UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 20192020

OR

☐ 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)

(781) 357-3300

(Registrant’s telephone number, including area code)

Securities registered or to be registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.01 par value per share

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files):    Yes  ☒    No  ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

As of November 5, 2019, there were 35,963,481 shares of common stock outstanding.

The registrant’s common stock is publicly traded on the Australian Securities Exchange (“the ASX”) in the form of CHESS Depositary Interests (“CDIs”) convertible at the option of the holders into shares of the registrant’s common stock on a 1-for-50 basis. The total number of shares of the registrant’s common stock outstanding on November 5, 2019, including shares of common stock underlying CDIs,October 20, 2020, was 35,963,481.88,093,659.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statementsas defined in Section 27A of the United States Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These forward-looking statements concernCompany business, operations, financial performance and condition as well as plans, objectives and expectations for Company 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 the Company’s:

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

These forward-looking statements are based on current expectations, estimates, forecasts and projections about the Company’s business and the industry in which the Company operates and 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 the Company’s control. As a result, any or all forward-looking statements in this Quarterly Report on Form 10-Q may later become inaccurate. The Company may not actually achieve the plans, intentions or expectations disclosed in the forward-looking statements and actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements made. The Company has 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 the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC), that could cause actual results or events to differ materially from the forward-looking statements made by the Company.

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 filed as exhibits to the Company’s Annual Report on Form 10-K completely and with the understanding that actual future results may be materially different from what is stated as expectation. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Unless required by law, the Company does 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 described in the reports the Company 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, 20192020

TABLE OF CONTENTS

References

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

Dates

Unless indicated otherwise in this Quarterly Report on Form 10-Q, all dates are stated as the date representing business hours in the Eastern Daylight Time zone or Eastern Standard Time zones. Any dates stated in the Australian Eastern Daylight Time zone or the Australian Eastern Standard Time zone will be denoted as “AEDT” or “AEST,” respectively.

Currency

Unless indicated otherwise in this Quarterly Report on Form 10-Q, all references to “$,” “US$” 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

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(unaudited)

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

GI Dynamics, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(unaudited)

(unaudited)

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

GI Dynamics, Inc. and Subsidiaries

Consolidated Statements of Changes in Redeemable Preferred Stock and Stockholders’ Deficit

(In thousands, except share)share amounts)

(unaudited)

(unaudited)

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

GI Dynamics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

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

GI Dynamics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

Notes to Consolidated Financial Statements

(unaudited)

(unaudited)

1. Nature of Business

GI Dynamics^® is a clinical stage medical device company focused on the development and commercialization of EndoBarrier,^®, a medical device intended for treatment ofto treat patients with type 2 diabetes and to reduce obesity.

Diabetes mellitus type 2 (also known as type 2 diabetes) is a long-term progressive metabolic disorder characterized by high blood sugar, insulin resistance, and reduced insulin production. According to the Centers for Disease Control and Prevention (“CDC”), peoplePeople with type 2 diabetes represent 90%90-95% of the worldwide diabetes population, whereas 10%population; only 5-10% of this population is diagnosed with type 1 diabetes (a form of diabetes mellitus in which not enoughwherein little to no insulin is produced).

Being overweight is a condition where the patient’s body mass index (“BMI”)BMI is greater than 25 (kg/m²); obesity is a condition where the patient’s BMI is greater than 30, according to the CDC.30. Obesity and its comorbidities contribute to the progression of type 2 diabetes. Many experts believe obesity contributes to higher levels of insulin resistance, which creates a feedback loop that increases the severity of type 2 diabetes.

When considering treatment for type 2 diabetes, The Company believes it is optimal to address obesity concurrently with diabetes.

EndoBarrier^®is intended for the treatment of type 2 diabetes and to reduce obesity in a minimally invasive and reversible manner.

The current treatment paradigm for type 2 diabetes is lifestyle therapy combined with pharmacological treatment, whereby treating clinicians prescribe a treatment regimen of one to four concurrent medications that could include insulin for patients with higher levels of blood sugar. Insulin carries a significant risk of increased mortality and may contribute to weight gain, which in turn may lead to higher levels of insulin resistance and increased levels of blood sugar. Fewer than 50% of patients treated pharmacologically for type 2 diabetes are adequately managed, meaning that medication does not lower blood sugar adequately and does not halt the progressive nature of diabetes of these patients.

The current pharmacological treatment algorithms for type 2 diabetes fall short of ideal, creating a large and unfilled treatmentefficacy gap.

The Company’sGI Dynamics vision is to make EndoBarrier^® the essential nonpharmacological and non-anatomy-altering treatment for patients with type 2 diabetes and obesity.diabetes. The Company intends to achieve this vision by providing a safe and effective device, focusing on optimal patient care, supporting treating clinicians, adding to the extensive body of clinical evidence around EndoBarrier,^®, gaining appropriate regulatory approvals, continuing to improve the Company’sits products and systems, operating the Company in a lean fashion, and maximizing stockholder value.

EndoBarrier^®is intended for the treatment of type 2 diabetes and to reduce obesity in a minimally invasive and reversible manner and is designed to mimic the mechanism of action of duodenal-jejunal exclusion created by gastric bypass surgery.

Since incorporation, the Company has devoted substantially all of its efforts to product commercialization, research and development, business planning, recruiting management and technical staff, acquiring operating assets, and raising capital. The Company currently operates in one reportable business segment.

EndoBarrier^®History

In 2011, the Company began commercial sales of its product, EndoBarrier^®, which was approved and became commercially available in multiple countries outside the U.S.

In 2013, the Company received approval from the U.S. Food and Drug Administration (“FDA”) to commence its initial pivotal trial of EndoBarrier^® (the “ENDO Trial”). The Company announced its decision to stop the ENDO Trial in the second half of fiscal year 2015 and thereafter announced that it was reducing headcount by approximately 46% as part of its efforts to restructure its business and expenses and to ensure sufficient cash remained available for it to establish new priorities, continue limited market development and research, and to evaluate strategic options.

In the second and third quarters of fiscal year 2016, in order to evolve strategic options, the Company took additional actions that resulted in non-recurring charges totaling approximately $1.1 million. In October 2016, the Company received final cancellation notification from the Therapeutic Goods Administration (“TGA”) for the listing of EndoBarrier^® on the Australian Register of Therapeutic Goods (“ARTG”).

In May 2017, the Company received notification from its notified body, SGS United Kingdom Limited (“SGS”), that the CE Mark for EndoBarrier^® had been suspended pending closure of non-conformances related to its quality management system required under International Organization for Standardization (“ISO”) regulations.  

On November 10, 2017, the Company received notification that SGS was withdrawing the Certificate of Conformance for EndoBarrier^®, ending the CE Marking of EndoBarrier^® in Europe and select Middle East countries.

In December 2017, the Company received notification from the Medicines and Healthcare Products Regulatory Agency (“MHRA”) that all EndoBarrier^® delivery systems (liners) in inventory needed to be returned to the Company.

In August 2018, the Company received approval of an investigational device exemption (“IDE”) from the FDA to begin enrollment in a pivotal trial evaluating the safety and efficacy of EndoBarrier^® in the United States pending Institutional Review Board (“IRB”) approval, which was received in February 2019.Going Concern Evaluation

As of September 30, 2019, five U.S. clinical sites have been initiated and pre-screening for enrollment is being conducted.

