EDGAR 10-K Filing

Company CIK: 1245791
Filing Year: 2021
Filename: 1245791_10-K_2021_0001213900-21-014975.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
Overview
GI Dynamics, Inc. (“GI Dynamics” or “the Company”) is a clinical stage medical device company focused on the development and commercialization of EndoBarrier, a medical device system intended for treatment of patients with type 2 diabetes and reduction of obesity. EndoBarrier is a medical implant designated for the treatment of type 2 diabetes and the reduction of obesity with nearly 4,000 implants since inception and is the subject of an approved FDA pivotal trial in the United States under which the Company initiated patient implant procedures in January 2020. The Company believes that EndoBarrier represents a paradigm-breaking approach to traditional management of type 2 diabetes, which has focused historically solely on lifestyle intervention and diabetes medications. According to the article “Challenges in Diabetes Management: Glycemic Control, Medication Adherence, and Healthcare Costs,” published in the American Journal of Managed Care in 2017, these historical treatments for type 2 diabetes are limited in efficacy, with approximately 40% of patients achieving glycemic control.
EndoBarrier represents the first material departure from this historical approach. The Company believes that EndoBarrier offers an adjunct to non-insulin diabetes pharmacotherapy, while providing patients a chance to significantly reduce or eliminate insulin and increase the likelihood of avoiding invasive and permanent bariatric or metabolic surgery. EndoBarrier is designed to mimic the mechanism of action of the duodenal-jejunal exclusion currently created by gastric bypass surgery (which is referred to as Roux-en-Y Gastric Bypass, or RYGB), as explained in the article “EndoBarrier: A Safe and Effective Novel Treatment for Obesity and Type 2 Diabetes?”, published in Obesity Surgery in 2018 by Nisha Patel. After implanting EndoBarrier, the patient’s food that exits the stomach will flow through the inside of the EndoBarrier Liner, and therefore will not contact the wall of the upper intestine (duodenum and jejunum). The food will also not mix with fluids from the pancreas and bile duct until these fluids and the food reach the far end of the EndoBarrier Liner. It is believed that, in a similar fashion to RYGB, shunting the food to a more distant location in the upper intestines triggers hormonal responses that regulate key factors that help control hunger, satiety, and insulin sensitivity, which is also explained in the article by Nisha Patel.
EndoBarrier has been shown in multiple independent clinical studies to lower blood sugar levels (as measured by hemoglobin A1c or HbA1c), reduce excess body weight, increase insulin sensitivity, and positively affect other health metrics and comorbidities. Because it has been utilized in approximately 4,000 procedures, EndoBarrier has a thoroughly characterized benefit-risk profile. A recent independent meta-analysis published in 2018 by Pichamol Jirapinyo in American Diabetes Association (ADA) Diabetes Care, “Effects of the Duodenal-Jejunal Bypass Liner on Glycemic Control in Patients with Type 2 Diabetes with Obesity: A Meta-Analysis with Secondary Analysis on Weight Loss and Hormonal Changes,” provides the most comprehensive review and meta-analysis of EndoBarrier clinical data to date. In addition, two ongoing EndoBarrier registries in the UK and Germany have captured and reported clinical results on more than 800 patients between the two databases. These registries as well as other investigator-initiated trials continue to release clinical data on an annual basis, largely centered around the annual meetings hosted by DDW (Digestive Disease Week) in May, ADA (American Diabetes Association) in June, EASD (European Association for the Study of Diabetes) in October, and Obesity Week in November.
Business Strategy
The Company’s goal is to become the leading provider of alternative options for treating type 2 diabetes and concurrently reducing obesity. The Company’s corporate priorities include:
1) US Clinical Operations: Conduct Stage 1 of the STEP-1 EndoBarrier pivotal trial in the United States.
The Company is focused on the successful execution of the STEP-1 pivotal trial in the United States. In August 2018, GI Dynamics received notification from the FDA that it had approved the Investigational Device Exemption (“IDE”) application for EndoBarrier, and received required Institutional Review Board (IRB) approval, in February 2019. The approved EndoBarrier IDE represents the pivotal clinical trial for EndoBarrier.
The STEP-1 clinical trial is a randomized, controlled, double blinded trial with 3:1 randomization between patients who receive the EndoBarrier implant (3) and the control group made up of patients who will receive a sham procedure and not receive the EndoBarrier implant (1). Both arms will maintain pharmacotherapy within ADA guidelines and will receive lifestyle and nutritional counseling consistent with ADA guidelines. The primary endpoint of the trial is reduction of HbA1c from baseline to removal of the EndoBarrier at twelve months as compared to the control group. The study includes numerous secondary endpoints, including changes in weight, cardiovascular risk metrics, as well as health metrics related to NAFLD (non-alcoholic fatty liver disease) and NASH (non-alcoholic steatohepatitis), and CKD (chronic kidney disease).
The STEP-1 clinical trial consists of two stages. The first stage consists of 50 EndoBarrier patients and approximately 17 control patients. At the end of stage 1, the Company will submit four DMC (Data Monitoring Committee) reports to the FDA for review. Upon a successful completion of the stage 1 review, the Company will submit a request to the FDA to complete the study by conducting stage 2, which the Company anticipates will be comprised of 130 EndoBarrier patients and approximately 43 control patients for a study total of 240 patients (180 EndoBarrier and 60 control patients). There is no guarantee that this will be the final composition of the study, as the number of remaining stages or remaining patients may vary based on the stage 1 clinical data and the outcome of the stage 1 review with FDA. In addition to the multiple staged study, the FDA has mandated certain stopping rules which, if triggered, could result in the STEP-1 study having enrollment or treatment delayed or stopped.
On January 27, 2020, the first patient was randomized into the STEP-1Trial Protocol. On March 11, 2020, the World Health Organization declared the outbreak of a coronavirus (“COVID-19”) pandemic. From the time of that declaration, the public safety restrictions adopted at the federal, state, and individual clinic policy level have impacted the ability to enroll patients after March 11, 2020. The EndoBarrier implantation procedure is classified as an elective procedure and was thus impacted by policies that disallowed elective procedures. In the fourth quarter of 2020, select clinical trial sites have been engaged in pre-screening activities to identify potential enrollees, although an increase in COVID-19 positivity rates and resulting policies on elective procedures, patient caution, and individual infections have prevented randomization of any additional enrollees prior to March 11, 2021. The Company continues to focus on potential patient identification and will resume enrollment and randomization as early as possible, presumably in the first half of 2021 due to the availability of the SARS-Cov2 vaccines and the assumption that the vaccines will continue to provide protection against emergent viral variants. Pending timely release of the COVID-19 restrictions, the Company expects to complete the enrollment of Stage 1 by the end of 2021.
2) India Partnership: Conduct the I-STEP EndoBarrier pivotal trial in India as part of the Apollo Sugar partnership.
GI Dynamics is focused on the successful execution of the EndoBarrier trial in India as part of its partnership with Apollo Sugar, which was announced on November 27, 2018.
The I-STEP study is also a randomized, controlled, double blinded trial with 3:1 randomization between patients who receive the EndoBarrier implant (3) and the control group made up of patients who will not receive the EndoBarrier implant (1). The primary endpoint of the trial is reduction of HbA1c from baseline to removal of the EndoBarrier at twelve months as compared to the control group. The study includes numerous secondary endpoints, including changes in weight and reduction in cardiovascular risk metrics. The study includes 100 patients in total, which consists of 75 patients who will receive the EndoBarrier implant and 25 control patients. Up to five clinical sites in India will participate in the study.
Apollo Sugar is a collaboration between Apollo Health & Lifestyle Limited and Sanofi. Apollo Sugar is a division of Apollo Hospitals Group (Apollo) focused on the treatment of metabolic disorders and operates an integrated network of centers of excellence for diabetes, obesity and endocrinology. Apollo is the largest private hospital system in India and has emerged as Asia’s foremost integrated healthcare services provider, maintaining a robust presence of hospitals, pharmacies, primary care and diagnostic clinics across the healthcare ecosystem. Since its inception, Apollo has treated over 65 million patients from 141 countries.
In April 2020, the Company and Apollo Sugar filed a pre-trial application with the Central Drugs Standards Control Organization (CDSCO) in India to obtain approval to initiate the I-STEP trial. As of March 11, 2021, the Company has not received communication from CDSCO regarding the timing of a response to the application, with the delay likely related to COVID-19 disruption in India. The Company expects to receive approval and initiate the trial in the first half of 2021, pending the removal of COVID-19 disruption and restrictions. Once initiated, the partners anticipate trial enrollment will take less than 12 months.
GI Dynamics and Apollo Sugar leadership are working to finalize the terms of the GI Dynamics-Apollo Sugar partnership that will focus on the marketing, distribution and clinical support of EndoBarrier to appropriate patients in India, Southeast Asia and the Middle East. Final terms of the proposed collaboration are subject to negotiation and will be disclosed upon completion.
3) Gain CE Mark: Work with new Notified Body to gain EndoBarrier CE mark.
CE Marking of a product is a manufacturer’s declaration that a product meets the applicable health, safety, and environmental requirements outlined in the appropriate European product legislation and has undergone the relevant conformity assessment procedure. A CE Mark is required before the Company can market EndoBarrier in the EU and certain Middle Eastern countries. In 2020, the standards for a medical device CE mark were scheduled to change from the Medical Device Directive (“MDD”) to the more stringent Medical Device Regulation (“MDR”), but largely due to the impacts of COVID-19, the deadline for conversion to MDR has been postponed. The Company has initiated the review process under MDD regulation with a new Notified Body, the independent third party commissioned to evaluate the conformity of products and the associated quality systems for manufacturers that seek to sell products in Europe.
