stock that may be issued pursuant to Stock Awards from and after the Effective Date will not exceed (A) 596,817 shares plus (B) the Returning Shares, if any, which become available for grant under this Plan from time to time (such aggregate number of shares described in (A) and (B) above, the Share Reserve).
(ii) For clarity, the Share Reserve in this Section 3(a) is a limitation on the number of shares of Common Stock that may be issued pursuant to the Plan. Accordingly, this Section 3(a) does not limit the granting of Stock Awards except as provided in Section 7(a).
(b) Reversion of Shares to the Share Reserve. If a Stock Award or any portion thereof (i) expires or otherwise terminates without all of the shares covered by such Stock Award having been issued or (ii) is settled in cash (i.e., the Participant receives cash rather than stock), such expiration, termination or settlement will not reduce (or otherwise offset) the number of shares of Common Stock that may be available for issuance under the Plan. If any shares of Common Stock issued pursuant to a Stock Award are forfeited back to or repurchased by the Company because of the failure to meet a contingency or condition required to vest such shares in the Participant, then the shares that are forfeited or repurchased will revert to and again become available for issuance under the Plan. Any shares reacquired by the Company in satisfaction of tax withholding obligations on a Stock Award or as consideration for the exercise or purchase price of a Stock Award will again become available for issuance under the Plan.
(c) Incentive Stock Option Limit. Subject to the Share Reserve and Section 9(a) relating to Capitalization Adjustments, the aggregate maximum number of shares of Common Stock that may be issued pursuant to the exercise of Incentive Stock Options will be two (2) times the Share Reserve.
(d) Source of Shares. The stock issuable under the Plan will be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Company on the open market or otherwise.
4. ELIGIBILITY.
(a) Eligibility for Specific Stock Awards. Incentive Stock Options may be granted only to employees of the Company or a parent corporation or subsidiary corporation thereof (as such terms are defined in Sections 424(e) and 424(f) of the Code). Stock Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants; provided, however, that Stock Awards may not be granted to Employees, Directors and Consultants who are providing Continuous Service only to any
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parent of the Company, as such term is defined in Rule 405, unless (i) the stock underlying such Stock Awards is treated as service recipient stock under Section 409A of the Code (for example, because the Stock Awards are granted pursuant to a corporate transaction such as a spin off transaction), or (ii) the Company, in consultation with its legal counsel, has determined that such Stock Awards are otherwise exempt from or alternatively comply with the distribution requirements of Section 409A of the Code.
(b) Ten Percent Stockholders. A Ten Percent Stockholder will not be granted an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value on the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant.
(c) Consultants. A Consultant will not be eligible for the grant of a Stock Award if, at the time of grant, either the offer or sale of the Companys securities to such Consultant is not exempt under Rule 701 because of the nature of the services that the Consultant is providing to the Company, because the Consultant is not a natural person, or because of any other provision of Rule 701, unless the Company determines that such grant need not comply with the requirements of Rule 701 and will satisfy another exemption under the Securities Act as well as comply with the securities laws of all other relevant jurisdictions.
5. PROVISIONS RELATING TO OPTIONS AND STOCK APPRECIATION RIGHTS.
Each Option or SAR will be in such form and will contain such terms and conditions as the Board deems appropriate. All Options will be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates will be issued for shares of Common Stock purchased on exercise of each type of Option. If an Option is not specifically designated as an Incentive Stock Option, or if an Option is designated as an Incentive Stock Option but some portion or all of the Option fails to qualify as an Incentive Stock Option under the applicable rules, then the Option (or portion thereof) will be a Nonstatutory Stock Option. The provisions of separate Options or SARs need not be identical; provided, however, that each Stock Award Agreement will conform to (through incorporation of provisions hereof by reference in the applicable Stock Award Agreement or otherwise) the substance of each of the following provisions:
(a) Term. Subject to the provisions of Section 4(b) regarding Ten Percent Stockholders, no Option or SAR will be exercisable after the expiration of ten (10) years from the date of its grant or such shorter period specified in the Stock Award Agreement.
(b) Exercise Price. Subject to the provisions of Section 4(b) regarding Ten Percent Stockholders, the exercise or strike price of each Option or SAR will be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option or SAR on the date the Stock Award is granted. Notwithstanding the foregoing, an Option or SAR may be granted with an exercise or strike price lower than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Stock Award if such Stock Award is granted pursuant to an assumption of or substitution for another option or stock appreciation right pursuant to a Corporate Transaction and in a manner consistent with the provisions of Section 409A of the Code and, if applicable, Section 424(a) of the Code. Each SAR will be denominated in shares of Common Stock equivalents.
(c) Purchase Price for Options. The purchase price of Common Stock acquired pursuant to the exercise of an Option may be paid, to the extent permitted by applicable law and as determined by the Board in its sole discretion, by any combination of the methods of payment set forth below. The Board
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will have the authority to grant Options that do not permit all of the following methods of payment (or otherwise restrict the ability to use certain methods) and to grant Options that require the consent of the Company to use a particular method of payment. The permitted methods of payment are as follows:
(i) by cash, check, bank draft or money order payable to the Company;
(ii) pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of the stock subject to the Option, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds;
(iii) by delivery to the Company (either by actual delivery or attestation) of shares of Common Stock;
(iv) if an Option is a Nonstatutory Stock Option, by a net exercise arrangement pursuant to which the Company will reduce the number of shares of Common Stock issuable upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price; provided, however, that the Company will accept a cash or other payment from the Participant to the extent of any remaining balance of the aggregate exercise price not satisfied by such reduction in the number of whole shares to be issued. Shares of Common Stock will no longer be subject to an Option and will not be exercisable thereafter to the extent that (A) shares issuable upon exercise are used to pay the exercise price pursuant to the net exercise, (B) shares are delivered to the Participant as a result of such exercise, and (C) shares are withheld to satisfy tax withholding obligations;
(v) according to a deferred payment or similar arrangement with the Optionholder; provided, however, that interest will compound at least annually and will be charged at the minimum rate of interest necessary to avoid (A) the imputation of interest income to the Company and compensation income to the Optionholder under any applicable provisions of the Code, and (B) the classification of the Option as a liability for financial accounting purposes; or
(vi) in any other form of legal consideration that may be acceptable to the Board and specified in the applicable Stock Award Agreement.
(d) Exercise and Payment of a SAR. To exercise any outstanding SAR, the Participant must provide written notice of exercise to the Company in compliance with the provisions of the Stock Award Agreement evidencing such SAR. The appreciation distribution payable on the exercise of a SAR will be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the SAR) of a number of shares of Common Stock equal to the number of Common Stock equivalents in which the Participant is vested under such SAR, and with respect to which the Participant is exercising the SAR on such date, over (B) the aggregate strike price of the number of Common Stock equivalents with respect to which the Participant is exercising the SAR on such date. The appreciation distribution may be paid in Common Stock, in cash, in any combination of the two or in any other form of consideration, as determined by the Board and contained in the Stock Award Agreement evidencing such SAR.
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(e) Transferability of Options and SARs. The Board may, in its sole discretion, impose such limitations on the transferability of Options and SARs as the Board will determine. In the absence of such a determination by the Board to the contrary, the following restrictions on the transferability of Options and SARs will apply:
(i) Restrictions on Transfer. An Option or SAR will not be transferable except by will or by the laws of descent and distribution (and pursuant to subsections (ii) and (iii) below), and will be exercisable during the lifetime of the Participant only by the Participant. The Board may permit transfer of the Option or SAR in a manner that is not prohibited by applicable tax and securities laws. Except as explicitly provided herein, neither an Option nor a SAR may be transferred for consideration.
(ii) Domestic Relations Orders. Subject to the approval of the Board or a duly authorized Officer, an Option or SAR may be transferred pursuant to the terms of a domestic relations order, official marital settlement agreement or other divorce or separation instrument as permitted by Treasury Regulation 1.421-1(b)(2). If an Option is an Incentive Stock Option, such Option may be deemed to be a Nonstatutory Stock Option as a result of such transfer.
(iii) Beneficiary Designation. Subject to the approval of the Board or a duly authorized Officer, a Participant may, by delivering written notice to the Company, in a form approved by the Company (or the designated broker), designate a third party who, upon the death of the Participant, will thereafter be entitled to exercise the Option or SAR and receive the Common Stock or other consideration resulting from such exercise. In the absence of such a designation, upon the death of the Participant, the executor or administrator of the Participants estate will be entitled to exercise the Option or SAR and receive the Common Stock or other consideration resulting from such exercise. However, the Company may prohibit designation of a beneficiary at any time, including due to any conclusion by the Company that such designation would be inconsistent with the provisions of applicable laws.
(f) Vesting Generally. The total number of shares of Common Stock subject to an Option or SAR may vest and become exercisable in periodic installments that may or may not be equal. The Option or SAR may be subject to such other terms and conditions on the time or times when it may or may not be exercised (which may be based on the satisfaction of performance goals or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options or SARs may vary. The provisions of this Section 5(f) are subject to any Option or SAR provisions governing the minimum number of shares of Common Stock as to which an Option or SAR may be exercised.
(g) Termination of Continuous Service. Except as otherwise provided in the applicable Stock Award Agreement or other agreement between the Participant and the Company, if a Participants Continuous Service terminates (other than for Cause and other than upon the Participants death or Disability), the Participant may exercise his or her Option or SAR (to the extent that the Participant was entitled to exercise such Stock Award as of the date of termination of Continuous Service) within the period of time ending on the earlier of (i) the date three (3) months following the termination of the Participants Continuous Service (or such longer or shorter period specified in the applicable Stock Award Agreement, which period will not be less than thirty (30) days if necessary to comply with applicable laws unless such termination is for Cause) and (ii) the expiration of the term of the Option or SAR as set forth in the Stock Award Agreement. If, after termination of Continuous Service, the Participant does not exercise his or her Option or SAR within the applicable time frame, the Option or SAR (as applicable) will terminate.
(h) Extension of Termination Date. Except as otherwise provided in the applicable Stock Award Agreement or other agreement between the Participant and the Company, if the exercise of an Option or SAR following the termination of the Participants Continuous Service (other than for Cause and other than upon the Participants death or Disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option or SAR will terminate on the earlier of (i) the expiration of a total period of time
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(that need not be consecutive) equal to the applicable post termination exercise period after the termination of the Participants Continuous Service during which the exercise of the Option or SAR would not be in violation of such registration requirements, or (ii) the expiration of the term of the Option or SAR as set forth in the applicable Stock Award Agreement. In addition, unless otherwise provided in a Participants Stock Award Agreement, if the sale of any Common Stock received upon exercise of an Option or SAR following the termination of the Participants Continuous Service (other than for Cause) would violate the Companys insider trading policy, then the Option or SAR will terminate on the earlier of (i) the expiration of a period of time (that need not be consecutive) equal to the applicable post-termination exercise period after the termination of the Participants Continuous Service during which the sale of the Common Stock received upon exercise of the Option or SAR would not be in violation of the Companys insider trading policy, or (ii) the expiration of the term of the Option or SAR as set forth in the applicable Stock Award Agreement.
(i) Disability of Participant. Except as otherwise provided in the applicable Stock Award Agreement or other agreement between the Participant and the Company, if a Participants Continuous Service terminates as a result of the Participants Disability, the Participant may exercise his or her Option or SAR (to the extent that the Participant was entitled to exercise such Option or SAR as of the date of termination of Continuous Service), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination of Continuous Service (or such longer or shorter period specified in the Stock Award Agreement, which period will not be less than six (6) months if necessary to comply with applicable laws), and (ii) the expiration of the term of the Option or SAR as set forth in the Stock Award Agreement. If, after termination of Continuous Service, the Participant does not exercise his or her Option or SAR within the applicable time frame, the Option or SAR (as applicable) will terminate.
(j) Death of Participant. Except as otherwise provided in the applicable Stock Award Agreement or other agreement between the Participant and the Company, if (i) a Participants Continuous Service terminates as a result of the Participants death, or (ii) the Participant dies within the period (if any) specified in the Stock Award Agreement for exercisability after the termination of the Participants Continuous Service (for a reason other than death), then the Option or SAR may be exercised (to the extent the Participant was entitled to exercise such Option or SAR as of the date of death) by the Participants estate, by a person who acquired the right to exercise the Option or SAR by bequest or inheritance or by a person designated to exercise the Option or SAR upon the Participants death, but only within the period ending on the earlier of (i) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Stock Award Agreement, which period will not be less than six (6) months if necessary to comply with applicable laws), and (ii) the expiration of the term of such Option or SAR as set forth in the Stock Award Agreement. If, after the Participants death, the Option or SAR is not exercised within the applicable time frame, the Option or SAR (as applicable) will terminate.
(k) Termination for Cause. Except as explicitly provided otherwise in a Participants Stock Award Agreement or other individual written agreement between the Company or any Affiliate and the Participant, if a Participants Continuous Service is terminated for Cause, the Option or SAR will terminate immediately upon such Participants termination of Continuous Service, and the Participant will be prohibited from exercising his or her Option or SAR from and after the time of such termination of Continuous Service.
(l) Non-Exempt Employees. If an Option or SAR is granted to an Employee who is a non-exempt employee for purposes of the Fair Labor Standards Act of 1938, as amended, the Option or SAR will not be first exercisable for any shares of Common Stock until at least six (6) months following the
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date of grant of the Option or SAR (although the Stock Award may vest prior to such date). Consistent with the provisions of the Worker Economic Opportunity Act, (i) if such non-exempt Employee dies or suffers a Disability, (ii) upon a Corporate Transaction in which such Option or SAR is not assumed, continued, or substituted, (iii) upon a Change in Control, or (iv) upon the Participants retirement (as such term may be defined in the Participants Stock Award Agreement, in another agreement between the Participant and the Company, or, if no such definition, in accordance with the Companys then current employment policies and guidelines), the vested portion of any Options and SARs may be exercised earlier than six (6) months following the date of grant. The foregoing provision is intended to operate so that any income derived by a non-exempt employee in connection with the exercise or vesting of an Option or SAR will be exempt from his or her regular rate of pay. To the extent permitted and/or required for compliance with the Worker Economic Opportunity Act to ensure that any income derived by a non-exempt employee in connection with the exercise, vesting or issuance of any shares under any other Stock Award will be exempt from the employees regular rate of pay, the provisions of this Section 5(l) will apply to all Stock Awards and are hereby incorporated by reference into such Stock Award Agreements.
(m) Early Exercise of Options. An Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholders Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Subject to the Repurchase Limitation in Section 8(l), any unvested shares of Common Stock so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate. Provided that the Repurchase Limitation in Section 8(l) is not violated, the Company will not be required to exercise its repurchase right until at least six (6) months (or such longer or shorter period of time required to avoid classification of the Option as a liability for financial accounting purposes) have elapsed following exercise of the Option unless the Board otherwise specifically provides in the Option Agreement.
(n) Right of Repurchase. Subject to the Repurchase Limitation in Section 8(l), the Option or SAR may include a provision whereby the Company may elect to repurchase all or any part of the vested shares of Common Stock acquired by the Participant pursuant to the exercise of the Option or SAR.
(o) Right of First Refusal. The Option or SAR may include a provision whereby the Company may elect to exercise a right of first refusal following receipt of notice from the Participant of the intent to transfer all or any part of the shares of Common Stock received upon the exercise of the Option or SAR. Such right of first refusal will be subject to the Repurchase Limitation in Section 8(l). Except as expressly provided in this Section 5(o) or in the Stock Award Agreement, such right of first refusal will otherwise comply with any applicable provisions of the bylaws of the Company.
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6. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS AND SARS.
(a) Restricted Stock Awards. Each Restricted Stock Award Agreement will be in such form and will contain such terms and conditions as the Board deems appropriate. To the extent consistent with the Companys bylaws, at the Boards election, shares of Common Stock underlying a Restricted Stock Award may be (i) held in book entry form subject to the Companys instructions until any restrictions relating to the Restricted Stock Award lapse; or (ii) evidenced by a certificate, which certificate will be held in such form and manner as determined by the Board. The terms and conditions of Restricted Stock Award Agreements may change from time to time, and the terms and conditions of separate Restricted Stock Award Agreements need not be identical. Each Restricted Stock Award Agreement will conform to (through incorporation of the provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:
(i) Consideration. A Restricted Stock Award may be awarded in consideration for (A) cash, check, bank draft or money order payable to the Company, (B) past services to the Company or an Affiliate, or (C) any other form of legal consideration (including future services) that may be acceptable to the Board, in its sole discretion, and permissible under applicable law.
(ii) Vesting. Subject to the Repurchase Limitation in Section 8(l), shares of Common Stock awarded under the Restricted Stock Award Agreement may be subject to forfeiture to the Company in accordance with a vesting schedule to be determined by the Board.
(iii) Termination of Participants Continuous Service. If a Participants Continuous Service terminates, the Company may receive through a forfeiture condition or a repurchase right, any or all of the shares of Common Stock held by the Participant as of the date of termination of Continuous Service under the terms of the Restricted Stock Award Agreement.
(iv) Transferability. Rights to acquire shares of Common Stock under the Restricted Stock Award Agreement will be transferable by the Participant only upon such terms and conditions as are set forth in the Restricted Stock Award Agreement, as the Board will determine in its sole discretion, so long as Common Stock awarded under the Restricted Stock Award Agreement remains subject to the terms of the Restricted Stock Award Agreement.
(v) Dividends. A Restricted Stock Award Agreement may provide that any dividends paid on Restricted Stock will be subject to the same vesting and forfeiture restrictions as apply to the shares subject to the Restricted Stock Award to which they relate.
(b) Restricted Stock Unit Awards. Each Restricted Stock Unit Award Agreement will be in such form and will contain such terms and conditions as the Board deems appropriate. The terms and conditions of Restricted Stock Unit Award Agreements may change from time to time, and the terms and conditions of separate Restricted Stock Unit Award Agreements need not be identical. Each Restricted Stock Unit Award Agreement will conform to (through incorporation of the provisions hereof by reference in the Agreement or otherwise) the substance of each of the following provisions:
(i) Consideration. At the time of grant of a Restricted Stock Unit Award, the Board will determine the consideration, if any, to be paid by the Participant upon delivery of each share of Common Stock subject to the Restricted Stock Unit Award. The consideration to be paid (if any) by the Participant for each share of Common Stock subject to a Restricted Stock Unit Award may be paid in any form of legal consideration that may be acceptable to the Board, in its sole discretion, and permissible under applicable law.
(ii) Vesting. At the time of the grant of a Restricted Stock Unit Award, the Board may impose such restrictions on or conditions to the vesting of the Restricted Stock Unit Award as it, in its sole discretion, deems appropriate.
(iii) Payment. A Restricted Stock Unit Award may be settled by the delivery of shares of Common Stock, their cash equivalent, any combination thereof or in any other form of consideration, as determined by the Board and contained in the Restricted Stock Unit Award Agreement.
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(iv) Additional Restrictions. At the time of the grant of a Restricted Stock Unit Award, the Board, as it deems appropriate, may impose such restrictions or conditions that delay the delivery of the shares of Common Stock (or their cash equivalent) subject to a Restricted Stock Unit Award to a time after the vesting of such Restricted Stock Unit Award.
(v) Dividend Equivalents. Dividend equivalents may be credited in respect of shares of Common Stock covered by a Restricted Stock Unit Award, as determined by the Board and contained in the Restricted Stock Unit Award Agreement. At the sole discretion of the Board, such dividend equivalents may be converted into additional shares of Common Stock covered by the Restricted Stock Unit Award in such manner as determined by the Board. Any additional shares covered by the Restricted Stock Unit Award credited by reason of such dividend equivalents will be subject to all of the same terms and conditions of the underlying Restricted Stock Unit Award Agreement to which they relate.
(vi) Termination of Participants Continuous Service. Except as otherwise provided in the applicable Restricted Stock Unit Award Agreement, such portion of the Restricted Stock Unit Award that has not vested will be forfeited upon the Participants termination of Continuous Service.
(vii) Compliance with Section 409A of the Code. Notwithstanding anything to the contrary set forth herein, any Restricted Stock Unit Award granted under the Plan that is not exempt from the requirements of Section 409A of the Code shall contain such provisions so that such Restricted Stock Unit Award will comply with the requirements of Section 409A of the Code. Such restrictions, if any, shall be determined by the Board and contained in the Restricted Stock Unit Award Agreement evidencing such Restricted Stock Unit Award. For example, such restrictions may include, without limitation, a requirement that any Common Stock that is to be issued in a year following the year in which the Restricted Stock Unit Award vests must be issued in accordance with a fixed pre-determined schedule.