Financing History

From its inception in 2003 to its initial public offering (“IPO”) in 2011, the Company was financed by a series of preferred stock financings. In September 2011, the Company completed its IPO of common stock in the form of 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 million of the Company’s convertible term promissory notes. In July and August 2013, the Company issued CDIs on the ASX through a Private Investment in Public Equity placement (“PIPE”) and share purchase plan (“SPP”), which raised a total of approximately $52.5 million, net of expenses. In May 2014, the Company raised approximately $30.8 million, net of expenses, when it issued CDIs on the ASX through a PIPE. In December 2016, the Company raised approximately $1 million, net of expenses, when it issued CDIs on the ASX through a PIPE. In January 2017, the Company raised approximately $0.2 million, net of expenses, when it issued CDIs on the ASX through an SPP.

In June 2017, the Company completed a convertible term promissory note (the “2017 Note”) secured financing with Crystal Amber Fund Limited, its largest stockholder and due to the size of its ownership position, a Related Party for ASX purposes (hereafter referred to as “Crystal Amber, a Related Party”). The 2017 Note was placed for a gross amount of $5 million and accrues annually compounded interest at 5% per annum. The 2017 Note was originally due on December 31, 2018 and is subject to security arrangements in favor of Crystal Amber, a Related Party (See Note 10 of the Consolidated Financial Statements for a more complete description of the terms and conditions of the financing).

In January and March 2018, the Company raised approximately $1.6 million, net of expenses, in an offering of its CDIs to sophisticated and professional investors, including certain existing investors in Australia, the United States and the United Kingdom.

In May 2018, the Company completed a convertible term promissory note (the “2018 Note”) and warrant (the “2018 Warrant”) financing with Crystal Amber, a Related Party, for a gross amount of $1.8 million. The 2018 Note accrued annually compounded interest at 10% per annum until notice of its conversion into CDIs was provided by Crystal Amber, a Related Party, on June 30, 2019, as described further below. The 2018 Warrant was exercised by Crystal Amber, a Related Party and the CDIs were issued on August 25, 2019, as described further below. (See Note 10 of these Consolidated Financial Statements for a more complete description of the terms and conditions of the financing).

In September 2018, the Company received commitments for a private placement of approximately $5 million in an offering of its CDIs to sophisticated and professional investors, including certain existing investors in Australia, the United States and the United Kingdom. The first tranche of $2.2 million closed and cash was received in September 2018. The issuance of the second and final tranche of $2.8 million was contingent upon stockholder approval, which was obtained in October 2018. Cash proceeds from the second tranche were received in November 2018.

In December 2018, the maturity date of the 2017 Note was extended from December 31, 2018 to March 31, 2019 in exchange for payment of $394 thousand, the total accrued interest on the 2017 Note at December 31, 2018.

In March 2019, the Company completed a convertible term promissory note (the “March 2019 Note”) and warrant (the “March 2019 Warrant”) financing with Crystal Amber, a Related Party, for a gross amount of $1 million. The March 2019 Note accrued annually compounded interest at 10% per annum until notice of its conversion into CDIs was provided by Crystal Amber, a Related Party, on June 30, 2019, as described further below. Certain specific conversion terms related to the March 2019 Note and issuance of the March 2019 Warrant required stockholder approval, which was obtained by the Company at the Annual Meeting of Stockholders held on June 30, 2019. On June 30, 2019, after the relevant stockholder approval was obtained, the March 2019 Warrant was issued to Crystal Amber, a Related Party and on such date the March 2019 Warrant became immediately exercisable until its expiry on June 30, 2024 (see Note 10 of these Consolidated Financial Statements for a more complete description of the terms and conditions of the financing).

In March 2019, the maturity date of the 2017 Note was extended to May 1, 2019. In April 2019, the maturity date of the 2017 Note was extended to July 1, 2019. A further extension of the maturity date of the 2017 Note is described below.

In May 2019, the Company completed a convertible term promissory note (the “May 2019 Note”) and warrant (the “May 2019 Warrant”) financing with, Crystal Amber, a Related Party, for a gross amount of $3 million. The May 2019 Note was funded in four tranches between May 10, 2019 and June 28, 2019, during which period 10% per annum interest was accrued on daily outstanding principal balances. Upon funding completion on June 28, 2019, accrued interest began to compound annually at 10% per annum until notice of its conversion into CDIs was provided by Crystal Amber, a Related Party, on June 30, 2019, as described further below. Certain specific conversion terms related to the May 2019 Note and issuance of the March 2019 Warrant required stockholder approval, which was obtained by the Company at the 2019 Annual Meeting of Stockholders held on June 30, 2019. On June 30, 2019, after the stockholder approval was obtained, the May 2019 Warrant was issued to Crystal Amber, a Related Party on such date the May 2019 Warrant became immediately exercisable until its expiry on June 30, 2024 (see Note 10 of these Consolidated Financial Statements for a more complete description of the terms and conditions of the financing).

In June 2019, the maturity date of the 2017 Note was extended to October 1, 2019.

On June 30, 2019, Crystal Amber, a Related Party, elected to convert the 2018 Note, the March 2019 Note and the May 2019 Note into CDIs. Under the terms of the respective notes, an aggregate of 453,609,963 CDIs (representing approximately 9,072,197 shares of common stock) were subscribed but unissued on conversion and concurrent cancellation of the 2018 Note, the March 2019 Note and the May 2019 Note. The CDIs were issued on July 3, 2019. 

On August 21, 2019, the Company and Crystal Amber, a Related Party, entered into a securities purchase agreement for a total funding of up to approximately $10 million (the “August 2019 SPA”). The initial $5.4 million is comprised of scheduled existing warrant exercises between August 25, 2019 and November 15, 2019 of the 2018 Warrant, the March 2019 Warrant, and the May 2019 Warrant issued to Crystal Amber, a Related Party, as further detailed above. The remaining amount, up to $4.6 million, is expected to be funded on or before December 6, 2019, at the request of the Company, pursuant to the terms of a convertible term promissory note (the “August 2019 Note”) in substantially the same form as the March 2019 and May 2019 convertible term promissory note. The Company, at its sole discretion, may elect to request any of the $4.6 million to be funded. In connection with the August 2019 Note, the Company agreed to issue Crystal Amber, a Related Party, a warrant (the “August 2019 Warrant”) to purchase CDIs or common stock as set forth in the August 2019 Warrant, subject to the receipt of required stockholder approval approving the issuance of the August 2019 Warrant. Stockholder approval will also be required to enable certain specific conversion features under the August 2019 Note as well for the issue the related August 2019 Warrant (see Note 10 of these Consolidated Financial Statements for a more complete description of the terms and conditions of the financing).

On August 21, 2019, the maturity date of the 2017 Note was extended to March 31, 2020.

On August 25, 2019, Crystal Amber, a Related Party, exercised the 2018 Warrant and a portion of the March 2019 Warrant in accordance with the terms of the August 2019 SPA. For an aggregate cash payment of $2 million, 97,222,200 CDIs (representing approximately 1,944,444 shares of common stock) were issued at $0.0144 per CDI under the 2018 Warrant and 47,244,119 CDIs (representing approximately 944,882 shares of common stock) were issued at $0.0127 per CDI under the March 2019 Warrant.

