GI DYNAMICS, INC. (Form: 10-Q, Received: 11/10/2014 14:45:47)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-55195

GI DYNAMICS, INC.

(Exact name of registrant as specified in its charter)


Delaware		84-1621425
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

25 Hartwell Avenue
Lexington, Massachusetts		02421
(Address of Principal Executive Offices)		(Zip Code)

(781) 357-3300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): ¨ Yes x No

As of October 31, 2014 there were 94,795,481 shares of common stock outstanding.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements concerning our business, operations, financial performance and condition as well as our plans, objectives and expectations for our business, operations and financial performance and condition. Any statements contained in this Quarterly Report on Form 10-Q that are not of historical facts may be deemed to be forward-looking statements. The forward-looking statements are contained principally in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements include, but are not limited to, statements about:

•

our expectations with respect to regulatory submissions and approvals;

•

our expectations with respect to our clinical trials, including enrollment in our clinical trials;

•

our expectations with respect to our intellectual property position;

•

our ability to commercialize our products;

•

our ability to develop and commercialize new products; and

•

our estimates regarding our capital requirements and our need for additional financing.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” “aims,” “assumes,” “goal,” “intends,” “objective,” “potential,” “positioned,” “target,” “continue,” “seek” and similar expressions intended to identify forward-looking statements.

These forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. These forward-looking statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may later become inaccurate. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section (which incorporates by reference to our registration statement on Form 10 filed with the Securities and Exchange Commission, or SEC), that could cause actual results or events to differ materially from the forward-looking statements that we make.

You are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to our Form 10 completely and with the understanding that our actual future results may be materially different from what we expect. These forward-looking statements speak only as at the date of this Quarterly Report on Form 10-Q. Unless required by law, we do not intend to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this Quarterly Report on Form 10-Q.

GI DYNAMICS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2014

TABLE OF CONTENTS


		Page
	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013		1
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and 2013		2
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013		3
	Notes to Condensed Consolidated Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24
Item 4.	Controls and Procedures		25

PART II – OTHER INFORMATION

Item 1A.	Risk Factors		26
Item 2.	Unregistered Sales of Equity Securities		27
Item 6.	Exhibits		27

	Signatures		28

References

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “GI Dynamics,” “the Company,” “we,” “us” and “our” refer to GI Dynamics, Inc. and its consolidated direct and indirect subsidiaries.

Currency

Unless indicated otherwise in this Quarterly Report on Form 10-Q, all references to “$”, “U.S.$” or “dollars” refer to United States dollars, the lawful currency of the United States of America. References to “A$” refer to Australian dollars, the lawful currency of the Commonwealth of Australia. References to “€” or “Euros” means Euros, the single currency of Participating Member States of the European Union.

Trademarks

EndoBarrier ^® and various company logos are the trademarks of the Company, in the United States and other countries. All other trademarks and trade names mentioned in this Quarterly Report on Form 10-Q are the property of their respective owners.

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

GI Dynamics, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(unaudited)


	September 30, 2014			December 31, 2013
Assets
Current assets:
Cash and cash equivalents	$	61,190		$	58,616
Accounts receivable, net		870			660
Inventory		7,485			7,271
Prepaid expenses and other current assets		1,673			1,288

Total current assets		71,218			67,835
Property and equipment, net		1,239			1,490

Total assets	$	72,457		$	69,325

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,141		$	1,267
Accrued expenses		7,360			4,400
Deferred revenue		659			722
Current portion of long-term debt		—			58
Other current liabilities		62			—

Total current liabilities		9,222			6,447
Deferred rent		205			167
Other liabilities		20			—
Warrants to purchase common stock		62			326
Commitments (Note 10)
Stockholders’ equity:
Preferred stock, $0.01 par value – 5,000,000 shares authorized; no shares issued and outstanding at September 30, 2014 and December 31, 2013		—			—
Common stock, $0.01 par value – 130,000,000 shares authorized; 94,795,481 shares issued and 94,760,481 shares outstanding at September 30, 2014 and 80,087,717 shares issued and outstanding at December 31, 2013		948			801
Class B common stock, $0.01 par value – 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2014 and December 31, 2013		—			—
Additional paid-in capital		247,832			213,305
Accumulated deficit		(185,832	)		(151,721	)

Total stockholders’ equity		62,948			62,385

Total liabilities and stockholders’ equity	$	72,457		$	69,325

The accompanying notes are an integral part of these condensed consolidated financial statements.

GI Dynamics, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

(In thousands, except share and per share amounts)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenue	$	609		$	493		$	2,355		$	1,195
Cost of revenue		393			432			1,846			1,508

Gross profit (loss)		216			61			509			(313	)
Operating expenses:
Research and development		6,833			3,879			19,693			10,567
Sales and marketing		2,412			2,778			7,974			7,943
General and administrative		2,670			1,947			7,276			7,032

Total operating expenses		11,915			8,604			34,943			25,542

Loss from operations		(11,699	)		(8,543	)		(34,434	)		(25,855	)
Other income (expense):
Interest income		41			173			217			320
Interest expense		—			(1	)		(1	)		(4	)
Foreign exchange gain (loss)		(522	)		491			(95	)		(694	)
Remeasurement of warrant liability		69			(223	)		264			(152	)

Other income (expense), net		(412	)		440			385			(530	)

Loss before income tax expense		(12,111	)		(8,103	)		(34,049	)		(26,385	)
Income tax expense		19			24			62			82

Net loss	$	(12,130	)	$	(8,127	)	$	(34,111	)	$	(26,467	)

Basic and diluted net loss per common share	$	(0.13	)	$	(0.11	)	$	(0.39	)	$	(0.42	)

Weighted-average number of common shares used in basic and diluted net loss per common share		94,760,481			75,445,376			88,365,265			63,497,247
Comprehensive loss	$	(12,130	)	$	(8,127	)	$	(34,111	)	$	(26,467	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

GI Dynamics, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)


	Nine Months Ended September 30,
	2014			2013
Operating activities
Net loss	$	(34,111	)	$	(26,467	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		485			283
Gain on sale of property and equipment		—			(1	)
Stock-based compensation expense		3,370			3,074
Remeasurement of warrant liability		(264	)		152
Changes in operating assets and liabilities:
Accounts receivable		(210	)		(597	)
Prepaid expenses and other current assets		(385	)		(534	)
Inventory		(214	)		(2,377	)
Accounts payable		(126	)		(6	)
Accrued expenses		2,907			(1,207	)
Deferred revenue		(63	)		577
Deferred rent		91			126

Net cash used in operating activities		(28,520	)		(26,977	)
Investing activities
Purchases of property and equipment		(234	)		(1,032	)
Proceeds from sale of property and equipment		—			1
Change in restricted cash		—			33

Net cash used in investing activities		(234	)		(998	)
Financing activities
Proceeds from exercise of stock options		604			42
Net proceeds from issuance of common stock		30,782			52,515
Payments on long-term debt		(58	)		(49	)

Net cash provided by financing activities		31,328			52,508

Net increase in cash and cash equivalents		2,574			24,533
Cash and cash equivalents at beginning of period		58,616			41,481

Cash and cash equivalents at end of period	$	61,190		$	66,014

Supplemental cash flow disclosures
Cash paid for interest	$	1		$	3
Income taxes paid	$	36		$	64

The accompanying notes are an integral part of these condensed consolidated financial statements.

GI Dynamics, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Nature of Business

GI Dynamics, Inc. (the “Company”) was incorporated on March 24, 2003, as a Delaware corporation, with operations based in Lexington, Massachusetts. The Company designs, develops, and markets medical devices for non-surgical approaches to treating type 2 diabetes and obesity. Since incorporation, the Company has devoted substantially all of its efforts to product commercialization, research and development, business planning, recruiting management and technical staff, acquiring operating assets, and raising capital. The Company began commercial sales of its product, EndoBarrier ^® , in 2011 and currently operates in one reportable business segment which designs, manufactures and markets medical devices.

The Company is subject to a number of risks similar to other medical device companies, including, but not limited to, market acceptance of the Company’s products, development by its competitors of new technological innovations, safety and efficacy of the products in clinical trials, the regulatory approval process governing medical devices, raising additional capital and protection of proprietary technology.

On October 6, 2014, the Company’s Notified Body in the European Union, an organization that has been accredited by a Member State to assess whether a product meets certain preordained standards, has temporarily suspended the Company’s commercial product shipments of the EndoBarrier labeled with a CE Mark, affecting all countries where the Company is currently selling EndoBarrier, pending a review of the Company’s vigilance and reporting systems. A CE Mark is a mandatory conformity marking for certain products sold within the European Economic Area. The suspension of shipments is not a product recall and does not apply to products currently owned by hospitals or distributors, or products required for use in clinical trials. The Company plans to continue its ongoing clinical trial activities, including the pivotal trial currently underway in the United States. In response to the Notified Body’s specific requests for corrective action relating to vigilance and reporting systems, the Company has formally submitted its responses for review by the Notified Body. The Company believes it has remediated the deficiencies in question, but continues to work closely with the governing authorities in Europe to resolve any remaining questions in order to resume product shipments as soon as possible. Meanwhile, the Company is continuing to manufacture its product as the design and manufacturing of the EndoBarrier has not been a subject of the Notified Body’s inquiry and action. As a result of the temporary suspension of commercial product shipments, the Company expects revenue to decrease in the three months ending December 31, 2014 compared to the three months ended September 30, 2014.

The Company has incurred operating losses since inception and at September 30, 2014, had an accumulated deficit of approximately $185.8 million. At September 30, 2014, the Company had approximately $61.2 million in cash and cash equivalents, which it believes is sufficient to fund its operations through at least September 30, 2015. In September 2011, the Company completed its initial public offering (“IPO”) of common stock in the form of CHESS Depositary Interests (“CDIs”) in Australia. As a result of the IPO and simultaneous private placement in the U.S., the Company raised a total of approximately $72.5 million in proceeds, net of expenses and repayment of $6.0 million of the Company’s Convertible Term Promissory Notes. Additionally, in July and August 2013, the Company sold CDIs on the Australian Securities Exchange (“ASX”) through a private placement and Share Purchase Plan (“SPP”), which raised a total of approximately $52.5 million, net of expenses. In May 2014, the Company raised an additional approximately $30.8 million, net of expenses, when it sold CDIs on the ASX through a private placement.

2. Summary of Significant Accounting Policies and Basis of Presentation

The accompanying condensed consolidated financial statements and the related disclosures as of September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013 are unaudited and have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s registration statement on Form 10 (“Form 10”). The December 31, 2013 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP for complete financial statements.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company’s financial position as of September 30, 2014, results of its operations for the three and nine months ended September 30, 2014 and 2013 and its cash flows for the nine months ended September 30, 2014 and 2013. The interim

GI Dynamics, Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

2. Summary of Significant Accounting Policies and Basis of Presentation (continued)

results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

The Company’s significant accounting policies are as described in Note 2, Summary of Significant Accounting Policies , in the Company’s Form 10.

In addition to the consignment-like arrangements described in Note 2 in the Company’s Form 10, in which the Company recognizes revenue when the product is implanted or otherwise consumed and payment is received from the customer, the Company has entered into consignment arrangements in which the Company delivers the product to the customer but retains title to the product until it is implanted or otherwise consumed. In these arrangements, the Company recognizes revenue once it receives proof of third party purchase, usually in the form of a customer purchase order.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of GI Dynamics, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances are eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in accordance with GAAP requires the Company’s management to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, the Company’s management evaluates its estimates, including those related to revenue recognition, inventory valuation and related reserves, impairment of long-lived assets, income taxes including the valuation allowance for deferred tax assets, research and development, contingencies and stock-based compensation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.

Subsequent Events

The Company evaluates events occurring after the date of its condensed consolidated balance sheet for potential recognition or disclosure in its condensed consolidated financial statements. There have been no subsequent events other than that disclosed in Note 1 that have occurred through the date the Company issued its condensed consolidated financial statements that require disclosure in or adjustment to its condensed consolidated financial statements.