(c) Other Stock Awards. Other forms of Stock Awards valued in whole or in part by reference to, or otherwise based on, Common Stock, including the appreciation in value thereof (e.g., options or stock rights with an exercise price or strike price less than one hundred percent (100%) of the Fair Market Value of the Common Stock at the time of grant) may be granted either alone or in addition to Stock Awards provided for under Section 5 and the preceding provisions of this Section 6. Subject to the provisions of the Plan, the Board will have sole and complete authority to determine the persons to whom and the time or times at which such Other Stock Awards will be granted, the number of shares of Common Stock (or the cash equivalent thereof) to be granted pursuant to such Other Stock Awards and all other terms and conditions of such Other Stock Awards.
7. COVENANTS OF THE COMPANY.
(a) Availability of Shares. The Company will keep available at all times the number of shares of Common Stock reasonably required to satisfy then-outstanding Stock Awards.
(b) Securities Law Compliance. The Company will seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking will not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts and at a reasonable cost, the Company is unable to obtain from any such regulatory
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commission or agency the authority that counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company will be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained. A Participant will not be eligible for the grant of a Stock Award or the subsequent issuance of cash or Common Stock pursuant to the Stock Award if such grant or issuance would be in violation of any applicable securities law.
(c) No Obligation to Notify or Minimize Taxes. The Company will have no duty or obligation to any Participant to advise such holder as to the time or manner of exercising such Stock Award. Furthermore, the Company will have no duty or obligation to warn or otherwise advise such holder of a pending termination or expiration of a Stock Award or a possible period in which the Stock Award may not be exercised. The Company has no duty or obligation to minimize the tax consequences of a Stock Award to the holder of such Stock Award.
8. MISCELLANEOUS.
(a) Use of Proceeds from Sales of Common Stock. Proceeds from the sale of shares of Common Stock pursuant to Stock Awards will constitute general funds of the Company.
(b) Corporate Action Constituting Grant of Stock Awards. Corporate action constituting a grant by the Company of a Stock Award to any Participant will be deemed completed as of the date of such corporate action, unless otherwise determined by the Board, regardless of when the instrument, certificate, or letter evidencing the Stock Award is communicated to, or actually received or accepted by, the Participant. In the event that the corporate records (e.g., Board consents, resolutions or minutes) documenting the corporate action constituting the grant contain terms (e.g., exercise price, vesting schedule or number of shares) that are inconsistent with those in the Stock Award Agreement as a result of a clerical error in the papering of the Stock Award Agreement, the corporate records will control and the Participant will have no legally binding right to the incorrect term in the Stock Award Agreement.
(c) Stockholder Rights. No Participant will be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to a Stock Award unless and until (i) such Participant has satisfied all requirements for exercise of, or the issuance of shares of Common Stock under, the Stock Award pursuant to its terms, and (ii) the issuance of the Common Stock subject to the Stock Award has been entered into the books and records of the Company.
(d) No Employment or Other Service Rights. Nothing in the Plan, any Stock Award Agreement or any other instrument executed thereunder or in connection with any Stock Award granted pursuant thereto will confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or will affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultants agreement with the Company or an Affiliate, or (iii) the service of a Director pursuant to the bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be.
(e) Change in Time Commitment. In the event a Participants regular level of time commitment in the performance of his or her services for the Company and any Affiliates is reduced (for example, and without limitation, if the Participant is an Employee of the Company and the Employee has a change in status from a full-time Employee to a part-time Employee) after the date of grant of any Stock
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Award to the Participant, the Board has the right in its sole discretion to (x) make a corresponding reduction in the number of shares subject to any portion of such Stock Award that is scheduled to vest or become payable after the date of such change in time commitment, and (y) in lieu of or in combination with such a reduction, extend the vesting or payment schedule applicable to such Stock Award. In the event of any such reduction, the Participant will have no right with respect to any portion of the Stock Award that is so reduced or extended.
(f) Incentive Stock Option Limitations. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and any Affiliates) exceeds one hundred thousand dollars ($100,000) (or such other limit established in the Code) or otherwise does not comply with the rules governing Incentive Stock Options, the Options or portions thereof that exceed such limit (according to the order in which they were granted) or otherwise do not comply with such rules will be treated as Nonstatutory Stock Options, notwithstanding any contrary provision of the applicable Option Agreement(s).
(g) Investment Assurances. The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participants knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participants own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, will be inoperative if (A) the issuance of the shares upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (B) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock.
(h) Withholding Obligations. Unless prohibited by the terms of a Stock Award Agreement, the Company may, in its sole discretion, satisfy any federal, state or local tax withholding obligation relating to a Stock Award by any of the following means or by a combination of such means: (i) causing the Participant to tender a cash payment; (ii) withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to the Participant in connection with the Stock Award; provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax required to be withheld by law (or such lesser amount as may be necessary to avoid classification of the Stock Award as a liability for financial accounting purposes); (iii) withholding cash from a Stock Award settled in cash; (iv) withholding payment from any amounts otherwise payable to the Participant; or (v) by such other method as may be set forth in the Stock Award Agreement.
(i) Electronic Delivery. Any reference herein to a written agreement or document will include any agreement or document delivered electronically or posted on the Companys intranet (or other shared electronic medium controlled by the Company to which the Participant has access).
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(j) Deferrals. To the extent permitted by applicable law, the Board, in its sole discretion, may determine that the delivery of Common Stock or the payment of cash, upon the exercise, vesting or settlement of all or a portion of any Stock Award may be deferred and may establish programs and procedures for deferral elections to be made by Participants. Deferrals by Participants will be made in accordance with Section 409A of the Code. Consistent with Section 409A of the Code, the Board may provide for distributions while a Participant is still an employee or otherwise providing services to the Company. The Board is authorized to make deferrals of Stock Awards and determine when, and in what annual percentages, Participants may receive payments, including lump sum payments, following the Participants termination of Continuous Service, and implement such other terms and conditions consistent with the provisions of the Plan and in accordance with applicable law.
(k) Compliance with Section 409A of the Code. To the extent that the Board determines that any Stock Award granted hereunder is subject to Section 409A of the Code, the Stock Award Agreement evidencing such Stock Award shall incorporate the terms and conditions necessary to avoid the consequences specified in Section 409A(a)(1) of the Code. To the extent applicable, the Plan and Stock Award Agreements shall be interpreted in accordance with Section 409A of the Code.
(l) Repurchase Limitation. The terms of any repurchase right will be specified in the Stock Award Agreement. The repurchase price for vested shares of Common Stock will be the Fair Market Value of the shares of Common Stock on the date of repurchase. The repurchase price for unvested shares of Common Stock will be the lower of (i) the Fair Market Value of the shares of Common Stock on the date of repurchase or (ii) their original purchase price. However, the Company will not exercise its repurchase right until at least six (6) months (or such longer or shorter period of time necessary to avoid classification of the Stock Award as a liability for financial accounting purposes) have elapsed following delivery of shares of Common Stock subject to the Stock Award, unless otherwise specifically provided by the Board.
9. ADJUSTMENTS UPON CHANGES IN COMMON STOCK; OTHER CORPORATE EVENTS.
(a) Capitalization Adjustments. In the event of a Capitalization Adjustment, the Board will appropriately and proportionately adjust: (i) the class(es) and maximum number of securities subject to the Plan pursuant to Section 3(a), (ii) the class(es) and maximum number of securities that may be issued pursuant to the exercise of Incentive Stock Options pursuant to Section 3(c), and (iii) the class(es) and number of securities and price per share of stock subject to outstanding Stock Awards. The Board will make such adjustments, and its determination will be final, binding and conclusive.
(b) Dissolution. Except as otherwise provided in the Stock Award Agreement, in the event of a Dissolution of the Company, all outstanding Stock Awards (other than Stock Awards consisting of vested and outstanding shares of Common Stock not subject to a forfeiture condition or the Companys right of repurchase) will terminate immediately prior to the completion of such Dissolution, and the shares of Common Stock subject to the Companys repurchase rights or subject to a forfeiture condition may be repurchased or reacquired by the Company notwithstanding the fact that the holder of such Stock Award is providing Continuous Service, provided, however, that the Board may, in its sole discretion, cause some or all Stock Awards to become fully vested, exercisable and/or no longer subject to repurchase or forfeiture (to the extent such Stock Awards have not previously expired or terminated) before the Dissolution is completed but contingent on its completion.
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(c) Corporate Transactions. The following provisions will apply to Stock Awards in the event of a Transaction unless otherwise provided in the Stock Award Agreement or any other written agreement between the Company or any Affiliate and the Participant or unless otherwise expressly provided by the Board at the time of grant of a Stock Award. In the event of a Transaction, then, notwithstanding any other provision of the Plan, the Board may take one or more of the following actions with respect to Stock Awards, contingent upon the closing or completion of the Transaction:
(i) arrange for the surviving corporation or acquiring corporation (or the surviving or acquiring corporations parent company) to assume or continue the Stock Award or to substitute a similar stock award for the Stock Award (including, but not limited to, an award to acquire the same consideration paid to the stockholders of the Company pursuant to the Transaction);
(ii) arrange for the assignment of any reacquisition or repurchase rights held by the Company in respect of Common Stock issued pursuant to the Stock Award to the surviving corporation or acquiring corporation (or the surviving or acquiring corporations parent company);
(iii) accelerate the vesting, in whole or in part, of the Stock Award (and, if applicable, the time at which the Stock Award may be exercised) to a date prior to the effective time of such Transaction as the Board determines (or, if the Board does not determine such a date, to the date that is five (5) days prior to the effective date of the Transaction), with such Stock Award terminating if not exercised (if applicable) at or prior to the effective time of the Transaction; provided, however, that the Board may require Participants to complete and deliver to the Company a notice of exercise before the effective date of a Transaction, which exercise is contingent upon the effectiveness of such Transaction;
(iv) arrange for the lapse, in whole or in part, of any reacquisition or repurchase rights held by the Company with respect to the Stock Award;
(v) cancel or arrange for the cancellation of the Stock Award, to the extent not vested or not exercised prior to the effective time of the Transaction, in exchange for such cash consideration, if any, as the Board, in its sole discretion, may consider appropriate; and
(vi) make a payment, in such form as may be determined by the Board equal to the excess, if any, of (A) the value of the property the Participant would have received upon the exercise of the Stock Award immediately prior to the effective time of the Transaction, over (B) any exercise price payable by such holder in connection with such exercise. For clarity, this payment may be zero ($0) if the value of the property is equal to or less than the exercise price. Payments under this provision may be delayed to the same extent that payment of consideration to the holders of the Companys Common Stock in connection with the Transaction is delayed as a result of escrows, earn outs, holdbacks or any other contingencies.
The Board need not take the same action or actions with respect to all Stock Awards or portions thereof or with respect to all Participants. The Board may take different actions with respect to the vested and unvested portions of a Stock Award.
(d) Change in Control. A Stock Award may be subject to additional acceleration of vesting and exercisability upon or after a Change in Control as may be provided in the Stock Award Agreement for such Stock Award or as may be provided in any other written agreement between the Company or any Affiliate and the Participant, but in the absence of such provision, no such acceleration will occur.
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10. PLAN TERM; EARLIER TERMINATION OR SUSPENSION OF THE PLAN.
(a) Plan Term. The Board may suspend or terminate the Plan at any time. Unless terminated sooner by the Board, the Plan will automatically terminate on the day before the tenth (10th) anniversary of the earlier of (i) the date the Plan is adopted by the Board, or (ii) the date the Plan is approved by the stockholders of the Company. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated.
(b) No Impairment of Rights. Suspension or termination of the Plan will not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the affected Participant or as otherwise permitted in the Plan.
11. EFFECTIVE DATE OF PLAN.
This Plan will become effective on the Effective Date.
12. CHOICE OF LAW.
The laws of the State of California will govern all questions concerning the construction, validity and interpretation of this Plan, without regard to that states conflict of laws rules.
13. DEFINITIONS. As used in the Plan, the following definitions will apply to the capitalized terms indicated below:
(a) Affiliate means, at the time of determination, any parent or majority-owned subsidiary of the Company, as such terms are defined in Rule 405. The Board will have the authority to determine the time or times at which parent or majority-owned subsidiary status is determined within the foregoing definition.
(b) Board means the Board of Directors of the Company.
(c) Capitalization Adjustment means any change that is made in, or other events that occur with respect to, the Common Stock subject to the Plan or subject to any Stock Award after the Effective Date without the receipt of consideration by the Company through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, large nonrecurring cash dividend, stock split, reverse stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure, or any similar equity restructuring transaction, as that term is used in Statement of Financial Accounting Standards Board Accounting Standards Codification Topic 718 (or any successor thereto). Notwithstanding the foregoing, the conversion of any convertible securities of the Company will not be treated as a Capitalization Adjustment.
(d) Cause shall have the meaning ascribed to such term in any written agreement between the Participant and the Company defining such term and, in the absence of such agreement, such term means with respect to a Participant, the occurrence of any of the following events: (i) such Participants commission of any felony or any crime involving fraud, dishonesty or moral turpitude under the laws of the United States or any state thereof; (ii) such Participants attempted commission of, or participation in, a fraud or act of dishonesty against the Company; (iii) such Participants intentional, material violation of any contract or agreement between the Participant and the Company or of any statutory duty owed to the Company; (iv) such Participants unauthorized use or disclosure of the Companys confidential information or trade secrets; or (v) such Participants gross misconduct. The determination that a
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termination of the Participants Continuous Service is either for Cause or without Cause shall be made by the Company in its sole discretion. Any determination by the Company that the Continuous Service of a Participant was terminated with or without Cause for the purposes of outstanding Stock Awards held by such Participant shall have no effect upon any determination of the rights or obligations of the Company or such Participant for any other purpose.
(e) Change in Control means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:
(i) any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Companys then outstanding securities other than by virtue of a merger, consolidation or similar transaction. Notwithstanding the foregoing, a Change in Control will not be deemed to occur (A) on account of the acquisition of securities of the Company directly from the Company, (B) on account of the acquisition of securities of the Company by an investor, any affiliate thereof or any other Exchange Act Person that acquires the Companys securities in a transaction or series of related transactions the primary purpose of which is to obtain financing for the Company through the issuance of equity securities or (C) solely because the level of Ownership held by any Exchange Act Person (the Subject Person) exceeds the designated percentage threshold of the outstanding voting securities as a result of a repurchase or other acquisition of voting securities by the Company reducing the number of shares outstanding, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, and after such share acquisition, the Subject Person becomes the Owner of any additional voting securities that, assuming the repurchase or other acquisition had not occurred, increases the percentage of the then outstanding voting securities Owned by the Subject Person over the designated percentage threshold, then a Change in Control will be deemed to occur;
(ii) there is consummated a merger, consolidation or similar transaction involving (directly or indirectly) the Company and, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Company immediately prior thereto do not Own, directly or indirectly, either (A) outstanding voting securities representing more than fifty percent (50%) of the combined outstanding voting power of the surviving Entity in such merger, consolidation or similar transaction or (B) more than fifty percent (50%) of the combined outstanding voting power of the parent of the surviving Entity in such merger, consolidation or similar transaction, in each case in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such transaction;
(iii) there is consummated a sale, lease, exclusive license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries to an Entity, more than fifty percent (50%) of the combined voting power of the voting securities of which are Owned by stockholders of the Company in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such sale, lease, license or other disposition; or
(iv) individuals who, on the date the Plan is adopted by the Board, are members of the Board (the Incumbent Board) cease for any reason to constitute at least a majority of the members of the Board; provided, however, that if the appointment or election (or nomination for election) of any new Board member was approved or recommended by a majority vote of the members of the Incumbent Board then still in office, such new member will, for purposes of this Plan, be considered as a member of the Incumbent Board.
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Notwithstanding the foregoing definition or any other provision of this Plan, (A) the term Change in Control will not include a sale of assets, merger or other transaction effected exclusively for the purpose of changing the domicile of the Company, and (B) the definition of Change in Control (or any analogous term) in an individual written agreement between the Company or any Affiliate and the Participant will supersede the foregoing definition with respect to Stock Awards subject to such agreement; provided, however, that if no definition of Change in Control or any analogous term is set forth in such an individual written agreement, the foregoing definition will apply.
(f) Code means the Internal Revenue Code of 1986, as amended, including any applicable regulations and guidance thereunder.
(g) Committee means a committee of one or more Directors to whom authority has been delegated by the Board in accordance with Section 2(c).
(h) Common Stock means the common stock of the Company.
(i) Company means Intersect ENT, Inc., a Delaware corporation.
(j) Consultant means any person, including an advisor, who is (i) engaged by the Company or an Affiliate to render consulting or advisory services and is compensated for such services, or (ii) serving as a member of the board of directors of an Affiliate and is compensated for such services. However, service solely as a Director, or payment of a fee for such service, will not cause a Director to be considered a Consultant for purposes of the Plan.
(k) Continuous Service means that the Participants service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. A change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Director or Consultant or a change in the Entity for which the Participant renders such service, provided that there is no interruption or termination of the Participants service with the Company or an Affiliate, will not terminate a Participants Continuous Service; provided, however, that if the Entity for which a Participant is rendering services ceases to qualify as an Affiliate, as determined by the Board in its sole discretion, such Participants Continuous Service will be considered to have terminated on the date such Entity ceases to qualify as an Affiliate. For example, a change in status from an Employee of the Company to a Consultant of an Affiliate or to a Director will not constitute an interruption of Continuous Service. To the extent permitted by law, the Board or the chief executive officer of the Company, in that partys sole discretion, may determine whether Continuous Service will be considered interrupted in the case of (i) any leave of absence approved by the Board or chief executive officer, including sick leave, military leave or any other personal leave, or (ii) transfers between the Company, an Affiliate, or their successors. Notwithstanding the foregoing, a leave of absence will be treated as Continuous Service for purposes of vesting in a Stock Award only to such extent as may be provided in the Companys leave of absence policy, in the written terms of any leave of absence agreement or policy applicable to the Participant, or as otherwise required by law.
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(l) Corporate Transaction means the consummation, in a single transaction or in a series of related transactions, of any one or more of the following events:
(i) a sale or other disposition of all or substantially all, as determined by the Board in its sole discretion, of the consolidated assets of the Company and its Subsidiaries;
(ii) a sale or other disposition of at least ninety percent (90%) of the outstanding securities of the Company;
(iii) a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or
(iv) a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise.
(m) Director means a member of the Board.
(n) Disability means, with respect to a Participant, the inability of such Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve (12) months as provided in Sections 22(e)(3) and 409A(a)(2)(c)(i) of the Code, and will be determined by the Board on the basis of such medical evidence as the Board deems warranted under the circumstances.
(o) Dissolution means when the Company, after having executed a certificate of dissolution with the State of Delaware, has completely wound up its affairs. Conversion of the Company into a Limited Liability Company will not be considered a Dissolution for purposes of the Plan.
(p) Effective Date means the effective date of this Plan, which is the earlier of (i) the date that this Plan is first approved by the Companys stockholders, and (ii) the date this Plan is adopted by the Board.
(q) Employee means any person employed by the Company or an Affiliate. However, service solely as a Director, or payment of a fee for such services, will not cause a Director to be considered an Employee for purposes of the Plan.
(r) Entity means a corporation, partnership, limited liability company or other entity.
(s) Exchange Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
(t) Exchange Act Person means any natural person, Entity or group (within the meaning of Section 13(d) or 14(d) of the Exchange Act), except that Exchange Act Person will not include (i) the Company or any Subsidiary of the Company, (ii) any employee benefit plan of the Company or any Subsidiary of the Company or any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary of the Company, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) an Entity Owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their Ownership of stock of the Company; or (v) any natural person, Entity or group (within the meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of the Effective Date, is the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Companys then outstanding securities.
19.
(u) Fair Market Value means, as of any date, the value of the Common Stock determined by the Board in compliance with Section 409A of the Code or, in the case of an Incentive Stock Option, in compliance with Section 422 of the Code.