On September 30, 2019, Crystal Amber, a Related Party, exercised the remaining portion of the March 2019 Warrant and a portion of the May 2019 Warrant further in accordance with the August 2019 SPA. For an aggregate cash payment of $2 million, 31,740,704 CDIs (representing approximately 634,814 shares of common stock) were issued at $0.0127 per CDI under the March 2019 Warrant and 125,739,610 CDIs (representing approximately 2,514,792 shares of common stock) were issued on October 4, 2019 at $0.0127 per CDI under the May 2019 Warrant. As of September 30, 2019, this was recorded as a subscription receivable from related party and the cash was received on October 1, 2019.

On October 31, 2019, Crystal Amber, a Related Party, exercised another portion of the May 2019 Warrant in accordance with the August 2019 SPA. For an aggregate cash payment of $1 million, 78,740,157 CDIs (representing approximately 1,574,803 shares of common stock) were issued on November 4, 2019 at $0.0127 per CDI under the May 2019 Warrant. Cash was received on October 31, 2019.

Going Concern

As of September 30, 2019,2020, the Company’s primary source of liquidity is its cash and restricted cash equivalents balances. GI Dynamics is currently focused primarily on obtaining CE mark approval to allow commercialization in select markets and on conducting its clinical trials which will support future regulatory submissions and potential commercialization activities. Until the Company is successful in gaining regulatory approvals, including CE mark, it is unable to sell the Company’s product in any market at this time. Without revenues, GI Dynamics is reliant on funding obtained from investment in the Company to maintain business operations until the Company can generate positive cash flows from operations. The Company continuescannot predict the extent of future operating losses and accumulated deficit, and it may never generate sufficient revenues to evaluate which markets are appropriate to pursue regulatory approvals, pursue reimbursement, raise market awarenessachieve or sustain profitability.

GI Dynamics has incurred operating losses since inception and conduct general market development efforts.at September 30, 2020, had an accumulated deficit of approximately $295 million and a working capital surplus of approximately $4.6 million. The Company continues to restructure its business and costs, establish new priorities, and evaluate strategic options. As a result, if the Company remains in business, it expects to incur significant operating losses for the next several years. At September 30, 2020, the Company had approximately $2.7 million in cash and restricted cash.

The Company has incurred operating losses since inceptioncompleted an initial public offering on the Australian Securities Exchange (“ASX”) on September 2, 2011. The Company’s Chess Depository Interests (“CDIs”), which represented 1/50^th of a share of the Company’s Common Stock were publicly traded until July 22, 2020, when the Company completed all requirements and atwas removed from the Official List of the ASX (the “Delisting”, described more fully in Note 11 of the consolidated financial statements). On Delisting, all CDIs were automatically converted to shares of Common Stock with any resulting fractional shares being redeemed by the Company for cash payment. Although the Company is not listed on any public exchange, the Company remains subject to all SEC reporting requirements due to the number of holders of shares of Common Stock.

On September 30,4, 2020, the Company and Crystal Amber Fund Limited (“Crystal Amber”) executed financing documents (the “September 2020 Financing”) that included the sale of up to $10 million of shares of Series A Convertible Preferred Stock (described more fully in Note 11 of the consolidated financial statements) and the conversion of the June 2020 Convertible Note (the “June 2020 Note”) and the August 2020 Convertible Note (the “August 2020 Note”) into shares of Series A Preferred Stock, the cancellation of the August 2019 had an accumulated deficitWarrant (described more fully in Note 4 and Note 9 of the consolidated financial statements), the extinguishment of the August 2019 Convertible Note, and the issuance of the September 2020 Convertible Note (described more fully in Note 9 of the consolidated financial statements). The Initial Close occurred on September 4, 2020 and resulted in cash proceeds of $3.75 million for the sale of approximately $28242.3 million shares of Series A Preferred Stock. The Initial Close also included the conversion of $1.26 million of Note principal and accrued interest due under the June 2020 and August 2020 Notes into 17.8 million shares of Series A Preferred Stock. The Initial Close also included the cancellation of the August 2019 Warrant, the extinguishment of the August 2019 Convertible Note, and the issuance of the September 2020 Convertible Note. Pursuant to the Series A Preferred Stock Share Purchase Agreement and related amendment, dated October 31, 2020, the Second Close of the September 2020 Financing will occur on November 30, 2020 and will include the sale of 56,414,306 shares of Series A Preferred Stock for proceeds of $5.0 million. Crystal Amber may sell a working capital deficitportion of approximately $2.3the $5 million cash used in 2019 for operating activitiesSecond Close allotment to independent investors and will purchase any shares of approximately $8.3 million and cash, cash equivalents and restricted cash of approximately $1.4 million. Cash provided by these activities will be used predominantly to prepare for and conduct the Company’s U.S. clinical trial, which will result in increased expenses. September 2020 Financing that remain unsubscribed at the Second Close.

The Company does not expect its currentexpects that the cash balancesreceived in the September 2020 Financing will be sufficient to operate beyondfund the endCompany’s operations through the later of February 2020. The Company will need to raiseobtaining of CE mark approval or May 31, 2021, after which additional funds through any combination of collaborative arrangements, strategic alliances, and additional equity and debt financings or from other sources. Furthermore, if the Company raises insufficient funds or is required to make payment to Crystal Amber, a Related Party, under the 2017 Note on its maturity date of March 31, 2020, the Companyfinancing will be required either to renegotiatecontinue the maturity date ofCompany’s operations. Further additional financing will be required to fund operations until the loan or to potentially cease operations. The Company expects to discuss a further extension of the maturity date of the 2017 Note with Crystal Amber, a Related Party, but thereachieves sustainably positive cash flow. There can be no assurance that any extension will occur.

The Company has no guaranteed source of capital that will sustain operations beyond February 2020. There can be no assurance that other potential financing opportunities will be available on acceptable terms, if at all. As such, if accessIf the Company is unable to raise sufficient capital is not achieved to satisfy cash needs in the near term,on the Company’s business, financial conditionrequired timelines and resultson acceptable terms to stockholders and the Board of Directors, it could be forced to reduce or cease operations will be materially harmedthat may include activities essential to support regulatory applications to commercialize EndoBarrier, file for bankruptcy, or undertake a combination of the Company may be required to cease operations. foregoing.

These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these consolidated financial statements are issued.

The accompanying interim consolidated financial statements have been prepared assuming the CompanyGI Dynamics will continue as a going concern, which contemplates the realization of assets and liabilities and commitments in the normal course of business. The accompanying consolidated financial statements as of September 30, 2019 and December 31, 2018 and the three and nine months ended September 30, 2019 and 2018 do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.concern.

2. Summary of Significant Accounting Policies and Basis of Presentation

The accompanyingconsolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such rules and regulations.  These interim consolidated financial statements and related disclosuresnotes should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 27, 2020. The Company’s balance sheet at December 31, 2019 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements.

In our opinion, the consolidated financial statements included herein contain all adjustments necessary to present fairly our financial position as of September 30, 2019,2020 and the results of our operations and cash flows for the three and nine months ended September 30, 20192020 and 2018,2019. Such adjustments are unaudited andof a normal recurring nature. In addition, certain reclassifications of prior period balances have been prepared in accordance with generally accepted accounting principles inmade to conform to the U.S. (“GAAP”)current period presentation. 