Summary
In summary, GI Dynamics believes that EndoBarrier represents the most effective new treatment option in a market dominated by pharmaceutical companies generating annual revenue in excess $40 billion. The Company believes that EndoBarrier is poised to have a transformative and disruptive effect on the type 2 diabetes market. EndoBarrier is one of the few treatment options that treats type 2 diabetes, concurrently reduces obesity, and continues to show lasting treatment effects post treatment in many patients. As the duration of the EndoBarrier treatment effect continues to increase in published literature and because, to date, there has been minimal observed clinical risk after EndoBarrier removal, the EndoBarrier risk-benefit balance continues to evolve in an increasingly positive manner.
Background of the Disease
Diabetes mellitus type 2 (also known as type 2 diabetes) is a long-term progressive metabolic disorder characterized by high blood sugar, insulin resistance, and reduced insulin production. People with type 2 diabetes represent 90-95% of the worldwide diabetes population; only 5-10% of this population is diagnosed with type 1 diabetes (a form of diabetes mellitus wherein little to no insulin is produced).
Being overweight is a condition where the patient’s body mass index (BMI) is greater than 25 (kg/m2); obesity is a condition where the patient’s BMI is greater than 30, with some countries applying a lower metric to both definitions. 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 for many patients.
When considering treatment for type 2 diabetes, it is optimal to address obesity concurrently with diabetes. According to the article “Mechanisms of Insulin Resistance in Obesity,” published in Frontiers of Medicine in 2013 by Jianping Ye, absent the concurrent reduction of obesity with the treatment of type 2 diabetes, obesity will likely continue to contribute to the progressive nature of type 2 diabetes. It is the Company’s belief that the inability of the current pharmacologic options to fully treat type 2 diabetes is due to the fact that diabetes medications generally treat blood sugar levels only and do not contribute substantially to weight loss.
Current Treatment Options
According to the American Diabetes Association 2018 Standards of Medical Care in Diabetes, 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. Insulin usage 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, as explained in the article “Insulin-associated weight gain in diabetes--causes, effects and coping strategies,” by Russel-Jones, D. Only 40% 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 for these patients, as explained in the article “Adherence to Therapies in Patients with Type 2 Diabetes,” by Luis-Emilio Garcia-Perez.
The current pharmacological treatment algorithms for type 2 diabetes fall short of ideal, creating a large and unfilled efficacy gap. GI Dynamics believes that EndoBarrier, which is designed to mimic the mechanism of action of duodenal-jejunal exclusion currently created by RYGB gastric bypass surgery and operates in a relatively similar manner by reducing both weight and long-term blood sugar levels, can fill this gap by treating type 2 diabetes and reducing obesity in a unique minimally invasive and reversible manner.
Market Opportunity
Unmet Clinical Needs in the Treatment of Type 2 Diabetes and Obesity.
In 2019, the International Diabetes Federation estimated there were approximately 463 million people with type 2 diabetes worldwide. Diabetes is the leading cause of cardiovascular disease, kidney failure, blindness, and lower-limb amputation in almost all countries.
Three years after initial diagnosis, over half of patients with type 2 diabetes require multiple drug therapies. Studies have shown that only 40% of the type 2 diabetes population is adequately managed pharmacologically, as explained in the article “Challenges in Diabetes Management: Glycemic Control, Medication Adherence, and Healthcare Costs,” published in the American Journal of Managed Care in 2017. At ten years post diagnosis, most patients, despite insulin use in many, struggle to reach their hemoglobin A1c (HbA1c) treatment goals. HbA1c is a glycosylated hemoglobin molecule found in the bloodstream that is formed when red blood cells are exposed to blood glucose. HbA1c has become the generally accepted gold standard biomarker for measuring levels of diabetes control in clinical practice and in human trials.
Many patients and health care systems struggle to meet the financial burden imposed by the numerous concurrent medications required to attempt to control the progressive nature of type 2 diabetes.
According to the World Health Organization, in 2016 more than 1.9 billion adults 18 and older were overweight. Of these, 650 million people worldwide are diagnosed with obesity (BMI ³ > 30 kg/m 2), a condition often leading to serious health consequences such as cardiovascular disease, diabetes, musculoskeletal disorders, and some cancers.
Those suffering from both type 2 diabetes and obesity, also referred to as diabesity, total more than 169 million worldwide, represent a significant public health problem not only in the United States (US) but also globally, as explained in the article “Epidemiology of Obesity and Diabetes and Their Cardiovascular Complications,” published in the Circulation Research in 2016 by Shilpa Bhupathiraju. GI Dynamics believes that the unchecked worldwide rate of growth of the type 2 diabetes and obesity patient population represents one of the greatest unmanaged health risks in all of health care.
GI Dynamics believes EndoBarrier can treat patients with type 2 diabetes and reduce obesity in a safe, effective, nonpharmacological, and nonpermanent manner.
The Efficacy Gap
The Company’s intent in developing and seeking regulatory approval for EndoBarrier is to help clinicians deliver a unique treatment option to those patients suffering from type 2 diabetes, a disease state that sorely lacks innovative and broadly effective new treatment options.
GI Dynamics and its scientific advisors feel there must be a change in how the medical establishment currently treats obese patients suffering from type 2 diabetes because current treatment options are not effective. According to the International Diabetes Federation, the number of obese patients progressing to later stages of type 2 diabetes continues to grow at an alarming rate. Yet less than half of all type 2 diabetes patients are adequately managed by pharmacotherapy, and insulin carries serious risks and may in many cases contribute to the further progression of obesity. At the extreme end of the treatment spectrum, the treatment options are limited to different types of bariatric or metabolic surgery, which are highly invasive and irreversible procedures. Less than 1% of patients who are eligible for bariatric or metabolic surgery opt to undergo the procedure, as explained in the article “Recent advances in clinical practice challenges and opportunities in the management of obesity,” published by Andres Acosta in 2015 in the Gut .
The graphic above illustrates the multiple treatment options during the course of progression of type 2 diabetes:
● Risk associated with treatment increases from left to right.
● Progression of diabetes and obesity health risk and cost increase vertically.
● Lifestyle therapy (lifestyle counseling including nutrition and exercise) is the first line of defense against the progression of type 2 diabetes and obesity.
● Pharmacotherapy
o Oral monotherapy follows lifestyle therapy, often with metformin as the first line of treatment.
o Multiple combinations may then be administered, as recommended by the American Diabetes Association and other diabetes associations around the world.
o Ultimately, as disease progression continues, injected insulin may be prescribed.
● Bariatric or metabolic gastric bypass surgery may represent a final option.
A significant and rapidly growing patient population falls into the efficacy gap, wherein the patient is inadequately managed by medication yet unwilling to undergo gastric bypass surgery. For patients who elect to undergo bariatric or metabolic surgery, the clinical gains may not be permanent, while the risk associated with the procedure is permanent. These risks include, but are not limited to, excessive bleeding, blood clots, infection and in some cases death. GI Dynamics believes that because EndoBarrier is minimally invasive, can mimic the effects of gastric bypass, and has minimal side-effects, EndoBarrier can uniquely fill this efficacy gap, as explained in the article “EndoBarrier: A Safe and Effective Novel Treatment for Obesity and Type 2 Diabetes?” published in Obesity Surgery in 2018 by Nisha Patel.
The EndoBarrier Solution
EndoBarrier is intended for the treatment of type 2 diabetes and the reduction of obesity in a minimally invasive and reversible manner. EndoBarrier is designed to mimic the mechanism of action of duodenal-jejunal exclusion created by gastric bypass surgery. The EndoBarrier System is provided sterile and consists of an EndoBarrier Liner preloaded, packaged and sterilized within the EndoBarrier Delivery System. The EndoBarrier Delivery System is utilized to deliver the EndoBarrier Liner to the proximal small intestine. The EndoBarrier Liner is removed using the EndoBarrier Retrieval System.
The EndoBarrier System consists of three primary components:
● EndoBarrier - The EndoBarrier or EndoBarrier Liner is a 60-cm-long implant consisting of a thin, flexible, impermeable fluoropolymer liner coupled to a proprietary nitinol Anchor Mechanism. A gastroenterologist implants the EndoBarrier Liner into the patient’s duodenum in a minimally invasive manner using the EndoBarrier Delivery System and standard gastroscope. The EndoBarrier Liner is placed endoscopically (through the mouth and esophagus and into the stomach without cutting tissue). Once the EndoBarrier Liner is properly positioned in the patient’s duodenal bulb, the area within the duodenum just below the stomach, the EndoBarrier Delivery System is removed and the EndoBarrier Liner remains, held in place by a proprietary Anchor Mechanism. The EndoBarrier Liner remains in the body for a maximum intended duration of twelve months until removal, again via a minimally invasive endoscopic procedure using the EndoBarrier Retrieval System.