(v) Incentive Stock Option means an option granted pursuant to Section 5 of the Plan that is intended to be, and that qualifies as, an incentive stock option within the meaning of Section 422 of the Code.
(w) Nonstatutory Stock Option means any option granted pursuant to Section 5 of the Plan that does not qualify as an Incentive Stock Option.
(x) Officer means any person designated by the Company as an officer.
(y) Option means an Incentive Stock Option or a Nonstatutory Stock Option to purchase shares of Common Stock granted pursuant to the Plan.
(z) Option Agreement means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an Option grant. Each Option Agreement will be subject to the terms and conditions of the Plan.
(aa) Optionholder means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option.
(bb) Other Stock Award means an award based in whole or in part by reference to the Common Stock which is granted pursuant to the terms and conditions of Section 6(c).
(cc) Other Stock Award Agreement means a written agreement between the Company and a holder of an Other Stock Award evidencing the terms and conditions of an Other Stock Award grant. Each Other Stock Award Agreement will be subject to the terms and conditions of the Plan.
(dd) Own, Owned, Owner, Ownership A person or Entity will be deemed to Own, to have Owned, to be the Owner of, or to have acquired Ownership of securities if such person or Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities.
(ee) Participant means a person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award.
(ff) Plan means this 2013 Intersect ENT, Inc. Equity Incentive Plan.
(gg) Restricted Stock Award means an award of shares of Common Stock which is granted pursuant to the terms and conditions of Section 6(a).
(hh) Restricted Stock Award Agreement means a written agreement between the Company and a holder of a Restricted Stock Award evidencing the terms and conditions of a Restricted Stock Award grant. Each Restricted Stock Award Agreement will be subject to the terms and conditions of the Plan.
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(ii) Restricted Stock Unit Award means a right to receive shares of Common Stock which is granted pursuant to the terms and conditions of Section 6(b).
(jj) Restricted Stock Unit Award Agreement means a written agreement between the Company and a holder of a Restricted Stock Unit Award evidencing the terms and conditions of a Restricted Stock Unit Award grant. Each Restricted Stock Unit Award Agreement will be subject to the terms and conditions of the Plan.
(kk) Rule 405 means Rule 405 promulgated under the Securities Act.
(ll) Rule 701 means Rule 701 promulgated under the Securities Act.
(mm) Securities Act means the Securities Act of 1933, as amended.
(nn) Stock Appreciation Right or SAR means a right to receive the appreciation on Common Stock that is granted pursuant to the terms and conditions of Section 5.
(oo) Stock Appreciation Right Agreement means a written agreement between the Company and a holder of a Stock Appreciation Right evidencing the terms and conditions of a Stock Appreciation Right grant. Each Stock Appreciation Right Agreement will be subject to the terms and conditions of the Plan.
(pp) Stock Award means any right to receive Common Stock granted under the Plan, including an Incentive Stock Option, a Nonstatutory Stock Option, a Restricted Stock Award, a Restricted Stock Unit Award, a Stock Appreciation Right or any Other Stock Award.
(qq) Stock Award Agreement means a written agreement between the Company and a Participant evidencing the terms and conditions of a Stock Award grant. Each Stock Award Agreement will be subject to the terms and conditions of the Plan.
(rr) Subsidiary means, with respect to the Company, (i) any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation will have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership, limited liability company or other entity in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or capital contribution) of more than fifty percent (50%) .
(ss) Ten Percent Stockholder means a person who Owns (or is deemed to Own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Affiliate.
(tt) Transaction means a Corporate Transaction or a Change in Control.
21.
INTERSECT ENT, INC.
STOCK OPTION GRANT NOTICE
(2013 EQUITY INCENTIVE PLAN)
Intersect ENT, Inc. (the Company), pursuant to its 2013 Equity Incentive Plan (the Plan), hereby grants to Optionholder an option to purchase the number of shares of the Companys Common Stock set forth below. This option is subject to all of the terms and conditions as set forth herein and in the Option Agreement, the Plan, and the Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety.
Optionholder: |
«Optionholder» | |
Date of Grant: |
«GrantDate» | |
Vesting Commencement Date: |
«VCD» | |
Number of Shares Subject to Option: |
«Shares» | |
Exercise Price (Per Share): |
$«ExercisePrice» | |
Total Exercise Price: |
$«TotalExercisePrice» | |
Expiration Date: |
«Expiration» |
Type of Grant: | x Incentive Stock Option1 |
¨ Nonstatutory Stock Option | ||
Exercise Schedule: | x Same as Vesting Schedule |
¨ Early Exercise Permitted | ||
Vesting Schedule: | 1/4th of the shares subject to the option shall vest on the one year anniversary of the Vesting Commencement Date; the balance of the shares shall vest in a series of thirty-six (36) successive equal monthly installments measured from the first anniversary of the Vesting Commencement Date; subject to Optionholders Continuous Service. | |||
Payment: | By one or a combination of the following items (described in the Option Agreement): | |||
x By cash or check | ||||
x Pursuant to a Regulation T Program if the Shares are publicly traded | ||||
x By delivery of already-owned shares if the Shares are publicly traded |
Additional Terms/Acknowledgements: The undersigned Optionholder acknowledges receipt of, and understands and agrees to, this Stock Option Grant Notice, the Option Agreement and the Plan. Optionholder acknowledges and agrees that this Stock Option Grant Notice and the Option Agreement may not be modified, amended or revised except in a writing signed by Optionholder and a duly authorized officer of the Company. Optionholder further acknowledges that as of the Date of Grant, this Stock Option Grant Notice, the Option Agreement, and the Plan set forth the entire understanding between Optionholder and the Company regarding the acquisition of stock in the Company and supersede all prior oral and written agreements, promises and/or representations on that subject with the exception of (i) options previously granted and delivered to Optionholder under the Plan, and (ii) the following agreements only:
OTHER AGREEMENTS: |
|
1 | If this is an Incentive Stock Option, it (plus other outstanding Incentive Stock Options) cannot be first exercisable for more than $100,000 in value (measured by exercise price) in any calendar year. Any excess over $100,000 is a Nonstatutory Stock Option. |
22.
INTERSECT ENT, INC. | «OPTIONHOLDER» | |||||
By: |
|
|
||||
Lisa D. Earnhardt President and Chief Executive Officer |
Signature |
ATTACHMENTS: Option Agreement, 2013 Equity Incentive Plan and Notice of Exercise
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INTERSECT ENT, INC.
2013 EQUITY INCENTIVE PLAN
OPTION AGREEMENT
(INCENTIVE STOCK OPTION OR NONSTATUTORY STOCK OPTION)
Pursuant to your Stock Option Grant Notice (Grant Notice) and this Option Agreement, INTERSECT ENT, INC. (the Company) has granted you an option under its 2013 Equity Incentive Plan (the Plan) to purchase the number of shares of the Companys Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined in this Option Agreement but defined in the Plan shall have the same definitions as in the Plan.
The details of your option are as follows:
1. VESTING. Subject to the limitations contained herein, your option will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service.
2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your option and your exercise price per share referenced in your Grant Notice may be adjusted from time to time for Capitalization Adjustments.
3. EXERCISE RESTRICTION FOR NON-EXEMPT EMPLOYEES. In the event that you are an Employee eligible for overtime compensation under the Fair Labor Standards Act of 1938, as amended (i.e., a Non-Exempt Employee), you may not exercise your option until you have completed at least six (6) months of Continuous Service measured from the Date of Grant specified in your Grant Notice, notwithstanding any other provision of your option.
4. EXERCISE PRIOR TO VESTING (EARLY EXERCISE). If permitted in your Grant Notice (i.e., the Exercise Schedule indicates Early Exercise Permitted) and subject to the provisions of your option, you may elect at any time that is both (i) during the period of your Continuous Service and (ii) during the term of your option, to exercise all or part of your option, including the unvested portion of your option; provided, however, that:
a. a partial exercise of your option shall be deemed to cover first vested shares of Common Stock and then the earliest vesting installment of unvested shares of Common Stock;
b. any shares of Common Stock so purchased from installments that have not vested as of the date of exercise shall be subject to the purchase option in favor of the Company as described in the Companys form of Early Exercise Stock Purchase Agreement;
c. you shall enter into the Companys form of Early Exercise Stock Purchase Agreement with a vesting schedule that will result in the same vesting as if no early exercise had occurred; and
d. if your option is an Incentive Stock Option, then, to the extent that the aggregate Fair Market Value (determined at the time of grant) of the shares of Common Stock with respect to which your option plus all other Incentive Stock Options you hold are exercisable for the first time by you during any calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), your option(s) or portions thereof that exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options.
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5. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of your option. You may elect to make payment of the exercise price in cash or by check or in any other manner permitted by your Grant Notice, which may include one or more of the following:
a. Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds.
b. Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, by delivery to the Company (either by actual delivery or attestation) of already-owned shares of Common Stock that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise. Notwithstanding the foregoing, you may not exercise your option by tender to the Company of Common Stock to the extent such tender would violate the provisions of any law, regulation or agreement restricting the redemption of the Companys stock.
c. Pursuant to the following deferred payment alternative:
1) Not less than one hundred percent (100%) of the aggregate exercise price, plus accrued interest, shall be due four (4) years from date of exercise or, at the Companys election, upon termination of your Continuous Service.
2) Interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid (1) the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement and (2) the classification of your option as a liability for financial accounting purposes.
3) In order to elect the deferred payment alternative, you must, as a part of your written notice of exercise, give notice of the election of this payment alternative and, in order to secure the payment of the deferred exercise price to the Company hereunder, if the Company so requests, you must tender to the Company a promissory note and a pledge agreement covering the purchased shares of Common Stock, both in form and substance satisfactory to the Company, or such other or additional documentation as the Company may request.
6. WHOLE SHARES. You may exercise your option only for whole shares of Common Stock.
7. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not exercise your option unless the shares of Common Stock issuable upon such exercise are then registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option also must comply with other applicable laws and regulations governing your option, and you may not exercise your option if the Company determines that such exercise would not be in material compliance with such laws and regulations.
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8. TERM. You may not exercise your option before the commencement of its term or after its term expires. The term of your option commences on the Date of Grant and expires upon the earliest of the following:
a. immediately upon the termination of your Continuous Service for Cause;
b. three (3) months after the termination of your Continuous Service for any reason other than Cause, Disability or death, provided that if during any part of such three (3)-month period you may not exercise your option solely because of the condition set forth in the preceding paragraph relating to Securities Law Compliance, your option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service;
c. twelve (12) months after the termination of your Continuous Service due to your Disability;
d. eighteen (18) months after your death if you die during your Continuous Service;
e. the Expiration Date indicated in your Grant Notice; or
f. the day before the tenth (10th) anniversary of the Date of Grant.
Notwithstanding the foregoing, if you die during the period provided in Section 8(b) or 8(c) above, the term of your option shall not expire until the earlier of eighteen (18) months after your death, the Expiration Date indicated in your Grant Notice, or the day before the tenth (10th) anniversary of the Date of Grant.
If your option is an Incentive Stock Option, note that, to obtain the federal income tax advantages associated with an Incentive Stock Option, the Code requires that at all times beginning on the date of grant of your option and ending on the day three (3) months before the date of your options exercise, you must be an employee of the Company or an Affiliate, except in the event of your death or Disability. The Company has provided for extended exercisability of your option under certain circumstances for your benefit but cannot guarantee that your option will necessarily be treated as an Incentive Stock Option if you continue to provide services to the Company or an Affiliate as a Consultant or Director after your employment terminates or if you otherwise exercise your option more than three (3) months after the date your employment terminates.
9. EXERCISE.
a. You may exercise the vested portion of your option (and the unvested portion of your option if your Grant Notice so permits) during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require.
b. By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are subject at the time of exercise, or (3) the disposition of shares of Common Stock acquired upon such exercise.
26.
c. If your option is an Incentive Stock Option, by exercising your option you agree that you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of your option that occurs within two (2) years after the date of your option grant or within one (1) year after such shares of Common Stock are transferred upon exercise of your option.
d. By exercising your option you agree that you shall not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any shares of Common Stock or other securities of the Company held by you, for a period of one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act or such longer period as necessary to permit compliance with FINRA Rule 2711 or NYSE Member Rule 472 and similar rules and regulations (the Lock-Up Period); provided, however, that nothing contained in this section shall prevent the exercise of a repurchase option, if any, in favor of the Company during the Lock-Up Period. You further agree to execute and deliver such other agreements as may be reasonably requested by the Company and/or the underwriter(s) that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to your shares of Common Stock until the end of such period. The underwriters of the Companys stock are intended third party beneficiaries of this Section 9(d) and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto.
10. TRANSFERABILITY.
a. If your option is an Incentive Stock Option, your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your option.
b. If your option is a Nonstatutory Stock Option, your option is not transferable, except (i) by will or by the laws of descent and distribution, (ii) with the prior written approval of the Company, by instrument to an inter vivos or testamentary trust, in a form accepted by the Company, in which the option is to be passed to beneficiaries upon the death of the trustor (settlor) and (iii) with the prior written approval of the Company, by gift, in a form accepted by the Company, to a permitted transferee under Rule 701 of the Securities Act.
11. RIGHT OF FIRST REFUSAL. Shares of Common Stock that you acquire upon exercise of your option are subject to any right of first refusal that may be described in the Companys bylaws in effect at such time the Company elects to exercise its right; provided, however, that if your option is an Incentive Stock Option and the right of first refusal described in the Companys bylaws in effect at the time the Company elects to exercise its right is more beneficial to you than the right of first refusal described in the Companys bylaws on the Date of Grant, then the right of first refusal described in the Companys bylaws on the Date of Grant shall apply. The Companys right of first refusal shall expire on the first date upon which any security of the Company is listed (or approved for listing) upon notice of issuance on a national securities exchange or quotation system.
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12. RIGHT OF REPURCHASE. To the extent provided in the Companys bylaws in effect at such time the Company elects to exercise its right, the Company shall have the right to repurchase all or any part of the shares of Common Stock you acquire pursuant to the exercise of your option.
13. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option shall obligate the Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate.
14. WITHHOLDING OBLIGATIONS.
a. At the time you exercise your option, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a cashless exercise pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with the exercise of your option.
b. Upon your request and subject to approval by the Company, in its sole discretion, and compliance with any applicable legal conditions or restrictions, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law (or such lower amount as may be necessary to avoid classification of your option as a liability for financial accounting purposes). If the date of determination of any tax withholding obligation is deferred to a date later than the date of exercise of your option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date of exercise of your option. Notwithstanding the filing of such election, shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined as of the date of exercise of your option that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility.
c. You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company shall have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein unless such obligations are satisfied.
15. TAX CONSEQUENCES. You hereby agree that the Company does not have a duty to design or administer the Plan or its other compensation programs in a manner that minimizes your tax liabilities. You shall not make any claim against the Company, or any of its Officers, Directors, Employees or Affiliates related to tax liabilities arising from your option or your other compensation. In particular, you acknowledge that this option is exempt from Section 409A of the Code only if the exercise price per share specified in the Grant Notice is at least equal to the fair market value per share of the
28.
Common Stock on the Date of Grant and there is no other impermissible deferral of compensation associated with the option. Because the Common Stock is not traded on an established securities market, the Fair Market Value is determined by the Board, perhaps in consultation with an independent valuation firm retained by the Company. You acknowledge that there is no guarantee that the Internal Revenue Service will agree with the valuation as determined by the Board, and you shall not make any claim against the Company, or any of its Officers, Directors, Employees or Affiliates in the event that the Internal Revenue Service asserts that the valuation determined by the Board is less than the fair market value as subsequently determined by the Internal Revenue Service.
16. NOTICES. Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company.
17. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations, which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of the Plan, the provisions of the Plan shall control.
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NOTICE OF EXERCISE
Intersect ENT, Inc. 1555 Adams Drive Menlo Park, CA 94025 |
Date of Exercise: |
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase the number of shares for the price set forth below.
Type of option (check one): |
Incentive ¨ | Nonstatutory ¨ | ||
Stock option dated: |
|
|||
Number of shares as to which option is exercised: |
|
|||
Certificates to be issued in name of: |
|
|||
Total exercise price: |
$ |
|||
Cash payment delivered herewith: |
$ |
By this exercise, I agree (i) to provide such additional documents as you may require pursuant to the terms of the INTERSECT ENT, INC. 2013 Equity Incentive Plan, (ii) to provide for the payment by me to you (in the manner designated by you) of your withholding obligation, if any, relating to the exercise of this option, and (iii) if this exercise relates to an incentive stock option, to notify you in writing within fifteen (15) days after the date of any disposition of any of the shares of Common Stock issued upon exercise of this option that occurs within two (2) years after the date of grant of this option or within one (1) year after such shares of Common Stock are issued upon exercise of this option.
I hereby make the following certifications and representations with respect to the number of shares of Common Stock of the Company listed above (the Shares), which are being acquired by me for my own account upon exercise of the Option as set forth above:
I acknowledge that the Shares have not been registered under the Securities Act of 1933, as amended (the Securities Act), and are deemed to constitute restricted securities under Rule 701 and Rule 144 promulgated under the Securities Act. I warrant and represent to the Company that I have no present intention of distributing or selling said Shares, except as permitted under the Securities Act and any applicable state securities laws.
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I further acknowledge that I will not be able to resell the Shares for at least ninety (90) days after the stock of the Company becomes publicly traded (i.e., subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934) under Rule 701 and that more restrictive conditions apply to affiliates of the Company under Rule 144.
I further acknowledge that all certificates representing any of the Shares subject to the provisions of the Option shall have endorsed thereon appropriate legends reflecting the foregoing limitations, as well as any legends reflecting restrictions pursuant to the Companys Certificate of Incorporation, Bylaws and/or applicable securities laws.
I further agree that, if required by the Company (or a representative of the underwriters) in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act, I will not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any shares of Common Stock or other securities of the Company for a period of one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act or such longer period as necessary to permit compliance with FINRA Rule 2711 or NYSE Member Rule 472 and similar rules and regulations (the Lock-Up Period). I further agree to execute and deliver such other agreements as may be reasonably requested by the Company and/or the underwriter(s) that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period.
Very truly yours, | ||
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Signature | ||
Print Name: |
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Address: |
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Email: |
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Social Security No.:
31.
Exhibit 10.4
INTERSECT ENT, INC.
2014 EQUITY INCENTIVE PLAN
ADOPTED BY THE BOARD OF DIRECTORS: JULY 7, 2014
APPROVED BY THE STOCKHOLDERS: JULY 10, 2014
IPO DATE/EFFECTIVE DATE: [ ], 2014
1. GENERAL.
(a) Eligible Award Recipients. Employees, Directors and Consultants are eligible to receive Awards.
(b) Available Awards. The Plan provides for the grant of the following Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) Stock Appreciation Rights (iv) Restricted Stock Awards, (v) Restricted Stock Unit Awards, (vi) Performance Stock Awards, (vii) Performance Cash Awards, and (viii) Other Stock Awards.
(c) Purpose. The Plan, through the grant of Awards, is intended to help the Company secure and retain the services of eligible award recipients, provide incentives for such persons to exert maximum efforts for the success of the Company and any Affiliate, and provide a means by which the eligible recipients may benefit from increases in value of the Common Stock.
2. ADMINISTRATION.
(a) Administration by Board. The Board will administer the Plan. The Board may delegate administration of the Plan to a Committee or Committees, as provided in Section 2(c).
(b) Powers of Board. The Board will have the power, subject to, and within the limitations of, the express provisions of the Plan:
(i) To determine: (A) who will be granted Awards; (B) when and how each Award will be granted; (C) what type of Award will be granted; (D) the provisions of each Award (which need not be identical), including when a person will be permitted to exercise or otherwise receive cash or Common Stock under the Award; (E) the number of shares of Common Stock subject to, or the cash value of, an Award; and (F) the Fair Market Value applicable to a Stock Award.
(ii) To construe and interpret the Plan and Awards granted under it, and to establish, amend and revoke rules and regulations for administration of the Plan and Awards. The Board, in the exercise of these powers, may correct any defect, omission or inconsistency in the Plan or in any Award Agreement or in the written terms of a Performance Cash Award, in a manner and to the extent it will deem necessary or expedient to make the Plan or Award fully effective.
(iii) To settle all controversies regarding the Plan and Awards granted under it.