Accounting policy relating to authorized share allocation to outstanding shares and instruments

In determining the applicable rules and regulationssufficiency of the Securities and Exchange Commission (“SEC”)number of shares of common stock authorized by shareholders for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K (“Form 10-K”), filed with the SEC on March 13, 2019. The December 31, 2018 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. 

Principles of Consolidation

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

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 impairment of long-lived assets, income taxes including the valuation allowance for deferred tax assets, research and development expenses, contingencies, lease liabilities, valuation of derivatives and derivative liabilities, estimates used to assess its ability to continue as a going concern and stock-based compensation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.

Cash and Cash Equivalents

The Company considers all highly liquid investment instruments with an original maturity when purchased of three months or less to be cash equivalents. Investments qualifying as cash equivalents primarily consist of money market funds and have a carrying amount that approximates fair value. The amount of cash equivalents included in cash and cash equivalents was approximately nil at September 30, 2019 and $1.1 million at December 31, 2018.

As of September 30, 2019 and December 31, 2018,issuance, the Company has $30 thousand in restricted cash used to secure a corporate credit card account.

Inventory

When the Company gains regulatory approval to resume commercial activity, inventory will be stated at the loweraccounts for all issued and outstanding shares of first-in, first-out cost or net realizable value. When capitalizing inventory, the Company will consider factors such as status of regulatory approval, alternative use of inventory, and anticipated commercial use of the product. At September 30, 2019 and December 31, 2018, there was no inventory.

Property and Equipment

Property and equipment are recorded at cost and are depreciated when placed in service using the straight-line method based on their estimated useful lives.

Included in property and equipment are certain costs of software obtained for internal use. Costs incurred during the preliminary project stage are expensed as incurred, while costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the software. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Maintenance and training costs related to software obtained for internal use are expensed as incurred.

Leasehold improvements, if obtained, will be amortized over the shorter of the estimated useful life of the asset or the remaining lease term. Costs for capital assets not yet placed into service are capitalized as construction in progress and will be subsequently depreciated in accordance with the above guidelines once placed into service. Maintenance and repair costs are expensed as incurred.

Lease Liabilities and Related Assets

The Company adopted Accounting Standards Codification (“ASC”), Topic 842,Leases(“ASC 842”) on January 1, 2019, but had no long-term leases to which it would apply. In May 2019, the Company entered into the first right-of-use Lease requiring the adoption of ASC 842.

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. The Company has elected not to recognize on the balance sheet leases with terms of one year or less. Leases with a non-cancellable term greater than one year are recognized on the balance sheet as lease assets, short-term lease liabilities and long-term lease liabilities. Using criteria defined in ASC 842, the Company determines whether the lease is a Financing Lease or an Operating Lease.

Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. Options to renew an Operating lease are not included in the Company’s initial lease term assessment unless there is reasonable certainty that the Company will renew. However, certain adjustments to the right-of-use operating asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes an estimated incremental borrowing rate, which is the rate it is expected to incur to borrow an amount equal to the lease payments on a collateralized basis (or on an unsecured basis if existing debt covenants prevent further securitization) over a similar term in a similar economic environment.

In accordance with the guidance in ASC 842, components of a lease are split into lease components and non-lease components. A policy election is available pursuant to which an entity may elect to not separate lease and non-lease components. For new and amended leases beginning in 2019 and after, the Company has not made the election to combine lease and non-lease components.

Research and Development Costs

Research and development costs are expensed when incurred. Research and development costs include costs of all basic research activitiescommon stock as well as other research, engineering, and technical effort required to develop a new product or service or make significant improvement to an existing product or manufacturing process. Research and development costs also include regulatory and clinical trial expenses incurred prior to regulatory approval.

Patent Costs

The Company expenses as incurred all costs, including legal expenses, associated with obtaining patents until the patented technology becomes feasible. All costs incurred after the patented technology is feasible will be capitalized as an intangible asset. As of September 30, 2019 and December 31, 2018, no such costs had been capitalized. The Company expensed patent costs within general and administrative expenses of $59 and $63 thousand for the three months ended September 30, 2019 and 2018, respectively, and $153 and $143 thousand for the nine months ended September 30, 2019 and 2018, respectively.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with the Financial Accounting Standards Board (“FASB”), ASC 718,Stock Compensation (“ASC 718”), which requires that stock-based compensation be measured and recognized as an expense in the financial statements and that such expense be measured at the grant date fair value.

For awards that vest based on service conditions, the Company uses the straight-line method to allocate compensation expense to reporting periods. The grant date fair value of options granted is calculated using the Black-Scholes option pricing model, which requires the use of subjective assumptions including volatility, expected term and the fair value of the underlying common stock, among others.

The assumptions used in determining the fair value of stock-based awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change, and different assumptions are used, stock-based compensation could be materially different in the future. The risk-free interest rate used for each grant is based on a zero-coupon U.S. Treasury instrument with a remaining term similar to the expected term of the stock-based award. The Company uses the simplified method for estimating the expected term, which is based on the average of the vesting tranches and the contractual life of each grant. Expected stock volatility is based on the Company’s to-date historical price volatility. The Company has not paid and does not anticipate paying cash dividends on the Company’s shares of common stock; therefore, the expected dividend yield is assumed to be zero.stock underlying any convertible or exercisable instruments. In 2017, the Company elected to use an actual occurrence method of recording award forfeitures rather than the prior standard of estimating forfeitures as of the grant date.

The Company periodically issues performance-based awards. For these awards, vesting will occur upon the achievement of certain milestones. When achievement of the milestone is deemed probable, the Company expenses the compensation of the stock award over the implicit service period.

Stock awards to non-employees are accounted for in accordance with Accounting Standards Update (“ASU”) 2018-07 which amends ASC718 with Improvements to Nonemployee Share-Based Payment Accounting. Under the main provision of ASU 2018-07, the fair value of the award is determined as of the grant date of the award (the date terms and conditions are agreed to between the Company and the Non-Employee vendor). The fair value at grant date estimate includes a probability component reflecting likelihood of achievement of any performance requirements. For the three and nine months ended September 30, 2019, the Company had no granted Nonemployee Share-Based Payments that had not been fully vested and earned.

Impairment of Long-Lived Assets

The Company regularly reviews the carrying amount of its long-lived assetsorder to determine whether indicatorsthe sufficiency of impairment may exist that warrant adjustments to carrying values or estimated useful lives. If indicationsauthorized shares of impairment exist, projected future undiscounted cash flows associated withcommon stock, the assetauthorized shares are comparedallotted first to the carrying amountissued and outstanding shares, then sequentially to determine whether the asset’s value is recoverable. If the carrying valueany additional relevant instruments in order of the asset exceeds such projected undiscounted cash flows, the asset will be written downdecreasing time to its estimated fair value.

Loss Contingencies

In accordance with ASC 450,Contingencies, the Company accrues anticipated costs of settlement, damages, and losses for loss contingencies based on historical experiencematurity or to the extent specific losses are probable and estimable. Otherwise, the Company expenses these costs as incurred. If the estimate of a probable loss is a range, and no amount within the range is more likely, the Company accrues the minimum amount of the range.