● EndoBarrier Delivery System - The EndoBarrier Liner is delivered using the Company’s proprietary sterile, single-use EndoBarrier Delivery System. This includes a custom-made Outer Catheter that is sufficiently flexible to allow for insertion through the patient’s mouth, through the stomach, and into the intestine without kinking. The EndoBarrier Liner is pre-assembled during manufacturing into a collapsed position inside the Capsule, which is located at the end of the Outer Catheter. The clinician uses the EndoBarrier Delivery System to advance the Capsule into the duodenum and deploy the EndoBarrier Liner from the Capsule. The delivery procedure is typically an outpatient procedure, during which the patient is under anesthesia or semi-sedation.
● EndoBarrier Removal System - The EndoBarrier Liner is removed at the end of the treatment period via a minimally invasive endoscopic procedure using the Company’s proprietary Retrieval System which is passed by the clinician through a standard gastroscope. The Hook of the EndoBarrier Removal System is used to pull either of two drawstrings located in the Anchor Mechanism. As the drawstring is pulled, the Anchor Mechanism is collapsed inward and disengages from the wall of the duodenum. The Hood, pre-placed on the end of a gastroscope, allows the EndoBarrier anchor assembly to be pulled and collapsed into the Hood with the Hood positioned to cover portions of the anchor. The EndoBarrier Liner is then safely removed through the patient’s stomach, esophagus, and mouth. The retrieval procedure is typically an outpatient procedure, during which the patient is under anesthesia or semi-sedation.
EndoBarrier has been shown in multiple company-sponsored and independent clinical studies to lower blood sugar levels (hemoglobin A1c or HbA1c), reduce excess body weight, and positively affect other health metrics and comorbidities.
EndoBarrier is not currently approved or commercially available in any jurisdiction. In August 2018, GI Dynamics received notification from the FDA that it had approved its IDE application, pending IRB approval which was received in February 2019. To gain regulatory approval to commercialize EndoBarrier in the United States, the Company must submit a pre-market authorization (PMA) application for review and approval by the FDA. In January 2020, GI Dynamics initiated treatment of patients in the STEP-1 pivotal clinical trial, which is the registration trial for the PMA application.
The EndoBarrier Effect
Obesity has been shown to exacerbate insulin resistance and contribute to the progression of type 2 diabetes. In situations where lifestyle modification and pharmacotherapy have failed and surgery is not an option or is considered a therapy of last resort, EndoBarrier is intended to reduce blood sugar and weight. In clinical trials in both the United States and outside of the United States, EndoBarrier has been shown to:
● significantly lower glucose levels;
● significantly lower body weight;
● lower cardiovascular-related risk factors.
EndoBarrier utilization accomplishes this in many patients by affecting key hormones involved in insulin sensitivity, glucose metabolism, satiety, and food intake. (See the section titled “How EndoBarrier Works: EndoBarrier Mechanism of Action.”)
The Company’s intent in positioning EndoBarrier to fill the type 2 diabetes efficacy gap with concurrent reduction of obesity is to help patients and clinicians avoid the initiation of insulin therapy by helping many patients maintain lower HbA1c levels and slow or halt the progression of type 2 diabetes. Furthermore, for those patients whose type 2 diabetes has progressed to the point where insulin therapy is necessary, EndoBarrier has been shown in many cases to lower HbA1c levels to the point where insulin dosage can be reduced, or insulin is no longer needed.
Finally, if the progression of type 2 diabetes is severe enough to warrant gastric bypass surgery, the Company expects that EndoBarrier either may serve as an opportunity to control type 2 diabetes so that surgery may not be needed, or at least better prepare the patient for bariatric surgery by lowering weight and helping control other comorbidities prior to surgery.
How EndoBarrier Works: EndoBarrier Mechanism of Action
The EndoBarrier mechanism of action is thought to be based on its functional similarities in many ways to RYGB. Once the EndoBarrier is implanted into the duodenum and proximal jejunum, ingested food passing through the EndoBarrier during the normal digestive process is prevented from interacting with the epithelium, microbiota, mucosal layer, or biliopancreatic secretions within the duodenum and proximal jejunum. In addition, EndoBarrier acts as a physical barrier that prevents the interaction of food with pancreatic enzymes and bile until reaching the end of the EndoBarrier Liner. Pancreatic enzymes and bile pass outside EndoBarrier and mix with the food at the distal end of the liner, where absorption ultimately takes place in the intestine. Thus, EndoBarrier creates a functional and reversible bypass of the upper intestine. Unlike RYGB surgery, EndoBarrier does not require an invasive and permanent surgical procedure or permanent physical modification of the stomach and exclusion of the distal stomach from the alimentary flow.
The Company’s scientific team and advisors have postulated the following EndoBarrier mechanisms of action, based on scientific evidence from such articles as “Effects of the Duodenal-Jejunal Bypass Liner on Glycemic Control in Patients with Type 2 Diabetes with Obesity: A Meta-Analysis with Secondary Analysis on Weight Loss and Hormonal Changes,” published in Diabetes Care in 2018 by Pichamol Jirapinyo and “The EndoBarrier: Duodenal-Jejunal Bypass Liner for Diabetes and Weight Loss,” published in Hindawi in 2018 by Aruchuna Ruban.:
Exclusion of the duodenum - This may offset an abnormality of gastrointestinal physiology responsible for insulin resistance and type 2 diabetes.
● Increased nutrient delivery to the distal small bowel - Additional findings suggest that the exclusion of the proximal intestine (foregut theory) and increase in nutrient delivery to the distal small bowel (hindgut theory) created by EndoBarrier likely induce neuro-hormonal changes and nutrient sensing that affect energy balance and glucose homeostasis.
● Secretion of GLP-1 - Partially digested nutrients reach the distal ileum, which stimulates the secretion of GLP-1 by L-cells located in this area. GLP-1 is known to regulate insulin secretion and action.
● Increase in gut hormones - This contributes to the restoration of energy and glucose homeostasis.
● Elevated GLP-1 and PYY levels - Both levels are elevated as quickly as one-week post-implantation. Both hormones may play a role in satiety and body weight control.
There is no known evidence of occurrence of clinically significant caloric malabsorption with EndoBarrier. EndoBarrier covers only 60 cm of duodenal and proximal jejunal mucosa, which most likely represents less than 10% of the length of the small intestine and leaves almost the entire jejunum and ileum for digestion and absorption.
Operations and Financing
GI Dynamics began selling EndoBarrier in Europe and South America in 2010 and in Australia in 2011. Since inception, the Company has distributed almost 4,000 units of EndoBarrier and generated a total of $7.8 million in revenue. The Company has incurred net losses in each year since its inception.
The Company has five subsidiaries: GI Dynamics Securities Corporation, a Massachusetts-incorporated nontrading entity; GID Europe Holding B.V., a Netherlands-incorporated nontrading holding company; GID Europe B.V., a Netherlands-incorporated company that conducts certain European business operations; GID Germany GmbH, a German-incorporated company that conducts certain European business operations; and GI Dynamics Australia Pty Ltd, an Australia-incorporated company that conducts Australian business operations.
GI Dynamics has raised net proceeds of approximately $283 million through sales of the Company’s equity and placement of debt, of which $9.5 million was received in 2020 that included the debt portion of the 2019 financing and the Initial Close of the September 2020 Series A Preferred Stock Financing. Prior to going public on the Australian Securities Exchange (“ASX”), the Company generated $75.7 million in proceeds, net of expenses, through the sale of convertible preferred stock to a number of US venture capital firms, two global medical device manufacturers, and qualified individual investors. In June 2011, the Company issued convertible term promissory notes to several of its stockholders totaling $6 million. In September 2011, the Company conducted an Initial Public Offering (“IPO”) in Australia and simultaneously conducted a private placement of CDIs to accredited investors in the United States. Net proceeds from these financings approximated $72.5 million, net of expenses and repayment of the June 2011 notes. In connection with the IPO, all existing shares of preferred stock were converted into common stock.
Between July 2013 and December 2016, GI Dynamics raised approximately $84.3 million, net of expenses, in offerings of the Company’s CDIs to qualified investors. In January 2017, GI Dynamics raised approximately $0.2 million, net of expenses, in an offering of the Company’s CDIs under a Security Purchase Plan (“SPP”) and in June 2017, GI Dynamics placed a Convertible Secured Term Promissory Note (the “2017 Note”, see Note 9 of the Consolidated Financial Statements for a more complete description of the terms and conditions of the financing).
In February and March 2018, GI Dynamics raised approximately $1.6 million in an offering of the Company’s CDIs to qualified investors and in May 2018, GI Dynamics placed a Convertible Term Promissory Note and Warrant (the “2018 Note and Warrant”, see Note 9 of the Consolidated Financial Statements for a more complete description of the terms and conditions of the financing). In September and November 2018, GI Dynamics raised approximately $5 million in an offering of the Company’s CDIs to qualified investors.
In October 2018, GI Dynamics announced that it signed an agreement with its new notified body Intertek to pursue CE marking of EndoBarrier in Europe. The Company has since suspended its relationship with Intertek and is working with a different notified body. In November 2018, the Company signed a clinical trial agreement and a memorandum of understanding with its clinical and potential commercial partner Apollo Sugar, a division of Apollo Hospitals Group located in India. In December 2018, GI Dynamics announced the appointment of Charles Carter, a consultant, as the Company’s Chief Financial Officer and Secretary. Mr. Carter became an employee of the Company on September 1, 2019.