1.
(iv) To accelerate, in whole or in part, the time at which an Award may be exercised or vest (or the time at which cash or shares of Common Stock may be issued in settlement thereof).
(v) To suspend or terminate the Plan at any time. Except as otherwise provided in the Plan or an Award Agreement, suspension or termination of the Plan will not materially impair a Participants rights under the Participants then-outstanding Award without the Participants written consent, except as provided in subsection (viii) below.
(vi) To amend the Plan in any respect the Board deems necessary or advisable, including, without limitation, by adopting amendments relating to Incentive Stock Options and certain nonqualified deferred compensation under Section 409A of the Code and/or bringing the Plan or Awards granted under the Plan into compliance with the requirements for Incentive Stock Options or ensuring that they are exempt from, or compliant with, the requirements for nonqualified deferred compensation under Section 409A of the Code, subject to the limitations, if any, of applicable law. If required by applicable law or listing requirements, and except as provided in Section 9(a) relating to Capitalization Adjustments, the Company will seek stockholder approval of any amendment of the Plan that (A) materially increases the number of shares of Common Stock available for issuance under the Plan, (B) materially expands the class of individuals eligible to receive Awards under the Plan, (C) materially increases the benefits accruing to Participants under the Plan, (D) materially reduces the price at which shares of Common Stock may be issued or purchased under the Plan, (E) materially extends the term of the Plan, or (F) materially expands the types of Awards available for issuance under the Plan. Except as otherwise provided in the Plan or an Award Agreement, no amendment of the Plan will materially impair a Participants rights under an outstanding Award without the Participants written consent.
(vii) To submit any amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of (A) Section 162(m) of the Code regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to Covered Employees, (B) Section 422 of the Code regarding incentive stock options or (C) Rule 16b-3.
(viii) To approve forms of Award Agreements for use under the Plan and to amend the terms of any one or more Awards, including, but not limited to, amendments to provide terms more favorable to the Participant than previously provided in the Award Agreement, subject to any specified limits in the Plan that are not subject to Board discretion; provided, however, that a Participants rights under any Award will not be impaired by any such amendment unless (A) the Company requests the consent of the affected Participant, and (B) such Participant consents in writing. Notwithstanding the foregoing, (1) a Participants rights will not be deemed to have been impaired by any such amendment if the Board, in its sole discretion, determines that the amendment, taken as a whole, does not materially impair the Participants rights, and (2) subject to the limitations of applicable law, if any, the Board may amend the terms of any one or more Awards without the affected Participants consent (A) to maintain the qualified status of the Award as an Incentive Stock Option under Section 422 of the Code; (B) to change the terms of an Incentive Stock Option, if such change results in impairment of the Award solely because it impairs the qualified status of the Award as an Incentive Stock
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Option under Section 422 of the Code; (C) to clarify the manner of exemption from, or to bring the Award into compliance with, Section 409A of the Code; or (D) to comply with other applicable laws or listing requirements.
(ix) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and that are not in conflict with the provisions of the Plan or Awards.
(x) To adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the Plan by Employees, Directors or Consultants who are foreign nationals or employed outside the United States (provided that Board approval will not be necessary for immaterial modifications to the Plan or any Award Agreement that are required for compliance with the laws of the relevant foreign jurisdiction).
(xi) To effect, with the consent of any adversely affected Participant, (A) the reduction of the exercise, purchase or strike price of any outstanding Stock Award; (B) the cancellation of any outstanding Stock Award and the grant in substitution therefor of a new (1) Option or SAR, (2) Restricted Stock Award, (3) Restricted Stock Unit Award, (4) Other Stock Award, (5) cash and/or (6) other valuable consideration determined by the Board, in its sole discretion, with any such substituted award (x) covering the same or a different number of shares of Common Stock as the cancelled Stock Award and (y) granted under the Plan or another equity or compensatory plan of the Company; or (C) any other action that is treated as a repricing under generally accepted accounting principles.
(c) Delegation to Committee.
(i) General. The Board may delegate some or all of the administration of the Plan to a Committee or Committees. If administration of the Plan is delegated to a Committee, the Committee will have, in connection with the administration of the Plan, the powers theretofore possessed by the Board that have been delegated to the Committee, including the power to delegate to a subcommittee of the Committee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board will thereafter be to the Committee or subcommittee, as applicable). Any delegation of administrative powers will be reflected in resolutions, not inconsistent with the provisions of the Plan, adopted from time to time by the Board or Committee (as applicable). The Board may retain the authority to concurrently administer the Plan with the Committee and may, at any time, revest in the Board some or all of the powers previously delegated.
(ii) Section 162(m) and Rule 16b-3 Compliance. The Committee may consist solely of two or more Outside Directors, in accordance with Section 162(m) of the Code, or solely of two or more Non-Employee Directors, in accordance with Rule 16b-3.
(d) Delegation to an Officer. The Board may delegate to one (1) or more Officers the authority to do one or both of the following (i) designate Employees who are not Officers to be recipients of Options and SARs (and, to the extent permitted by applicable law, other Stock Awards) and, to the extent permitted by applicable law, the terms of such Awards, and (ii) determine the number of shares of Common Stock to be subject to such Stock Awards granted to
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such Employees; provided, however, that the Board resolutions regarding such delegation will specify the total number of shares of Common Stock that may be subject to the Stock Awards granted by such Officer and that such Officer may not grant a Stock Award to himself or herself. Any such Stock Awards will be granted on the form of Stock Award Agreement most recently approved for use by the Committee or the Board, unless otherwise provided in the resolutions approving the delegation authority. The Board may not delegate authority to an Officer who is acting solely in the capacity of an Officer (and not also as a Director) to determine the Fair Market Value pursuant to Section 13(x)(iii) below.
(e) Effect of Boards Decision. All determinations, interpretations and constructions made by the Board in good faith will not be subject to review by any person and will be final, binding and conclusive on all persons.
3. SHARES SUBJECT TO THE PLAN.
(a) Share Reserve. Subject to Section 9(a) relating to Capitalization Adjustments, the aggregate number of shares of Common Stock that may be issued pursuant to Stock Awards will not exceed 4,750,000 shares (the Share Reserve). The Share Reserve will automatically increase on January 1st of each year, for a period of not more than ten years, commencing on January 1st of the year following the year in which the IPO Date occurs and ending on (and including) January 1, 2024, in an amount equal to 3% of the total number of shares of Capital Stock outstanding on December 31st of the preceding calendar year. Notwithstanding the foregoing, the Board may act prior to January 1st of a given year to provide that there will be no January 1st increase in the Share Reserve for such year or that the increase in the Share Reserve for such year will be a lesser number of shares of Common Stock than would otherwise occur pursuant to the preceding sentence. For clarity, the Share Reserve in this Section 3(a) is a limitation on the number of shares of Common Stock that may be issued pursuant to the Plan. Accordingly, this Section 3(a) does not limit the granting of Stock Awards except as provided in Section 7(a). Shares may be issued in connection with a merger or acquisition as permitted by NASDAQ Listing Rule 5635(c) or, if applicable, NYSE Listed Company Manual Section 303A.08, AMEX Company Guide Section 711 or other applicable rule, and such issuance will not reduce the number of shares available for issuance under the Plan.
(b) Reversion of Shares to the Share Reserve. If a Stock Award or any portion thereof (i) expires or otherwise terminates without all of the shares covered by such Stock Award having been issued or (ii) is settled in cash (i.e., the Participant receives cash rather than stock), such expiration, termination or settlement will not reduce (or otherwise offset) the number of shares of Common Stock that may be available for issuance under the Plan. If any shares of Common Stock issued pursuant to a Stock Award are forfeited back to or repurchased by the Company because of the failure to meet a contingency or condition required to vest such shares in the Participant, then the shares that are forfeited or repurchased will revert to and again become available for issuance under the Plan. Any shares reacquired by the Company in satisfaction of tax withholding obligations on a Stock Award or as consideration for the exercise or purchase price of a Stock Award will again become available for issuance under the Plan.
(c) Incentive Stock Option Limit. Subject to the provisions of Section 9(a) relating to Capitalization Adjustments, the aggregate maximum number of shares of Common Stock that may be issued pursuant to the exercise of Incentive Stock Options will be 10,000,000 shares of Common Stock.
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(d) Section 162(m) Limitations. Subject to the provisions of Section 9(a) relating to Capitalization Adjustments, at such time as the Company may be subject to the applicable provisions of Section 162(m) of the Code, the following limitations shall apply.
(i) A maximum of 1,000,000 shares of Common Stock subject to Options, SARs and Other Stock Awards whose value is determined by reference to an increase over an exercise or strike price of at least 100% of the Fair Market Value on the date the Stock Award is granted may be granted to any one Participant during any one calendar year. Notwithstanding the foregoing, if any additional Options, SARs or Other Stock Awards whose value is determined by reference to an increase over an exercise or strike price of at least 100% of the Fair Market Value on the date the Stock Award are granted to any Participant during any calendar year, compensation attributable to the exercise of such additional Stock Awards will not satisfy the requirements to be considered qualified performance-based compensation under Section 162(m) of the Code unless such additional Stock Award is approved by the Companys stockholders.
(ii) A maximum of 1,000,000 shares of Common Stock subject to Performance Stock Awards may be granted to any one Participant during any one calendar year (whether the grant, vesting or exercise is contingent upon the attainment during the Performance Period of the Performance Goals).
(iii) A maximum of $1,000,000 may be granted as a Performance Cash Award to any one Participant during any one calendar year.
(e) Source of Shares. The stock issuable under the Plan will be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Company on the open market or otherwise.
4. ELIGIBILITY.
(a) Eligibility for Specific Stock Awards. Incentive Stock Options may be granted only to employees of the Company or a parent corporation or subsidiary corporation thereof (as such terms are defined in Sections 424(e) and 424(f) of the Code). Stock Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants; provided, however, that Stock Awards may not be granted to Employees, Directors and Consultants who are providing Continuous Service only to any parent of the Company, as such term is defined in Rule 405 of the Securities Act, unless (i) the stock underlying such Stock Awards is treated as service recipient stock under Section 409A of the Code (for example, because the Stock Awards are granted pursuant to a corporate transaction such as a spin off transaction), (ii) the Company, in consultation with its legal counsel, has determined that such Stock Awards are otherwise exempt from Section 409A of the Code, or (iii) the Company, in consultation with its legal counsel, has determined that such Stock Awards comply with the distribution requirements of Section 409A of the Code.
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(b) Ten Percent Stockholders. A Ten Percent Stockholder will not be granted an Incentive Stock Option unless the exercise price of such Option is at least 110% of the Fair Market Value on the date of grant and the Option is not exercisable after the expiration of five years from the date of grant.
5. PROVISIONS RELATING TO OPTIONS AND STOCK APPRECIATION RIGHTS.
Each Option or SAR will be in such form and will contain such terms and conditions as the Board deems appropriate. All Options will be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates will be issued for shares of Common Stock purchased on exercise of each type of Option. If an Option is not specifically designated as an Incentive Stock Option, or if an Option is designated as an Incentive Stock Option but some portion or all of the Option fails to qualify as an Incentive Stock Option under the applicable rules, then the Option (or portion thereof) will be a Nonstatutory Stock Option. The provisions of separate Options or SARs need not be identical; provided, however, that each Award Agreement will conform to (through incorporation of provisions hereof by reference in the applicable Award Agreement or otherwise) the substance of each of the following provisions:
(a) Term. Subject to the provisions of Section 4(b) regarding Ten Percent Stockholders, no Option or SAR will be exercisable after the expiration of ten years from the date of its grant or such shorter period specified in the Award Agreement.
(b) Exercise Price. Subject to the provisions of Section 4(b) regarding Ten Percent Stockholders, the exercise or strike price of each Option or SAR will be not less than 100% of the Fair Market Value of the Common Stock subject to the Option or SAR on the date the Award is granted. Notwithstanding the foregoing, an Option or SAR may be granted with an exercise or strike price lower than 100% of the Fair Market Value of the Common Stock subject to the Award if such Award is granted pursuant to an assumption of or substitution for another option or stock appreciation right pursuant to a Corporate Transaction and in a manner consistent with the provisions of Section 409A and, if applicable, Section 424(a) of the Code. Each SAR will be denominated in shares of Common Stock equivalents.
(c) Purchase Price for Options. The purchase price of Common Stock acquired pursuant to the exercise of an Option may be paid, to the extent permitted by applicable law and as determined by the Board in its sole discretion, by any combination of the methods of payment set forth below. The Board will have the authority to grant Options that do not permit all of the following methods of payment (or otherwise restrict the ability to use certain methods) and to grant Options that require the consent of the Company to use a particular method of payment. The permitted methods of payment are as follows:
(i) by cash, check, bank draft or money order payable to the Company;
(ii) pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of the stock subject to the Option, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds;
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(iii) by delivery to the Company (either by actual delivery or attestation) of shares of Common Stock;
(iv) if an Option is a Nonstatutory Stock Option, by a net exercise arrangement pursuant to which the Company will reduce the number of shares of Common Stock issuable upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price; provided, however, that the Company will accept a cash or other payment from the Participant to the extent of any remaining balance of the aggregate exercise price not satisfied by such reduction in the number of whole shares to be issued. Shares of Common Stock will no longer be subject to an Option and will not be exercisable thereafter to the extent that (A) shares issuable upon exercise are used to pay the exercise price pursuant to the net exercise, (B) shares are delivered to the Participant as a result of such exercise, and (C) shares are withheld to satisfy tax withholding obligations; or
(v) in any other form of legal consideration that may be acceptable to the Board and specified in the applicable Award Agreement.
(d) Exercise and Payment of a SAR. To exercise any outstanding SAR, the Participant must provide written notice of exercise to the Company in compliance with the provisions of the Stock Appreciation Right Agreement evidencing such SAR. The appreciation distribution payable on the exercise of a SAR will be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the SAR) of a number of shares of Common Stock equal to the number of Common Stock equivalents in which the Participant is vested under such SAR, and with respect to which the Participant is exercising the SAR on such date, over (B) the aggregate strike price of the number of Common Stock equivalents with respect to which the Participant is exercising the SAR on such date. The appreciation distribution may be paid in Common Stock, in cash, in any combination of the two or in any other form of consideration, as determined by the Board and contained in the Award Agreement evidencing such SAR.
(e) Transferability of Options and SARs. The Board may, in its sole discretion, impose such limitations on the transferability of Options and SARs as the Board will determine. In the absence of such a determination by the Board to the contrary, the following restrictions on the transferability of Options and SARs will apply:
(i) Restrictions on Transfer. An Option or SAR will not be transferable except by will or by the laws of descent and distribution (or pursuant to subsections (ii) and (iii) below), and will be exercisable during the lifetime of the Participant only by the Participant. The Board may permit transfer of the Option or SAR in a manner that is not prohibited by applicable tax and securities laws. Except as explicitly provided in the Plan, neither an Option nor a SAR may be transferred for consideration.
(ii) Domestic Relations Orders. Subject to the approval of the Board or a duly authorized Officer, an Option or SAR may be transferred pursuant to the terms of a domestic relations order, official marital settlement agreement or other divorce or separation instrument as permitted by Treasury Regulations Section 1.421-1(b)(2). If an Option is an Incentive Stock Option, such Option may be deemed to be a Nonstatutory Stock Option as a result of such transfer.
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(iii) Beneficiary Designation. Subject to the approval of the Board or a duly authorized Officer, a Participant may, by delivering written notice to the Company, in a form approved by the Company (or the designated broker), designate a third party who, on the death of the Participant, will thereafter be entitled to exercise the Option or SAR and receive the Common Stock or other consideration resulting from such exercise. In the absence of such a designation, upon the death of the Participant, the executor or administrator of the Participants estate will be entitled to exercise the Option or SAR and receive the Common Stock or other consideration resulting from such exercise. However, the Company may prohibit designation of a beneficiary at any time, including due to any conclusion by the Company that such designation would be inconsistent with the provisions of applicable laws.
(f) Vesting Generally. The total number of shares of Common Stock subject to an Option or SAR may vest and become exercisable in periodic installments that may or may not be equal. The Option or SAR may be subject to such other terms and conditions on the time or times when it may or may not be exercised (which may be based on the satisfaction of Performance Goals or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options or SARs may vary. The provisions of this Section 5(f) are subject to any Option or SAR provisions governing the minimum number of shares of Common Stock as to which an Option or SAR may be exercised.
(g) Termination of Continuous Service. Except as otherwise provided in the applicable Award Agreement or other agreement between the Participant and the Company, if a Participants Continuous Service terminates (other than for Cause and other than upon the Participants death or Disability), the Participant may exercise his or her Option or SAR (to the extent that the Participant was entitled to exercise such Award as of the date of termination of Continuous Service) within the period of time ending on the earlier of (i) the date which occurs ninety (90) days following the termination of the Participants Continuous Service (or such longer or shorter period specified in the applicable Award Agreement), and (ii) the expiration of the term of the Option or SAR as set forth in the Award Agreement. If, after termination of Continuous Service, the Participant does not exercise his or her Option or SAR (as applicable) within the applicable time frame, the Option or SAR will terminate.
(h) Extension of Termination Date. If the exercise of an Option or SAR following the termination of the Participants Continuous Service (other than for Cause and other than upon the Participants death or Disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option or SAR will terminate on the earlier of (i) the expiration of a total period of time (that need not be consecutive) equal to the applicable post termination exercise period after the termination of the Participants Continuous Service during which the exercise of the Option or SAR would not be in violation of such registration requirements, and (ii) the expiration of the term of the Option or SAR as set forth in the applicable Award Agreement. In addition, unless otherwise provided in a Participants Award Agreement, if the sale of any Common Stock received on exercise of an Option or SAR following the termination of the Participants Continuous Service (other than for Cause) would violate the Companys insider trading policy,
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then the Option or SAR will terminate on the earlier of (i) the expiration of the period of days or months (that need not be consecutive) equal to the applicable post-termination exercise period after the termination of the Participants Continuous Service during which the sale of the Common Stock received upon exercise of the Option or SAR would not be in violation of the Companys insider trading policy, or (ii) the expiration of the term of the Option or SAR as set forth in the applicable Award Agreement.
(i) Disability of Participant. Except as otherwise provided in the applicable Award Agreement or other agreement between the Participant and the Company, if a Participants Continuous Service terminates as a result of the Participants Disability, the Participant may exercise his or her Option or SAR (to the extent that the Participant was entitled to exercise such Option or SAR as of the date of termination of Continuous Service), but only within such period of time ending on the earlier of (i) the date which occurs 12 months following such termination of Continuous Service (or such longer or shorter period specified in the Award Agreement), and (ii) the expiration of the term of the Option or SAR as set forth in the Award Agreement. If, after termination of Continuous Service, the Participant does not exercise his or her Option or SAR within the applicable time frame, the Option or SAR (as applicable) will terminate.
(j) Death of Participant. Except as otherwise provided in the applicable Award Agreement or other agreement between the Participant and the Company, if (i) a Participants Continuous Service terminates as a result of the Participants death, or (ii) the Participant dies within the period (if any) specified in the Award Agreement for exercisability after the termination of the Participants Continuous Service for a reason other than death, then the Option or SAR may be exercised (to the extent the Participant was entitled to exercise such Option or SAR as of the date of death) by the Participants estate, by a person who acquired the right to exercise the Option or SAR by bequest or inheritance or by a person designated to exercise the Option or SAR upon the Participants death, but only within the period ending on the earlier of (i) the date which occurs 18 months following the date of death (or such longer or shorter period specified in the Award Agreement), and (ii) the expiration of the term of such Option or SAR as set forth in the Award Agreement. If, after the Participants death, the Option or SAR is not exercised within the applicable time frame, the Option or SAR (as applicable) will terminate.
(k) Termination for Cause. Except as explicitly provided otherwise in a Participants Award Agreement or other individual written agreement between the Company or any Affiliate and the Participant, if a Participants Continuous Service is terminated for Cause, the Option or SAR will terminate immediately upon such Participants termination of Continuous Service, and the Participant will be prohibited from exercising his or her Option or SAR from and after the date of such termination of Continuous Service.