Income Taxes

The Company provides for income taxes under the liability method. The Company records deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the Company’s financial reporting and the tax bases of assets and liabilities measured using the enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.

The Company accounts for uncertain tax positions recognized in the consolidated financial statements by applying a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

Guarantees

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

As permitted under Delaware law, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the 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 coveragetermination. Any instrument that would limit its exposure and enable it to recover a portion of any future amounts paid. The Company has never filed a claim under directors’ and officers’ insurance.

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.

For the three and nine months ended September 30, 2019 and 2018, 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 relatedhave sufficient authorized shares of common stock to these indemnification obligations and, consequently, concluded that the fair value of these obligationsallow conversion or exercise is negligible. As a result, no related reserves have been established.

Issuance Costs Related to Equity and Debt

The Company allocates issuance costs between the individual freestanding instruments identified on the same basis as proceeds were allocated. Issuance costs associated with the issuance of stock or equity contracts (i.e., equity-classified warrants and convertible preferred stock) are recordedreclassified, if needed, as a charge against the gross proceeds of the offering. Any issuance costs associated with the issuance of liability-classified warrants are expensed as incurred. Issuance costs associated with the issuance of debt (i.e., convertible debt) isliability recorded as a direct reduction of the carrying amount of the debt liability but limited to the notional value of the debt. The Company accounts for debt as liabilities measured at amortized cost and amortizes the resulting debt discount to interest expense using the effective interest method over the expected term of the notes pursuant to ASC 835,Interest (“ASC 835”). To the extent that the reduction from issuance costs of the carrying amount of the debt liability would reduce the carrying amount below zero, such excess is recorded as interest expense.

Embedded Conversion Features

The Company evaluates embedded conversion features within convertible debt under ASC 815,Derivatives and Hedgingto determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options.” Under ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Company convertible debt instruments is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on the consolidated balance sheets and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component of the notes. Therefore, the Company is required to record as non-cash interest expense the amortization of the discounted carrying value of the convertible debt to the face amount over the term of the convertible debt. The Company reports higher interest expense in the Company’s financial results because ASC 470-20 requires interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest.

For conventional convertible debt where the rate of conversion is below market value, the Company values and records a beneficial conversion feature (“BCF”) and related debt discount on issuance. When the Company records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument (offset to additional paid in capital) and amortized to interest expense over the life of the debt.

Reclassification

On the consolidated statement of cash flows, the Company reclassified amortization of debt issuance costs non-cash interest expense of $141 thousand and accretion of debt discount of $96 thousand into non-cash interest expense for the nine months ended September 30, 2018 in order to conform with current year presentation.

Subsequent Events

The Company evaluates events occurring after the date of its consolidated balance sheet for potential recognition or disclosure in its consolidated financial statements.

On October 31, 2019, Crystal Amber, a Related Party, exercised another portion of the May 2019 Warrant as scheduled in the August 2019 SPA. For an aggregate cash payment of $1 million, 78,740,157 CDIs (representing approximately 1,574,803until sufficient shares of common stock) were issued on November 4, 2019stock are authorized, at $0.0127 per CDI underwhich time the May 2019 Warrant. This was recorded as a subscription receivable from related party andclassification returns to the cash was received on October 1, 2019 (see Note 4 of these Consolidated Financial Statements for a more complete descriptionclassification determined in the original accounting analysis of the terms and conditions of the May 2019 Warrant).instrument.

NewRecently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. ASU 2016-02 requires that most operating leases be recorded on the balance sheet unless the practical expedient is elected for short-term operating leases. The lessee will record a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset representing the lessee’s right to use the underlying asset for the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. The Company elected to apply the practical expedient as it relates to short-term leases. The Company adopted ASU 2016-02 on January 1, 2019. There was no impact to retained earnings upon adoption as there were no long-term leases in effect at adoption (see Note 11 of these Consolidated Financial Statements for a more complete description of the lease accounting and impacts of adoption).

In June 2018, the FASB issued ASU No. 2018-07,Compensation – Stock Compensation (Topic 718: Improvements to nonemployee share-based payment accounting), or ASU 2018-07, which provides measurement provisions and clarifications for the accounting for Non-employee Share-Based Payments (“NESBP”). As a result, most of the guidance within ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, applies to NESBP. ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted but not in advance of adoption of Topic 606,Revenue Recognition. Upon transition, the entity is required to measure these nonemployee awards at fair value as of the adoption date. The entity must not remeasure assets that are completed. The Company adopted ASC 2018-07 as of January 1, 2019 and there was no impact to retained earnings or equity as no uncompleted NESBPs were outstanding when adopted. For the three and nine months ended September 30, 2019, the Company had no unvested or unearned NESBPs outstanding. 

In July 2018, the FASB issued ASU No. 2018-09,Codification Improvements, or ASU 2018-09, which affects a wide variety of topics, including the following: Amendments to Subtopic 220-10,Income Statement— Reporting Comprehensive Income—Overallrelates to income taxes not payable in cash; Amendments to Subtopic 470-50,Debt—Modifications and Extinguishmentsrelates to debt extinguishment and requires that the net carrying amount of extinguished fair value elected debt equals its fair value at reacquisition and related gains or losses in other comprehensive income must be included in net income upon extinguishment of the debt; Amendments to Subtopic 480-10,Distinguishing Liabilities from Equity—Overallrelates to combinations of freestanding financial instruments with non-controlling interests; Amendments to Subtopic 718-740,Compensation—Stock Compensation—Income Taxesrelate to recognition timing clarification for excess tax benefits or deficiencies for compensation expense; Amendments to Subtopic 805-740,Business Combinations— Income Taxesrelate to allocating tax provisions to an acquired entity; Amendments to Subtopic 815-10,Derivatives and Hedging— Overallrelate to accounting for offsetting derivatives; Amendments to Subtopic 820-10,Fair Value Measurement— Overallrelate to the wording with respect to how transfer restrictions effect the fair value of an asset and adds explicit wording to allow entities to measure fair value on a net basis for those portfolios in which financial assets and financial liabilities and nonfinancial instruments are managed and valued together. Amendments to Subtopic 940-405,Financial Services—Brokers and Dealers—Liabilitiesrelate to guidance about offsetting on the balance sheet; and Amendments to Subtopic 962-325,Plan Accounting—Defined Contribution Pension Plans—Investments—Otherrelate to plan evaluation of whether a readily determinable fair value exists to determine whether those investments may qualify for the practical expedient to measure at net asset value in accordance with Topic 820. The transition and selection of an effective date is based on the facts and circumstances of each amendment, but many of the amendments have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. The Company is currently evaluating the relevance of each components and potential impact of ASU 2018-09 components to its consolidated financial statements. 