Reclassifications

Certain reclassifications related to the presentation of income tax expense in the condensed consolidated statements of comprehensive loss have been made to prior year amounts to conform with current year presentation. In prior years, income tax expense was included in operating expenses as the amounts were not material.

New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the effect of recently issued standards that are not yet effective will not have a material effect on its consolidated financial position or results of operations upon adoption.

GI Dynamics, Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

2. Summary of Significant Accounting Policies and Basis of Presentation (continued)

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2016. Early adoption is not permitted. Management is currently evaluating the impact of the pending adoption of ASU 2014-09 on the Company’s consolidated financial statements.

3. Net Loss per Common Share

Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Potential common stock equivalents are determined using the treasury stock method. For diluted net loss per share purposes, the Company excludes stock options and other stock-based awards, including shares issued as a result of option exercises but which are subject to repurchase by the Company, whose effect would be anti-dilutive from the calculation. During each of the three and nine months ended September 30, 2014 and 2013, common stock equivalents were excluded from the calculation of diluted net loss per common share, as their effect was anti-dilutive due to the net loss incurred. The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares outstanding as of September 30, 2014 and 2013, as they would be anti-dilutive:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Warrants to purchase common stock		500,000		500,000		500,000		500,000
Options to purchase common stock and other stock-based awards		15,419,580		9,642,220		15,419,580		9,642,220

Total		15,919,580		10,142,220		15,919,580		10,142,220

4. Common Stock Warrants

In connection with the Company’s IPO in September 2011, the Company issued warrants in an aggregate amount of 500,000 shares of common stock at an exercise price of A$5.50 per share to the lead manager of the IPO and certain other investors. The warrants will expire on the fifth anniversary of their date of grant. The warrants may be converted on a cashless basis at the option of the holder. The Company has reserved 500,000 shares of common stock related to these warrants.

The Company accounts for the warrants under Accounting Standards Codification 815, Derivatives and Hedging (“ASC 815”). In accordance with the guidance included in ASC 815, because the Company’s functional currency is the U.S. dollar and the exercise price of the warrants is in Australian dollars, the Company is exposed to currency exchange risk related to the warrants. As a result, the warrants are not considered indexed to the Company’s own stock, and therefore, the warrants are classified as a liability and the fair value of the warrants must be remeasured at each reporting period. At the time the warrants were issued, the Company estimated the fair value of the warrants using the Black-Scholes option pricing model. The Company remeasured the fair value of the warrants at each reporting period using current assumptions and current foreign exchange rates, with changes in value recorded as other income or expense (Note 5).

GI Dynamics, Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

5. Fair Value of Financial Instruments

The tables below present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, and indicates the fair value hierarchy of the valuation techniques the Company used to determine such fair value. In general, fair values determined by Level 1 inputs utilize observable inputs such as quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are either directly or indirectly observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, requiring the Company to develop its own assumptions for the asset or liability.

The following tables present the assets and liabilities the Company has measured at fair value on a recurring basis (in thousands):


			Fair Value Measurements at Reporting Date Using
Description	September 30, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Money market funds (included in cash and cash equivalents)	$	41,949	$	41,949	$	—	$	—

Total assets	$	41,949	$	41,949	$	—	$	—

Liabilities
Warrants to purchase common stock	$	62	$	—	$	—	$	62

Total liabilities	$	62	$	—	$	—	$	62


			Fair Value Measurements at Reporting Date Using
Description	December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Money market funds (included in cash and cash equivalents)	$	45,560	$	45,560	$	—	$	—

Total assets	$	45,560	$	45,560	$	—	$	—

Liabilities
Warrants to purchase common stock	$	326	$	—	$	—	$	326

Total liabilities	$	326	$	—	$	—	$	326

GI Dynamics, Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

5. Fair Value of Financial Instruments (continued)

The assumptions used in the Black-Scholes option pricing model to determine the fair value of the common stock warrants at September 30, 2014 and December 31, 2013 were as follows:


	September 30, 2014			December 31, 2013
Exercise price (A$5.50 at current exchange rate)	$	4.81		$	4.92
Fair value of common stock	$	2.10		$	3.36
Expected volatility		50.1	%		48.7	%
Expected term (in years)		1.9			2.7
Risk-free interest rate		0.6	%		0.7	%
Expected dividend yield		—	%		—	%

The following table is a rollforward of the fair value of the warrants, where fair value is determined by Level 3 inputs (in thousands):


Balance at December 31, 2013		326
Decrease in fair value of warrants upon remeasurement included in other income (expense)		(264	)

Balance at September 30, 2014	$	62

Cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities at September 30, 2014 and December 31, 2013 are carried at amounts that approximate fair value due to their short-term maturities and highly liquid nature of these instruments.

6. Concentrations of Credit Risk, Accounts Receivable and Related Valuation Account

Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalent balances with high quality financial institutions, and consequently, the Company believes that such funds are subject to minimal credit risk. The Company’s short-term investments potentially subject the Company to concentrations of credit risk. The Company has adopted an investment policy that limits the amounts the Company may invest in any one type of investment and requires all investments held by the Company to have a rating of not less than A, thereby reducing credit risk concentration.

Accounts receivable primarily consist of amounts due from customers. The Company’s accounts receivable are with distributors and health care providers in different countries. In light of the current economic state of many foreign countries, the Company continues to monitor the creditworthiness of its customers.

At September 30, 2014 and December 31, 2013, one distributor accounted for approximately 47% and 49% of the Company’s accounts receivable, respectively. No other customer accounted for greater than 10% of the Company’s accounts receivable at either September 30, 2014 or December 31, 2013.

The Company grants credit to customers in the normal course of business but generally does not require collateral or any other security to support its receivables. The Company makes judgments as to its ability to collect outstanding receivables and provides an allowance for receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices and the overall quality and age of those invoices not individually reviewed. The Company believes that credit risks associated with these customers are not significant. To date, the Company has not had any write-offs of bad debt, and as such, the Company does not have an allowance for doubtful accounts as of September 30, 2014 and December 31, 2013.

GI Dynamics, Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

6. Concentrations of Credit Risk, Accounts Receivable and Related Valuation Account (continued)

In certain circumstances the Company allows customers to return defective or nonconforming products for credit or replacement products. Defective or nonconforming products typically include those products that resulted in an unsuccessful implant procedure. The Company records an estimate for product returns based upon historical trends. The associated reserve for product returns is included in the Company’s accounts receivable.

The following table shows the components of the Company’s accounts receivable at September 30, 2014 and December 31, 2013 (in thousands):


	September 30, 2014			December 31, 2013
Accounts receivable	$	925		$	688
Less: allowance for sales returns		(55	)		(28	)

Total	$	870		$	660

7. Inventory

The Company states inventory at the lower of first-in, first-out cost or market. The Company records a provision for excess, expired, and obsolete inventory based primarily on estimates of forecasted revenues. A significant change in the timing or level of demand for products as compared to forecasted amounts may result in recording additional provisions for excess, expired, and obsolete inventory in the future. When capitalizing inventory, the Company considers factors such as status of regulatory approval, alternative use of inventory, and anticipated commercial use of the product.

Inventory at September 30, 2014 and December 31, 2013 was as follows (in thousands):


	September 30, 2014		December 31, 2013
Finished goods	$	1,057	$	1,010
Work-in-process		2,345		1,208
Raw materials		4,083		5,053

Total	$	7,485	$	7,271

The Company has entered into consignment arrangements in which the Company delivers the product to the customer but retains title to the product until it is implanted or otherwise consumed. At September 30, 2014, an immaterial amount of the finished goods inventory was at customer locations pursuant to these arrangements.

GI Dynamics, Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

8. Property and Equipment

Property and equipment consisted of the following (in thousands):


	September 30, 2014			December 31, 2013
Laboratory equipment	$	421		$	387
Computer equipment and software		1,124			1,032
Office furniture and equipment		290			270
Construction in process		183			95
Leasehold improvements		921			921

		2,939			2,705
Less accumulated depreciation and amortization		(1,700	)		(1,215	)

Total	$	1,239		$	1,490

Depreciation and amortization expense of property and equipment was approximately $0.2 million and $0.1 million for the three months ended September 30, 2014 and 2013, respectively. Depreciation and amortization expense of property and equipment was approximately $0.5 million and $0.3 million for the nine months ended September 30, 2014 and 2013, respectively.

9. Accrued Expenses

Accrued expenses consisted of the following (in thousands):


	September 30, 2014		December 31, 2013
Clinical trials	$	3,808	$	1,526
Payroll and related liabilities		2,302		1,576
Professional fees		503		630
Deferred rent, current portion		144		91
Other		603		577

Total	$	7,360	$	4,400

Included in payroll and related liabilities is a total of approximately $0.8 million of separation expenses associated with the termination of our chief commercial officer and chief executive officer which will be paid out through September 2015.

10. Commitments and Contingencies

Lease Commitments

In June 2013, the Company entered into a noncancelable agreement to sublease 33,339 square feet of office, laboratory and manufacturing space in Lexington, Massachusetts. The sublease commenced in June 2013 and expires in December 2016, subject to earlier termination under certain conditions. Base rent during the initial rent period is approximately $0.6 million per year and increases annually by approximately $17,000. The space was delivered to the Company in June 2013 and rent payments commenced in May 2014. The rent expense, inclusive of the escalating rent payments and free rent period, is recognized on a straight-line basis over the term of the sublease agreement. In accordance with the terms of the sublease agreement, the Company maintains an unsecured letter of credit of approximately $0.2 million securing its obligations under the sublease agreement.

GI Dynamics, Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

10. Commitments (continued)

In March 2012, the Company’s subsidiary, GID Germany GmbH, entered into a noncancelable operating lease for office space in Dusseldorf, Germany. The lease was renewed in September 2013 and was extended through April 2015 and is subject to earlier termination based on certain terms and conditions. The lease will extend automatically for successive twelve-month periods until terminated. The rent expense, inclusive of the free rent periods, is recognized on a straight-line basis over the term of the current lease agreement.

In July 2013, the Company’s subsidiary, GI Dynamics Australia Pty Ltd, entered into a noncancelable operating lease for office space in Baulkham Hills, Australia. The initial term of the lease was for twelve months, which expired in July 2014. The Company exercised its option to renew the lease and extended the term through July 2015, subject to earlier termination under certain conditions.

Rent expense on noncancelable operating leases was approximately $0.1 million and $0.2 million for the three months ended September 30, 2014 and 2013, respectively. Rent expense on noncancelable operating leases was approximately $0.4 million for both the nine months ended September 30, 2014 and 2013.

Future minimum lease payments under noncancelable operating leases at September 30, 2014, are as follows (in thousands):


Year Ending December 31,
2014	$	157
2015		617
2016		611

Total	$	1,385

Litigation

From time to time, the Company is involved in various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these ongoing legal matters, individually and in aggregate, will have a material adverse effect on the Company’s financial position.

Guarantees

The Company has identified the guarantees described below as disclosable, in accordance with ASC 460, Guarantees .

As permitted under Delaware law, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make is unlimited; however, the Company has directors’ and officers’ insurance coverage that should limit its exposure and enable it to recover a portion of any future amounts paid.

The Company is a party to a number of agreements entered into in the ordinary course of business that contain typical provisions that obligate the Company to indemnify the other parties to such agreements upon the occurrence of certain events. Such indemnification obligations are usually in effect from the date of execution of the applicable agreement for a period equal to the applicable statute of limitations. The aggregate maximum potential future liability of the Company under such indemnification provisions is uncertain.

GI Dynamics, Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

10. Commitments (continued)

The Company leases office space under non-cancelable operating leases. The Company has standard indemnification arrangements under the leases that require it to indemnify its landlords against all costs, expenses, fines, suits, claims, demands, liabilities, and actions directly resulting from any breach, violation or nonperformance of any covenant or condition of the Company’s leases. The aggregate maximum potential future liability of the Company under such indemnification provisions is uncertain.