(l) Non-Exempt Employees. If an Option or SAR is granted to an Employee who is a non-exempt employee for purposes of the Fair Labor Standards Act of 1938, as amended, the Option or SAR will not be first exercisable for any shares of Common Stock until at least six months following the date of grant of the Option or SAR (although the Award may vest prior to such date). Consistent with the provisions of the Worker Economic Opportunity Act, (i) if such non-exempt Employee dies or suffers a Disability, (ii) upon a Corporate Transaction in which such Option or SAR is not assumed, continued, or substituted, (iii) upon a Change in Control, or (iv) upon the Participants retirement (as such term may be defined in the Participants Award
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Agreement in another agreement between the Participant and the Company, or, if no such definition, in accordance with the Companys then current employment policies and guidelines), the vested portion of any Options and SARs may be exercised earlier than six months following the date of grant. The foregoing provision is intended to operate so that any income derived by a non-exempt employee in connection with the exercise or vesting of an Option or SAR will be exempt from his or her regular rate of pay. To the extent permitted and/or required for compliance with the Worker Economic Opportunity Act to ensure that any income derived by a non-exempt employee in connection with the exercise, vesting or issuance of any shares under any other Stock Award will be exempt from the employees regular rate of pay, the provisions of this Section 5(l) will apply to all Stock Awards and are hereby incorporated by reference into such Stock Award Agreements.
6. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS AND SARS.
(a) Restricted Stock Awards. Each Restricted Stock Award Agreement will be in such form and will contain such terms and conditions as the Board will deem appropriate. To the extent consistent with the Companys bylaws, at the Boards election, shares of Common Stock may be (x) held in book entry form subject to the Companys instructions until any restrictions relating to the Restricted Stock Award lapse; or (y) evidenced by a certificate, which certificate will be held in such form and manner as determined by the Board. The terms and conditions of Restricted Stock Award Agreements may change from time to time, and the terms and conditions of separate Restricted Stock Award Agreements need not be identical. Each Restricted Stock Award Agreement will conform to (through incorporation of the provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:
(i) Consideration. A Restricted Stock Award may be awarded in consideration for (A) cash, check, bank draft or money order payable to the Company, (B) past services to the Company or an Affiliate, or (C) any other form of legal consideration (including future services) that may be acceptable to the Board, in its sole discretion, and permissible under applicable law.
(ii) Vesting. Shares of Common Stock awarded under the Restricted Stock Award Agreement may be subject to forfeiture to the Company in accordance with a vesting schedule to be determined by the Board.
(iii) Termination of Participants Continuous Service. If a Participants Continuous Service terminates, the Company may receive through a forfeiture condition or a repurchase right any or all of the shares of Common Stock held by the Participant that have not vested as of the date of termination of Continuous Service under the terms of the Restricted Stock Award Agreement.
(iv) Transferability. Rights to acquire shares of Common Stock under the Restricted Stock Award Agreement will be transferable by the Participant only upon such terms and conditions as are set forth in the Restricted Stock Award Agreement, as the Board will determine in its sole discretion, so long as Common Stock awarded under the Restricted Stock Award Agreement remains subject to the terms of the Restricted Stock Award Agreement.
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(v) Dividends. A Restricted Stock Award Agreement may provide that any dividends paid on Restricted Stock will be subject to the same vesting and forfeiture restrictions as apply to the shares subject to the Restricted Stock Award to which they relate.
(b) Restricted Stock Unit Awards. Each Restricted Stock Unit Award Agreement will be in such form and will contain such terms and conditions as the Board will deem appropriate. The terms and conditions of Restricted Stock Unit Award Agreements may change from time to time, and the terms and conditions of separate Restricted Stock Unit Award Agreements need not be identical. Each Restricted Stock Unit Award Agreement will conform to (through incorporation of the provisions hereof by reference in the Agreement or otherwise) the substance of each of the following provisions:
(i) Consideration. At the time of grant of a Restricted Stock Unit Award, the Board will determine the consideration, if any, to be paid by the Participant upon delivery of each share of Common Stock subject to the Restricted Stock Unit Award. The consideration to be paid (if any) by the Participant for each share of Common Stock subject to a Restricted Stock Unit Award may be paid in any form of legal consideration that may be acceptable to the Board, in its sole discretion, and permissible under applicable law.
(ii) Vesting. At the time of the grant of a Restricted Stock Unit Award, the Board may impose such restrictions on or conditions to the vesting of the Restricted Stock Unit Award as it, in its sole discretion, deems appropriate.
(iii) Payment. A Restricted Stock Unit Award may be settled by the delivery of shares of Common Stock, their cash equivalent, any combination thereof or in any other form of consideration, as determined by the Board and contained in the Restricted Stock Unit Award Agreement.
(iv) Additional Restrictions. At the time of the grant of a Restricted Stock Unit Award, the Board, as it deems appropriate, may impose such restrictions or conditions that delay the delivery of the shares of Common Stock (or their cash equivalent) subject to a Restricted Stock Unit Award to a time after the vesting of such Restricted Stock Unit Award.
(v) Dividend Equivalents. Dividend equivalents may be credited in respect of shares of Common Stock covered by a Restricted Stock Unit Award, as determined by the Board and contained in the Restricted Stock Unit Award Agreement. At the sole discretion of the Board, such dividend equivalents may be converted into additional shares of Common Stock covered by the Restricted Stock Unit Award in such manner as determined by the Board. Any additional shares covered by the Restricted Stock Unit Award credited by reason of such dividend equivalents will be subject to all of the same terms and conditions of the underlying Restricted Stock Unit Award Agreement to which they relate.
(vi) Termination of Participants Continuous Service. Except as otherwise provided in the applicable Restricted Stock Unit Award Agreement, such portion of the Restricted Stock Unit Award that has not vested will be forfeited upon the Participants termination of Continuous Service.
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(c) Performance Awards.
(i) Performance Stock Awards. A Performance Stock Award is a Stock Award (covering a number of shares not in excess of that set forth in Section 3(d) above) that is payable (including that may be granted, may vest or may be exercised) contingent upon the attainment during a Performance Period of certain Performance Goals. A Performance Stock Award may but need not require the Participants completion of a specified period of Continuous Service. The length of any Performance Period, the Performance Goals to be achieved during the Performance Period, and the measure of whether and to what degree such Performance Goals have been attained will be conclusively determined by the Committee (or, if not required for compliance with Section 162(m) of the Code, the Board), in its sole discretion. In addition, to the extent permitted by applicable law and the applicable Award Agreement, the Board may determine that cash may be used in payment of Performance Stock Awards.
(ii) Performance Cash Awards. A Performance Cash Award is a cash award (for a dollar value not in excess of that set forth in Section 3(d) above) that is payable contingent upon the attainment during a Performance Period of certain Performance Goals. A Performance Cash Award may also require the completion of a specified period of Continuous Service. At the time of grant of a Performance Cash Award, the length of any Performance Period, the Performance Goals to be achieved during the Performance Period, and the measure of whether and to what degree such Performance Goals have been attained will be conclusively determined by the Committee (or, if not required for compliance with Section 162(m) of the Code, the Board), in its sole discretion. The Board may specify the form of payment of Performance Cash Awards, which may be cash or other property, or may provide for a Participant to have the option for his or her Performance Cash Award, or such portion thereof as the Board may specify, to be paid in whole or in part in cash or other property.
(iii) Board Discretion. The Board retains the discretion to reduce or eliminate the compensation or economic benefit due upon attainment of Performance Goals and to define the manner of calculating the Performance Criteria it selects to use for a Performance Period. Partial achievement of the specified criteria may result in the payment or vesting corresponding to the degree of achievement as specified in the Stock Award Agreement or the written terms of a Performance Cash Award.
(iv) Section 162(m) Compliance. Unless otherwise permitted in compliance with the requirements of Section 162(m) of the Code with respect to an Award intended to qualify as performance-based compensation thereunder, the Committee will establish the Performance Goals applicable to, and the formula for calculating the amount payable under, the Award no later than the earlier of (a) the date which occurs 90 days after the commencement of the applicable Performance Period, and (b) the date on which 25% of the Performance Period has elapsed, and in any event at a time when the achievement of the applicable Performance Goals remains substantially uncertain. Prior to the payment of any compensation under an Award intended to qualify as performance-based compensation under Section 162(m) of the Code, the Committee will certify the extent to which any Performance Goals and any other material terms under such Award have been satisfied (other than in cases where such Performance Goals relate solely to the increase in the value of the Common Stock). Notwithstanding satisfaction of, or completion of any Performance Goals, the number of shares of Common Stock, Options, cash or
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other benefits granted, issued, retainable and/or vested under an Award on account of satisfaction of such Performance Goals may be reduced by the Committee on the basis of such further considerations as the Committee, in its sole discretion, will determine.
(d) Other Stock Awards. Other forms of Stock Awards valued in whole or in part by reference to, or otherwise based on, Common Stock, including the appreciation in value thereof (e.g., options or stock rights with an exercise price or strike price less than 100% of the Fair Market Value of the Common Stock at the time of grant) may be granted either alone or in addition to Stock Awards provided for under Section 5 and the preceding provisions of this Section 6. Subject to the provisions of the Plan, the Board will have sole and complete authority to determine the persons to whom and the time or times at which such Other Stock Awards will be granted, the number of shares of Common Stock (or the cash equivalent thereof) to be granted pursuant to such Other Stock Awards and all other terms and conditions of such Other Stock Awards.
7. COVENANTS OF THE COMPANY.
(a) Availability of Shares. The Company will keep available at all times the number of shares of Common Stock reasonably required to satisfy then-outstanding Awards.
(b) Securities Law Compliance. The Company will seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking will not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts and at a reasonable cost, the Company is unable to obtain from any such regulatory commission or agency the authority that counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company will be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained. A Participant will not be eligible for the grant of an Award or the subsequent issuance of cash or Common Stock pursuant to the Award if such grant or issuance would be in violation of any applicable securities law.
(c) No Obligation to Notify or Minimize Taxes. The Company will have no duty or obligation to any Participant to advise such holder as to the time or manner of exercising such Stock Award. Furthermore, the Company will have no duty or obligation to warn or otherwise advise such holder of a pending termination or expiration of an Award or a possible period in which the Award may not be exercised. The Company has no duty or obligation to minimize the tax consequences of an Award to the holder of such Award.
8. MISCELLANEOUS.
(a) Use of Proceeds from Sales of Common Stock. Proceeds from the sale of shares of Common Stock pursuant to Awards will constitute general funds of the Company.
(b) Corporate Action Constituting Grant of Awards. Corporate action constituting a grant by the Company of an Award to any Participant will be deemed completed as
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of the date of such corporate action, unless otherwise determined by the Board, regardless of when the instrument, certificate, or letter evidencing the Award is communicated to, or actually received or accepted by, the Participant. In the event that the corporate records (e.g., Board consents, resolutions or minutes) documenting the corporate action constituting the grant contain terms (e.g., exercise price, vesting schedule or number of shares) that are inconsistent with those in the Award Agreement or related grant documents as a result of a clerical error in the papering of the Award Agreement or related grant documents, the corporate records will control and the Participant will have no legally binding right to the incorrect term in the Award Agreement or related grant documents.
(c) Stockholder Rights. No Participant will be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to an Award unless and until (i) such Participant has satisfied all requirements for exercise of, or the issuance of shares of Common Stock under, the Award pursuant to its terms, and (ii) the issuance of the Common Stock subject to such Award has been entered into the books and records of the Company.
(d) No Employment or Other Service Rights. Nothing in the Plan, any Award Agreement or any other instrument executed thereunder or in connection with any Award granted pursuant thereto will confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Award was granted or will affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultants agreement with the Company or an Affiliate, or (iii) the service of a Director pursuant to the bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be.
(e) Change in Time Commitment. In the event a Participants regular level of time commitment in the performance of his or her services for the Company and any Affiliates is reduced (for example, and without limitation, if the Participant is an Employee of the Company and the Employee has a change in status from a full-time Employee to a part-time Employee or takes an extended leave of absence) after the date of grant of any Award to the Participant, the Board has the right in its sole discretion to (x) make a corresponding reduction in the number of shares or cash amount subject to any portion of such Award that is scheduled to vest or become payable after the date of such change in time commitment, and (y) in lieu of or in combination with such a reduction, extend the vesting or payment schedule applicable to such Award. In the event of any such reduction, the Participant will have no right with respect to any portion of the Award that is so reduced or extended.
(f) Incentive Stock Option Limitations. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and any Affiliates) exceeds $100,000 (or such other limit established in the Code) or otherwise does not comply with the rules governing Incentive Stock Options, the Options or portions thereof that exceed such limit (according to the order in which they were granted) or otherwise do not comply with such rules will be treated as Nonstatutory Stock Options, notwithstanding any contrary provision of the applicable Option Agreement(s).
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(g) Investment Assurances. The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Award, (i) to give written assurances satisfactory to the Company as to the Participants knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that such Participant is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Award for the Participants own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, will be inoperative if (A) the issuance of the shares upon the exercise or acquisition of Common Stock under the Award has been registered under a then currently effective registration statement under the Securities Act, or (B) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock.
(h) Withholding Obligations. Unless prohibited by the terms of an Award Agreement, the Company may, in its sole discretion, satisfy any federal, state or local tax withholding obligation relating to an Award by any of the following means or by a combination of such means: (i) causing the Participant to tender a cash payment; (ii) withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to the Participant in connection with the Award; provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax required to be withheld by law (or such lesser amount as may be necessary to avoid classification of the Stock Award as a liability for financial accounting purposes); (iii) withholding cash from an Award settled in cash; (iv) withholding payment from any amounts otherwise payable to the Participant; or (v) by such other method as may be set forth in the Award Agreement.
(i) Electronic Delivery. Any reference herein to a written agreement or document will include any agreement or document delivered electronically, filed publicly at www.sec.gov (or any successor website thereto) or posted on the Companys intranet (or other shared electronic medium controlled by the Company to which the Participant has access).
(j) Deferrals. To the extent permitted by applicable law, the Board, in its sole discretion, may determine that the delivery of Common Stock or the payment of cash, upon the exercise, vesting or settlement of all or a portion of any Award may be deferred and may establish programs and procedures for deferral elections to be made by Participants. Deferrals by Participants will be made in accordance with Section 409A of the Code. Consistent with Section 409A of the Code, the Board may provide for distributions while a Participant is still an employee or otherwise providing services to the Company. The Board is authorized to make deferrals of Awards and determine when, and in what annual percentages, Participants may
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receive payments, including lump sum payments, following the Participants termination of Continuous Service, and implement such other terms and conditions consistent with the provisions of the Plan and in accordance with applicable law.
(k) Compliance with Section 409A of the Code. Unless otherwise expressly provided for in an Award Agreement, the Plan and Award Agreements will be interpreted to the greatest extent possible in a manner that makes the Plan and the Awards granted hereunder exempt from Section 409A of the Code, and, to the extent not so exempt, in compliance with Section 409A of the Code. If the Board determines that any Award granted hereunder is not exempt from and is therefore subject to Section 409A of the Code, the Award Agreement evidencing such Award will incorporate the terms and conditions necessary to avoid the consequences specified in Section 409A(a)(1) of the Code, and to the extent an Award Agreement is silent on terms necessary for compliance, such terms are hereby incorporated by reference into the Award Agreement. Notwithstanding anything to the contrary in this Plan (and unless the Award Agreement specifically provides otherwise), if the shares of Common Stock are publicly traded, and if a Participant holding an Award that constitutes deferred compensation under Section 409A of the Code is a specified employee for purposes of Section 409A of the Code, no distribution or payment of any amount that is due because of a separation from service (as defined in Section 409A of the Code without regard to alternative definitions thereunder) will be issued or paid before the date that is six months following the date of such Participants separation from service (as defined in Section 409A of the Code without regard to alternative definitions thereunder) or, if earlier, the date of the Participants death, unless such distribution or payment can be made in a manner that complies with Section 409A of the Code, and any amounts so deferred will be paid in a lump sum on the day after such six month period elapses, with the balance paid thereafter on the original schedule.
(l) Clawback/Recovery. All Awards granted under the Plan will be subject to recoupment in accordance with any clawback policy that the Company is required to adopt pursuant to the listing standards of any national securities exchange or association on which the Companys securities are listed or as is otherwise required by the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law. In addition, the Board may impose such other clawback, recovery or recoupment provisions in an Award Agreement as the Board determines necessary or appropriate, including but not limited to a reacquisition right in respect of previously acquired shares of Common Stock or other cash or property upon the occurrence of an event constituting Cause. No recovery of compensation under such a clawback policy will be an event giving rise to a right to resign for good reason or constructive termination (or similar term) under any agreement with the Company.
9. ADJUSTMENTS UPON CHANGES IN COMMON STOCK; OTHER CORPORATE EVENTS.
(a) Capitalization Adjustments. In the event of a Capitalization Adjustment, the Board will appropriately and proportionately adjust: (i) the class(es) and maximum number of securities subject to the Plan pursuant to Section 3(a), (ii) the class(es) and maximum number of securities that may be issued pursuant to the exercise of Incentive Stock Options pursuant to Section 3(c), (iii) the class(es) and maximum number of securities that may be awarded to any person pursuant to Sections 3(d), and (iv) the class(es) and number of securities and price per share of stock subject to outstanding Stock Awards. The Board will make such adjustments, and its determination will be final, binding and conclusive.
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(b) Dissolution or Liquidation. Except as otherwise provided in the Stock Award Agreement, in the event of a dissolution or liquidation of the Company, all outstanding Stock Awards (other than Stock Awards consisting of vested and outstanding shares of Common Stock not subject to a forfeiture condition or the Companys right of repurchase) will terminate immediately prior to the completion of such dissolution or liquidation, and the shares of Common Stock subject to the Companys repurchase rights or subject to a forfeiture condition may be repurchased or reacquired by the Company notwithstanding the fact that the holder of such Stock Award is providing Continuous Service; provided, however, that the Board may, in its sole discretion, cause some or all Stock Awards to become fully vested, exercisable and/or no longer subject to repurchase or forfeiture (to the extent such Stock Awards have not previously expired or terminated) before the dissolution or liquidation is completed but contingent on its completion.
(c) Corporate Transaction. The following provisions will apply to Stock Awards in the event of a Corporate Transaction unless otherwise provided in the instrument evidencing the Stock Award or any other written agreement between the Company or any Affiliate and the Participant or unless otherwise expressly provided by the Board at the time of grant of a Stock Award. In the event of a Corporate Transaction, then, notwithstanding any other provision of the Plan, the Board will take one or more of the following actions with respect to Stock Awards, contingent upon the closing or completion of the Corporate Transaction:
(i) arrange for the surviving corporation or acquiring corporation (or the surviving or acquiring corporations parent company) to assume or continue the Stock Award or to substitute a similar stock award for the Stock Award (including, but not limited to, an award to acquire the same consideration paid to the stockholders of the Company pursuant to the Corporate Transaction);
(ii) arrange for the assignment of any reacquisition or repurchase rights held by the Company in respect of Common Stock issued pursuant to the Stock Award to the surviving corporation or acquiring corporation (or the surviving or acquiring corporations parent company);
(iii) accelerate the vesting, in whole or in part, of the Stock Award (and, if applicable, the time at which the Stock Award may be exercised) to a date prior to the effective time of such Corporate Transaction as the Board determines (or, if the Board does not determine such a date, to the date that is five days prior to the effective date of the Corporate Transaction), with such Stock Award terminating if not exercised (if applicable) at or prior to the effective time of the Corporate Transaction;
(iv) arrange for the lapse, in whole or in part, of any reacquisition or repurchase rights held by the Company with respect to the Stock Award;
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(v) cancel or arrange for the cancellation of the Stock Award, to the extent not vested or not exercised prior to the effective time of the Corporate Transaction, in exchange for such cash consideration, if any, as the Board, in its sole discretion, may consider appropriate; and
(vi) make a payment, in such form as may be determined by the Board equal to the excess, if any, of (A) the value of the property the Participant would have received upon the exercise of the Stock Award immediately prior to the effective time of the Corporate Transaction, over (B) any exercise price payable by such holder in connection with such exercise.
The Board need not take the same action or actions with respect to all Stock Awards or portions thereof or with respect to all Participants. The Board may take different actions with respect to the vested and unvested portions of a Stock Award.