In August 2018, the FASBFinancial Accounting Standards Board issued ASUAccounting Standards Update (“ASU”) No. 2018-13,Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13, which provides guidance focused on the disclosure requirements for disclosing fair value estimates, assumptions, and methodology. RequirementsThis ASU removed include the requirementrequirements to disclose details around amount and reasoning for level 1 to level 2 transfers, timing policies for transfer between levels and the valuation processes for level 3 fair value measurements. Modified requirements include details regarding net asset redemption restrictions and timing related to uncertainty disclosures. RequirementsFurther, this ASU added includerequired disclosures of changes in unrealized gains and losses for recurring level 3 measurements held as of the reporting date and disclosures around the range and weighted average of significant inputs used to develop level 3 fair value measurements. These amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption iswas permitted upon issuance of this update. An entity is permitted toupdate, however the Company declined early adopt any removed or modified disclosures upon issuance of this update and delay adoption of the additional disclosures until their effective date.adoption. The Company is currently evaluating the individual componentsadopted this ASU on January 1, 2020 and as these are disclosure refinements, expectsconcluded that it had no impact toon its consolidated financial statements on adoption. 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 of Common Stock 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 are excluded, 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. For diluted net loss per share purposes, derivatives to purchase shares of common stock or CDIs are treated identically because shares of common stock and CDIs are interchangeable at the sole election of the stockholder. For diluted net loss per share purposes, options and warrants conferring the right to purchase shares of common stock or CDIs are excluded from diluted net loss per share calculations as inclusion would have an anti-dilutive effect. For diluted net loss per share purposes, shares of preferred stock that are convertible into shares of common stock are excluded from diluted net loss per share calculations as inclusion would have an anti-dilutive effect. During the three and nine months ended September 30, 20192020 and 2018,2019, common stock equivalents were excluded from the calculation of diluted net loss per common share, as their effect was anti-dilutive due to the net loss incurred. Therefore, basic and diluted net loss per share was the samewere equivalent in all periodseach period presented.

The following potentially dilutive securities have been excluded from the computation of diluted weighted-averageweighted- average shares outstanding as of September 30, 20192020 and 2018,2019, as they would be anti-dilutive:

4. Warrants to Purchase Common Stock or CDIs

The following series of warrants were outstanding and exercisable at September 30, 2020 and 2019 (warrants to purchase CDIs presented as shares at a 50 CDI per share ratio):

On May 4, 2016, the Company entered into a consulting agreement pursuant to which a consulting firm providedprovides strategic advisory, finance, accounting, human resources and administrative functions, including chief financial officer services, to the Company. In connection with the consulting agreement, the Company granted the consulting firm a warrant (“Consultant Warrant”) to purchase up to 28,532 shares of the Company’s common stock at an exercise price per share equal to $0.64. The Consultant Warrant is fully vested and expires on May 4, 2021. The Company has reserved 28,532 shares of common stock related to the Consultant Warrant. As of September 30, 2019,2020, the Consultant WarrantWarrants had not been exercised.

On May 30, 2018, the CompanyAugust 21, 2019, GI Dynamics and Crystal Amber entered into a notesecurities purchase agreement for a total funding of up to approximately $10 million (the “2018 Note”“August 2019 SPA”) and warrant (the “2018 Warrant”) Purchase agreement that included a warrant to purchase 97,222,200 CDIs (representing approximately 1,944,444 sharescomprised of common stock). Thethe scheduled exercise price of the 2018 Warrant, was initially $0.018 per CDIthe March 2019 Warrant, and was subsequently reset to $0.0144 when the Company issued securities at the lower price in September 2018. The 2018May 2019 Warrant was exercised for $1.4 million on August 25, 2019.

On March 15, 2019, the Company entered into a note (the “March 2019 Note”) and warrant (the “March 2019 Warrant”) Purchase agreement that included a form of warrant to purchase 78,984,823 CDIs (representing approximately 1,579,696(totaling 8,248,549 shares of common stock). The Marchstock purchased for approximately $5.4 million) and the issue and sale of an Unsecured Convertible Note for up to approximately $4.6 million (the “August 2019 Warrant was subsequently approved by stockholders and issued on June 30,Note”), which included an agreement to issue a warrant (the “August 2019 withWarrant”) to purchase up to 229,844,650 CDIs (representing 4,596,893 shares of common stock) for an exercise price of $0.0127$0.02 per CDI.CDI issued on exercise. On August 25,December 16, 2019, a portionstockholders approved the issuance of the MarchAugust 2019 Warrant, totaling 47,244,119 CDIs (representing approximately 944,882 shares of common stock)which was exercised for $600 thousand. The remaining portionissued on January 13, 2020 upon funding of the MarchAugust 2019 Note. The August 2019 Warrant totaling 31,740,704 CDIs (representing approximately 634,814 shares of common stock) was exercised for approximately $400 thousandcancelled on September 30, 2019. The exercise was recorded4, 2020 as common shares subscribed, but unissuedfurther described in Notes 4 and subscription receivable as notice of exercise had been received, but cash had not posted to the Company accounts and CDIs had not been issued at September 30, 2019. The cash was received on October 1, 2019 and the CDIs were issued on October 4, 2019.

On May 8, 2019, the Company entered into a note (the “May 2019 Note”) and warrant (the “May 2019 Warrant”) purchase agreement that included a form of warrant to purchase up to 236,220,472 CDIs (representing 4,724,409 shares of common stock). The May 2019 Warrant to purchase the maximum number of CDIs of 236,220,472, was both approved by stockholders and issued on June 30, 2019. The May 2019 Warrant’s exercise price was $0.0127 per CDI. A portionNote 9 of the May 2019 Warrant totaling 125,739,610 CDIs (representing approximately 2,514,792 shares of common stock) was exercised for approximately $1.6 million on September 30, 2019. The exercise was recorded as common shares subscribed, but unissued and subscription receivable as notice of exercise had been received, but cash had not posted to the Company accounts and CDIs had not been issued at September 30, 2019. The cash was received on October 1, 2019 and the CDIs were issued on October 4, 2019.

consolidated financial statements.

Another portion of the May 2019 Warrant totaling 78,740,157 CDIs (equivalent to 1,574,803 shares of common stock) was exercised for approximately $1 million on October 31, 2019.

5. Fair Value of Assets and LiabilitiesMeasurements

The tables below present informationInformation about the Company’s assets and liabilities that are measured at fair value initially or on a recurring basis as of September 30, 20192020 and December 31, 20182019 is provided below and indicatesincludes 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 presentOn March 31, 2020, the assetsclassification of the Consultant Warrant was re-evaluated, and liabilities the Company has measured at fair value onre-classified it as an equity instrument. On March 31, 2020, this reclassification resulted in a recurring basis (in thousands):credit to Other Income.

The assumptions usedOn June 18, 2020 and on August 4, 2020, convertible notes were issued to Crystal Amber, the terms of which include a mandatory conversion of outstanding principal and interest into shares issued in the Black-Scholes option pricing modelnext Qualified Financing, which was the September 2020 Financing, at a conversion price equal to determine80% of the price per share of Series A Preferred Stock. The fair value of each the derivative liabilities asJune 2020 Note and the August 2020 Note at issuance was determined using directly observable Level 2 inputs including the time period to the Proposed Offering, accrued interest and the fixed conversion premium. The Company has elected the interest method of accretion to approximate fair value, so the June 2020 Note was only remeasured at August 1, 2020 when the timing and conversion discount methodology was clarified to be different from the original assumptions. The August 2020 Note used known values for valuation variables. The June 2020 and the August 2020 Notes were converted into shares of Series A Preferred Stock on September 30, 2019, and December 31, 2018 were as follows:4, 2020.