In March 2019, the Company completed a Note Purchase Agreement (“March 2019 NPA”) detailing a convertible term promissory note (the “March 2019 Note”) and warrant (the “March 2019 Warrant”) financing with Crystal Amber for a gross amount of $1 million (see Note 9 of the Consolidated Financial Statements for a more complete description of the terms and conditions of the financing). 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 for a gross amount of $3 million. (see Note 9 of the Consolidated Financial Statements for a more complete description of the terms and conditions of the financing). On June 30, 2019, Crystal Amber elected to convert the 2018 Note, the March 2019 Note and the May 2019 Note into an aggregate of 453,609,963 CDIs (representing approximately 9,072,197 shares of common stock).
On August 21, 2019, the Company and Crystal Amber entered into a securities purchase agreement for a total funding of up to approximately $10 million (the “August 2019 SPA”, see Note 9 of the Consolidated Financial Statements for a more complete description of the terms and conditions of the financing). In a series of scheduled transactions between August 2019 and November 2019, Crystal Amber exercised the 2018 Warrant, the March 2019 Warrant, and the May 2019 Warrant per the terms of the August 2019 SPA. In December 2019, the Company and Crystal Amber agreed to defer the funding of the August 2019 Note to January 2020.
On January 13, 2020, the $4.6 million August 2019 Note was funded by Crystal Amber and the August 2019 Warrant was issued to Crystal Amber, providing for the purchase of up to 229,844,650 CDIs (representing 4,596,893 shares of common stock) at $0.02 per CDI.
On June 18, 2020, the Company entered into a Note Purchase Agreement (“June 2020 NPA”) by and between the Company and Crystal Amber. Pursuant to the June 2020 NPA, the Company issued and sold to Crystal Amber, a Convertible Promissory Note in an aggregate original principal amount of $750 thousand, with terms including mandatory conversion in the event of the close of a Series A Preferred Stock offering.
On July 13, 2020, Crystal Amber provided the Company with a notice of optional conversion of the 2017 Note. On the conversion date, the principal of $5 million and the accrued and unpaid interest 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 $0.002093 per CDI or $0.10467 per share of Common Stock. On receipt of the notice issued the available 38,401,704 shares and the Company and Crystal Amber executed a Right to Shares and Waiver Agreement in which the Company agreed to issue the remaining 13,095,764 shares of Common Stock owed under the conversion when the Company had received shareholder approval and had increased the authorized number of shares of common stock to allow for issuance of the remaining shares. The additional shares were issued September 3, 2020.
On July 22, 2020, GI Dynamics was removed from the Official List of the ASX and all CDIs were converted to shares of Common Stock, with cash redemption of fractional shares. The CHESS Depository Nominee was subsequently dissolved. Although the Company’s securities are not traded on any exchange, the Company remains subject to SEC reporting requirements.
On August 4, 2020, the Company entered into a Note Purchase Agreement (“August 2020 NPA”) by and between the Company and Crystal Amber. Pursuant to the August 2020 NPA, the Company issued and sold to Crystal Amber, a Convertible Promissory Note in an aggregate original principal amount of $500 thousand (the “August 2020 Note”) with terms including mandatory conversion in the event of the close of a Series A Preferred Stock offering. The Company received $250 thousand on August 3, 2020 and the remaining $250 thousand on August 6, 2020.
On September 4, 2020, the Company executed a series of financing-related agreements (“the September 2020 Financing”) which included the cancellation of the August 2019 Warrant, the restructuring of the August 2019 Note into the September 2020 Note (see below for a detailed description of the September 2020 Note and the accounting classification of the August 2019 Note restructuring into the September 2020 Note), the conversion of the June and August 2020 Convertible Notes into shares of Series A Preferred Stock (see below for a detailed description of the June and August 2020 Notes and Note 10 to the Consolidated Financial Statements for a description of the Series A Preferred Stock), and the sale of $8.75 million of Series A Preferred Stock to Crystal Amber under the Series A Preferred Stock Purchase Agreement (the “Series A SPA”, see Note 11 to the Consolidated Financial Statements for a description of the Series A SPA terms). The Initial Close of the September 2020 Financing occurred on September 4, 2020, and included all components of the September 2020 Financing, including the Crystal Amber purchase of 42,310,730 shares of Series A Preferred Stock for gross proceeds of $3.75. Pursuant to the Series A SPA and subsequent amendments, the second and final close (the “Second Close”) was originally to occur on October 31, 2020 but through a series of extensions, was extended until February 24, 2021. On February 24, 2021, an individual investor closed the purchase of 600,000 shares of Series A Preferred Stock for approximate proceeds of $53 thousand. Effective February 24, 2021, Crystal Amber executed a contract amendment restructuring the Second Close to include the sale of 16,924,292 shares of Series A Preferred Stock for proceeds of $1.5 million to close on March 4, 2021, the sale of 11,282,861 shares of Series A Preferred Stock for proceeds of $1.5 million to close no later than March 25, 2021, and the remaining 27,607,153 shares of Series A Preferred Stock for proceeds of $2.45 million to close no later than May 28, 2021.
On October 8, 2020, Mr. Joseph Virgilio was appointed Chief Operating Officer of the Company.
On October 20, 2020, Ginger Glaser was appointed a Director of the Company.
On November 2, 2020, Mr. Scott Schorer resigned as President and Chief Executive Officer of the Company and Mr. Joseph Virgilio was appointed Chief Executive Officer and a director of the Company.
On December 31, 2020, Charles Carter, the Company’s Chief Financial Officer, Secretary and Treasurer, ceased to be an employee of the Company and executed a retention bonus agreement and a consulting agreement. Mr. Carter remains the Company’s Chief Financial Officer, Secretary and Treasurer.
The rights of the Company’s stockholders are governed by Delaware general corporation law.
GI Dynamics is headquartered in Boston, Massachusetts, where the majority of the Company’s employees work. The Company has subsidiaries in the Netherlands, Germany, and Australia, with employees in Germany and Australia.
Strategic Focus in 2021: The Path Forward
The global COVID-19 pandemic and associated public health restrictions caused major disruption to the Company’s operations, specifically in the clinical hold on elective procedures pausing the Step-1 clinical trial enrollment in the United States, the COVID-19 related delay in receiving approval to initiate the I-Step trial in India, the COVID-19 related changes in the schedule and priorities of critical vendors in the application and review for CE Mark. With the majority of 2020 being disrupted due to the ongoing COVID-19 pandemic, our strategic goals for 2021 involve the resumption of the pursuit of our corporate strategy with an aggressive focus on time compression of key activities to make up for COVID-19 related delays. The complete resumption of activity will be dependent on both a release of the restrictions that impacted operations in 2020, but also a processing of prioritized backlogs by critical agencies and vendors.
The Company’s goal is to become the leading provider of alternative options for treating type 2 diabetes and concurrently reducing obesity. GI Dynamics intends to do this by conducting the following activities:
1) U.S. clinical operations and pivotal trial:
Complete enrollment in Stage 1 of the STEP-1 pivotal trial in the US.
2) India partnership and pivotal trial:
Initiate enrollment in the I-STEP pivotal trial in India.
3) Gain CE Mark:
Work with the Company’s notified body to gain the EndoBarrier CE mark.
The Company will need to raise additional capital in 2021.
As of December 31, 2020, the Company’s primary source of liquidity is its cash and restricted cash balances. GI Dynamics is currently focused on obtaining an EndoBarrier CE mark and enrolling the Company’s clinical trials, which will support future regulatory submissions and potential commercialization activities. Until the Company is successful in gaining regulatory approvals, 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 cannot predict the extent of future operating losses and accumulated deficit, and it may never generate sufficient revenues to achieve or sustain profitability.
The Company has incurred operating losses since inception and at December 31, 2020 and had an accumulated deficit of approximately $296 million. The Company expects to incur significant operating losses for the next several years. At December 31, 2020, the Company had approximately $1.2 million in cash and restricted cash.
The Company will need to arrange additional financing before August 1, 2021 in order to continue to pursue its current business objectives as planned and to continue to fund its operations. The Company is looking to raise additional funds through any combination of additional equity and debt financings or from other sources, however, the Company has no guaranteed source of capital that will sustain operations past August 1, 2021. There can be no assurance that any such potential financing opportunities will be available on acceptable terms, if at all. If the Company is unable to raise sufficient capital on the Company’s required timelines and on acceptable terms to stockholders and the Board of Directors, it could be forced to cease operations, including activities essential to support regulatory applications to commercialize EndoBarrier. If access to capital is not achieved in the near term, it will materially harm the Company’s business, financial condition and results of operations to the extent that the Company may be required to cease operations altogether, file for bankruptcy, or undertake any combination of the 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.
In addition, if the Company does not meet its payment obligations to third parties as they become due, the Company may be subject to litigation claims and its credit worthiness would be adversely affected. Even if the Company is successful in defending these claims, litigation could result in substantial costs and would be a distraction to management and may have other unfavorable results that could further adversely impact the Company’s financial condition.
As a result of the factors described above, the Company’s Consolidated Financial Statements include a going-concern disclosure. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for further information regarding the Company’s funding requirements.
Implications of Being a Smaller Reporting Company
We are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of any fiscal year for so long as either (1) the market value of our shares of common stock held by non-affiliates does not equal or exceed $250.0 million as of the prior June 30th, or (2) our annual revenues did not equal or exceed $100.0 million during such completed fiscal year and the market value of our shares of common stock held by non-affiliates did not equal or exceed $700.0 million as of the prior June 30th. To the extent we take advantage of any reduced disclosure obligations, it may make comparison of our financial statements with other public companies difficult or impossible.