(d) Change in Control. A Stock Award may be subject to additional acceleration of vesting and exercisability upon or after a Change in Control as may be provided in the Stock Award Agreement for such Stock Award or as may be provided in any other written agreement between the Company or any Affiliate and the Participant, but in the absence of such provision, no such acceleration will occur.
10. PLAN TERM; EARLIER TERMINATION OR SUSPENSION OF THE PLAN.
The Board may suspend or terminate the Plan at any time. No Incentive Stock Options may be granted after the tenth anniversary of the earlier of (i) the date the Plan is adopted by the Board (the Adoption Date), or (ii) the date the Plan is approved by the stockholders of the Company. No Awards may be granted under the Plan while the Plan is suspended or after it is terminated.
11. EXISTENCE OF THE PLAN; TIMING OF FIRST GRANT OR EXERCISE.
The Plan will come into existence on the Adoption Date; provided, however, that no Award may be granted prior to the IPO Date (that is, the Effective Date). In addition, no Stock Award will be exercised (or, in the case of a Restricted Stock Award, Restricted Stock Unit Award, Performance Stock Award, or Other Stock Award, no Stock Award will be granted) and no Performance Cash Award will be settled unless and until the Plan has been approved by the stockholders of the Company, which approval will be within 12 months after the date the Plan is adopted by the Board.
12. CHOICE OF LAW.
The law of the State of Delaware will govern all questions concerning the construction, validity and interpretation of this Plan, without regard to that states conflict of laws rules.
13. | DEFINITIONS. As used in the Plan, the following definitions will apply to the capitalized terms indicated below: |
(a) Affiliate means, at the time of determination, any parent or subsidiary of the Company as such terms are defined in Rule 405 of the Securities Act. The Board will have the authority to determine the time or times at which parent or subsidiary status is determined within the foregoing definition.
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(b) Award means a Stock Award or a Performance Cash Award.
(c) Award Agreement means a written agreement between the Company and a Participant evidencing the terms and conditions of an Award.
(d) Board means the Board of Directors of the Company.
(e) Capital Stock means each and every class of common stock of the Company, regardless of the number of votes per share.
(f) Capitalization Adjustment means any change that is made in, or other events that occur with respect to, the Common Stock subject to the Plan or subject to any Stock Award after the Adoption Date without the receipt of consideration by the Company through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, large nonrecurring cash dividend, stock split, reverse stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or any similar equity restructuring transaction, as that term is used in Statement of Financial Accounting Standards Board Accounting Standards Codification Topic 718 (or any successor thereto). Notwithstanding the foregoing, the conversion of any convertible securities of the Company will not be treated as a Capitalization Adjustment.
(g) Cause will have the meaning ascribed to such term in any written agreement between the Participant and the Company defining such term and, in the absence of such agreement, such term means, with respect to a Participant, the occurrence of any of the following events: (i) such Participants commission of any felony or any crime involving fraud, dishonesty or moral turpitude under the laws of the United States or any state thereof; (ii) such Participants attempted commission of, or participation in, a fraud or act of dishonesty against the Company; (iii) such Participants intentional, material violation of any contract or agreement between the Participant and the Company or of any statutory duty owed to the Company; (iv) such Participants unauthorized use or disclosure of the Companys confidential information or trade secrets; or (v) such Participants gross misconduct. The determination that a termination of the Participants Continuous Service is either for Cause or without Cause will be made by the Company, in its sole discretion. Any determination by the Company that the Continuous Service of a Participant was terminated with or without Cause for the purposes of outstanding Awards held by such Participant will have no effect upon any determination of the rights or obligations of the Company or such Participant for any other purpose.
(h) Change in Control means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:
(i) any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Companys then outstanding securities other than by virtue of a merger, consolidation or similar transaction. Notwithstanding the foregoing, a Change in Control will not be deemed to occur (A) on account of the acquisition of securities of the Company directly from the Company, (B)
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on account of the acquisition of securities of the Company by an investor, any affiliate thereof or any other Exchange Act Person that acquires the Companys securities in a transaction or series of related transactions the primary purpose of which is to obtain financing for the Company through the issuance of equity securities, (C) on account of the acquisition of securities of the Company by any individual who is, on the IPO Date, either an executive officer or a Director (either, an IPO Investor) and/or any entity in which an IPO Investor has a direct or indirect interest (whether in the form of voting rights or participation in profits or capital contributions) of more than 50% (collectively, the IPO Entities) or on account of the IPO Entities continuing to hold shares that come to represent more than 50% of the combined voting power of the Companys then outstanding securities as a result of the conversion of any class of the Companys securities into another class of the Companys securities having a different number of votes per share pursuant to the conversion provisions set forth in the Companys Amended and Restated Certificate of Incorporation; or (D) solely because the level of Ownership held by any Exchange Act Person (the Subject Person) exceeds the designated percentage threshold of the outstanding voting securities as a result of a repurchase or other acquisition of voting securities by the Company reducing the number of shares outstanding, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, and after such share acquisition, the Subject Person becomes the Owner of any additional voting securities that, assuming the repurchase or other acquisition had not occurred, increases the percentage of the then outstanding voting securities Owned by the Subject Person over the designated percentage threshold, then a Change in Control will be deemed to occur;
(ii) there is consummated a merger, consolidation or similar transaction involving (directly or indirectly) the Company and, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Company immediately prior thereto do not Own, directly or indirectly, either (A) outstanding voting securities representing more than 50% of the combined outstanding voting power of the surviving Entity in such merger, consolidation or similar transaction or (B) more than 50% of the combined outstanding voting power of the parent of the surviving Entity in such merger, consolidation or similar transaction, in each case in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such transaction; provided, however, that a merger, consolidation or similar transaction will not constitute a Change in Control under this prong of the definition if the outstanding voting securities representing more than 50% of the combined voting power of the surviving Entity or its parent are owned by the IPO Entities;
(iii) there is consummated a sale, lease, exclusive license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries to an Entity, more than 50% of the combined voting power of the voting securities of which are Owned by stockholders of the Company in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such sale, lease, license or other disposition; provided, however, that a sale, lease, exclusive license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries will not constitute a Change in Control under this prong of the definition if the outstanding voting securities representing more than 50% of the combined voting power of the acquiring Entity or its parent are owned by the IPO Entities; or
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(iv) individuals who, on the date the Plan is adopted by the Board, are members of the Board (the Incumbent Board) cease for any reason to constitute at least a majority of the members of the Board; provided, however, that if the appointment or election (or nomination for election) of any new Board member was approved or recommended by a majority vote of the members of the Incumbent Board then still in office, such new member will, for purposes of this Plan, be considered as a member of the Incumbent Board.
Notwithstanding the foregoing definition or any other provision of the Plan, the term Change in Control will not include a sale of assets, merger or other transaction effected exclusively for the purpose of changing the domicile of the Company and the definition of Change in Control (or any analogous term) in an individual written agreement between the Company or any Affiliate and the Participant will supersede the foregoing definition with respect to Awards subject to such agreement; provided, however, that if no definition of Change in Control or any analogous term is set forth in such an individual written agreement, the foregoing definition will apply.
(i) Code means the Internal Revenue Code of 1986, as amended, including any applicable regulations and guidance thereunder.
(j) Committee means a committee of one or more Directors to whom authority has been delegated by the Board in accordance with Section 2(c).
(k) Common Stock means, as of the IPO Date, the common stock of the Company, having one vote per share.
(l) Company means Intersect ENT, Inc., a Delaware corporation.
(m) Consultant means any person, including an advisor, who is (i) engaged by the Company or an Affiliate to render consulting or advisory services and is compensated for such services, or (ii) serving as a member of the board of directors of an Affiliate and is compensated for such services. However, service solely as a Director, or payment of a fee for such service, will not cause a Director to be considered a Consultant for purposes of the Plan. Notwithstanding the foregoing, a person is treated as a Consultant under this Plan only if a Form S-8 Registration Statement under the Securities Act is available to register either the offer or the sale of the Companys securities to such person.
(n) Continuous Service means that the Participants service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. A change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participants service with the Company or an Affiliate, will not terminate a Participants Continuous Service; provided, however, that if the Entity for which a Participant is rendering services ceases to qualify as an Affiliate, as determined by the Board, in its sole discretion, such Participants Continuous Service will be considered to have terminated on the date such Entity ceases to
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qualify as an Affiliate. To the extent permitted by law, the Board or the chief executive officer of the Company, in that partys sole discretion, may determine whether Continuous Service will be considered interrupted in the case of (i) any leave of absence approved by the Board or chief executive officer, including sick leave, military leave or any other personal leave, or (ii) transfers between the Company, an Affiliate, or their successors. Notwithstanding the foregoing, a leave of absence will be treated as Continuous Service for purposes of vesting in an Award only to such extent as may be provided in the Companys leave of absence policy, in the written terms of any leave of absence agreement or policy applicable to the Participant, or as otherwise required by law.
(o) Corporate Transaction means the consummation, in a single transaction or in a series of related transactions, of any one or more of the following events:
(i) a sale or other disposition of all or substantially all, as determined by the Board, in its sole discretion, of the consolidated assets of the Company and its Subsidiaries;
(ii) a sale or other disposition of at least 90% of the outstanding securities of the Company;
(iii) a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or
(iv) a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise.
(p) Covered Employee will have the meaning provided in Section 162(m)(3) of the Code.
(q) Director means a member of the Board.
(r) Disability means, with respect to a Participant, the inability of such Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months, as provided in Sections 22(e)(3) and 409A(a)(2)(c)(i) of the Code, and will be determined by the Board on the basis of such medical evidence as the Board deems warranted under the circumstances.
(s) Effective Date means the IPO Date.
(t) Employee means any person employed by the Company or an Affiliate. However, service solely as a Director, or payment of a fee for such services, will not cause a Director to be considered an Employee for purposes of the Plan.
(u) Entity means a corporation, partnership, limited liability company or other entity.
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(v) Exchange Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
(w) Exchange Act Person means any natural person, Entity or group (within the meaning of Section 13(d) or 14(d) of the Exchange Act), except that Exchange Act Person will not include (i) the Company or any Subsidiary of the Company, (ii) any employee benefit plan of the Company or any Subsidiary of the Company or any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary of the Company, (iii) an underwriter temporarily holding securities pursuant to a registered public offering of such securities, (iv) an Entity Owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their Ownership of stock of the Company; or (v) any natural person, Entity or group (within the meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of the Effective Date, is the Owner, directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Companys then outstanding securities.
(x) Fair Market Value means, as of any date, the value of the Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or traded on any established market, the Fair Market Value of a share of Common Stock will be, unless otherwise determined by the Board, the closing sales price for such stock as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the date of determination, as reported in a source the Board deems reliable.
(ii) Unless otherwise provided by the Board, if there is no closing sales price for the Common Stock on the date of determination, then the Fair Market Value will be the closing selling price on the last preceding date for which such quotation exists.
(iii) In the absence of such markets for the Common Stock, the Fair Market Value will be determined by the Board in good faith and in a manner that complies with Sections 409A and 422 of the Code.
(y) Incentive Stock Option means an option granted pursuant to Section 5 of the Plan that is intended to be, and qualifies as, an incentive stock option within the meaning of Section 422 of the Code.
(z) IPO Date means the date of the underwriting agreement between the Company and the underwriter(s) managing the initial public offering of the Common Stock, pursuant to which the Common Stock is priced for the initial public offering.
(aa) Non-Employee Director means a Director who either (i) is not a current employee or officer of the Company or an Affiliate, does not receive compensation, either directly or indirectly, from the Company or an Affiliate for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act (Regulation S-K)), does not possess an interest in any other transaction for which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship for which disclosure would be required pursuant to Item 404(b) of Regulation S-K; or (ii) is otherwise considered a non-employee director for purposes of Rule 16b-3.
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(bb) Nonstatutory Stock Option means any Option granted pursuant to Section 5 of the Plan that does not qualify as an Incentive Stock Option.
(cc) Officer means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act.
(dd) Option means an Incentive Stock Option or a Nonstatutory Stock Option to purchase shares of Common Stock granted pursuant to the Plan.
(ee) Option Agreement means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an Option grant. Each Option Agreement will be subject to the terms and conditions of the Plan.
(ff) Optionholder means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option.
(gg) Other Stock Award means an award based in whole or in part by reference to the Common Stock which is granted pursuant to the terms and conditions of Section 6(d).
(hh) Other Stock Award Agreement means a written agreement between the Company and a holder of an Other Stock Award evidencing the terms and conditions of an Other Stock Award grant. Each Other Stock Award Agreement will be subject to the terms and conditions of the Plan.
(ii) Outside Director means a Director who either (i) is not a current employee of the Company or an affiliated corporation (within the meaning of Treasury Regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an affiliated corporation who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year, has not been an officer of the Company or an affiliated corporation, and does not receive remuneration from the Company or an affiliated corporation, either directly or indirectly, in any capacity other than as a Director, or (ii) is otherwise considered an outside director for purposes of Section 162(m) of the Code.
(jj) Own, Owned, Owner, Ownership means a person or Entity will be deemed to Own, to have Owned, to be the Owner of, or to have acquired Ownership of securities if such person or Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities.
(kk) Participant means a person to whom an Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award.
(ll) Performance Cash Award means an award of cash granted pursuant to the terms and conditions of Section 6(c)(ii).
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(mm) Performance Criteria means the one or more criteria that the Board will select for purposes of establishing the Performance Goals for a Performance Period. The Performance Criteria that will be used to establish such Performance Goals may be based on any one of, or combination of, the following as determined by the Board: (i) earnings (including earnings per share and net earnings); (ii) earnings before interest, taxes and depreciation; (iii) earnings before interest, taxes, depreciation and amortization; (iv) earnings before interest, taxes, depreciation, amortization and legal settlements; (v) earnings before interest, taxes, depreciation, amortization, legal settlements and other income (expense); (vi) earnings before interest, taxes, depreciation, amortization, legal settlements, other income (expense) and stock-based compensation; (vii) earnings before interest, taxes, depreciation, amortization, legal settlements, other income (expense), stock-based compensation and changes in deferred revenue; (viii) total stockholder return; (ix) return on equity or average stockholders equity; (x) return on assets, investment, or capital employed; (xi) stock price; (xii) margin (including gross margin); (xiii) income (before or after taxes); (xiv) operating income; (xv) operating income after taxes; (xvi) pre-tax profit; (xvii) operating cash flow; (xviii) sales or revenue targets; (xix) increases in revenue or product revenue; (xx) expenses and cost reduction goals; (xxi) improvement in or attainment of working capital levels; (xxii) economic value added (or an equivalent metric); (xxiii) market share; (xxiv) cash flow; (xxv) cash flow per share; (xxvi) share price performance; (xxvii) debt reduction; (xxviii) implementation or completion of projects or processes; (xxix) user satisfaction; (xxx) stockholders equity; (xxxi) capital expenditures; (xxxii) debt levels; (xxxiii) operating profit or net operating profit; (xxxiv) workforce diversity; (xxxv) growth of net income or operating income; (xxxvi) billings; (xxxvii) bookings; (xxxviii) the number of users, including but not limited to unique users; (xxxix) employee retention; and (xxxx) to the extent that an Award is not intended to comply with Section 162(m) of the Code, other measures of performance selected by the Board.
(nn) Performance Goals means, for a Performance Period, the one or more goals established by the Board for the Performance Period based upon the Performance Criteria. Performance Goals may be based on a Company-wide basis, with respect to one or more business units, divisions, Affiliates, or business segments, and in either absolute terms or relative to the performance of one or more comparable companies or the performance of one or more relevant indices. Unless specified otherwise by the Board (i) in the Award Agreement at the time the Award is granted or (ii) in such other document setting forth the Performance Goals at the time the Performance Goals are established, the Board will appropriately make adjustments in the method of calculating the attainment of Performance Goals for a Performance Period as follows: (1) to exclude restructuring and/or other nonrecurring charges; (2) to exclude exchange rate effects; (3) to exclude the effects of changes to generally accepted accounting principles; (4) to exclude the effects of any statutory adjustments to corporate tax rates; (5) to exclude the effects of any extraordinary items as determined under generally accepted accounting principles; (6) to exclude the dilutive effects of acquisitions or joint ventures; (7) to assume that any business divested by the Company achieved performance objectives at targeted levels during the balance of a Performance Period following such divestiture; (8) to exclude the effect of any change in the outstanding shares of common stock of the Company by reason of any stock dividend or split, stock repurchase, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distributions to common stockholders other than regular cash dividends; (9) to exclude the effects of stock based compensation and the award of bonuses under the Companys bonus plans; (10) to exclude costs
25.
incurred in connection with potential acquisitions or divestitures that are required to be expensed under generally accepted accounting principles; (11) to exclude the goodwill and intangible asset impairment charges that are required to be recorded under generally accepted accounting principles; and (12) to exclude the effect of any other unusual, non-recurring gain or loss or other extraordinary item. In addition, the Board retains the discretion to reduce or eliminate the compensation or economic benefit due upon attainment of Performance Goals and to define the manner of calculating the Performance Criteria it selects to use for such Performance Period. Partial achievement of the specified criteria may result in the payment or vesting corresponding to the degree of achievement as specified in the Stock Award Agreement or the written terms of a Performance Cash Award.
(oo) Performance Period means the period of time selected by the Board over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participants right to and the payment of a Stock Award or a Performance Cash Award. Performance Periods may be of varying and overlapping duration, at the sole discretion of the Board.
(pp) Performance Stock Award means a Stock Award granted under the terms and conditions of Section 6(c)(i).
(qq) Plan means this Intersect ENT, Inc. 2014 Equity Incentive Plan, as it may be amended.
(rr) Restricted Stock Award means an award of shares of Common Stock which is granted pursuant to the terms and conditions of Section 6(a).
(ss) Restricted Stock Award Agreement means a written agreement between the Company and a holder of a Restricted Stock Award evidencing the terms and conditions of a Restricted Stock Award grant. Each Restricted Stock Award Agreement will be subject to the terms and conditions of the Plan.
(tt) Restricted Stock Unit Award means a right to receive shares of Common Stock which is granted pursuant to the terms and conditions of Section 6(b).
(uu) Restricted Stock Unit Award Agreement means a written agreement between the Company and a holder of a Restricted Stock Unit Award evidencing the terms and conditions of a Restricted Stock Unit Award grant. Each Restricted Stock Unit Award Agreement will be subject to the terms and conditions of the Plan.
(vv) Rule 16b-3 means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time.
(ww) Securities Act means the Securities Act of 1933, as amended.
(xx) Stock Appreciation Right or SAR means a right to receive the appreciation on Common Stock that is granted pursuant to the terms and conditions of Section 5.
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(yy) Stock Appreciation Right Agreement means a written agreement between the Company and a holder of a Stock Appreciation Right evidencing the terms and conditions of a Stock Appreciation Right grant. Each Stock Appreciation Right Agreement will be subject to the terms and conditions of the Plan.
(zz) Stock Award means any right to receive Common Stock granted under the Plan, including an Incentive Stock Option, a Nonstatutory Stock Option, a Restricted Stock Award, a Restricted Stock Unit Award, a Stock Appreciation Right, a Performance Stock Award or any Other Stock Award.
(aaa) Stock Award Agreement means a written agreement between the Company and a Participant evidencing the terms and conditions of a Stock Award grant. Each Stock Award Agreement will be subject to the terms and conditions of the Plan.
(bbb) Subsidiary means, with respect to the Company, (i) any corporation of which more than 50% of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation will have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership, limited liability company or other entity in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or capital contribution) of more than 50%.
(ccc) Ten Percent Stockholder means a person who Owns (or is deemed to Own pursuant to Section 424(d) of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Affiliate.
27.
INTERSECT ENT, INC.
STOCK OPTION GRANT NOTICE
(2014 EQUITY INCENTIVE PLAN)
Intersect ENT, Inc. (the Company), pursuant to its 2014 Equity Incentive Plan (the Plan), hereby grants to Optionholder an option to purchase the number of shares of the Companys Common Stock set forth below. This option is subject to all of the terms and conditions as set forth in this notice, in the Option Agreement, the Plan and the Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety. Capitalized terms not explicitly defined herein but defined in the Plan or the Option Agreement will have the same definitions as in the Plan or the Option Agreement. If there is any conflict between the terms in this notice and the Plan, the terms of the Plan will control.