As of September 30, 2014 and December 31, 2013, the Company had not experienced any material losses related to these indemnification obligations and no material claims with respect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible. As a result, the Company has not established any related reserves.

11. Stock Plans

The Company has two stock-based compensation plans under which stock options, restricted and unrestricted stock awards, restricted stock units, and other share-based awards are available for grant to employees, directors and consultants of the Company. At September 30, 2014, there were 713,121 shares available for future grant under both plans.

Stock-Based Compensation

In calculating stock-based compensation costs, the Company estimated the fair value of stock options using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived, exchange-traded options that have no vesting restrictions and are fully transferable. The Company estimates the number of awards that will be forfeited in calculating compensation costs. Such costs are then recognized over the requisite service period of the awards on a straight-line basis.

Determining the fair value of stock-based awards using the Black-Scholes option-pricing model requires the use of highly subjective assumptions, including the expected term of the award and expected stock price volatility. The weighted-average assumptions used to estimate the fair value of employee stock options using the Black-Scholes option-pricing model were as follows for the three and nine months ended September 30, 2014 and 2013:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Expected volatility		61.0	%		64.8	%		61.6	%		64.9	%
Expected term (in years)		6.05			6.05			6.05			6.05
Risk-free interest rate		2.1	%		1.8	%		2.1	%		1.1	%
Expected dividend yield		—	%		—	%		—	%		—	%

The Company uses historical data to estimate forfeiture rates. The Company’s estimated forfeiture rates were 5% and 2% at September 30, 2014 and 2013, respectively.

During the three months ended September 30, 2014, the Company modified the terms of stock awards previously granted to an employee upon his change in status from employee to non-employee. The modifications included an extension of the exercise period after the status change with respect to certain of the awards and the extension of the vesting of certain options through the end of his expected service to the Company. These modifications resulted in an immaterial increase in stock-based compensation. The Company accounted for the modifications of stock awards in accordance with the provision of ASC 718, Stock Compensation (“ASC 718”). Stock awards that are modified and continue to vest when an employee has a change in employment status are subject to periodic revaluation over their vesting terms.

GI Dynamics, Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

11. Stock Plans (continued)

Stock-based compensation is reflected in the condensed consolidated statements of comprehensive loss as follows for the three and nine months ended September 30, 2014 and 2013 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Cost of revenue	$	33	$	17	$	93	$	52
Research and development		330		235		970		609
Sales and marketing		376		342		1,202		1,079
General and administrative		423		301		1,105		1,334

	$	1,162	$	895	$	3,370	$	3,074

Stock Options

The following table summarizes share-based activity under the Company’s stock option plans:


	Shares of Common Stock Attributable to Options			Weighted- Average Exercise Price		Weighted- Average Contractual Life		Aggregate Intrinsic Value
						(in years)		(in thousands)
Outstanding at December 31, 2013		9,634,547		$	2.59		6.66	$	13,319
Granted		6,125,089		$	2.68
Exercised		(1,517,511	)	$	0.40
Cancelled		(914,985	)	$	4.00

Outstanding at September 30, 2014		13,327,140		$	2.78		7.35	$	4,811

Vested or expected to vest at September 30, 2014		12,949,271		$	2.77		6.86	$	4,803

Exercisable at September 30, 2014		5,769,829		$	2.54		4.20	$	4,643

As of September 30, 2014, there was approximately $11.0 million of unrecognized stock-based compensation, net of estimated forfeitures, related to unvested stock option grants under the plans, which is expected to be recognized over a weighted-average period of 3.3 years. The total unrecognized stock-based compensation cost will be adjusted for future changes in estimated forfeitures. The Company also has unrecognized stock-based compensation expense of approximately $0.5 million, net of estimated forfeitures, related to stock options with performance-based vesting criteria that are not considered probable of achievement as of September 30, 2014; therefore the Company has not yet begun to recognize the expense on these awards.

GI Dynamics, Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

11. Stock Plans (continued)

The weighted-average grant date fair value of options granted during the three months ended September 30, 2014 and 2013 was $1.23 and $2.13, respectively, and $1.53 and $1.96 for the nine months ended September 30, 2014 and 2013, respectively. The total intrinsic value of options exercised during the three months ended September 30, 2014 and 2013 was approximately none and $32,000, respectively, and approximately $4.3 million and $0.4 million for the nine months ended September 30, 2014 and 2013, respectively. The intrinsic value represents the difference between the fair value of the Company’s common stock on the date of exercise and the exercise price of the stock option. Cash received from option exercises during the three months ended September 30, 2014 and 2013 was approximately $82,000 and $6,000, respectively, and approximately $0.6 million and $42,000 for the nine months ended September 30, 2014 and 2013, respectively. No tax benefits were realized from options and other stock-based payment arrangements during these periods.

The stock-based compensation plans provide that grantees may have the right to exercise an option prior to vesting. Shares purchased upon the exercise of unvested options will be subject to the same vesting schedule as the underlying options, and are subject to repurchase at the original exercise price by the Company should the grantee discontinue providing services to the Company for any reason, prior to becoming fully vested in such shares. At September 30, 2014, there were 35,000 shares issued pursuant to the exercise of unvested options that remain unvested and subject to repurchase by the Company. The exercise of these shares is not substantive and as a result, the cash paid for the exercise price is considered a deposit or prepayment of the exercise price and is recorded as a liability. Additionally, while, the shares subject to repurchase are included in the legally issued shares, they are excluded from the calculation of outstanding shares. At December 31, 2013, there were no shares subject to repurchase by the Company.

Restricted Stock Units

Each restricted stock unit (“RSU”) represents a contingent right to receive one share of the Company’s common stock. RSUs generally vest on a pro-rata basis on each anniversary of the issuance date over four years or vest in equal parts upon the achievement of a product revenue milestone and a regulatory milestone. There is no consideration payable on the vesting of RSUs issued under the plans. Upon vesting, the RSUs are exercised automatically and settled in shares of the Company’s common stock. In the nine months ended September 30, 2014, the Company awarded a total of 2,095,720 RSUs to employees of the Company.

The following table summarizes information related to the RSUs and activity in the nine months ended September 30, 2014:


	Number of Units			Weighted- Average Contractual Life		Aggregate Intrinsic Value
				(in years)		(in thousands)
Outstanding at December 31, 2013		—			—	$	—
Granted		2,095,720
Vested/Exercised		—
Cancelled		(38,280	)

Outstanding at September 30, 2014		2,057,440			5.73	$	4,321

The aggregate intrinsic value at September 30, 2014 noted in the table above represents the closing price of the Company’s common stock multiplied by the number of RSUs outstanding.

At September 30, 2014, 1,221,991 of the RSUs outstanding are subject to performance-based vesting criteria as described above.

GI Dynamics, Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

11. Stock Plans (continued)

The fair value of each RSU award equals the closing price of the Company’s common stock on the date of grant. The weighted average grant date fair value per share of RSUs granted in the three and nine months ended September 30, 2014 was $2.15 and $2.26, respectively.

As of September 30, 2014, there was approximately $2.9 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested RSU awards. This expense is expected to be recognized over a weighted average period of 2.7 years. The Company also has unrecognized stock-based compensation expense of approximately $1.3 million, net of estimated forfeitures, related to RSUs with performance-based vesting criteria that are not considered probable of achievement as of September 30, 2014; therefore the Company has not yet begun to recognize the expense on these awards.

12. Segment Reporting

Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company has one reportable segment which designs, develops, manufactures and markets medical devices for non-surgical approaches to treating type 2 diabetes and obesity.

Geographic Reporting

All the Company’s revenue is attributable to customers outside the U.S. The Company is dependent on favorable economic and regulatory environments for its products. Products are sold to customers located in Europe, the Middle East, Australia and South America and sales are attributed to a country or region based on the location of the customer to whom the products are sold.

At September 30, 2014, long-lived assets, comprised of property and equipment, of approximately $1.2 million are primarily held in the U.S. Total long-lived assets held outside of the U.S. represent less than 1% of total long-lived assets.

Product sales by geographic location for the three and nine months ended September 30, 2014 and 2013 are listed in the table below (in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Germany	$	272	$	93	$	764	$	325
Netherlands		*		78		*		138
Other Europe		133		94		689		191
Qatar		—		118		—		118
Israel		*		50		*		*
Other Middle East		14		—		242		71
Chile		63		49		284		206
Australia		127		11		376		146

Total Revenue	$	609	$	493	$	2,355	$	1,195

*	Revenue associated with the individual country is less than 10% of total revenue for the period and is included in the appropriate regional line.

GI Dynamics, Inc.

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

12. Segment Reporting (continued)

Major Customers

In the three months ended September 30, 2014, one health care provider accounted for approximately 13% of the Company’s revenue and one distributor accounted for approximately 10% of the Company’s revenue. In the three months ended September 30, 2013, two health care providers accounted for approximately 24% and 16%, respectively, and two distributors each accounted for approximately 10% of the Company’s revenue. No other customer accounted for greater than 10% of the Company’s revenue during the three months ended September 30, 2014 and 2013.

In the nine months ended September 30, 2014, one distributor accounted for approximately 11% of the Company’s revenue. In the nine months ended September 30, 2013, one distributor accounted for approximately 17% of the Company’s revenue and two health care providers accounted for approximately 12% and 10%, respectively, of the Company’s revenue. No other customer accounted for greater than 10% of the Company’s revenue during the nine months ended September 30, 2014 and 2013.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2013 included in our registration statement on Form 10, or our Form 10. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” in Item 1A of our Form 10 which are incorporated herein by reference, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a medical device company headquartered in Lexington, Massachusetts, that focuses on the development and commercialization of effective, non-surgical approaches for the treatment of type 2 diabetes and obesity. We have commercially launched our lead product, the EndoBarrier ^® , which is now being sold in select markets in Europe and South America, as well as Australia and the Middle East. In countries where reimbursement is required for broad-based use, we are endeavoring to secure such reimbursement. In other countries where patients are more accustomed to paying for all or a majority of health care expenses, we are growing such markets or pursuing regulatory approvals.

Currently, we are focused on the commercial rollout of the EndoBarrier in selected countries in Europe and South America, as well as in Australia and Israel. Consistent with executing our commercial strategy during 2014, we expect to continue to drive broad-based market awareness among patients and physicians in our commercial geographies, continue to support increasing adoption of EndoBarrier Therapy at existing medical centers, and train doctors in new medical centers. To achieve broad-based clinical acceptance and commercial uptake, reimbursement coverage by health care insurers will be required in many markets.

In certain geographies where reimbursement is necessary for clinical acceptance and commercial uptake, such as in Europe, we are already receiving partial reimbursement in certain markets at a local or national level, but we have not yet achieved full or national reimbursement in any market.

In self-pay markets where we have regulatory approval, we are currently focusing on expanding both the product use per center and the number of centers. We are also seeking regulatory approval in other countries that we believe will have a large self-pay population, such as Brazil.

In the U.S., we have received approval from the U.S. Food and Drug Administration, or FDA, to commence our pivotal trial, which we began in 2013. The multi-center, randomized, double-blinded study will enroll 500 patients with uncontrolled type 2 diabetes and obesity at as many as 25 sites in the U.S. The primary endpoint is improvement in diabetes control as measured by HbA1c levels. As of September 30, 2014, 24 of a possible 25 clinical sites across the U.S. have initiated patient recruitment and a total of 237 patients have been enrolled in the study. Following completion of the trial, we intend to submit our results to the FDA seeking regulatory approval for commercial sale in the U.S.