Employees
At March 11, 2021, GI Dynamics has 12 full-time employees, 9 of whom are in the United States. None of the Company employees are represented by labor unions or covered by collective bargaining agreements.
Available Information
Financial and other information about GI Dynamics is available on the Company website, whose address is www.gidynamics.com. The Company makes available on its website, free of charge, copies of its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the U.S. Securities and Exchange Commission (SEC).The information contained in the Company website is not intended to be part of this filing.

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ITEM 1A. RISK FACTORS
Item 1A. RISK FACTORS
The Company’s business faces many risks. The Company believes the risks described below are the material risks that it faces. However, the risks described below may not be the only risks that it faces. Additional unknown risks or risks that are currently considered immaterial, may also impair the Company’s business operations. If any of the events or circumstances described below actually occur, the Company’s business, financial condition or results of operations could suffer. You should consider the specific risk factors discussed below together with the cautionary statements under the caption “Forward-Looking Statements” and the other information and documents that the Company files from time to time with the Securities and Exchange Commission (SEC).
Risks Related to the Company’s Business
GI Dynamics will need substantial additional funding and may be unable to raise capital when needed, which could force the Company to delay, reduce, or eliminate planned activities or result in its inability to operate as a going concern.
As of December 31, 2020, the Company’s primary source of liquidity is its cash and restricted cash balances. GI Dynamics is currently focused on obtaining an EndoBarrier CE mark and enrolling the Company’s clinical trials, which will support future regulatory submissions and potential commercialization activities. Until the Company is successful in gaining regulatory approvals, 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 cannot predict the extent of future operating losses and accumulated deficit, and it may never generate sufficient revenues to achieve or sustain profitability.
The Company has incurred operating losses since inception and at December 31, 2020 and had an accumulated deficit of approximately $296 million. The Company expects to incur significant operating losses for the next several years. At December 31, 2020, the Company had approximately $1.2 million in cash and restricted cash.
The Company will need to arrange additional financing before August 1, 2021 in order to continue to pursue its current business objectives as planned and to continue to fund its operations. The Company is looking to raise additional funds through any combination of additional equity and debt financings or from other sources, however, the Company has no guaranteed source of capital that will sustain operations past August 1, 2021. There can be no assurance that any such potential financing opportunities will be available on acceptable terms, if at all. If the Company is unable to raise sufficient capital on the Company’s required timelines and on acceptable terms to stockholders and the Board of Directors, it could be forced to cease operations, including activities essential to support regulatory applications to commercialize EndoBarrier. If access to capital is not achieved in the near term, it will materially harm the Company’s business, financial condition and results of operations to the extent that the Company may be required to cease operations altogether, file for bankruptcy, or undertake any combination of the 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.
In addition, if the Company does not meet its payment obligations to third parties as they become due, the Company may be subject to litigation claims and its credit worthiness would be adversely affected. Even if the Company is successful in defending these claims, litigation could result in substantial costs and would be a distraction to management and may have other unfavorable results that could further adversely impact the Company’s financial condition.
As a result of the factors described above, the Company’s Consolidated Financial Statements include a going-concern disclosure. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for further information regarding the Company’s funding requirements.
Failure to achieve a positive outcome in the U.S. clinical trial of EndoBarrier could negatively impact the Company’s ability to raise additional capital and obtain regulatory approval in other countries.
GI Dynamics is conducting the U.S. pivotal trial of EndoBarrier under the FDA’s IDE. The Company refers to this trial as the GI Dynamics STEP-1 clinical trial in its statements and filings. Failure to achieve a positive outcome in this clinical trial could result in the failure of EndoBarrier to gain regulatory approval in the U. S. This outcome could negatively impact the Company’s ability to raise additional capital and obtain regulatory approval in other countries.
In order to complete the STEP-1 clinical trial, GI Dynamics will need to enroll patients that ultimately complete the trial protocol. If the Company is unable to enroll patients, if the enrollment pace is slower than anticipated, or if a number of enrolled patients do not complete the study protocol, it could have a negative effect on the Company’s ability to complete the clinical trial, which could adversely affect the Company’s business, operating results and prospects.
Conducting successful clinical studies will require the enrollment of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including the sufficient resolution of COVID-19 related public health restrictions to allow enrollment and implantation of patients, the sufficient decline in the perception of risk of infection with SARS-CoV2, or emerging or new variants, related to physical presence in a clinical setting, the size of the target patient population, the nature of the trial protocol, the desirability of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators and support staff, the proximity of patients to clinical sites, the ability of patients to comply with the eligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in the Company’s clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of the Company’s product or if they determine that the treatments received under the trial protocols are not desirable or involve unacceptable risk or discomfort.
Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy are required and GI Dynamics may not adequately develop such protocols to support clearance or approval. Further, the FDA may require the Company to submit data on a greater number of patients than originally anticipated and/or for a longer follow-up period or change the data collection requirements or data analysis applicable to the Company’s clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may cause an increase in costs and delays in the approval or clearance and attempted commercialization of the Company’s product or result in the failure of the clinical trial. In addition, despite considerable time and expense invested in clinical trials, the FDA may not consider the Company’s data adequate to demonstrate safety and efficacy. Such increased costs and delays or failures could adversely affect the Company’s business, operating results and prospects.
GI Dynamics or third parties upon whom it depends may be adversely affected by natural disasters and/or health epidemics (specifically, COVID-19), and the Company’s business, financial condition and results of operations could continue to be adversely affected.
In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. In January 2020, this coronavirus spread to other parts of the world, including the United States and Europe, and efforts to contain the spread of this coronavirus intensified. In March 2020, the World Health Organization declared the Coronavirus outbreak a “pandemic.” The Company operations experienced significant restrictions and delays in 2020, including the following operational impacts:
● The pause of enrollment of the Step-1 trial due to categorization of the EndoBarrier implantation procedure as an elective procedure. In the face of the epidemic and as a measure to reduce the spread of SARS-CoV-2, many states and/or clinics ceased all elective procedures. All of the Step-1 clinical sites ceased enrollment for a period in 2020 and as of March 11, 2021, all sites were able to enroll, pending procedural backlog clearance in individual clinics.
● The private and public regulatory agencies required to approve the initiation of clinical trials, review and audit quality systems, and review applications for regulatory approvals all had to adapt to COVID-19 restricted work protocols that may have impacted productivity, priorities and schedules. As such, many regulatory applications the Company submitted were delayed in submission and follow-up response from the agencies were dramatically delayed. In one instance, the Company was able to incur substantial cost in enabling a timely in-person audit under COVID-19 safety precautions. In other instances, the Company cannot accelerate the timing of agency response.
● The economic impact of the pandemic and resulting restrictions may have affected investor perception of available funds for investment and risk tolerance.
● Business travel was largely restricted or eliminated in 2020, potentially limiting the effectiveness of fundraising and other important business meetings.
As of March 2021, various vaccines are being administered at differential rates in global communities and while the spread of SARS-CoV-2 is being impacted positively, a state of global economic and public health safety uncertainty remains as SARS-CoV-2 variants have emerged. Currently, the existing vaccines provide protection against the known variants, but the emergence of a variant for which the current vaccines are not effective may occur. If such a variant does emerge, the same effects experienced in 2020 may be repeated as restrictions are again required to minimize the impact of the re-emergent pandemic.
Should the coronavirus continue to spread in the United States and Europe or should a novel strain develop for which there is no vaccine or effective treatments, GI Dynamics business operations will likely continue to be delayed or interrupted. For instance, the Company’s clinical trials may be impacted by containment policies enacted by the clinical practice, the respective state or the Federal government. Further, as a result of 2020 restrictions, there is a growing backlog of patient procedures which may be prioritized higher than EndoBarrier implantation. These, and other COVID-19 related effects could result in lower than anticipated patient registration or enrollment and GI Dynamics may be forced to temporarily delay or pause ongoing trials. Further, if the spread of the coronavirus continues and the Company’s operations are impacted, GI Dynamics risks a delay, default and/or nonperformance under existing agreements arising from force majeure. If any of the foregoing were to occur, it could materially adversely affect the Company’s financial condition.
The FDA has mandated certain stopping rules in the STEP-1 clinical trial. If the stopping rules are triggered or other unanticipated adverse issues occur during the STEP-1 clinical trial, the FDA may not permit the trial to continue. If that were to happen, the Company’s business, operating results and prospects would be materially and adversely affected.
Clinical trials involve the administration of the biological product candidate to patients under the supervision of qualified investigators, generally physicians not employed by or under the trial sponsor’s control. Clinical trials are conducted under protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety, including stopping rules that assure a clinical trial will be stopped if certain adverse events should occur. In the context of the GI Dynamics STEP-1 clinical trial, hepatic bleeding is an example of an adverse event that would be investigated and could trigger such stopping rules.
If, during the STEP-1 clinical trial, the stopping rules are triggered or other unanticipated adverse issues occur, the FDA may prevent the Company from enrolling additional patients in the clinical trial or may not permit the clinical trial to be completed. If that were to happen, the Company’s business, operating results and prospects would be materially and adversely affected.
In order to commercialize the Company’s product in the U.S. and certain other countries, GI Dynamics will need to obtain regulatory and other approvals. The Company’s inability to achieve, or a delay in achieving, such approvals could lead to the denial of marketing approval for EndoBarrier® or any of its other products.