Optionholder: |
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Date of Grant: |
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Vesting Commencement Date: |
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Number of Shares Subject to Option: |
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Exercise Price (Per Share): |
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Total Exercise Price: |
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Expiration Date: |
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Type of Grant: | ¨ Incentive Stock Option1 ¨ Nonstatutory Stock Option | |
Exercise Schedule: | Same as Vesting Schedule | |
Vesting Schedule: | [One-fourth (1/4th) of the shares vest one year after the Vesting Commencement Date; the balance of the shares vest in a series of thirty-six (36) successive equal monthly installments measured from the first anniversary of the Vesting Commencement Date, subject to Optionholders Continuous Service as of each such date.] | |
Payment: | By one or a combination of the following items (described in the Option Agreement): | |
¨ By cash, check, bank draft or money order payable to the Company | ||
¨ Pursuant to a Regulation T Program if the shares are publicly traded | ||
¨ By delivery of already-owned shares if the shares are publicly traded | ||
¨ If and only to the extent this option is a Nonstatutory Stock Option, and subject to the Companys consent at the time of exercise, by a net exercise arrangement |
Additional Terms/Acknowledgements: Optionholder acknowledges receipt of, and understands and agrees to, this Stock Option Grant Notice, the Option Agreement and the Plan. Optionholder acknowledges and agrees that this Stock Option Grant Notice and the Option Agreement may not be modified, amended or revised except as provided in the Plan. Optionholder further acknowledges that as of the Date of Grant, this Stock Option Grant Notice, the Option Agreement, and the Plan set forth the entire understanding between Optionholder and the Company regarding this option award and supersede
1 | If this is an Incentive Stock Option, it (plus other outstanding Incentive Stock Options) cannot be first exercisable for more than $100,000 in value (measured by exercise price) in any calendar year. Any excess over $100,000 is a Nonstatutory Stock Option. |
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all prior oral and written agreements, promises and/or representations on that subject with the exception of (i) options previously granted and delivered to Optionholder, (ii) any compensation recovery policy that is adopted by the Company or is otherwise required by applicable law and (iii) any written employment or severance arrangement that would provide for vesting acceleration of this option upon the terms and conditions set forth therein.
By accepting this option, Optionholder consents to receive such documents by electronic delivery and to participate in the Plan through an online or electronic system established and maintained by the Company or another third party designated by the Company.
INTERSECT ENT, INC. | OPTIONHOLDER: | |||||||
By: |
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Signature | Signature | |||||||
Title: |
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Date: |
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Date: |
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ATTACHMENTS: Option Agreement, 2014 Equity Incentive Plan and Notice of Exercise
2.
ATTACHMENT I
OPTION AGREEMENT
INTERSECT ENT, INC.
2014 EQUITY INCENTIVE PLAN
OPTION AGREEMENT
(INCENTIVE STOCK OPTION OR NONSTATUTORY STOCK OPTION)
Pursuant to your Stock Option Grant Notice (Grant Notice) and this Option Agreement, Intersect ENT, Inc. (the Company) has granted you an option under its 2014 Equity Incentive Plan (the Plan) to purchase the number of shares of the Companys Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. The option is granted to you effective as of the date of grant set forth in the Grant Notice (the Date of Grant). If there is any conflict between the terms in this Option Agreement and the Plan, the terms of the Plan will control. Capitalized terms not explicitly defined in this Option Agreement or in the Grant Notice but defined in the Plan will have the same definitions as in the Plan.
The details of your option, in addition to those set forth in the Grant Notice and the Plan, are as follows:
1. VESTING. Subject to the provisions contained herein, your option will vest as provided in your Grant Notice. Vesting will cease upon the termination of your Continuous Service.
2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your option and your exercise price per share in your Grant Notice will be adjusted for Capitalization Adjustments.
3. EXERCISE RESTRICTION FOR NON-EXEMPT EMPLOYEES. If you are an Employee eligible for overtime compensation under the Fair Labor Standards Act of 1938, as amended (that is, a Non-Exempt Employee), and except as otherwise provided in the Plan, you may not exercise your option until you have completed at least six (6) months of Continuous Service measured from the Date of Grant, even if you have already been an employee for more than six (6) months. Consistent with the provisions of the Worker Economic Opportunity Act, you may exercise your option as to any vested portion prior to such six (6) month anniversary in the case of (i) your death or disability, (ii) a Corporate Transaction in which your option is not assumed, continued or substituted, (iii) a Change in Control or (iv) your termination of Continuous Service on your retirement (as defined in the Companys benefit plans).
4. METHOD OF PAYMENT. You must pay the full amount of the exercise price for the shares you wish to exercise. You may pay the exercise price in cash or by check, bank draft or money order payable to the Company or in any other manner permitted by your Grant Notice, which may include one or more of the following:
a. Pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. This manner of payment is also known as a broker-assisted exercise, same day sale, or sell to cover.
b. By delivery to the Company (either by actual delivery or attestation) of already-owned shares of Common Stock that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise. Delivery for these
1.
purposes, in the sole discretion of the Company at the time you exercise your option, will include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. You may not exercise your option by delivery to the Company of Common Stock if doing so would violate the provisions of any law, regulation or agreement restricting the redemption of the Companys stock.
c. If this option is a Nonstatutory Stock Option, subject to the consent of the Company at the time of exercise, by a net exercise arrangement pursuant to which the Company will reduce the number of shares of Common Stock issued upon exercise of your option by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price. You must pay any remaining balance of the aggregate exercise price not satisfied by the net exercise in cash or other permitted form of payment. Shares of Common Stock will no longer be outstanding under your option and will not be exercisable thereafter if those shares (i) are used to pay the exercise price pursuant to the net exercise, (ii) are delivered to you as a result of such exercise, and (iii) are withheld to satisfy your tax withholding obligations.
5. WHOLE SHARES. You may exercise your option only for whole shares of Common Stock.
6. SECURITIES LAW COMPLIANCE. In no event may you exercise your option unless the shares of Common Stock issuable upon exercise are then registered under the Securities Act or, if not registered, the Company has determined that your exercise and the issuance of the shares would be exempt from the registration requirements of the Securities Act. The exercise of your option also must comply with all other applicable laws and regulations governing your option, and you may not exercise your option if the Company determines that such exercise would not be in material compliance with such laws and regulations (including any restrictions on exercise required for compliance with Treas. Reg. 1.401(k)-1(d)(3), if applicable).
7. TERM. You may not exercise your option before the Date of Grant or after the expiration of the options term. The term of your option expires, subject to the provisions of Section 5(h) of the Plan, upon the earliest of the following:
a. immediately upon the date on which the event giving rise to your termination of Continuous Service for Cause occurs (or, if required by law, the date of termination of Continuous Service for Cause);
b. three (3) months after the termination of your Continuous Service for any reason other than Cause, your Disability or your death (except as otherwise provided in Section 7(d) below); provided, however, that if during any part of such three (3) month period your option is not exercisable solely because of the condition set forth in the section above relating to Securities Law Compliance, your option will not expire until the earlier of the Expiration Date or until it has been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service; provided further, if during any part of such three (3) month period, the sale of any Common Stock received upon exercise of your option would violate the Companys insider trading policy, then your option will not expire until the earlier of the Expiration Date or until it has been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service during which the sale of the Common Stock received upon exercise of your option would not be in violation of the Companys insider trading policy. Notwithstanding the foregoing, if (i) you are a Non-Exempt Employee, (ii) your Continuous Service terminates within six (6) months after the Date of Grant, and (iii) you have vested in a portion of your option at the time of your termination of Continuous Service, your option will not expire until the earlier of (x) the later of (A) the date that is seven (7) months after the Date of Grant, and (B) the date that is three (3) months after the termination of your Continuous Service, and (y) the Expiration Date;
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c. twelve (12) months after the termination of your Continuous Service due to your Disability (except as otherwise provided in Section 7(d)) below;
d. eighteen (18) months after your death if you die during your Continuous Service;
e. the Expiration Date indicated in your Grant Notice; or
f. the day before the tenth (10th) anniversary of the Date of Grant.
If your option is an Incentive Stock Option, note that to obtain the federal income tax advantages associated with an Incentive Stock Option, the Code requires that at all times beginning on the Date of Grant and ending on the day three (3) months before the date of your options exercise, you must be an employee of the Company or an Affiliate, except in the event of your death or Disability. The Company has provided for extended exercisability of your option under certain circumstances for your benefit but cannot guarantee that your option will necessarily be treated as an Incentive Stock Option if you continue to provide services to the Company or an Affiliate as a Consultant or Director after your employment terminates or if you otherwise exercise your option more than three (3) months after the date your employment with the Company or an Affiliate terminates.
8. EXERCISE.
a. You may exercise the vested portion of your option during its term by (i) delivering a Notice of Exercise (in a form designated by the Company) or completing such other documents and/or procedures designated by the Company for exercise and (ii) paying the exercise price and any applicable withholding taxes to the Companys Secretary, stock plan administrator, or such other person as the Company may designate, together with such additional documents as the Company may then require.
b. By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (i) the exercise of your option, (ii) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are subject at the time of exercise, or (iii) the disposition of shares of Common Stock acquired upon such exercise.
c. If your option is an Incentive Stock Option, by exercising your option you agree that you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of your option that occurs within two (2) years after the Date of Grant or within one (1) year after such shares of Common Stock are transferred upon exercise of your option.
9. TRANSFERABILITY. Except as otherwise provided in this Section 9, your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you.
a. Certain Trusts. Upon receiving written permission from the Board or its duly authorized designee, you may transfer your option to a trust if you are considered to be the sole beneficial owner (determined under Section 671 of the Code and applicable state law) while the option is held in the trust. You and the trustee must enter into transfer and other agreements required by the Company.
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b. Domestic Relations Orders. Upon receiving written permission from the Board or its duly authorized designee, and provided that you and the designated transferee enter into transfer and other agreements required by the Company, you may transfer your option pursuant to the terms of a domestic relations order, official marital settlement agreement or other divorce or separation instrument as permitted by Treasury Regulation 1.421-1(b)(2) that contains the information required by the Company to effectuate the transfer. You are encouraged to discuss the proposed terms of any division of this option with the Company prior to finalizing the domestic relations order or marital settlement agreement to help ensure the required information is contained within the domestic relations order or marital settlement agreement. If this option is an Incentive Stock Option, this option may be deemed to be a Nonstatutory Stock Option as a result of such transfer.
c. Beneficiary Designation. Upon receiving written permission from the Board or its duly authorized designee, you may, by delivering written notice to the Company, in a form approved by the Company and any broker designated by the Company to handle option exercises, designate a third party who, on your death, will thereafter be entitled to exercise this option and receive the Common Stock or other consideration resulting from such exercise. In the absence of such a designation, your executor or administrator of your estate will be entitled to exercise this option and receive, on behalf of your estate, the Common Stock or other consideration resulting from such exercise.
10. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option will be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option will obligate the Company or an Affiliate, their respective stockholders, boards of directors, officers or employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate.
11. WITHHOLDING OBLIGATIONS.
a. At the time you exercise your option, in whole or in part, and at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a same day sale pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with the exercise of your option.
b. If this option is a Nonstatutory Stock Option, then upon your request and subject to approval by the Company, and compliance with any applicable legal conditions or restrictions, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law (or such lower amount as may be necessary to avoid classification of your option as a liability for financial accounting purposes). If the date of determination of any tax withholding obligation is deferred to a date later than the date of exercise of your option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date of exercise of your option.
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Notwithstanding the filing of such election, shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined as of the date of exercise of your option that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility.
c. You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company will have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein, if applicable, unless such obligations are satisfied.
12. TAX CONSEQUENCES. You hereby agree that the Company does not have a duty to design or administer the Plan or its other compensation programs in a manner that minimizes your tax liabilities. You will not make any claim against the Company, or any of its Officers, Directors, Employees or Affiliates related to tax liabilities arising from your option or your other compensation. In particular, you acknowledge that this option is exempt from Section 409A of the Code only if the exercise price per share specified in the Grant Notice is at least equal to the fair market value per share of the Common Stock on the Date of Grant and there is no other impermissible deferral of compensation associated with the option.
13. NOTICES. Any notices provided for in your option or the Plan will be given in writing (including electronically) and will be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. The Company may, in its sole discretion, decide to deliver any documents related to participation in the Plan and this option by electronic means or to request your consent to participate in the Plan by electronic means. By accepting this option, you consent to receive such documents by electronic delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.
14. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations, which may from time to time be promulgated and adopted pursuant to the Plan. If there is any conflict between the provisions of your option and those of the Plan, the provisions of the Plan will control. In addition, your option (and any compensation paid or shares issued under your option) is subject to recoupment in accordance with The DoddFrank Wall Street Reform and Consumer Protection Act and any implementing regulations thereunder, any clawback policy adopted by the Company and any compensation recovery policy otherwise required by applicable law.
15. OTHER DOCUMENTS. You hereby acknowledge receipt of and the right to receive a document providing the information required by Rule 428(b)(1) promulgated under the Securities Act, which includes the Plan prospectus. In addition, you acknowledge receipt of the Companys policy permitting certain individuals to sell shares only during certain window periods and the Companys insider trading policy, in effect from time to time.
16. EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of this option will not be included as compensation, earnings, salaries, or other similar terms used when calculating your benefits under any employee benefit plan sponsored by the Company or any Affiliate, except as such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any of the Companys or any Affiliates employee benefit plans.
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17. VOTING RIGHTS. You will not have voting or any other rights as a stockholder of the Company with respect to the shares to be issued pursuant to this option until such shares are issued to you. Upon such issuance, you will obtain full voting and other rights as a stockholder of the Company. Nothing contained in this option, and no action taken pursuant to its provisions, will create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or any other person.
18. SEVERABILITY. If all or any part of this Option Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity will not invalidate any portion of this Option Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Option Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.
19. MISCELLANEOUS.
a. The rights and obligations of the Company under your option will be transferable to any one or more persons or entities, and all covenants and agreements hereunder will inure to the benefit of, and be enforceable by the Companys successors and assigns.
b. You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of your option.
c. You acknowledge and agree that you have reviewed your option in its entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting your option, and fully understand all provisions of your option.
d. This Option Agreement will be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.
e. All obligations of the Company under the Plan and this Option Agreement will be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.
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This Option Agreement will be deemed to be signed by you upon the signing by you of the Grant Notice to which it is attached.
6.
ATTACHMENT II
2014 EQUITY INCENTIVE PLAN
ATTACHMENT III
NOTICE OF EXERCISE
NOTICE OF EXERCISE
Intersect ENT, Inc.
Attention: [Stock Plan Administrator]
1555 Adams Drive
Menlo Park, CA 94025
Date of Exercise:
This constitutes notice to Intersect ENT, Inc. (the Company) under my stock option that I elect to purchase the below number of shares of Common Stock of the Company (the Shares) for the price set forth below.
Type of option (check one): |
Incentive ¨ | Nonstatutory ¨ | ||||||
Stock option dated: |
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Number of Shares as to which option is exercised: |
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Certificates to be issued in name of: |
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Total exercise price: |
$ | $ | ||||||
Cash payment delivered herewith: |
$ | $ | ||||||
Value of Shares delivered herewith: |
$ | $ | ||||||
Value of Shares pursuant to net exercise: |
$ | $ | ||||||
Regulation T Program (cashless exercise): |
$ | $ |
By this exercise, I agree (i) to provide such additional documents as you may require pursuant to the terms of the Intersect ENT, Inc. 2014 Equity Incentive Plan, (ii) to provide for the payment by me to you (in the manner designated by you) of your withholding obligation, if any, relating to the exercise of this option, and (iii) if this exercise relates to an Incentive Stock Option, to notify you in writing within fifteen (15) days after the date of any disposition of any of the Shares issued upon exercise of this option that occurs within two (2) years after the date of grant of this option or within one (1) year after such Shares are issued upon exercise of this option.
Very truly yours, |
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Signature |
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Print Name |
Exhibit 10.5
INTERSECT ENT, INC.
2014 EMPLOYEE STOCK PURCHASE PLAN
ADOPTED BY THE BOARD OF DIRECTORS: JULY 7, 2014
APPROVED BY THE STOCKHOLDERS: JULY 10, 2014
IPO DATE/EFFECTIVE DATE: [ ], 2014
1. | GENERAL; PURPOSE. |
(a) The Plan provides a means by which Eligible Employees of the Company and certain designated Related Corporations may be given an opportunity to purchase shares of Common Stock. The Plan permits the Company to grant a series of Purchase Rights to Eligible Employees under an Employee Stock Purchase Plan.
(b) The Company, by means of the Plan, seeks to retain the services of such Employees, to secure and retain the services of new Employees and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Related Corporations.
2. | ADMINISTRATION. |
(a) The Board will administer the Plan unless and until the Board delegates administration of the Plan to a Committee or Committees, as provided in Section 2(c).
(b) The Board will have the power, subject to, and within the limitations of, the express provisions of the Plan:
(i) To determine how and when Purchase Rights will be granted and the provisions of each Offering (which need not be identical).
(ii) To designate from time to time which Related Corporations of the Company will be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and Purchase Rights, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it deems necessary or expedient to make the Plan fully effective.
(iv) To settle all controversies regarding the Plan and Purchase Rights granted under the Plan.
(v) To suspend or terminate the Plan at any time as provided in Section 12.
(vi) To amend the Plan at any time as provided in Section 12.
(vii) Generally, to exercise such powers and to perform such acts as it deems necessary or expedient to promote the best interests of the Company and its Related Corporations and to carry out the intent that the Plan be treated as an Employee Stock Purchase Plan.
1
(viii) To adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the Plan by Employees who are foreign nationals or employed outside the United States.
(c) The Board may delegate some or all of the administration of the Plan to a Committee or Committees. If administration is delegated to a Committee, the Committee will have, in connection with the administration of the Plan, the powers theretofore possessed by the Board that have been delegated to the Committee, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board will thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may retain the authority to concurrently administer the Plan with the Committee and may, at any time, revest in the Board some or all of the powers previously delegated. Whether or not the Board has delegated administration of the Plan to a Committee, the Board will have the final power to determine all questions of policy and expediency that may arise in the administration of the Plan.
(d) All determinations, interpretations and constructions made by the Board in good faith will not be subject to review by any person and will be final, binding and conclusive on all persons.
3. | SHARES OF COMMON STOCK SUBJECT TO THE PLAN. |
(a) Subject to the provisions of Section 11(a) relating to Capitalization Adjustments, the maximum number of shares of Common Stock that may be issued under the Plan will not exceed 496,092 shares of Common Stock, plus the number of shares of Common Stock that are automatically added on January 1 of each year for a period of up to ten years, commencing on the first January 1 following the IPO Date and ending on (and including) January 1, 2024, in an amount equal to the lesser of (i) 1.0% of the total number of shares of Capital Stock outstanding on December 31 of the preceding fiscal year, and (ii) such lesser number as determined by the Board or the Compensation Committee. Notwithstanding the foregoing, the Board may act prior to the first day of any fiscal year to provide that there will be no January 1 increase in the share reserve for such fiscal year or that the increase in the share reserve for such fiscal year will be a lesser number of shares of Common Stock than would otherwise occur pursuant to the preceding sentence.
(b) If any Purchase Right granted under the Plan terminates without having been exercised in full, the shares of Common Stock not purchased under such Purchase Right will again become available for issuance under the Plan.
(c) The stock purchasable under the Plan will be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Company on the open market.
4. | GRANT OF PURCHASE RIGHTS; OFFERING. |
(a) The Board may from time to time grant or provide for the grant of Purchase Rights to Eligible Employees under an Offering (consisting of one or more Purchase Periods) on an Offering Date or Offering Dates selected by the Board. Each Offering will be in such form and will contain such terms and conditions as the Board will deem appropriate, and will comply with the requirement of Section 423(b)(5) of the Code that all Employees granted Purchase Rights will have the same rights and privileges. The terms and conditions of an Offering shall be incorporated by reference into the Plan and treated as part of the Plan. The provisions of separate Offerings need not be identical, but each Offering will include (through incorporation of the provisions of this Plan by reference in the document comprising the Offering or otherwise) the period during which the Offering will be effective, which period will not exceed 27 months beginning with the Offering Date, and the substance of the provisions contained in Sections 5 through 8, inclusive.