On October 6, 2014, our Notified Body in the European Union, an organization that has been accredited by a Member State to assess whether a product meets certain preordained standards, has temporarily suspended our commercial product shipments of the EndoBarrier labeled with a CE Mark, affecting all countries where we are currently selling EndoBarrier, pending a review of our vigilance and reporting systems. A CE Mark is a mandatory conformity marking for certain products sold within the European Economic Area. The suspension of shipments is not a product recall and does not apply to products currently owned by hospitals or distributors, or products required for use in clinical trials. We plan to continue our ongoing clinical trial activities, including the U.S. pivotal trial currently underway in the United States. In response to the Notified Body’s specific requests for corrective action relating to vigilance and reporting systems, we have formally submitted our responses for review by the Notified Body. We believe we have remediated the deficiencies in question, but continue to work closely with the governing authorities in Europe to resolve any remaining questions in order to resume product shipments as soon as possible. Meanwhile, we are continuing to manufacture our product as the design and manufacturing of the EndoBarrier has not been a subject of the Notified Body’s inquiry and action. As a result of the temporary suspension of commercial product shipments, we expect revenue to decrease in the three months ending December 31, 2014 compared to the three months ended September 30, 2014.

For financial reporting purposes, we have one reportable segment which designs, manufactures and markets medical devices for the treatment of type 2 diabetes and obesity.

To date, we have devoted substantially all of our efforts to product commercialization, research and development, business planning, recruiting management and technical staff, acquiring operating assets, and raising capital. We have incurred significant operating losses since our inception in 2003. As of September 30, 2014, we had an accumulated deficit of approximately $185.8 million. We expect to incur net losses for the foreseeable future as we continue our clinical trials, continue research and development into product improvements and next generation products, enhance our infrastructure and expand commercial markets.

We have raised net proceeds of approximately $231.5 million through sales of our equity. We generated $75.7 million in proceeds, net of expenses, through the sale of convertible preferred stock to a number of U.S. venture capital firms, two global medical device manufacturers and individuals. In September 2011, we raised approximately $72.5 million, net of expenses and repayment of $6.0 million of Convertible Term Promissory Notes, in our initial public offering, or IPO, in Australia and simultaneous private placement of CHESS Depositary Interests, or CDIs, to accredited investors in the U.S. In July and August 2013, we raised approximately $52.5 million, net of expenses, in an offering of our CDIs to sophisticated, professional and accredited investors in Australia, the U.S. and certain other jurisdictions. In May 2014, we raised approximately $30.8 million, net of expenses, in an offering of our CDIs to sophisticated, professional and accredited investors in Australia, Hong Kong, the United Kingdom and certain other jurisdictions. In connection with the IPO, all of our existing shares of preferred stock were converted into common stock.

In June 2011, we issued Convertible Term Promissory Notes to several of our shareholders totaling $6.0 million, which were repaid concurrent with the closing of our IPO with the associated gross proceeds.

Our corporate headquarters and manufacturing facility are located in Lexington, Massachusetts.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements prepared in accordance with generally accepted accounting principles in the U.S. The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reported periods and related disclosures. These estimates and assumptions, including those related to revenue recognition, inventory valuation, impairment of long-lived assets, income taxes including the valuation allowance for deferred tax assets, research and development and stock-based compensation are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on our historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.

During the three and nine months ended September 30, 2014, there were no material changes to our critical accounting policies as reported in our Form 10.

Results of Operations

The following is a description of significant components of our operations, including significant trends and uncertainties that we believe are important to an understanding of our business and results of operations.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenue	$	609		$	493		$	2,355		$	1,195
Cost of revenue		393			432			1,846			1,508

Gross profit (loss)		216			61			509			(313	)
Operating expenses:
Research and development		6,833			3,879			19,693			10,567
Sales and marketing		2,412			2,778			7,974			7,943
General and administrative		2,670			1,947			7,276			7,032

Total operating expenses		11,915			8,604			34,943			25,542

Loss from operations		(11,699	)		(8,543	)		(34,434	)		(25,855	)
Other income (expense):
Interest income		41			173			217			320
Interest expense		—			(1	)		(1	)		(4	)
Foreign exchange gain (loss)		(522	)		491			(95	)		(694	)
Remeasurement of warrant liability		69			(223	)		264			(152	)

Other income (expense), net		(412	)		440			385			(530	)

Loss before income tax expense		(12,111	)		(8,103	)		(34,049	)		(26,385	)
Income tax expense		19			24			62			82

Net loss	$	(12,130	)	$	(8,127	)	$	(34,111	)	$	(26,467	)

Three and Nine months Ended September 30, 2014 Compared to Three and Nine months Ended September 30, 2013


	Three Months Ended September 30,				Change						Nine Months Ended September 30,					Change
	2014		2013		$			%			2014		2013			$		%
	(dollars in thousands)										(dollars in thousands)
Revenue	$	609	$	493	$	116			23.5	%	$	2,355	$	1,195		$	1,160		97.1	%
Cost of revenue		393		432		(39	)		(9.0	)%		1,846		1,508			338		22.4	%

Gross profit (loss)	$	216	$	61	$	155			254.1	%	$	509	$	(313	)	$	822		262.6	%

Revenue. The increase in revenue of approximately $0.1 million for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 was primarily due to increases in sales in Europe, South America and Australia of approximately 52%, 28% and 1,026%, respectively, in those markets, partially offset by a decrease of approximately 92% in sales in the Middle East. In each market where sales increased, the increase was the result of increased unit volume.

The increase in revenue of approximately $1.2 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 was primarily due to increases in sales in Europe, South America, Australia and the Middle East of approximately 122%, 37%, 158% and 28%, respectively, in those markets. In each of these markets, the increase in sales was the result of increased unit volume.

As a result of the temporary suspension of commercial product shipments, we expect revenue to decrease in the three months ending December 31, 2014 compared to the three months ended September 30, 2014, with a corresponding decrease in gross profit.

We believe we have remediated the deficiencies related to our vigilance and reporting systems that were identified by our Notified Body. We continue to work closely with the governing authorities in Europe to resolve any remaining questions so that we may resume product shipments as soon as possible.

Cost of Revenue. The decrease in cost of revenue was approximately $39,000 for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The decrease in the cost of revenue was primarily related to a more efficient utilization of manufacturing resources partially offset by an increase in units sold. The increase in cost of revenue was approximately $0.3 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The increase was primarily related to the increase in sales during the corresponding period.

The increase in the gross profit for the three months ended September 30, 2014 compared to the three months ended September 30, 2013, as well as for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, was the result of improved utilization of our manufacturing infrastructure as we increased production volume to meet increased sales and clinical trial requirements. We expect that our gross margin will vary, and may vary significantly, quarter to quarter due to our current stage of commercial development. Specifically, factors such as changes in volume of inventory production, utilization of our manufacturing capacity, changes in our manufacturing spending, and overall economies of scale may vary as revenues increase. Although we experienced a gross profit in the three months ended September 30, 2014, we may experience a gross loss in future periods based upon these changes.

Operating Expenses


	Three Months Ended September 30,				Change						Nine Months Ended September 30,				Change
	2014		2013		$			%			2014		2013		$		%
	(dollars in thousands)										(dollars in thousands)
Research and development expense	$	6,833	$	3,879	$	2,954			76.2	%	$	19,693	$	10,567	$	9,126		86.4	%
Sales and marketing expense		2,412		2,778		(366	)		(13.2	)%		7,974		7,943		31		0.4	%
General and administrative expense		2,670		1,947		723			37.1	%		7,276		7,032		244		3.5	%

Total operating expenses	$	11,915	$	8,604	$	3,311			38.5	%	$	34,943	$	25,542	$	9,401		36.8	%

Research and Development Expense. The increase in research and development expense of approximately $3.0 million for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 was primarily due to an increase of approximately $2.4 million in clinical trial expenses, primarily third-party expenses related to our U.S. pivotal trial, such as those relating to our clinical research organization and to our clinical sites as we continue enrolling patients, and an increase of approximately $0.4 million in compensation and other employee related costs related to new hires made during 2013 and 2014 to support our research and development efforts.

The increase in research and development expense of approximately $9.1 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 was primarily due to an increase of approximately $6.5 million in clinical trial and other study related expenses, primarily third-party expenses related to our U.S. pivotal trial, such as those relating to our clinical research organization and to our clinical sites as we continue enrolling patients, and an increase of approximately $1.3 million in compensation and other employee related costs related to new hires made during 2013 and 2014 to support our research and development efforts, and an increase of approximately $0.9 million in consulting expenses.

Sales and Marketing Expense. The decrease in sales and marketing expense was approximately $0.4 million for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The decrease was primarily the result of lower spending on marketing related activities to support our commercialization efforts.

The increase in sales and marketing expense was approximately $31,000 for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The increase of approximately $0.3 million was primarily the result of compensation and other employee related costs largely associated with the termination of our chief commercial officer, partially offset by a decrease of approximately $0.2 million in marketing related activities to support our commercialization efforts.

General and Administrative Expense. The increase in general and administrative expense of approximately $0.7 million for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 was primarily a result of compensation and other employee related costs associated with the departure and replacement of our chief executive officer.

The increase in general and administrative expense of approximately $0.2 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 was primarily due to an increase of approximately $1.0 million in compensation and employee related expenses largely associated with the departure and replacement of our chief executive officer, partially offset by a decrease of approximately $0.2 million in legal fees primarily associated with the successful settlement of our lawsuit with W. L. Gore & Associates, Inc. in January 2013 and a non-recurring stock-based compensation charge of approximately $0.4 million incurred in the first quarter of 2013.

Other Income (Expense), Net


	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
	2014			2013			$			%			2014			2013			$			%
	(dollars in thousands)												(dollars in thousands)
Other income (expense):
Interest income	$	41		$	173		$	(132	)		(76.3	)%	$	217		$	320		$	(103	)		(32.2	)%
Interest expense		—			(1	)		1			100.0	%		(1	)		(4	)		3			75.0	%
Foreign exchange gain (loss)		(522	)		491			(1,013	)		(206.3	)%		(95	)		(694	)		599			86.3	%
Remeasurement of warrant liability		69			(223	)		292			130.9	%		264			(152	)		416			273.7	%

Total other income (expense), net	$	(412	)	$	440		$	(852	)		(193.6	)%	$	385		$	(530	)	$	915			172.6	%

Interest Income. The decrease in interest income was approximately $0.1 million for both the three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013. The decreases during both periods were due to lower average interest rates, partially offset by higher average cash and cash equivalents balances.

Interest Expense. Interest expense decreased by approximately $1,000 during the three months ended September 30, 2014 compared to the three months ended September 30, 2013 and approximately $3,000 during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The decreases during both periods resulted from lower outstanding balances on our credit facility related to our enterprise resource planning system. The credit facility was fully repaid in August 2014.

Foreign Exchange Gain (Loss). The decrease in foreign exchange gain was approximately $1.0 million for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The decrease was primarily the result of the depreciation of the Australian dollar versus the U.S. dollar during the three months ended September 30, 2014 compared to the appreciation of the Australian dollar versus the U.S. dollar during the corresponding period in 2013.

The decrease in foreign exchange loss was approximately $0.6 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The decrease in loss was primarily the result of less depreciation of the Australian dollar versus the U.S. dollar during the respective period in 2014 compared to the corresponding period in 2013.

Remeasurement of Warrant Liability. The increase in the remeasurement of warrant liability was approximately $0.3 million and $0.4 million for the three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013, respectively. The increases were the result of a decrease in the fair value of the warrants resulting from the change in the market value of the common stock underlying the warrants and the change in the exchange rate between the Australian dollar and the U.S. dollar during both the three and nine month periods in 2014 compared with an increase in the fair value of the warrants during the corresponding periods in 2013.