At present, GI Dynamics has no regulatory approvals for the marketing and sale of EndoBarrier. In November 2017, the Company received notification from SGS, the Company’s now former notified body in Europe, that they were withdrawing the Certificate of Conformity for EndoBarrier. The Certificate of Conformity is required for the sale of any product under CE marking. As a result, GI Dynamics is not permitted to supply the EndoBarrier, EndoBarrier Delivery System and EndoBarrier Retrieval System in Europe.
There is no guarantee that GI Dynamics will obtain additional approvals from regulatory bodies in the future, including the FDA in the U.S. In the U.S., the Company stopped its pivotal trial of EndoBarrier in 2015. The Company will not be able to obtain FDA approval to commercialize EndoBarrier in the U.S. until the STEP-1 clinical trial is successfully completed and regulatory approval is obtained from the FDA through the PMA review process. The STEP-1 clinical trial will be conducted in two stages. At the end of the first stage, the FDA will review data collected to date from the STEP-1 clinical trial and must approve the continuation of the STEP-1 clinical trial to the second stage. There can be no assurance that the FDA will approve continuation of the trial at the end of the first stage.
Regulatory authorities in other countries may also require additional clinical trials. Any such clinical trials may be delayed, suspended or prematurely terminated because costs are greater than anticipated or for a variety of other reasons, including: COVID-19 related delays, delay or failure in reaching agreement with the foreign regulatory authority(ies) on a trial design that the Company is able to execute; delay or failure in obtaining authorization to commence a trial or inability to comply with conditions imposed by a regulatory authority regarding the scope or design of a clinical trial; or regulators may require that the Company suspend or terminate its clinical trials for various reasons, including noncompliance with regulatory requirements, unforeseen safety issues or adverse side effects, or a finding that the participants are being exposed to unacceptable health risks. Any of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of marketing approval for EndoBarrier or any of the Company’s other products. Necessary regulatory approvals could also be delayed, which could significantly impact the Company’s ability to commercialize the Company’s technology in the U.S. and other countries.
GI Dynamics has a history of net losses and may never achieve or maintain profitability.
GI Dynamics is a medical device company with a limited history of operations and has limited commercial experience with its product. As of December 31, 2020, the Company’s primary source of liquidity is its cash and restricted cash balances. The Company continues to evaluate which markets are appropriate to continue pursuing reimbursement, market awareness and general market development and selling efforts, and continues to restructure its business and costs, establish new priorities, and evaluate strategic options. The Company expects to continue to incur significant operating losses for the foreseeable future as it incurs costs, including those associated with commercializing the Company’s products, conducting clinical trials to test its products, attempting to secure regulatory approvals for the Company’s products (in the U.S. and other countries) and ongoing costs associated with being an SEC reporting company in the U.S. As a result, if the Company remains in business, it expects to incur significant operating losses for the next several years.
The Company has incurred operating losses since inception and at December 31, 2020, had an accumulated deficit of approximately $296 million. The Company expects to incur significant operating losses for the next several years. At December 31, 2020, the Company had approximately $1.2 million in cash and restricted cash.
GI Dynamics cannot predict the extent of future operating losses and accumulated deficit, and it may never generate sufficient revenues to achieve or sustain profitability.
GI Dynamics depends heavily on the success of the Company’s product, EndoBarrier. The Company cannot give any assurance that EndoBarrier will receive regulatory approval, which is necessary before it can be commercialized.
The Company’s ability to generate product revenues will depend heavily on the successful commercialization of its product, EndoBarrier, if approved by regulatory agencies in the U.S. or abroad. GI Dynamics cannot be certain that EndoBarrier will be successful in clinical trials or receive regulatory approval. Further, EndoBarrier may not receive regulatory approval even if it is successful in clinical trials. If the Company does not receive regulatory approvals for EndoBarrier, it may not be able to continue operations.
If GI Dynamics can obtain the required regulatory approvals in the U.S. and certain other countries, it expects to derive substantially all of its revenue from sales of EndoBarrier. Accordingly, the Company’s ability to generate revenues in the future relies on its ability to market and sell this product.
The degree of market acceptance for EndoBarrier will depend on a number of factors, including:
● the efficacy, ease of use and perceived advantages and disadvantages of EndoBarrier over other available treatments and technologies for managing type 2 diabetes;
● the prevalence and severity of any adverse events or side effects of EndoBarrier;
● the extent to which physicians adopt EndoBarrier (which may be influenced by the Company’s ability to provide additional clinical data regarding the potential long-term benefits provided by EndoBarrier and the strength of the Company’s sales and marketing initiatives);
● the price of EndoBarrier and the third-party coverage and reimbursement for procedures using EndoBarrier;
● the extent to which reimbursement may be secured for each country in which EndoBarrier is commercialized; and
● the Company’s ability to attract and retain professional sales personnel to drive EndoBarrier revenue.
GI Dynamics cannot predict the outcome and timing of its current and future human clinical trials of EndoBarrier products. If the trials do not produce positive results, the commercial prospects for EndoBarrier will be impaired.
The results of current and future human clinical trials, whether investigator initiated, or Company sponsored, cannot be predicted. If EndoBarrier or new products that the Company develops and tests in the future cause serious adverse events in future human clinical trials, these trials may need to be delayed or stopped. For example, GI Dynamics stopped its original U.S. pivotal trial, the ENDO trial, in 2015 because of adverse events associated with EndoBarrier in that trial. In addition, these clinical trials may not produce positive safety or efficacy results or may produce results that are not as favorable as those seen in previous clinical trials.
Negative safety or efficacy results of any future human clinical trials could require that the Company attempt to modify the EndoBarrier device or the treatment guidelines to address these issues and there is no guarantee that any potential modifications would be successfully developed.
If future human clinical trials of EndoBarrier products do not meet the required clinical specifications or cause serious adverse or unexpected events, such as those experienced in the ENDO trial, then these results could affect regulatory approvals and adoption and materially impact potential product sales and reimbursement. If the Company is not able to adequately address any adverse or unexpected events through training, education, changes in product design or product claims, this may significantly impair the commercial prospects for EndoBarrier.
Doctors may not accept EndoBarrier as a treatment option, which would harm the Company’s business and future revenues, if any.
The commercial success of EndoBarrier will require acceptance by physicians, who may be slow to adopt the Company’s product for the following reasons (among others):
● lack of long-term clinical data supporting patient benefits or cost savings over existing alternative treatments;
● lack of experience with EndoBarrier and training time required before it can be used, which may drive preferences for other products or procedures;
● lack of adequate payment to the physician for implanting the device or caring for the patient (driven by availability of adequate coverage and reimbursement for hospitals and implanting physicians);
● perceived strength of products, procedures or pharmacotherapies as alternatives to EndoBarrier; and
● perceived liability risks associated generally with the use of new products and procedures.
Although the Company has developed relationships with physicians who are key opinion leaders in certain countries, GI Dynamics cannot assure that these existing relationships and arrangements can be maintained or that new relationships will be established in support of its products. If physicians do not consider the Company’s products to be adequate for the treatment of type 2 diabetes or if a sufficient number of physicians recommend and use competing products or pharmacotherapies, it could harm the Company’s business and future revenues, if any.
The Company has limited sales, marketing and distribution experience; therefore, it may be unable to successfully commercialize its products.
There can be no guarantee that the Company will be able to effectively commercialize its products. Developing direct sales, distribution and marketing capabilities will require the devotion of significant resources and require GI Dynamics to ensure compliance with all legal and regulatory requirements for sales, marketing and distribution. Failure to develop these capabilities and meet these requirements could jeopardize the Company’s ability to market its products or could subject it to substantial liability. In addition, for those countries where the Company commercializes its products through distributors or other third parties, GI Dynamics will rely heavily on the ability of its partners to effectively market and sell its products to physicians and other end users in those countries. The Company cannot guarantee that distributors or other third parties will be effective in commercializing GI Dynamics products.
GI Dynamics may compete against companies that have longer operating histories, more established or approved products, and greater resources, which may prevent the Company from achieving market penetration with its products.
Competition in the medical device industry is intense and EndoBarrier will likely compete in part against more established procedures and products for the treatment of type 2 diabetes and obesity. Bariatric surgery, including gastric bypass surgery and the gastric band, have been used for many years with extensive publication histories on clinical effectiveness. Large multinational medical device companies sell supplies for these procedures and are formidable competitors to new entrants. In addition, certain drugs have been approved, and are used, for the treatment of type 2 diabetes and obesity. Pharmaceutical companies with significantly greater resources than the Company market these drugs, and GI Dynamics may be unable to compete effectively against these companies.
Many of the Company’s competitors have significantly greater sales, marketing, financial and manufacturing capabilities than it has and have established reputations and/or significantly greater name recognition. Accordingly, there is no assurance that GI Dynamics will be able to win market share from these competitors or that these competitors will not succeed in developing products that are more effective or economic.
Additionally, GI Dynamics is likely to compete with companies offering new technologies in the future. The Company may also face competition from other medical therapies, which may focus on the Company’s target market as well as competition from manufacturers of pharmaceutical and other devices that have not yet been developed. Competition from these companies could adversely affect the Company’s business.
GI Dynamics does not have data regarding the long-term benefits of EndoBarrier, which may affect market acceptance. Furthermore, if the long-term data, once obtained, does not indicate that EndoBarrier is as safe or effective as other treatment options, the Company’s business would be harmed.