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(b) If a Participant has more than one Purchase Right outstanding under the Plan, unless he or she otherwise indicates in forms delivered to the Company: (i) each form will apply to all of his or her Purchase Rights under the Plan, and (ii) a Purchase Right with a lower exercise price (or an earlier-granted Purchase Right, if different Purchase Rights have identical exercise prices) will be exercised to the fullest possible extent before a Purchase Right with a higher exercise price (or a later-granted Purchase Right if different Purchase Rights have identical exercise prices) will be exercised.
(c) The Board will have the discretion to structure an Offering so that if the Fair Market Value of a share of Common Stock on the first Trading Day of a new Purchase Period within that Offering is less than or equal to the Fair Market Value of a share of Common Stock on the Offering Date for that Offering, then (i) that Offering will terminate immediately as of that first Trading Day, and (ii) the Participants in such terminated Offering will be automatically enrolled in a new Offering beginning on the first Trading Day of such new Purchase Period.
5. | ELIGIBILITY. |
(a) Purchase Rights may be granted only to Employees of the Company or, as the Board may designate in accordance with Section 2(b), to Employees of a Related Corporation. Except as provided in Section 5(b), an Employee will not be eligible to be granted Purchase Rights unless, on the Offering Date, the Employee has been in the employ of the Company or the Related Corporation, as the case may be, for such continuous period preceding such Offering Date as the Board may require, but in no event will the required period of continuous employment be equal to or greater than two years. In addition, the Board may provide that no Employee will be eligible to be granted Purchase Rights under the Plan unless, on the Offering Date, such Employees customary employment with the Company or the Related Corporation is more than 20 hours per week and more than five months per calendar year or such other criteria as the Board may determine consistent with Section 423 of the Code.
(b) The Board may provide that each person who, during the course of an Offering, first becomes an Eligible Employee will, on a date or dates specified in the Offering which coincides with the day on which such person becomes an Eligible Employee or which occurs thereafter, receive a Purchase Right under that Offering, which Purchase Right will thereafter be deemed to be a part of that Offering. Such Purchase Right will have the same characteristics as any Purchase Rights originally granted under that Offering, as described herein, except that:
(i) the date on which such Purchase Right is granted will be the Offering Date of such Purchase Right for all purposes, including determination of the exercise price of such Purchase Right;
(ii) the period of the Offering with respect to such Purchase Right will begin on its Offering Date and end coincident with the end of such Offering; and
(iii) the Board may provide that if such person first becomes an Eligible Employee within a specified period of time before the end of the Offering, he or she will not receive any Purchase Right under that Offering.
(c) No Employee will be eligible for the grant of any Purchase Rights if, immediately after any such Purchase Rights are granted, such Employee owns stock possessing five percent or more of the total combined voting power or value of all classes of stock of the Company or of any Related
3
Corporation. For purposes of this Section 5(c), the rules of Section 424(d) of the Code will apply in determining the stock ownership of any Employee, and stock which such Employee may purchase under all outstanding Purchase Rights and options will be treated as stock owned by such Employee.
(d) As specified by Section 423(b)(8) of the Code, an Eligible Employee may be granted Purchase Rights only if such Purchase Rights, together with any other rights granted under all Employee Stock Purchase Plans of the Company and any Related Corporations, do not permit such Eligible Employees rights to purchase stock of the Company or any Related Corporation to accrue at a rate which exceeds $25,000 of Fair Market Value of such stock (determined at the time such rights are granted, and which, with respect to the Plan, will be determined as of their respective Offering Dates) for each calendar year in which such rights are outstanding at any time.
(e) Officers of the Company and any designated Related Corporation, if they are otherwise Eligible Employees, will be eligible to participate in Offerings under the Plan. Notwithstanding the foregoing, the Board may provide in an Offering that Employees who are highly compensated Employees within the meaning of Section 423(b)(4)(D) of the Code will not be eligible to participate.
6. | PURCHASE RIGHTS; PURCHASE PRICE. |
(a) On each Offering Date, each Eligible Employee, pursuant to an Offering made under the Plan, will be granted a Purchase Right to purchase up to that number of shares of Common Stock purchasable either with a percentage or with a maximum dollar amount, as designated by the Board, but in either case not exceeding 15% of such Employees earnings (as defined by the Board in each Offering) during the period that begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date will be no later than the end of the Offering.
(b) The Board will establish one or more Purchase Dates during an Offering on which Purchase Rights granted for that Offering will be exercised and shares of Common Stock will be purchased in accordance with such Offering.
(c) In connection with each Offering made under the Plan, the Board may specify (i) a maximum number of shares of Common Stock that may be purchased by any Participant on any Purchase Date during such Offering, (ii) a maximum aggregate number of shares of Common Stock that may be purchased by all Participants pursuant to such Offering and/or (iii) a maximum aggregate number of shares of Common Stock that may be purchased by all Participants on any Purchase Date under the Offering. If the aggregate purchase of shares of Common Stock issuable upon exercise of Purchase Rights granted under the Offering would exceed any such maximum aggregate number, then, in the absence of any Board action otherwise, a pro rata (based on each Participants accumulated Contributions) allocation of the shares of Common Stock available will be made in as nearly a uniform manner as will be practicable and equitable.
(d) The purchase price of shares of Common Stock acquired pursuant to Purchase Rights will be not less than the lesser of:
(i) an amount equal to 85% of the Fair Market Value of the shares of Common Stock on the Offering Date; or
(ii) an amount equal to 85% of the Fair Market Value of the shares of Common Stock on the applicable Purchase Date.
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7. | PARTICIPATION; WITHDRAWAL; TERMINATION. |
(a) An Eligible Employee may elect to authorize payroll deductions as the means of making Contributions by completing and delivering to the Company, within the time specified in the Offering, an enrollment form provided by the Company. The enrollment form will specify the amount of Contributions not to exceed the maximum amount specified by the Board. Each Participants Contributions will be credited to a bookkeeping account for such Participant under the Plan and will be deposited with the general funds of the Company except where applicable law requires that Contributions be deposited with a third party. If permitted in the Offering, a Participant may begin such Contributions with the first payroll occurring on or after the Offering Date (or, in the case of a payroll date that occurs after the end of the prior Offering but before the Offering Date of the next new Offering, Contributions from such payroll will be included in the new Offering). If permitted in the Offering, a Participant may thereafter reduce (including to zero) or increase his or her Contributions. If specifically provided in the Offering, in addition to making Contributions by payroll deductions, a Participant may make Contributions through the payment by cash or check prior to a Purchase Date.
(b) During an Offering, a Participant may cease making Contributions and withdraw from the Offering by delivering to the Company a withdrawal form provided by the Company. The Company may impose a deadline before a Purchase Date for withdrawing. Upon such withdrawal, such Participants Purchase Right in that Offering will immediately terminate and the Company will distribute to such Participant all of his or her accumulated but unused Contributions and such Participants Purchase Right in that Offering shall thereupon terminate. A Participants withdrawal from that Offering will have no effect upon his or her eligibility to participate in any other Offerings under the Plan, but such Participant will be required to deliver a new enrollment form to participate in subsequent Offerings.
(c) Purchase Rights granted pursuant to any Offering under the Plan will terminate immediately if the Participant either (i) is no longer an Employee for any reason or for no reason (subject to any post-employment participation period required by law) or (ii) is otherwise no longer eligible to participate. The Company will distribute to such individual all of his or her accumulated but unused Contributions.
(d) During a Participants lifetime, Purchase Rights will be exercisable only by such Participant. Purchase Rights are not transferable by a Participant, except by will, by the laws of descent and distribution, or, if permitted by the Company, by a beneficiary designation as described in Section 10.
(e) Unless otherwise specified in the Offering, the Company will have no obligation to pay interest on Contributions.
8. | EXERCISE OF PURCHASE RIGHTS. |
(a) On each Purchase Date, each Participants accumulated Contributions will be applied to the purchase of shares of Common Stock, up to the maximum number of shares of Common Stock permitted by the Plan and the applicable Offering, at the purchase price specified in the Offering. No fractional shares will be issued unless specifically provided for in the Offering.
(b) If any amount of accumulated Contributions remains in a Participants account after the purchase of shares of Common Stock and such remaining amount is less than the amount required to purchase one share of Common Stock on the final Purchase Date of an Offering, then such remaining amount will be held in such Participants account for the purchase of shares of Common Stock under the next Offering under the Plan, unless such Participant withdraws from or is not eligible to participate in such Offering, in which case such amount will be distributed to such Participant after the final Purchase
5
Date, without interest. If the amount of Contributions remaining in a Participants account after the purchase of shares of Common Stock is at least equal to the amount required to purchase one whole share of Common Stock on the final Purchase Date of an Offering, then such remaining amount will not roll over to the next Offering and will instead be distributed in full to such Participant after the final Purchase Date of such Offering without interest.
(c) No Purchase Rights may be exercised to any extent unless the shares of Common Stock to be issued upon such exercise under the Plan are covered by an effective registration statement pursuant to the Securities Act and the Plan is in material compliance with all applicable federal, state, foreign and other securities and other laws applicable to the Plan. If on a Purchase Date the shares of Common Stock are not so registered or the Plan is not in such compliance, no Purchase Rights will be exercised on such Purchase Date, and the Purchase Date will be delayed until the shares of Common Stock are subject to such an effective registration statement and the Plan is in material compliance, except that the Purchase Date will in no event be more than 6 months from the Offering Date. If, on the Purchase Date, as delayed to the maximum extent permissible, the shares of Common Stock are not registered and the Plan is not in material compliance with all applicable laws, no Purchase Rights will be exercised and all accumulated but unused Contributions will be distributed to the Participants without interest.
9. | COVENANTS OF THE COMPANY. |
The Company will seek to obtain from each federal, state, foreign or other regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Purchase Rights and issue and sell shares of Common Stock thereunder. If, after commercially reasonable efforts, the Company is unable to obtain the authority that counsel for the Company deems necessary for the grant of Purchase Rights or the lawful issuance and sale of Common Stock under the Plan, and at a commercially reasonable cost, the Company will be relieved from any liability for failure to grant Purchase Rights and/or to issue and sell Common Stock upon exercise of such Purchase Rights.
10. | DESIGNATION OF BENEFICIARY. |
(a) The Company may, but is not obligated to, permit a Participant to submit a form designating a beneficiary who will receive any shares of Common Stock and/or Contributions from the Participants account under the Plan if the Participant dies before such shares and/or Contributions are delivered to the Participant. The Company may, but is not obligated to, permit the Participant to change such designation of beneficiary. Any such designation and/or change must be on a form approved by the Company.
(b) If a Participant dies, and in the absence of a valid beneficiary designation, the Company will deliver any shares of Common Stock and/or Contributions to the executor or administrator of the estate of the Participant. If no executor or administrator has been appointed (to the knowledge of the Company), the Company, in its sole discretion, may deliver such shares of Common Stock and/or Contributions to the Participants spouse, dependents or relatives, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.
11. | ADJUSTMENTS UPON CHANGES IN COMMON STOCK; CORPORATE TRANSACTIONS. |
(a) In the event of a Capitalization Adjustment, the Board will appropriately and proportionately adjust: (i) the class(es) and maximum number of securities subject to the Plan pursuant to Section 3(a), (ii) the class(es) and maximum number of securities by which the share reserve is to increase automatically each year pursuant to Section 3(a), (iii) the class(es) and number of securities subject to, and the purchase price applicable to outstanding Offerings and Purchase Rights, and (iv) the class(es) and number of securities that are the subject of the purchase limits under each ongoing Offering. The Board will make these adjustments, and its determination will be final, binding and conclusive.
6
(b) In the event of a Corporate Transaction, then: (i) any surviving corporation or acquiring corporation (or the surviving or acquiring corporations parent company) may assume or continue outstanding Purchase Rights or may substitute similar rights (including a right to acquire the same consideration paid to the stockholders in the Corporate Transaction) for outstanding Purchase Rights, or (ii) if any surviving or acquiring corporation (or its parent company) does not assume or continue such Purchase Rights or does not substitute similar rights for such Purchase Rights, then the Participants accumulated Contributions will be used to purchase shares of Common Stock within ten business days prior to the Corporate Transaction under the outstanding Purchase Rights, and the Purchase Rights will terminate immediately after such purchase.
12. | AMENDMENT, TERMINATION OR SUSPENSION OF THE PLAN. |
(a) The Board may amend the Plan at any time in any respect the Board deems necessary or advisable. However, except as provided in Section 11(a) relating to Capitalization Adjustments, stockholder approval will be required for any amendment of the Plan for which stockholder approval is required by applicable law or listing requirements, including any amendment that either (i) materially increases the number of shares of Common Stock available for issuance under the Plan, (ii) materially expands the class of individuals eligible to become Participants and receive Purchase Rights, (iii) materially increases the benefits accruing to Participants under the Plan or materially reduces the price at which shares of Common Stock may be purchased under the Plan, (iv) materially extends the term of the Plan, or (v) expands the types of awards available for issuance under the Plan, but in each of (i) through (v) above only to the extent stockholder approval is required by applicable law or listing requirements.
(b) The Board may suspend or terminate the Plan at any time. No Purchase Rights may be granted under the Plan while the Plan is suspended or after it is terminated.
(c) Any benefits, privileges, entitlements and obligations under any outstanding Purchase Rights granted before an amendment, suspension or termination of the Plan will not be materially impaired by any such amendment, suspension or termination except (i) with the consent of the person to whom such Purchase Rights were granted, (ii) as necessary to comply with any laws, listing requirements, or governmental regulations (including, without limitation, the provisions of Section 423 of the Code and the regulations and other interpretive guidance issued thereunder relating to Employee Stock Purchase Plans) including without limitation any such regulations or other guidance that may be issued or amended after the date the Plan is adopted by the Board, or (iii) as necessary to obtain or maintain favorable tax, listing, or regulatory treatment. To be clear, the Board may amend outstanding Purchase Rights without a Participants consent if such amendment is necessary to ensure that the Purchase Right and/or the Plan comply with the requirements of Section 423 of the Code.
13. | EFFECTIVE DATE OF PLAN. |
The Plan will become effective immediately prior to and contingent upon the IPO Date. No Purchase Rights will be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval must be within 12 months before or after the date the Plan is adopted (or if required under Section 12(a) above, materially amended) by the Board.
7
14. | MISCELLANEOUS PROVISIONS. |
(a) Proceeds from the sale of shares of Common Stock pursuant to Purchase Rights will constitute general funds of the Company.
(b) A Participant will not be deemed to be the holder of, or to have any of the rights of a holder with respect to, shares of Common Stock subject to Purchase Rights unless and until the Participants shares of Common Stock acquired upon exercise of Purchase Rights are recorded in the books of the Company (or its transfer agent).
(c) The Plan and Offering do not constitute an employment contract. Nothing in the Plan or in the Offering will in any way alter the at will nature of a Participants employment or be deemed to create in any way whatsoever any obligation on the part of any Participant to continue in the employ of the Company or a Related Corporation, or on the part of the Company or a Related Corporation to continue the employment of a Participant.
(d) The provisions of the Plan will be governed by the laws of the State of Delaware without resort to that states conflicts of laws rules.
15. | DEFINITIONS. |
As used in the Plan, the following definitions will apply to the capitalized terms indicated below:
(a) Board means the Board of Directors of the Company.
(b) Capital Stock means each and every class of common stock of the Company, regardless of the number of votes per share.
(c) Capitalization Adjustment means any change that is made in, or other events that occur with respect to, the Common Stock subject to the Plan or subject to any Purchase Right after the date the Plan is adopted by the Board without the receipt of consideration by the Company through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, large nonrecurring cash dividend, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other similar equity restructuring transaction, as that term is used in Financial Accounting Standards Board Accounting Standards Codification Topic 718 (or any successor thereto). Notwithstanding the foregoing, the conversion of any convertible securities of the Company will not be treated as a Capitalization Adjustment.
(d) Code means the Internal Revenue Code of 1986, as amended, including any applicable regulations and guidance thereunder.
(e) Committee means a committee of one or more members of the Board to whom authority has been delegated by the Board in accordance with Section 2(c).
(f) Common Stock means, as of the IPO Date, the common stock of the Company, having 1 vote per share.
(g) Company means Intersect ENT, Inc., a Delaware corporation.
(h) Contributions means the payroll deductions and other additional payments specifically provided for in the Offering that a Participant contributes to fund the exercise of a Purchase Right. A
8
Participant may make additional payments into his or her account if specifically provided for in the Offering, and then only if the Participant has not already had the maximum permitted amount withheld during the Offering through payroll deductions.
(i) Corporate Transaction means the consummation, in a single transaction or in a series of related transactions, of any one or more of the following events:
(i) a sale or other disposition of all or substantially all, as determined by the Board in its sole discretion, of the consolidated assets of the Company and its Subsidiaries;
(ii) a sale or other disposition of at least 90% of the outstanding securities of the Company;
(iii) a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or
(iv) a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise.
(j) Director means a member of the Board.
(k) Eligible Employee means an Employee who meets the requirements set forth in the document(s) governing the Offering for eligibility to participate in the Offering, provided that such Employee also meets the requirements for eligibility to participate set forth in the Plan.
(l) Employee means any person, including an Officer or Director, who is employed for purposes of Section 423(b)(4) of the Code by the Company or a Related Corporation. However, service solely as a Director, or payment of a fee for such services, will not cause a Director to be considered an Employee for purposes of the Plan.
(m) Employee Stock Purchase Plan means a plan that grants Purchase Rights intended to be options issued under an employee stock purchase plan, as that term is defined in Section 423(b) of the Code.
(n) Exchange Act means the Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder.
(o) Fair Market Value means, as of any date, the value of the Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or traded on any established market, the Fair Market Value of a share of Common Stock will be the closing sales price for such stock as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the date of determination, as reported in such source as the Board deems reliable. Unless otherwise provided by the Board, if there is no closing sales price for the Common Stock on the date of determination, then the Fair Market Value will be the closing sales price on the last preceding date for which such quotation exists.
9
(ii) In the absence of such markets for the Common Stock, the Fair Market Value will be determined by the Board in good faith in compliance with applicable laws and in a manner that complies with Sections 409A of the Code.
(iii) Notwithstanding the foregoing, for any Offering that commences on the IPO Date, the Fair Market Value of the shares of Common Stock on the Offering Date will be the price per share at which shares are first sold to the public in the Companys initial public offering as specified in the final prospectus for that initial public offering.
(p) IPO Date means the date of the underwriting agreement between the Company and the underwriter(s) managing the initial public offering of the Common Stock, pursuant to which the Common Stock is priced for the initial public offering.
(q) Offering means the grant to Eligible Employees of Purchase Rights, with the exercise of those Purchase Rights automatically occurring at the end of one or more Purchase Periods. The terms and conditions of an Offering will generally be set forth in the Offering Document approved by the Board for that Offering.
(r) Offering Date means a date selected by the Board for an Offering to commence.
(s) Officer means a person who is an officer of the Company or a Related Corporation within the meaning of Section 16 of the Exchange Act.
(t) Participant means an Eligible Employee who holds an outstanding Purchase Right.
(u) Plan means this Intersect ENT, Inc. 2014 Employee Stock Purchase Plan.
(v) Purchase Date means one or more dates during an Offering selected by the Board on which Purchase Rights will be exercised and on which purchases of shares of Common Stock will be carried out in accordance with such Offering.
(w) Purchase Period means a period of time specified within an Offering, generally beginning on the Offering Date or on the first Trading Day following a Purchase Date, and ending on a Purchase Date. An Offering may consist of one or more Purchase Periods.
(x) Purchase Right means an option to purchase shares of Common Stock granted pursuant to the Plan.
(y) Related Corporation means any parent corporation or subsidiary corporation of the Company whether now or subsequently established, as those terms are defined in Sections 424(e) and (f), respectively, of the Code.
(z) Securities Act means the Securities Act of 1933, as amended.
(aa) Trading Day means any day on which the exchange(s) or market(s) on which shares of Common Stock are listed, including but not limited to the NYSE, Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market or any successors thereto, is open for trading.
10
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption Experts and to the use of our report dated May 1, 2014, except for Note 17, as to which the date is June 11, 2014, in the Amendment No. 2 to the Registration Statement (Form S-1) and related Prospectus of IntersectENT, Inc. dated July 14, 2014.
/s/ Ernst & Young LLP
Redwood City, California
July 11, 2014
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