Liquidity and Capital Resources

We have incurred losses since our inception in March 2003 and, as of September 30, 2014, we had an accumulated deficit of approximately $185.8 million. We have financed our operations from a combination of sales of equity securities and issuances of convertible term notes. In June 2011, we generated approximately $6.0 million in net proceeds from the issuance of our Convertible Term Promissory Notes. In September 2011, we generated approximately $72.5 million in proceeds, net of expenses and repayment of

$6.0 million of Convertible Term Promissory Notes, from our IPO in Australia and simultaneous private placement in the U.S. In July and August 2013, we generated approximately $52.5 million in proceeds, net of expenses, from a private placement and share purchase plan of our CDIs. In May 2014, we generated approximately $30.8 million in proceeds, net of expenses, from a private placement of our CDIs. As of September 30, 2014, we had approximately $61.2 million of cash and cash equivalents.

During the nine months ended September 30, 2014, our cash and cash equivalents balance increased by approximately $2.6 million as we received approximately $30.8 million in net proceeds from our May 2014 private equity placement and approximately $0.6 million in proceeds from the exercise of stock options. These sources of cash were partially offset by the approximately $28.5 million in cash used to operate our business, such as making payments related to, among other things, research and development, sales and marketing, and general and administrative expenses as we continued to fund our U.S. pivotal trial and support the commercialization of the EndoBarrier.

The following table sets forth the major sources and uses of cash for each of the periods set forth below:


	Nine Months Ended September 30,
	2014			2013
	(in thousands)
Net cash (used in) provided by:
Operating activities	$	(28,520	)	$	(26,977	)
Investing activities		(234	)		(998	)
Financing activities		31,328			52,508

Net increase in cash and cash equivalents	$	2,574		$	24,533

Cash Flows From Operating Activities

Net cash used in operating activities totaled approximately $28.5 million for the nine months ended September 30, 2014 as a result of:

•

funding our net loss of approximately $34.1 million;

•

a net positive adjustment to cash flow from changes in working capital of approximately $2.0 million resulting primarily from increases in accrued expenses; and

•

a net positive adjustment to cash flow from non-cash items of approximately $3.6 million, primarily from stock-based compensation expense.

Net cash used in operating activities totaled approximately $27.0 million for the nine months ended September 30, 2013 as a result of:

•

funding our net loss of approximately $26.5 million;

•

a net negative adjustment to cash flow from changes in working capital of approximately $4.0 million resulting primarily from an increase in inventory and a decrease in accrued expenses;

•

a net positive adjustment to cash flow from non-cash items of approximately $3.5 million, primarily from stock-based compensation expense.

We expect that the temporary suspension of our commercial shipments will have an adverse effect on our cash flow from operating activities as a result of lower anticipated revenue in the three months ending December 31, 2014. However, we do not believe our remediation efforts will have a material adverse impact on our cash flow from operations.

Cash Flows From Investing Activities

Cash used in investing activities for the nine months ended September 30, 2014 and 2013 totaled approximately $0.2 million and $1.0 million, respectively, and resulted from the purchase of property and equipment.

Cash Flows From Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2014 totaled approximately $31.3 million and resulted primarily from approximately $30.8 million in net proceeds from the issuance of CDIs in the private equity placement in May 2014, and approximately $0.6 million in proceeds received upon the exercise of stock options.

Cash provided by financing activities for the nine months ended September 30, 2013 totaled approximately $52.5 million and resulted primarily from approximately $52.5 million in net proceeds from the issuance of CDIs in the private placement and Share Purchase Plan in July and August 2013.

Funding Requirements

As of September 30, 2014 our primary source of liquidity was our cash and cash equivalents on hand of approximately $61.2 million. We believe our current cash balances, together with the net product revenues, will be sufficient to meet our anticipated cash requirements to fund our U.S. pivotal trial, further expand the commercialization of the EndoBarrier, invest in our manufacturing and supply chain infrastructure, and to fund our currently contemplated research and development efforts through at least September 2015.

Our forecast of the period of time through which our financial resources will be adequate to support our operations, fund our U.S. pivotal trial, further expand the commercialization of the EndoBarrier, invest in our manufacturing and supply chain infrastructure, and to fund our currently contemplated research and development efforts are forward-looking statements and involve risks and uncertainties, and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in “Item 1A. Risk Factors” in our Form 10. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

Due to the numerous risks and uncertainties associated with the development and commercialization of the EndoBarrier, we are unable to estimate precisely the amounts of capital outlays and operating expenditures necessary to complete the development of, and to obtain regulatory approval for, the EndoBarrier (other than in select markets in Europe, South America and Australia) for the U.S. and other markets for which we believe the EndoBarrier is suited. Our funding requirements will depend on many factors, including, but not limited to, the following:

•

the rate of progress and cost of our commercialization activities;

•

the expenses we incur in marketing and selling the EndoBarrier;

•

the revenue generated by sales of the EndoBarrier;

•

the product performance from a safety and efficacy standpoint in addressing diabetes and obesity;

•

the success of our investment in our manufacturing and supply chain infrastructure;

•

the time and costs involved in obtaining regulatory approvals for the EndoBarrier in new markets;

•

the success of our research and development efforts, including the U.S. pivotal trial;

•

the ability to ship CE marked products;

•

the emergence of competing or complementary developments; and

•

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

We may, from time to time, consider additional funding through a combination of new collaborative arrangements, strategic alliances, and additional equity and debt financings or from other sources. We will continue to manage our capital structure and to consider financing opportunities, whenever they may occur, that could strengthen our long-term liquidity profile. Any such capital transactions may or may not be similar to transactions in which we have engaged in the past. There can be no assurance that any such financing opportunities will be available on acceptable terms, if at all.

Off–Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships. We enter into guarantees in the ordinary course of business related to the guarantee of our own performance and the performance of our subsidiaries.

Contractual Obligations and Commitments

The disclosure of our contractual obligations and commitments is set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations” in our Form 10.

We exercised our option to renew the lease for our Baulkham Hills, Australia office for an additional 12 months and extended the lease through July 2015. Other than this, there have been no material changes from the contractual commitments and obligations previously disclosed in that registration statement.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements please refer to Note 2, “Summary of Significant Accounting Policies and Basis of Presentation,” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 will be effective for us for reporting periods beginning after December 15, 2016, with early adoption not permitted. Management is currently evaluating the impact of the pending adoption of ASU 2014-09 on our consolidated financial statements.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We develop, manufacture and sell the EndoBarrier globally and our earnings and cash flows are exposed to market risk from changes in currency exchange rates and interest rates.

Interest Rate Sensitivity

Our cash and cash equivalents of approximately $61.2 million at September 30, 2014 consisted of cash and money market funds, all of which will be used for working capital purposes. We do not enter into investments for trading or speculative purposes. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of interest rates in the U.S. and Australia. Because of the short-term nature of our cash and cash equivalents, we do not believe that we have any material exposure to changes in their fair values as a result of changes in interest rates. The continuation of historically low interest rates in the U.S. will limit our earnings on investments held in U.S. dollars.

We currently bear no debt and the debt we previously held bore a fixed rate and therefore had minimal exposure to changes in interest rates.

Foreign Currency Risk

We conduct business in foreign countries. For U.S. reporting purposes, we translate all assets and liabilities of our non-U.S. entities at the period-end exchange rate and revenue and expenses at the average exchange rates in effect during the periods. The net effect of these translation adjustments is shown in the accompanying condensed consolidated financial statements as a component of net loss.

We generate a significant portion of our revenue and collect receivables in foreign currencies. Fluctuations in the exchange rate of the U.S. dollar against major foreign currencies, including the Euro, British Pound and Australian dollar, can result in foreign currency exchange gains and losses that may significantly impact our financial results. These foreign currency transaction and translation gains and losses are presented as a separate line item in our condensed consolidated statements of comprehensive loss. Continued fluctuation of these exchange rates could result in financial results that are not comparable from quarter to quarter. We do not currently utilize foreign currency contracts to mitigate the gains and losses generated by the re-measurement of non-functional currency assets and liabilities but do hold cash reserves in currencies in which those reserves are anticipated to be expended.

All of the proceeds from our 2011, 2013 and 2014 offerings were denominated in Australian dollars, and as of September 30, 2014 we held the equivalent of approximately US$6.6 million denominated as Australian dollars. Accordingly, we have had and will continue to have exposure to foreign currency exchange rate fluctuations. A change of 10% or more in foreign currency exchange rates of the Australian dollar or the Euro would have a material impact on our financial position and results of operations if our revenue continues to be denominated in currencies other than the U.S. dollar or if we retain a substantial portion of our cash and cash equivalents in Australian dollars. For example during the three-month period ended September 30, 2014, the Australian dollar depreciated from US$0.9420 to US$0.8752 which contributed to our realized and unrealized foreign exchange loss of approximately $0.5 million.

Effects of Inflation

We do not believe that inflation and changing prices over the three and nine months ended September 30, 2014 and 2013 had a significant impact on our results of operations.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, or the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s, rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control

There were no changes during the period covered by this Quarterly Report on Form 10-Q materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A.

Risk Factors

In addition to the other information contained elsewhere in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in “Item 1A. Risk Factors” in our Form 10 and as set forth below, which could materially affect our business, financial condition or future results. The risks described in our Form 10 and noted below are not the only risks we face. Additional risks that we do not presently know or that we currently believe are immaterial could also materially and adversely affect any of our business, financial condition or future results. The trading price of our CDIs may decline due to these risks.

We are subject to extensive and dynamic medical device regulation in the European Union and other areas and countries where we sell the EndoBarrier, which may impede or hinder the approval or sale of our products and, in some cases, may ultimately result in an inability to obtain approval of certain products or may result in the recall or seizure of previously approved products.

Before we can market our products in the European Union, or EU, and in many other parts of the world, we must obtain CE Mark certification, which indicates that a product meets the essential requirements of applicable EU Directives and has been subject to the appropriate conformity assessment route. This conformity assessment procedure is often done through a self-certification, but depending on the type of product, may also require verification by an independent certification body, called a “Notified Body.” Notified Bodies will also periodically audit us to ensure that we remain in compliance with the applicable requirements. The CE Mark allows free movement of products in the EU, the European Economic Area (EEA) and Switzerland although any of the member countries may require medical devices to be registered and also impose requirements relating to the language of the device information. Many non-European countries also recognize and accept the CE Mark. If we cannot support our performance claims and demonstrate continued compliance with the applicable EU requirements, we could lose our right to affix the CE Mark to our products, which would prevent us from selling our products within the territory and in other countries that recognize the CE Mark.

In addition, we are required to timely file various reports with regulatory authorities in the countries in which we market our products, including reports of adverse events including events that may have caused or contributed to a death or serious injury and malfunctions that would likely cause or contribute to a death or serious injury if the malfunction were to recur. If these reports are not timely filed, regulators may impose sanctions, including temporarily suspending our market authorizations or CE Mark, and sales of EndoBarrier may suffer. In that case, we may be subject to product liability or regulatory enforcement actions, all of which could harm our business. As we announced on October 6, 2014, our Notified Body temporarily suspended commercial product shipments labeled with a CE Mark affecting all countries where we were selling EndoBarrier, pending a review of our vigilance and reporting systems. If we are not able to successfully remedy our systems and resume product shipments, our business could be harmed and our inventory could become stale.

In some countries, we rely on our foreign distributors and agents to assist us in complying with foreign regulatory requirements, and we cannot be sure that they will always do so. If we or any of our suppliers, distributors, agents or customers fail to comply with applicable requirements, we may face:

•

adverse publicity;

•

investigations by governmental authorities;

•

fines and prosecutions;

•

increased difficulty in obtaining required approvals;

•

losses of approvals already granted;

•

delays in purchasing decisions by customers or cancellation of existing orders; and

•

the inability to sell our products in or to import our products into such countries.

Requirements affecting the development, manufacture and sale of medical devices are evolving and subject to future change. We cannot predict what impact, if any, those changes might have on our business. Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. Later discovery of previously unknown problems with a product or manufacturer could result in fines, delays or suspensions of regulatory approvals. The failure to receive product approval on a timely basis, or the withdrawal of product approval by regulatory agencies could have a material adverse effect on our business, financial condition or results of operations.