An important factor that may be relevant to market acceptance of EndoBarrier is whether it improves or maintains glycemic control and maintains weight loss over extended periods of time after removal of the device. While the Company has tested and evaluated its technology in several clinical trials with hundreds of patients which, in the aggregate, have shown that EndoBarrier is an effective treatment for type 2 diabetes and also reduces obesity, GI Dynamics does not yet have sufficient data to demonstrate and claim any longer-term benefits of its product in the treatment of type 2 diabetes and the reduction of obesity following removal of the device from the patient.
GI Dynamics is continuing to monitor some patients who participated in the Company’s clinical trials after device removal to determine the ongoing effects and longevity of results, however, the Company does not currently have long-term data that supports the safety and efficacy of EndoBarrier. Accordingly, the Company cannot provide assurance that the long-term data, once obtained, will prove lower HbA1c levels compared to alternative treatment options for type 2 diabetes. If the results obtained from the Company clinical trials indicate that EndoBarrier is not as safe or effective as other treatment options or as effective as the Company’s current short-term data would suggest, EndoBarrier may not be approved, or its adoption may suffer, and the Company’s business would be harmed.
If GI Dynamics fails to obtain and maintain adequate levels of reimbursement for its products by health insurers and other third-party payers, there may be no commercially viable markets for its products, or the markets may be much smaller than expected.
If GI Dynamics products are approved for sale, health care providers, including hospitals and physicians that may purchase the Company’s products, generally rely on third-party payers, particularly government-sponsored health care and private health insurance providers, to pay for all or a portion of the costs of the procedures, including the cost of the products used in such procedures. Reimbursement and health care payment systems vary significantly by country. Third-party payers may attempt to limit coverage and the level of reimbursement of new therapeutic products.
If GI Dynamics fails to obtain and maintain adequate levels of reimbursement for its products by health insurers and other third-party payers, there may be few commercially viable markets for its products, or the markets may be much smaller than expected. Third-party payers may demand additional clinical data requiring new clinical trials or economic models showing the cost savings of using the Company’s product, each of which would consume resources and may delay the decision on reimbursement. If the results of such studies are not satisfactory to third-party payers, then reimbursement may not be received in an acceptable amount or at all. In addition, the efficacy, safety, performance and cost-effectiveness of the Company’s products in comparison to any competing products or therapies may determine the availability and level of reimbursement.
The Company believes that future reimbursement may be subject to increased restrictions both in the U.S. and in international markets. Future legislation, regulation or reimbursement policies of health insurers or third-party payers may adversely affect the demand for the Company’s current and future products or limit the Company’s ability to sell these products on a profitable basis.
The Company’s products may be subject to extensive, dynamic and ongoing regulation in countries where it plans to sell EndoBarrier, which may impede or hinder the approval or sale of its products and, in some cases, may ultimately result in the inability to obtain approval of certain products or may result in the recall or seizure of previously approved products.
The medical device industry is regulated extensively by governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies and authorities, such as the E.U., legislative bodies and the European Economic Area, or EEA, Member State Competent Authorities. Additionally, the exit of Great Britain from the E.U. may create a separate and distinct regulatory agency with different requirements for regulatory approval in Great Britain.
Before GI Dynamics can market its products in the E.U., and in many other parts of the world, it must obtain and maintain CE Mark certification, which indicates that a product meets the essential requirements of applicable E.U. Directives and has been subject to the appropriate conformity assessment route. This conformity assessment procedure is often done through a self-certification, but depending on the type of product, may also require verification by an independent certification body, called a “notified body.” Notified bodies will also periodically conduct audits to ensure continued compliance with the applicable requirements. The CE Mark allows free movement of products in the E.U., the EEA and Switzerland although any of the member countries may require medical devices to be registered and impose requirements relating to the language of the device information. Many non-European countries also recognize and accept the CE Mark. Failure to support product performance claims and demonstrate continued compliance with the applicable E.U. requirements, can result in the loss of the right to affix the CE Mark to the product, which prevents the product from being sold within the territory and in other countries that recognize the CE Mark.
Before GI Dynamics can market its products in other parts of the world, which are not regulated via CE mark or FDA approvals, it must obtain and maintain regulatory approvals in those countries. These approvals are dependent on clinical data and may require specific clinical trial data to be collected before applications for approval can be made. The Company does not currently have any assurance in any jurisdiction that such regulatory approvals will be granted or that more extensive clinical trials will not be required to secure such approvals. In India, GI Dynamics is partnering with Apollo Sugar to initiate and conduct clinical trials to generate data required by the Indian regulatory authorities, but as with any market, the Company does not have any assurance that these trials will generate the complete data set required to support a marketing approval.
In addition, even if the Company receives regulatory approval of its products in existing markets, the Company will be subject to ongoing regulatory requirements relating to its existing products in those markets. These include the requirement to timely file various reports with regulatory authorities in the countries in which the Company markets products, including reports of adverse events such as those experienced in the ENDO trial, 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 existing market authorizations, and sales of EndoBarrier may suffer. In that case, the Company may be subject to product liability or regulatory enforcement actions, all of which could harm the Company’s business. The Company’s failure to comply with EEA or other foreign regulations applicable in the countries where it operates could lead to the issuance of warning letters or untitled letters, the imposition of injunctions, suspensions or loss of regulatory clearance or approvals, product recalls, termination of distribution, product seizures or civil penalties. In the most extreme cases, criminal sanctions or closure of the Company’s manufacturing facilities are possible.
In addition, numerous new regulatory changes in the E.U. came into effect in 2016. The Company may not be able to comply with the new regulations and standards, despite compliance with prior regulations and standards.
In some countries, GI Dynamics may rely on its foreign distributors and agents to assist in complying with foreign regulatory requirements, and the Company cannot be sure that they will always do so. If the Company or any of its suppliers, third-party manufacturers, distributors, agents or customers fail to comply with applicable requirements, the Company may face:
● adverse publicity;
● investigations by governmental authorities;
● fines and prosecutions;
● inability to raise capital;
● inability to attract and retain sales professionals;
● inability to attract and agree to terms with business partners;
● increased difficulty in obtaining required approvals;
● loss of approvals already granted;
● delays in purchasing decisions by customers or cancellation of existing orders; and
● the inability to sell or import the Company’s products into such countries.
Regulatory requirements affecting the development, manufacture and sale of medical devices are evolving and subject to future change. GI Dynamics cannot predict what impact, if any, those changes might have on its business. Failure to comply with regulatory requirements could have a material adverse effect on the Company’s 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 the Company’s business, financial condition or results of operations.
GI Dynamics has had historical challenges with regulatory compliance, which led to a 2014 shipping hold in the E.U., multiple observations by the Therapeutic Goods Administration (“TGA”) in Australia regarding the Company’s failure to comply with Essential Principals of the TGA, and compliance issues that led to the TGA’s cancellation of the EndoBarrier listing on the Australian Register of Therapeutic Goods (“ARTG”) in 2016. In addition, in May 2017, GI Dynamics received notification from its notified body, SGS, that the CE Mark for EndoBarrier had been suspended pending closure of non-conformances related to the Company’s quality management system required under International Organization for Standardization (“ISO”) regulations. On November 10, 2017, the Company received notification from SGS that SGS was withdrawing the Certificate of Conformance for EndoBarrier, ending the CE Marking of EndoBarrier in Europe and select Middle East countries.
Given the past challenges the Company has had in meeting all the requirements of a comprehensive global quality system, a risk exists that the Company will have compliance issues in the future.
Claims that the Company’s current or future products infringe or misappropriate the proprietary rights of others could adversely affect the Company’s ability to sell those products and cause it to incur additional costs.
If any third-party intellectual property claim against the Company is successful, the Company could be prevented from commercializing EndoBarrier or other Company products.
There are numerous issued patents and pending patent applications in the U.S. and internationally that are owned by third parties and that contain patent claims in areas that are the focus of the Company’s product development efforts. GI Dynamics is aware of patents owned by third parties, to which it does not have licenses, that relate to, among other things, liner materials and anchoring. The Company has also employed individuals who were previously employed at other medical device companies, including competitors or potential competitors, which may result in claims from third parties that the Company has inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information of former employers of its employees.
In addition, because patent applications can take many years to issue, there may be currently pending applications, unknown to the Company, which may later result in issued patents that pose a material risk to the Company.
GI Dynamics expects that it could be subject to third-party infringement claims if the number of competitors grows and the functionality of products and technology in different industry segments overlap. Third parties may currently have, or may eventually be issued, patents on which its current or future technologies may infringe.
If GI Dynamics is unable to obtain, maintain and enforce intellectual property protection covering its products, others may be able to make, use, or sell products substantially the same as the Company’s, which could adversely affect the Company’s ability to compete in the market.
The Company’s commercial success is dependent in part on obtaining, maintaining and enforcing intellectual property rights, including patents, covering EndoBarrier and the Company’s future products. If GI Dynamics is unable to obtain, maintain and enforce intellectual property protection covering its products, others may be able to make, use or sell products that are substantially the same as the Company’s without incurring the sizeable development costs that the Company has incurred, which would adversely affect the Company’s ability to compete in the market. Certain patents covering EndoBarrier will begin to expire in 2023.
Even if GI Dynamics patents are determined by a court to be valid and enforceable, they may not be sufficiently broad or enforceable to prevent others from marketing products similar to the Company’s or designing around the Company’s patents, despite its patent rights. GI Dynamics products may also not have freedom to operate unimpeded by the patent rights of others.