The following table rolls forward the fair value of the derivative liabilities, where fair value is determined by Level 3 inputs (in thousands):

Cash, cash equivalents, restricted cash, subscription receivable from related party, prepaid expenses and other current assets, right-of-use assets, accounts payable, accrued expenses, short-term lease liabilities and short-term debt to Crystal Amber, a Related Party,related party, excluding the June 2020 and the August 2020 convertible note, and other current liabilities at September 30, 20192020 and December 31, 20182019 are carried at amounts that approximate fair value due to their short-term maturities and the highly liquid nature of these instruments. The carrying value of the Company’s long-term debt to Crystal Amber, a Related Party at December 31, 2018, and long-term lease liabilities at September 30, 2019 approximates fair value based on commonly applied estimation methodologies, published market data and industry studies obtained by the Company.

6. Concentrations of Credit Risk and Related Valuation AccountsAccount

Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents and restricted cash. The Company maintains its cash and cash equivalentCash balances are maintained with high quality financial institutions, and consequently, while the balances may exceed federally insured limits, 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 CompanyGI Dynamics has adopted an investment policy that limits the amounts the Companyit may invest in any one type of investment and requires all investments held by the Companyinvestments to hold at least an A rating from a recognized credit rating agency, thereby reducing credit risk concentration.

When the Company had regulatory approval to sell EndoBarrier^® in select markets, the Company granted unsecured credit to customers in the normal course of business. The Company made judgments as to its ability to collect outstanding receivables and provided an allowance for receivables when collection became doubtful. Provisions were made based upon a specific review of all significant outstanding invoices and the overall quality and age of those invoices not individually reviewed. Amounts determined to be uncollectible are written off against the total reserve. After regulatory approval for EndoBarrier^® was suspended, the Company deemed certain remaining accounts receivable uncollectible and recorded write-offs of uncollectible accounts receivable of $42 thousand in the nine months ended September 30, 2018. As of September 30, 2019 and December 31, 2018, the Company had no accounts receivable and no reserves for uncollectible accounts receivable.7. Prepaid Expenses

The following is a roll forward of the Company’s allowance for doubtful accounts (in thousands):

7. Inventory

The Company assessed the probability and timing of regulatory approval and appropriate inventory life span and deemed the inventory on hand as of December 31, 2017 to be obsolete and subsequently wrote off all inventory and reserves in 2018. There is no inventory or reserves against inventory on the balance sheet at September 30, 2019 and December 31, 2018.

8. Property and Equipment

Property and equipmentPrepaid expenses consisted of the following (in thousands):

DepreciationOn July 23, 2020 the Company paid Scott Schorer, the Company’s Chief Executive Officer, a Retention Bonus. In lieu of any severance benefits Mr. Schorer would otherwise be entitled to, the Company paid Mr. Schorer a one-time cash bonus of approximately $609 thousand. The Retention Bonus is subject to pro-rata forfeiture and amortization expenserepayment if Mr. Schorer leaves the Company prior to December 31, 2020, without Good Cause as defined in the Offer Letter or if terminated for Cause. The pro-rata forfeiture and repayment schedule is the repayment of propertythe total bonus less 1/6 of the bonus for each full month Mr. Schorer remains in his position beginning in July 2020 and equipment totaled approximately $7 thousand and nilextending through December 2020 with the Retention Bonus being fully earned on December 31, 2020. Additionally, in lieu of any performance bonus Mr. Schorer may be entitled to per the Offer Letter, Mr. Schorer is eligible for the three months ended September 30, 2019 and 2018 and $24 and $11a milestone bonus of up to $100 thousand for achieving the ninereceipt of European CE mark approval and/or achieving approval of the I-Step clinical trial in India during the Retention Period. If Mr. Schorer’s employment is terminated without cause or if Mr. Schorer resigns for Good Reason as defined in the Offer Letter, and a milestone is subsequently attained, Mr. Schorer will be entitled to a pro-rata portion of the Milestone Bonus based on the percentage of the Retention Period that Mr. Schorer remained employed by the Company. Should Mr. Schorer’s employment be terminated for any reason following the Effective Date of the Retention Bonus Agreement and Amendment, Mr. Schorer will provide consulting services to the Company at a predetermined rate and averaging ten hours per month, subject to adjustment by the parties (the “Consulting Services”), for a period of six months ended September 30, 2019following such termination (the “Consulting Term”), subject to earlier termination by mutual agreement of the parties. Mr. Schorer resigned for Good Reason on November 2, 2020, and 2018, respectively.the Retention Bonus became fully earned.

At September 30, 2019 and December 31, 2018, the Company had no property and equipment assets financed in any capital lease arrangement.

9.8. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

10.In 2017, following notification by the Medicines and Healthcare Products Regulatory Agency (“MHRA”), the Company notified its customers to return their inventory on hand. The Company calculated an estimate for returns, reversed its revenue and recorded an accrued expense estimate of $202 thousand of product return related costs in addition to $77 thousand of credit memos granted to customers. Through December 31, 2019, this reserve had various claims and adjustments of $115 thousand. On March 31, 2020, the Company reversed the remaining accrual for $164 thousand and recognized other income as the Company concluded that the likelihood that further claims will be made was remote, given the amount of time having lapsed since product expiry, during which the Company has not received any such claims.

Accrued interest at September 30, 2020 is comprised of interest on the September 2020 Convertible Note and an immaterial amount for the Company’s Paycheck Protection Program loan.

9. Notes Payable

2017 Convertible Note Financing

On June 15, 2017, the Company entered into a Note Purchase Agreement (“2017 NPA”) by and between the Company and Crystal Amber, a Related Party. Pursuant to the Note Purchase Agreement,2017 NPA, the Company issued and sold to Crystal Amber, a Related Party, a Senior Secured Convertible Promissory Note in an aggregate original principal amount of $5.0 million (the “2017 Note”).

The 2017 Note accruesaccrued interest at an annually compounded rate of 5% per annum, other than during the continuance of an event of default, when the 2017 Note accrueswould accrue interest at a rate of 8% per annum. The entire outstanding principal balance and all unpaid accrued interest thereon was initially due on the original maturity date of December 31, 2018, butand, as announced on July 1, 2020, was most recently amended to extend the maturity date was extended multiple times as described below.to July 31, 2020.

The 2017 Note iswas secured by a first priority security interest in substantially all tangible and intangible assets of the Company, including intellectual property (the “Collateral”). In the event of an uncured default, Crystal Amber, a Related Party, iswas authorized to sell, transfer, assign or otherwise deal in or with the Collateral or the proceeds thereof or any related goods securing the Collateral, as fully and effectually as if Crystal Amber a Related Party, were the absolute owner thereof.

The ASX provided the Company with a waiver to allow all asset liens (the “Security”) to be granted to Crystal Amber, a Related Party, without the customary requirement of having to obtain stockholder approval for the grant of a security to a Related Party of the Company. As a result of the waiver, the Security contains a provision that provides that if an event of default occurs and Crystal Amber, a Related Party, exercises its rights under the Security, neither Crystal Amber, a Related Party, nor any of its associates can acquire any legal or beneficial interest in an asset of the Company or its subsidiaries in full or partial satisfaction of the Company’s obligations under the Security, or otherwise deal with the assets of the Company or its subsidiaries, without the Company first having complied with any applicable ASX Listing Rules, including ASX Listing Rule 10.1, other than as required by law or through a receiver, manager, or analogous person appointed by Crystal Amber, a Related Party, exercising its power of sale under the Security and selling the assets to an unrelated third party on arm’s length commercial terms and conditions and distributing the cash proceeds to Crystal Amber, a Related Party, or any of its associates in accordance with their legal entitlements.