Item 2.

Unregistered Sales of Equity Securities

In connection with a private placement, on May 9, 2014, we issued 65,951,265 CDIs (equivalent to 13,190,253 shares of common stock). The aggregate offering proceeds for this issuance was $ 32.1 million (A$34.3 million), and we incurred sales commissions of $1.3 million (A$1.4 million). Our lead placement agent was Bell Potter. The sales of these CDIs were exempt from registration pursuant to Regulation S promulgated under the Securities Act of 1933.

On September 10, 2014, we issued 35,000 shares of common stock to our director Daniel Moore, sold in reliance on Section 4(a)(2) of the Securities Act of 1933. The shares are currently restricted until vesting requirements have been satisfied. Proceeds resulting from the sale were approximately $0.1 million.

Item 6.

Exhibits

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q, which is incorporated by reference herein.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	GI Dynamics, Inc.

Date: November 10, 2014	By:	/s/ M ICHAEL DALE
		Michael D. Dale
		Chief Executive Officer and Director (principal executive officer)

Date: November 10, 2014	By:	/s/ R OBERT CRANE
		Robert W. Crane
		Chief Financial Officer, Secretary and Treasurer (principal financial officer and principal accounting officer)

EXHIBIT INDEX


Exhibit No:		Description

3.1		Certificate of Incorporation of GI Dynamics, Inc. incorporated by reference to Exhibit 3.1 of GI Dynamics, Inc.’s registration statement on Form 10, filed with the SEC on April 30, 2014

3.2		Bylaws of GI Dynamics, Inc. incorporated by reference to Exhibit 3.2 of GI Dynamics, Inc.’s registration statement on Form 10, filed with the SEC on April 30, 2014

10.1		Separation Agreement, dated August 28, 2014 between GI Dynamics, Inc. and Stuart A. Randle incorporated by reference to Exhibit 10.1 of GI Dynamics, Inc.’s Current Report on Form 8-K, filed with the SEC on August 29, 2014

10.2		Letter of Employment, dated August 28, 2014, between GI Dynamics, Inc. and Michael Dale incorporated by reference to Exhibit 10.2 of GI Dynamics, Inc.’s Current Report on Form 8-K, filed with the SEC on August 29, 2014

10.3*		Non-Employee Director Compensation Policy

10.4*		Form of Indemnification Agreement

31.1*		Certification of Chief Executive Officer pursuant to Rules 13a-14 or 15d-14 of the Exchange Act

31.2*		Certification of Chief Financial Officer pursuant to Rules 13a-14 or 15d-14 of the Exchange Act

32.1‡		Certification of Chief Executive Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350

32.2‡		Certification of Chief Financial Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Database

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

*	Filed herewith.

‡	Furnished herewith.

Exhibit 10.3

GI DYNAMICS, INC.

NON-EMPLOYEE DIRECTOR COMPENSATION POLICY

The Compensation Committee of the Board of Directors of GI Dynamics, Inc. (the “ Company ”) has approved the following Non-Employee Director Compensation Policy (this “ Policy ”) which establishes compensation to be paid to non-employee directors of the Company, effective as of August 1, 2011 (the “ Effective Time ”) and revised as of May 22, 2014, to provide an inducement to obtain and retain the services of qualified persons to serve as members of the Company’s Board of Directors.

Applicable Persons

This Policy shall apply to each director of the Company who is not an employee of, or consultant to, the Company or any Affiliate (each, an “ Outside Director ”). “Affiliate” shall mean a corporation which is a direct or indirect parent or subsidiary of the Company, as determined pursuant to Section 424 of the Internal Revenue Code of 1986, as amended.

Stock Option Grants

All stock option amounts set forth herein shall be subject to automatic adjustment in the event of any stock split or other recapitalization affecting the Company’s common stock.

Initial Stock Option Grants for Existing Directors

Upon the adoption by the Board of Directors of the Company’s 2011 Employee, Director and Consultant Equity Incentive Plan (the “ Stock Plan ”), each Outside Director shall be granted a non-qualified stock option (the “ Existing Director Initial Option Grant ”) to purchase 130,000 shares of the Company’s common stock under the Stock Plan. Each such option shall vest over five years from the date of the grant in (i) one installment of 20% of the shares on the first anniversary of the date of the grant and (ii) forty-eight substantially equal monthly installments thereafter, each subject to the Outside Director’s continued service on the Board of Directors.

Initial Stock Option Grant For Newly Appointed or Elected Directors

Each Outside Director whose service on the Board of Directors commences following the date of adoption of the Stock Plan and prior to the annual meeting of stockholders in 2012 shall, subject to shareholder approval being obtained under the ASX Listing Rules, be granted a non-qualified stock option to purchase 130,000 shares of the Company’s common stock under the Stock Plan on the date of his or her initial appointment or election to the Board of Directors. Each such option shall vest over five years from the date of the grant in (i) one installment of 20% of the shares on the first anniversary of the date of the grant and (ii) forty-eight substantially equal monthly installments thereafter, each subject to the Outside Director’s continued service on the Board of Directors.

Each Outside Director whose service on the Board of Directors commences at or following the annual meeting of stockholders in 2012 and prior to the annual meeting of stockholders in 2013 shall, subject to shareholder approval being obtained under the ASX Listing Rules, be granted a non-qualified stock option to purchase 105,000 shares of the Company’s common stock under the Stock Plan on the date of his or her initial appointment or election to the Board of Directors. Each such option shall vest over four years from the date of the grant in (i) one installment of 25% of the shares on the first anniversary of the date of the grant and (ii) thirty-six substantially equal monthly installments thereafter, each subject to the Outside Director’s continued service on the Board of Directors.

Each Outside Director whose service on the Board of Directors commences at or following the annual meeting of stockholders in 2013 shall, subject to shareholder approval being obtained under the ASX Listing Rules, be granted a non-qualified stock option to purchase 80,000 shares of the Company’s common stock under the Stock Plan on the date of his or her initial appointment or election to the Board of Directors. Each such option shall vest over three years from the date of the grant in (i) one installment of 33% of the shares on the first anniversary of the date of the grant and (ii) twenty-four substantially equal monthly installments thereafter, each subject to the Outside Director’s continued service on the Board of Directors.

Annual Equity Incentive Grants

Commencing in 2014, each Outside Director shall, subject to any required shareholder approval being obtained under the ASX Listing Rules, be granted (i) a non-qualified stock option (the “Annual Option Grant”) to purchase 10,000 shares of the Company’s common stock under the Stock Plan, and (ii) a restricted stock unit (the “Annual RSU Grant”) with respect to 10,000 shares of the Company’s common stock under the Stock Plan, each year on or about the annual meeting of the Board of Directors following the Company’s annual meeting of stockholders. Each Annual Option Grant and Annual RSU Grant shall vest in full on the first anniversary of the date of the grant , each subject to the Outside Director’s continued service on the Board of Directors.

Terms for All Option Grants

Unless otherwise specified by the Board of Directors or the Compensation Committee at the time of grant, all options granted under this Policy shall (i) have an exercise price equal to the fair market value of the Company’s common stock as determined pursuant to the Stock Plan on the date of grant (which for the Existing Director Initial Option Grants shall be equal to the price per common equivalent share at which Chess Depositary Interests (“CDIs”) are offered to the public in the contemplated initial public offering of the Company’s CDIs unless otherwise determined by the Compensation Committee prior to the consummation of such offering); and (iii) contain such other terms and conditions as the Board of Directors or the Compensation Committee shall determine prior to the grant of the option. Such options shall become exercisable in full immediately prior to a change of control of the Company. A change of control shall be defined as: (i) any “person” or “group” (as such terms are used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, (other than a person or group which is one of our shareholders as of June 16, 2011) is or becomes the beneficial owner, directly or indirectly,

through a purchase, merger or other acquisition transaction or series of transactions, of our capital stock entitling such person or group to control 50% or more of the total voting power of our capital stock entitled to vote generally in the election of directors, where any voting capital stock of which such person or group is the beneficial owner that are not then outstanding are deemed outstanding for purposes of calculating such percentage; except in connection with our issuance of capital stock in a bona-fide financing transaction the proceeds of which are to be utilized by us for general corporate purposes or (ii) any sale or transfer of all or substantially all of our assets to another person.

Cash Fees

Annual Cash Payments

The following annual cash fees shall be paid to the Outside Directors serving on the Board of Directors and the Audit Committee, Compensation Committee and Nominating and Governance Committee, as applicable. For clarity, an Outside Director is paid for each role that such Outside Director is appointed to although a Chair of a Committee cannot also me considered as a member for compensation purposes.


Board of Directors or Committee of Board of Directors	Annual Retainer Amount for Chair		Annual Retainer Amount for Member
Board of Directors	$	75,000	$	50,000
Audit Committee	$	15,000	$	3,000
Compensation Committee	$	10,000	$	2,000
Nominating and Governance Committee	$	5,000	$	1,000

Payment Terms for All Cash Fees

Cash payments payable to Outside Directors shall be paid quarterly in arrears as of the last day of each fiscal quarter commencing as of the Effective Date.

Following an Outside Director’s first election or appointment to the Board of Directors, such Outside Director shall receive his or her cash compensation pro rated beginning on the date he or she was initially appointed or elected. If an Outside Director dies, resigns or is removed during any quarter, he or she shall be entitled to a cash payment on a pro rated basis through his or her last day of service.

Expenses

Upon presentation of documentation of such expenses reasonably satisfactory to the Company, each Outside Director shall be reimbursed for his or her reasonable out-of-pocket business expenses incurred in connection with attending meetings of the Board of Directors and Committees thereof or in connection with other business related to the Board of Directors.

Amendments

The Compensation Committee or the Board of Directors shall review this Policy from time to time to assess whether any amendments in the type and amount of compensation provided herein should be adjusted in order to fulfill the objectives of this Policy.

Exhibit 10.4

INDEMNIFICATION AGREEMENT

THIS INDEMNIFICATION AGREEMENT (the “ Agreement ”) is made and entered into as of , 2014 between GI Dynamics, Inc. , a Delaware corporation (the “ Company ”), and [name] (“ Indemnitee ”). Certain capitalized terms used herein are defined in Section 13 hereof.

WHEREAS , highly competent persons have become more reluctant to serve corporations as directors or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation;

WHEREAS , the Board of Directors of the Company (the “ Board ”) has determined that, in order to attract and retain qualified individuals, the Company shall maintain, to the extent commercially reasonable and on an ongoing basis, at its sole expense, liability insurance to protect persons serving the Company and its subsidiaries from certain liabilities. Although the furnishing of such insurance has been a customary and widespread practice among United States-based corporations and other business enterprises, the Company believes that, given current market conditions and trends, such insurance may be available to it in the future only at higher premiums and with more exclusions. At the same time, directors, officers, and other persons in service to corporations or business enterprises are being increasingly subjected to expensive and time-consuming litigation relating to, among other things, matters that traditionally would have been brought only against the Company or business enterprise itself. The Certificate of Incorporation of the Company requires indemnification of the officers and directors of the Company. Indemnitee may also be entitled to indemnification pursuant to the General Corporation Law of the State of Delaware (“ DGCL ”). The Certificate of Incorporation of the Company and the DGCL expressly provide that the indemnification provisions set forth therein are not exclusive, and thereby contemplate that contracts may be entered into between the Company and members of the board of directors, officers and other persons with respect to indemnification;

WHEREAS , the uncertainties relating to such insurance and to indemnification have increased the difficulty of attracting and retaining such persons;

WHEREAS , the Board has determined that the increased difficulty in attracting and retaining such persons is detrimental to the best interests of the Company’s stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future;

WHEREAS , it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify, and to advance expenses on behalf of, such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified;

WHEREAS , this Agreement is a supplement to and in furtherance of the Certificate of Incorporation of the Company and any resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder;

WHEREAS , Indemnitee does not regard the protection available under the Company’s Certificate of Incorporation and insurance as adequate in the present circumstances, and may not be willing to serve as an officer or director without adequate protection, and the Company desires Indemnitee to serve in such capacity. Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be so indemnified; and

WHEREAS , Indemnitee may have certain rights to indemnification and/or insurance provided the by Fund Indemnitor (as defined herein) which Indemnitee and the Fund Indemnitor intend to be secondary to the primary obligation of the Company to indemnify Indemnitee as provided herein, with the Company’s acknowledgement and agreement to the foregoing being a material condition to Indemnitee’s willingness to serve on the Board.

NOW, THEREFORE , in consideration of Indemnitee’s agreement to serve as director after the date hereof, the parties hereto agree as follows:

1. Indemnity of Indemnitee . The Company hereby agrees to hold harmless and indemnify Indemnitee to the fullest extent permitted by the DGCL, as the same may be amended from time to time. In furtherance of the foregoing indemnification, and without limiting the generality thereof:

(a) Proceedings Other Than Proceedings by or in the Right of the Company . Indemnitee shall be entitled to the rights of indemnification provided in this Section l(a) if, by reason of his Corporate Status, the Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding, other than a Proceeding by or in the right of the Company. Pursuant to this Section 1(a) , Indemnitee shall be indemnified against all costs, judgments, penalties, fines, liabilities, and amounts paid in settlement by or on behalf of Indemnitee in any Proceeding, and Expenses actually and reasonably incurred by or on behalf of Indemnitee in connection with such Proceeding, if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any criminal Proceeding, had no reasonable cause to believe the Indemnitee’s conduct was unlawful.

(b) Proceedings by or in the Right of the Company . Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(b) if, by reason of his Corporate Status, the Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding brought by or in the right of the Company. Pursuant to this Section 1(b) , Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by the Indemnitee, or on the Indemnitee’s behalf, in connection with such Proceeding if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company; provided, however, if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that the Court of Chancery of the State of Delaware shall determine that such indemnification may be made.

(c) Indemnification for Expenses of a Party Who is Wholly or Partly Successful . Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in defense of any Proceeding, or in defense of any claim, issue or matter therein, including, without limitation, the dismissal of any action without prejudice, or if it is ultimately determined that Indemnitee is otherwise entitled to be indemnified against Expenses, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith, including the cancellation of any obligation to repay advances for expenses incurred in defense of the claim. If Indemnitee is partially successful on the merits or otherwise in defense of any Proceeding, such indemnification shall be apportioned appropriately to reflect the degree of success.

2. Additional Indemnity . In addition to, and without regard to any limitations on, the indemnification provided for in Section 1 of this Agreement, the Company shall and hereby does indemnify and hold harmless Indemnitee against all Expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf if, by reason of his Corporate Status, he is, or is threatened to be made, a party to or participant in any Proceeding (including a Proceeding by or in the right of the Company), including, without limitation, all liability arising out of the negligence or active or passive wrongdoing of Indemnitee. The only limitation that shall exist upon the Company’s obligations pursuant to this Agreement shall be that the Company shall not be obligated to make any payment to Indemnitee that is finally determined (under the procedures, and subject to the presumptions, set forth in Sections 6 and 7 hereof) to be unlawful.

3. Contribution .

(a) Whether or not the indemnification provided in Sections 1 and 2 hereof is available, in respect of any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall pay, in the first instance, the entire amount of any judgment or settlement of such action, suit or proceeding without requiring Indemnitee to contribute to such payment and the Company hereby waives and relinquishes any right of contribution it may have against Indemnitee. Subject to the terms and conditions of any applicable insurance policy, the Company shall not enter into any settlement of any action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding) unless such settlement provides for a full and final release of all claims asserted against Indemnitee.

(b) Without diminishing or impairing the obligations of the Company set forth in the preceding subparagraph, if, for any reason, Indemnitee shall elect or be required to pay all or any portion of any judgment or settlement in any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall contribute to the amount of Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in proportion to the relative benefits received by the Company and all officers, directors or employees of the Company, other than Indemnitee, who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand,

and Indemnitee, on the other hand, from the transaction from which such action, suit or proceeding arose; provided, however, that the proportion determined on the basis of relative benefit may, to the extent necessary to conform to law, be further adjusted by reference to the relative fault of the Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, in connection with the events that resulted in such expenses, judgments, fines or settlement amounts, as well as any other equitable considerations which the Law may require to be considered. The relative fault of the Company and all officers, directors or employees of the Company, other than Indemnitee, who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, shall be determined by reference to, among other things, the degree to which their actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary and the degree to which their conduct is active or passive.

(c) The Company hereby agrees to fully indemnify and hold Indemnitee harmless from any claims of contribution which may be brought by officers, directors or employees of the Company, other than Indemnitee, who may be jointly liable with Indemnitee.

(d) To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s).

4. Indemnification for Expenses of a Witness . Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith.

5. Advancement of Expenses . Notwithstanding any other provision of this Agreement, the Company shall advance Expenses to the Indemnitee to the fullest extent permitted by the DGCL as the same may be amended from time to time. Indemnitee shall be entitled to the advancement provided in this Section if by reason of Indemnitee’s Corporate Status, Indemnitee is a party or is threatened to be made a party, or a witness to any Proceeding; or if Indemnitee brings and pursues an action pursuant to Section 7(d) of this Agreement. The advancement shall be made within thirty (30) days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by a written undertaking by or on behalf of Indemnitee to repay any Expenses

advanced if it shall ultimately be determined, after all appeals to a court of competent jurisdiction are exhausted, that Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 5 shall be unsecured and interest free. In making a written claim for advancement, Indemnitee need not submit to the Company information that counsel for Indemnitee deems is privileged and exempt from compulsory disclosure in any proceeding.

6. Procedures and Presumptions for Determination of Entitlement to Indemnification . It is the intent of this Agreement to secure for Indemnitee rights of indemnity that are as favorable as may be permitted under the DGCL and public policy of the State of Delaware. Accordingly, the parties agree that the following procedures and presumptions shall apply in the event of any question as to whether Indemnitee is entitled to indemnification under this Agreement:

(a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification. Notwithstanding the foregoing, any failure of Indemnitee to provide such a request to the Company, or to provide such a request in a timely fashion, shall not relieve the Company of any liability that it may have to Indemnitee unless, and to the extent that, such failure actually and materially prejudices the interests of the Company.

(b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 6(a) hereof, a determination with respect to Indemnitee’s entitlement thereto shall be made in the specific case by one of the following five methods: (1) by a majority vote of the Disinterested Directors, even though less than a quorum, (2) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum, (3) by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to the Indemnitee, which Independent Counsel shall be selected by majority vote of the Company’s directors at a meeting at which a quorum is present, or a majority vote of the Disinterested Directors, or committee of Disinterested Directors (subject to Section 6(c)(d)), (4) by the stockholders of the Company by a majority vote of those in attendance at a meeting at which a quorum is present, or (5) if a Change in Control has occurred, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to the Indemnitee, which Independent Counsel shall be selected by the Indemnitee (subject to Sections 6(c)-(d)).

(c) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 6(b) hereof, the Independent Counsel shall be selected as provided in this Section 6(c) . Indemnitee or the Company, as applicable, may, within 10 days after written notice of selection shall have been given, deliver to the other party a written objection to such selection; provided , however , that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 13 of this Agreement, and the objection shall set forth with

particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 6(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware for resolution of any objection which shall have been made to the selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 6(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 6(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 6(c) , regardless of the manner in which such Independent Counsel was selected or appointed.

(d) The Company agrees that if there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Board who were directors immediately prior to such Change in Control) then with respect to all matters thereafter arising concerning the rights of the Indemnitee to indemnification under this Agreement or any other agreements, Company by-laws, provisions in the Certificate of Incorporation or any other document now or hereafter in effect relating to such indemnification, the Company shall seek legal advice only from Independent Counsel selected by Indemnitee. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys’ fees) claims, liabilities and damages arising out of or relating to this Agreement of its engagement pursuant hereto.

(e) The Company shall pay all costs associated with its determination of Indemnitee’s eligibility for indemnification.

(f) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence. Neither the failure of the Company (including by its directors or Independent Counsel) to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including by its directors or Independent Counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.

(g) Indemnitee shall be deemed to have acted in good faith if Indemnitee’s action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to Indemnitee by the officers of the Enterprise

(as hereinafter defined) in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. Whether or not the foregoing provisions of this Section 6(g) are satisfied, it shall in any event be presumed that Indemnitee has at all times acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.

(h) If the person, persons or entity empowered or selected under Section 6 to determine whether Indemnitee is entitled to indemnification shall not have made a determination within sixty (60) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such 60-day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person, persons or entity making such determination with respect to entitlement to indemnification in good faith requires such additional time to obtain or evaluate documentation and/or information relating thereto; and provided, further, that the foregoing provisions of this Section 6(h) shall not apply if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 6(b) of this Agreement and if (A) within fifteen (15) days after receipt by the Company of the request for such determination, the Board or the Disinterested Directors, if appropriate, resolve to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy-five (75) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat.

(i) Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel, member of the Board or stockholder of the Company shall act reasonably and in good faith in making a determination regarding the Indemnitee’s entitlement to indemnification under this Agreement. Any costs or expenses (including attorneys’ fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.

(j) The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any action, claim or proceeding to which Indemnitee is a party is resolved in any manner other than by adverse judgment against Indemnitee (including, without limitation, settlement of such action, claim or proceeding with or without payment of money or other consideration) it shall be presumed that Indemnitee has been successful on the merits or otherwise in such action, suit or proceeding. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.

(k) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful.

(l) Subject to the terms and conditions of any applicable insurance policy or policies, the Company will be entitled to participate in the Proceeding at its own expense.

(m) Notwithstanding any other provision of this Agreement, with respect to any such Proceeding of which Indemnitee notifies the Company:

(i) Except as otherwise provided in this Section 6(m) , to the extent that it may wish, the Company may, separately or jointly with any other indemnifying party, assume the defense of the Proceeding. After notice from the Company to Indemnitee of its election to assume the defense of the Proceeding, the Company shall not be liable to Indemnitee under this Agreement for any Expenses subsequently incurred by Indemnitee except as otherwise provided below. Indemnitee shall have the right to employ Indemnitee’s own counsel in such Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof shall be at the expense of Indemnitee unless (a) the employment of counsel by Indemnitee has been authorized by the Company, (b) Indemnitee shall have reasonably determined that there is a conflict of interest between the Company and Indemnitee in the conduct of the defense of the Proceeding, and such determination is supported by an opinion of qualified legal counsel addressed to the Company, or (c) the Company shall not within sixty (60) calendar days of receipt of notice from Indemnitee in fact have employed counsel to assume the defense of the Proceeding;

(ii) The Company is not entitled to assume the defense of any Proceeding brought by or on behalf of the Company, or as to which Indemnitee shall have made the determination provided for in subparagraph (i)(b) above; and

(iii) Regardless of whether the Company has assumed the defense of a Proceeding, the Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any Proceeding effected without the Company’s written consent, and the Company shall not settle any Proceeding in any manner that would impose any penalty or limitation on, or require any payment from, Indemnitee without Indemnitee’s written consent. Neither the Company nor Indemnitee may unreasonably withhold its consent to any proposed settlement.

(n) Until the Company receives notice of a Proceeding from Indemnitee, the Company shall have no obligation to indemnify or advance Expenses to Indemnitee as to Expenses incurred prior to Indemnitee’s notification of Company.

7. Remedies of Indemnitee .

(a) In the event that (i) a determination is made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 5 of this Agreement, (iii) no determination of entitlement to indemnification is made pursuant to Section 6(b) of this Agreement within 60 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to this Agreement within ten (10) days after receipt by the Company of a written request therefor or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 6 of this Agreement, Indemnitee shall be entitled to an adjudication in the Chancery Court of the State of Delaware. The Company shall not oppose Indemnitee’s right to seek any such adjudication.