The 2017 Note was issued without stockholder approval of certain specific conversion features and as a consequence, Crystal Amber, a Related Party, had no right to exercise any note conversion rights until stockholders approved the 2017 Note conversion terms on May 24, 2018. Subsequently, the entire outstanding principal balance under the 2017 Note and all unpaid accrued interest thereon iswas convertible into CDIs (i) prior to the maturity date, at the option of Crystal Amber a Related Party, at a conversion price calculated based on the five-day volume weighted average price (“VWAP”) of the Company’s CDIs traded on the ASX (“Optional Conversion Price”), or (ii) automatically upon the occurrence of an equity financing in which the Company raises at least $10 million (a “Qualified Financing”) at the price per CDI of the CDIs issued and sold in such financing.

In the event thatOn July 13, 2020, Crystal Amber provided the Company issues additional CDIs inwith a subsequent equity financing at a price per CDI that is less than the then-effective Optional Conversion Price, Crystal Amber, a Related Party, has a 30-day option to convert at an adjusted conversion price reflecting, on a weighted average basis, the lower price per CDI. The numbernotice of CDIs that Crystal Amber, a Related Party, may acquire uponoptional conversion of the 2017 Note at this adjustedNote. On the conversion price is limited todate, the number that maintains Crystal Amber’s, a Related Party, fully-diluted ownership percentageprincipal of $5 million and the Company at the same level as existed immediately preceding the applicable subsequent equity financing.

In addition, upon a change of control of the Company (other than a change of control resulting from a Qualified Financing) in which the Company’s stockholders receive cash consideration, the Company is obligated under the 2017 Note to pay all accrued and unpaid interest then due plus 110%of $390,240 totaling $5,390,240 was converted into 2,574,873,400 CDIs, which was equivalent to 51,497,468 shares of Common Stock. The conversion price equaled the 5-day VWAP per CDI for the 5 trading days immediately preceding the date of notice, which equaled $0.002093 per CDI or $0.10467 per share of Common Stock.

On receipt of the remaining outstanding unconverted principal balance. Ifnotice of conversion, the changeCompany did not have sufficient authorized shares to issue to CHESS Depository Nominees, Ltd. (“CDN”) to enable the required number of control results in non-cash consideration,CDIs to be allotted to Crystal Amber. The available 38,401,704 shares were issued to CDN, allowing the allotment of 1,920,085,200 CDIs to Crystal Amber. The Company and Crystal Amber executed a Related Party, may convertRight to Shares and Waiver Agreement in which the entire outstanding principal balanceCompany agreed to issue the remaining 13,095,764 shares of Common Stock owed under the 2017 Noteconversion when the Company filed an amended and restated certification of incorporation with the Delaware Secretary of State after the Company was delisted from the ASX and in connection with the consummation of the September 2020 Financing and. On July 22, 2020, the Company was removed from the Official List of the ASX (“Delisted”) and the CDN trust was subsequently dissolved, causing all unpaid accrued interest then due into CDIs to automatically convert to shares of Common Stock. The remaining 13,095,764 shares of Common Stock owed under the conversion were issued as shares of Common Stock immediately after Shareholders approved the increase in the authorized shares of common stock to 280,000,000 shares at the abovementioned Optional Conversion Price. Other than as described above, the Company may not prepay the 2017 Note without the consentSpecial Meeting of Crystal Amber, a Related Party.

The 2017 Note Purchase Agreement contains customary events of default including a failure to perform obligations under the 2017 Note Purchase Agreement, bankruptcy, a decision by the board of directors of the Company to wind up the Company, or if the Company otherwise ceases to carryShareholders held on its ongoing business operations. If a default occurs and is not cured within the applicable cure period or is not waived, any outstanding obligations under the 2017 Note may be accelerated. The 2017 Note Purchase Agreement and related 2017 Note documents also contain additional representations and warranties, covenants and conditions, in each case customary for transactions of this type.

The Company recorded the $5 million 2017 Note, net of debt issuance costs of $115 thousand and amortized the debt issuance costs over the life of the 2017 Note.

In December 2018, the maturity date of the 2017 Note was extended to March 31, 2019 in exchange for payment of $394 thousand, which was the total interest accrued on the 2017 Note at December 31, 2018. Payment of this amount was made in January 2019. The modification extended the conversion rights and resulted in an additional $40 thousand of debt discount liability being recorded along with issuance costs of $53 thousand.

In March 2019, the maturity date of the 2017 Note was extended to May 1, 2019. The modification extended the beneficial conversion rights and resulted in an additional debt discount liability, which was not recorded since it was determined to be immaterial to the consolidated financial statements. In April 2019, the maturity date of the 2017 Note was further extended to July 1, 2019, which resulted in $24 thousand of debt discount liability being recorded. In June 2019, the maturity date of the 2017 Note was further extended to October 1, 2019, which resulted in an additional $31 thousand of the debt discount liability being recorded. On August 21, 2019 the maturity date of the 2017 Note was further extended to March 31, 2020, which resulted in an additional $273 thousand of the debt discount liability being recorded.September 3, 2020.

For the three and nine months ended September 30, 2019,2020, the Company accruedrecognized interest expense of $63$9 and $187 thousand and amortization of the debt discount to interest expense of $75 and $194$140 thousand, respectively, related to the 2017 Note. For the three and nine months ended September 30, 2018,2019, the Company recognized interest expense of $67$63 and $191 thousand and amortization of debt issuance costs of $19 and $56$187 thousand, respectively, related to the 2017 Note.

2018 Convertible Note and Warrant Financing

On May 30, 2018, the Company entered into a Note Purchase Agreement by and between the Company and Crystal Amber, a Related Party. Pursuant to the Note Purchase Agreement, the Company issued and sold to Crystal Amber a Senior Unsecured Convertible Promissory Note in an aggregate original principal amount of $1.8 million (the “2018 Note”) with a maturity date of May 30, 2023. Interest accrued at an annually compounded rate of 10% per annum.

Subsequent to stockholder pre-approval of the conversion features on May 24, 2018, the entire outstanding principal balance under the 2018 Note and all unpaid accrued interest thereon was immediately convertible into CDIs, at the option of Crystal Amber, a Related Party, at an initial conversion price of $0.018 per CDI. Subsequently, the Company issued additional CDIs in a subsequent equity financing in September 2018 at a price per CDI of $0.0144, resulting in an adjustment of the conversion price to $0.0144 per CDI. Notice to convert the 2018 Note was provided by Crystal Amber, a Related Party on June 30, 2019 to 134,852,549 CDIs (representing 2,697,050 shares of common stock). The principal of $1.8 million converted to 121,527,777 CDIs (representing 2,430,555 shares of common stock) and the accrued interest of $192 thousand converted to 13,324,772 CDIs (representing 266,495 shares of common stock). Upon the conversion of the 2018 Note, the Company also recorded $1.4 million of unamortizedas well as interest expense related to the unamortized debt discount. Asamortization of June 30, 2019, the conversion of the CDIs had been executed, but not yet settled with the CDIs issued and available. The CDIs were then issued on July 3, 2019 and have a one-year restriction on trading on the ASX.