(b) In the event that a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 7 shall be conducted in all respects as a de novo trial on the merits, and Indemnitee shall not be prejudiced by reason of the adverse determination under Section 6(b) .

(c) If a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 7 , absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s misstatement not materially misleading in connection with the application for indemnification, or (ii) a prohibition of such indemnification under applicable law.

(d) In the event that Indemnitee, pursuant to this Section 7 , seeks a judicial adjudication of his rights under, or to recover damages for breach of, this Agreement, or to recover under any directors’ and officers’ liability insurance policies maintained by the Company, the Company shall pay on his behalf, in advance, any and all expenses (of the types described in the definition of Expenses in Section 13 of this Agreement) actually and reasonably incurred by him in such judicial adjudication, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of expenses or insurance recovery.

(e) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 7 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement. The Company shall indemnify Indemnitee against any and all Expenses and, if requested by Indemnitee, shall (within ten (10) days after receipt by the Company of a written request therefore) advance, to the extent not prohibited by law, such expenses to Indemnitee, which are incurred by Indemnitee in connection with any action brought by Indemnitee for indemnification or advance of Expenses from the Company under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of Expenses or insurance recovery, as the case may be.

(f) Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification under this Agreement shall be required to be made prior to the final disposition of the Proceeding as to which advancement or indemnity is sought.

(g) The knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement.

8. Non-Exclusivity; Survival of Rights; Insurance ; Primacy of Indemnification ; Subrogation.

(a) The rights of indemnification as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation or by-laws of the Company, any agreement, a vote of stockholders, a resolution of directors or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in the DGCL, whether by statute or judicial decision, permits greater indemnification than would be afforded currently under the Certificate of Incorporation of the Company and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.

(b) For the duration of Indemnitee’s service as a director and/or officer of the Company, and thereafter for so long as Indemnitee shall be subject to any pending or possible liability or expense for which indemnification may be provided under this Agreement,

the Company shall use commercially reasonable efforts (taking into account the scope and amount of coverage available relative to the cost thereof) to cause to be maintained in effect policies of directors’ and officers’ liability insurance providing coverage for directors and/or officers of the Company that is at least substantially comparable in scope and amount to that provided by the Company’s current policies of directors’ and officers’ liability insurance.

(c) If commercially reasonable, in the event of and immediately upon a Change of Control, the Company (or any successor to the interests of the Company by way of merger, sale of assets, or otherwise) shall be obligated to continue, procure, and otherwise maintain in effect for a period of six (6) years from the date on which such Change in Control is effective a policy or policies of insurance (which may be a “tail” policy) (the “Change in Control Coverage”) providing Indemnitee with coverage for losses from alleged wrongful acts occurring on or before the effective date of the Change in Control. If such insurance is in place immediately prior to the Change in Control, then the Change of Control Coverage shall contain limits, retentions or deductibles, terms and exclusions that are no less favorable to Indemnitee than those set forth above. Each policy evidencing the Change of Control Coverage shall be non-cancellable by the insurer except for non-payment of premium. .

(d) If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

(e) The Company hereby acknowledges that Indemnitee may have certain rights to indemnification, advancement of expenses and/or insurance provided by the Fund Indemnitors. The Company hereby agrees (i) that it is the indemnitor of first resort (i.e., its obligations to Indemnitee are primary and any obligation of the Fund Indemnitors to advance expenses or to provide indemnification for the same expenses or liabilities incurred by Indemnitee are secondary), (ii) that it shall be required to advance the full amount of expenses incurred by Indemnitee and shall be liable for the full amount of all Expenses, judgments, penalties, fines and amounts paid in settlement to the extent legally permitted and as required by the terms of this Agreement and the Certificate of Incorporation or Bylaws of the Company (or any other agreement between the Company and Indemnitee), without regard to any rights Indemnitee may have against the Fund Indemnitors, and, (iii) that it irrevocably waives, relinquishes and releases the Fund Indemnitors from any and all claims against the Fund Indemnitors for contribution, subrogation or any other recovery of any kind in respect thereof. The Company further agrees that no advancement or payment by the Fund Indemnitors on behalf of Indemnitee with respect to any claim for which Indemnitee has sought indemnification from the Company shall affect the foregoing and the Fund Indemnitors shall have a right of contribution and/or be subrogated to the extent of such advancement or payment to all of the rights of recovery of Indemnitee against the Company. The Company and Indemnitee agree that the Fund Indemnitors are express third party beneficiaries of the terms of this Section 8(e).

(f) Except as provided in paragraph (e) above, in the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment

to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

(g) Except as provided in paragraph (e) above, the Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

(h) Except as provided in paragraph (e) above, the Company’s obligation to indemnify or advance Expenses hereunder to Indemnitee who is or was serving at the request of the Company as a director, officer, employee or agent of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise shall be reduced by any amount Indemnitee has actually received as indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise.

9. Exception to Right of Indemnification . Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any claim made against Indemnitee:

(a) for which payment has actually been made to or on behalf of Indemnitee under any insurance policy or other indemnity provision, except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision, provided, that the foregoing shall not affect the rights of Indemnitee or the Fund Indemnitors set forth in Section 8(e) above; or

(b) for an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of state statutory law or common law; or

(c) in connection with any Proceeding (or any part of any Proceeding) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees or other indemnitees, unless (i) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law.

10. Duration of Agreement . All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an officer or director of the Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall continue thereafter, whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives.

11. Security . To the extent requested by Indemnitee and approved by the Board, the Company may at any time and from time to time provide security to Indemnitee for the Company’s obligations hereunder through an irrevocable bank line of credit, funded trust or other collateral. Any such security, once provided to Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee.

12. Enforcement .

(a) The Company expressly confirms and agrees that it has entered into this Agreement and assumes the obligations imposed on it hereby in order to induce Indemnitee to serve as an officer or director of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as an officer or director of the Company.

(b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof.

13. Definitions . For purposes of this Agreement:

(a) “ Beneficial Owner ” shall have the meaning given to such term in Rule 13d-3 under the Exchange Act; provided, however, that Beneficial Owner shall exclude any Person otherwise becoming a Beneficial Owner by reason of the stockholders of the Company approving a merger of the Company with another entity.

(b) “ Change of Control ” shall be deemed to occur upon the earliest to occur after the date of this Agreement of any of the following events:

(i) Any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company’s then outstanding securities;

(ii) During any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clauses (i), (iii) or (iv) of this definition of Change of Control) whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a least a majority of the members of the Board;

(iii) The effective date of a merger or consolidation of the Company with any other entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 51% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation and with the power to elect at least a majority of the Board or other governing body of such surviving entity;

(iv) The approval by the stockholders of the Company of a complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets; and

(v) There occurs any other event of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any similar item on any similar schedule or form) promulgated under the Exchange Act, whether or not the Company is then subject to such reporting requirement.

(c) “ Corporate Status ” describes the status of a person who is or was a director, officer, employee, agent or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise that such person is or was serving at the express written request of the Company.

(d) “ Disinterested Director ” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.

(e) “ Enterprise ” shall mean the Company, any of its subsidiaries, and any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise that Indemnitee is or was serving at the express written request of the Company as a director, officer, employee, agent or fiduciary.

(f) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended;

(g) “ Expenses ” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding, or responding to, or objecting to, a request to provide discovery in any Proceeding. Expenses also shall include Expenses incurred in connection with any appeal resulting from any Proceeding including without limitation the premium, security for, and other costs relating to any cost bond, supersede as bond, or other appeal bond or its equivalent, and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or

deemed receipt of any payments under this Agreement. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.

(h) “ Fund Indemnitors ” shall mean the fund indemnitor(s) identified on the signature page hereto, if any.

(i) “ Incumbent Directors ” shall mean those members of the Board serving as such immediately prior to the consummation of any transaction which by its terms or otherwise results in a change in the composition of the Board.

(j) “ Independent Counsel ” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.

(k) “ Person ” shall have the meaning as set forth in Sections 13(d) and 14(d) of the Exchange Act; provided, however, that Person shall exclude (i) the Company, (ii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, and (iii) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.

(l) “ Proceeding ” includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company, the Board or a committee thereof, or otherwise and whether civil, criminal, administrative or investigative, formal or informal, in which Indemnitee was, is or reasonably believes will become involved as a party or otherwise, by reason of the fact that Indemnitee is or was an officer or director of the Company, by reason of any action taken by him or of any inaction on his part while acting as an officer or director of the Company, or by reason of the fact that he is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other Enterprise; in each case whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement, but excluding one initiated by an Indemnitee pursuant to Section 7 of this Agreement to enforce his rights under this Agreement.

14. Severability . The invalidity of unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. Without limiting the generality of the foregoing, this Agreement is intended to confer upon Indemnitee indemnification rights to the fullest extent permitted by applicable laws. In the event any provision hereof conflicts with any applicable law, such provision shall be deemed modified, consistent with the aforementioned intent, to the extent necessary to resolve such conflict.

15. Modification and Waiver . No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

16. Notice By Indemnitee . Indemnitee agrees promptly to notify the Company in writing upon being served with or otherwise receiving any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification covered hereunder. The failure to so notify the Company shall not relieve the Company of any obligation which it may have to Indemnitee under this Agreement or otherwise unless and only to the extent that such failure or delay materially prejudices the Company.

17. Notices . All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, and if not so confirmed, then on the next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent:

(a) To Indemnitee at the address set forth below Indemnitee signature hereto.

(b) To the Company at:

GI Dynamics, Inc.

25 Hartwell Avenue

Lexington, MA 02421

Attention: Chief Executive Officer

Facsimile: (781) 357-3311

with a copy to:

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

One Financial Center

Boston, MA 02111

Attention: Daniel H. Follansbee, Esq.

Facsimile: (617) 542-2241

or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.

18. Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. This Agreement may also be executed and delivered by facsimile signature and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

19. Headings . The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

20. Governing Law and Consent to Jurisdiction. This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. The Company and Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the Chancery Court of the State of Delaware (the “ Delaware Court ”), and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Delaware Court for purposes of any action or proceeding arising out of or in connection with this Agreement, (iii) waive any objection to the laying of venue of any such action or proceeding in the Delaware Court, and (iv) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.

SIGNATURE PAGE TO FOLLOW

IN WITNESS WHEREOF , the parties hereto have executed this Agreement on and as of the day and year first above written.


COMPANY:				GI DYNAMICS, INC.
				By:
				Name:
				Title:
INDEMNITEE:
				Name:
				Address:
				Fund Indemnitor(s) (if any):

EXHIBIT 31.1

CERTIFICATION PURSUANT

TO RULES 13a-14(a) OR 15d-14(a) UNDER

THE SECURITIES EXCHANGE ACT OF 1934

I, Michael D. Dale, certify that:

I have reviewed this Quarterly Report on Form 10-Q of GI Dynamics, Inc. (the “registrant”);

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2014

/s/ M ICHAEL DALE

Michael D. Dale

Chief Executive Officer

(principal executive officer)

EXHIBIT 31.2

CERTIFICATION PURSUANT

TO RULES 13a-14(a) OR 15d-14(a) UNDER

THE SECURITIES EXCHANGE ACT OF 1934

I, Robert W. Crane, certify that:

I have reviewed this Quarterly Report on Form 10-Q of GI Dynamics, Inc. (the “registrant”);

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2014

/s/ R OBERT C RANE

Robert W. Crane

Chief Financial Officer

(principal accounting and financial officer)

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of GI Dynamics, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael D. Dale, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ M ICHAEL DALE

Michael D. Dale

Chief Executive Officer

(principal executive officer)

November 10, 2014

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of GI Dynamics, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert W. Crane, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ R OBERT C RANE

Robert W. Crane

Chief Financial Officer

(principal accounting and financial officer)

November 10, 2014

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company