In addition to patented technology, the Company relies on a combination of non-patented proprietary technology, trade secrets, processes, procedures, technical knowledge and know-how accumulated or acquired since inception. Any of the Company’s intellectual property rights could be challenged, invalidated, circumvented or misappropriated. In order to preserve and enforce the Company’s patent and other intellectual property rights, GI Dynamics may need to make claims or file lawsuits against third parties. This can entail significant costs and divert management’s attention from developing and commercializing EndoBarrier.
GI Dynamics relies on suppliers for certain key components in the manufacture of the EndoBarrier system. If these suppliers were to become unavailable to the Company, there could be delays in the commercialization of the Company’s products.
GI Dynamics relies on suppliers for several key components of EndoBarrier, in particular the material used to manufacture the sleeve used in EndoBarrier. Except as discussed below, the Company or its manufacturing partner, PPMD, have supply agreements in place with suppliers of all components and services required to manufacture the EndoBarrier System. While GI Dynamics currently has adequate material required to make the sleeve to support the Company well into commercialization efforts, the Company does not presently have an active supply agreement with a manufacturer for additional material. The reliance on third-party suppliers subjects the Company to risks that could harm its business, particularly with respect to the supply of key components or processes. Although the Company believes that alternative suppliers are available, the process of identifying and qualifying new suppliers who can produce the components to the Company’s specifications could cause delays in the commercialization of the Company products.
The use, misuse or off-label use of the Company’s products by physicians may harm the Company’s image in the marketplace or result in injuries that lead to product liability.
GI Dynamics cannot prevent a physician from using EndoBarrier for purposes outside of its eventual approved and intended use, which is known as off-label use. If physicians attempt to use the Company’s products off-label, there may be an increased risk of adverse events. Further, the use of the Company’s products for uses other than those uses for which the products have been approved may not effectively treat such conditions, which could harm the Company’s reputation in the marketplace among physicians and patients.
Physicians may also misuse the Company’s products or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability for the Company. Physicians may also treat patients from other countries where the product is not approved, and the physician is then unable to properly monitor the patient’s progress. If GI Dynamics is deemed to have engaged in the promotion of any of its products for off-label use, the Company could be subject to action by regulatory authorities and the imposition of sanctions, which could also affect the Company’s reputation and position within the industry.
Patients may not follow instructions from their physicians. Patients who ignore training and ignore their clinician’s request to comply with dietary instructions or pharmacotherapy label instructions, or to remove EndoBarrier at the end of the 12-month indication for treatment may be exposed to greater physical and clinical risk.
Product liability claims could damage the Company’s reputation or adversely affect its business or financial position.
GI Dynamics may be exposed to the risk of product liability claims, which are inherent in the design, manufacturing, marketing and use of medical devices and, in particular, implantable medical devices. The Company holds product liability insurance; however, adequate product liability insurance may not continue to be available on commercially acceptable terms. Product liability claims may damage the Company’s reputation and, if the Company’s insurance coverage proves inadequate, may harm or destroy the Company’s business. Defending a suit, regardless of its merits, could be costly and could divert Company management’s attention from the Company’s core business activities.
GI Dynamics will rely on a third-party manufacturer for its products and this manufacturer is required to comply with regulatory requirements. Failure of the Company’s manufacturer or suppliers to comply with regulatory requirements could disrupt the manufacturing process, which would, in turn, have a material adverse effect on the Company’s business and results of operations.
Future clinical trials and commercialization of GI Dynamics products requires access to manufacturing facilities that meet applicable regulatory standards to manufacture a sufficient supply of the Company’s products. GI Dynamics will rely on a third-party manufacturer to meet the applicable regulatory requirements. Suppliers of components and products used to manufacture the Company’s products and the Company’s third-party manufacturer must also comply with applicable regulatory requirements. These often require significant time, resources, record-keeping and quality assurance efforts and subject the Company, its suppliers and third-party manufacturer to potential regulatory inspections and stoppages. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored by regulatory authorities. Failure by GI Dynamics, its third-party manufacturer or suppliers to comply with regulatory requirements or failure to take satisfactory corrective action in response to an adverse inspection could result in enforcement actions that could have a material adverse effect on the Company’s business and results of operations.
In order to manufacture EndoBarrier in the quantities that GI Dynamics anticipates will be required to meet its clinical trial needs and potential future market demand, the Company will need to increase production capacity and efficiency over current levels, and the Company’s third-party manufacturer must therefore be able to provide the Company with sufficient quantities of its product in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable cost and on a timely basis. The Company’s potential future growth could strain the ability of its third-party manufacturer to deliver the Company’s product and obtain materials and components in sufficient quantities. Third-party manufacturers often experience difficulties in scaling up production, including problems with production yields and quality control and assurance. If the Company is unable to obtain a sufficient or consistent supply of EndoBarrier or any other product it is developing, or if it cannot do so efficiently, the Company’s revenue, business and financial prospects would be adversely affected.
The Company announced on July 26, 2017 that it executed an agreement with PPMD to manufacture the Company’s product. GI Dynamics does not have extensive experience with this manufacturer, and the Company cannot guarantee that PPMD will manufacture its product in a validated manner or to acceptable levels of quality. The Company is seeking other suppliers who will be able to manufacture the Company’s product should the relationship with PPMD not prove successful.
GI Dynamics has been focused on efficiently running the Company’s operations in order to conserve resources which may impact its ability to retain its remaining employees and therefore the Company may not be able to sustain its business.
At March 11, 2021, 2020, GI Dynamics has 12 full time employees. Since the Company’s initial restructuring efforts in 2015, the Company has been heavily dependent upon its ability to retain its remaining employees. The loss of service of any of the Company’s remaining employees, particularly members of the management team, may have an adverse effect on the Company’s business. Given the long period of reduced staff, the morale of the Company’s remaining employees may be lower, employees may be distracted and any one of the remaining employees could terminate his or her employment with the Company at any time. A departing employee’s expertise would be difficult to replace and the failure to do so on a timely basis could have a material adverse effect on the Company’s ability to achieve its business goals. There can be no assurance that the Company will have the financial resources to, or otherwise be successful in, retaining the Company’s remaining personnel and failure to do so could have a material adverse effect on the Company’s business, financial condition and results of operations.
If GI Dynamics is unable to retain or hire key personnel, it may not be able to sustain or grow its business.
The Company’s ability to operate successfully and manage potential future growth depends significantly upon the ability to attract, retain and motivate highly skilled and qualified research, technical, clinical, regulatory, sales, marketing, managerial and financial personnel. The competition for qualified employees in the medical device industry is intense and there are a limited number of persons with the necessary skills and experience.
The Company’s performance is substantially dependent on senior management and key technical staff to continue to develop and manage the Company operations. The loss or the inability to recruit and retain high-caliber staff could have a material adverse effect on the Company. GI Dynamics also relies on the technical and management abilities of certain key directors, key members of the executive team and employees, consultants and scientific advisers. The loss of any of these directors, members of the executive team, employees, consultants, or scientific advisers could have an adverse effect on the Company’s business.
GI Dynamics may be unable to effectively manage its anticipated growth.
To manage the Company’s anticipated growth and to commercialize its products, GI Dynamics will need to expand operations (research and development, product development, quality, regulatory, manufacturing, sales, marketing and administrative). This expansion will place a significant strain on management, infrastructure, and operational and financial resources, particularly in light of the uncertainties related to operational execution and methods after the COVID-19 pandemic, for example, international business travel versus virtual presence. Specifically, the Company will need to manage relationships with various persons and entities participating in the Company’s clinical trials and quality systems, manufacturers, suppliers and other organizations, including various regulatory bodies in the U.S. and other jurisdictions. GI Dynamics may not be able to implement the required improvements in an efficient and timely manner and may discover deficiencies in existing systems and controls. The failure to accomplish any of these tasks could materially harm the Company’s business and its ability to commercialize EndoBarrier. As a result, the Company’s revenue, business and financial prospects would be adversely affected.
If the Company fails to maintain proper and effective internal controls over financial reporting, its ability to produce accurate and timely financial statements could be impaired, which could harm the Company’s operating results, and investors could lose confidence in the Company’s financial reports, which could adversely affect the value of the Company.
As an SEC reporting company in the U.S., GI Dynamics is required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, to furnish a report by management on, among other things, the effectiveness of its internal control over financial reporting as of the end of the fiscal year. The controls and other procedures are designed to ensure that information required to be disclosed by the Company in the reports that the Company files with the SEC is disclosed accurately and is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The Company’s first report on compliance with Section 404 was furnished in connection with the GI Dynamics financial statements for the year ended December 31, 2014. As a former emerging growth company and a current smaller reporting company, the Company has been and currently is exempted from the requirement to include an external auditor opinion on the Company’s internal controls in its filings. GI Dynamics continues to update, document and evaluate its internal control over financial reporting to the requirements of Section 404.
In Item 9A of this report, the Company discloses that with respect to the standards of Section 404, the Company concluded that its internal control over financial reporting was effective as of December 31, 2020. For additional information on this item, please see Item 9A. Controls and Procedures.
Although the Company concluded that its internal control over financial reporting was effective as of December 31, 2020, the Company has identified and reported material weaknesses in prior periods, and the Company cannot be certain that its internal control practices will ensure that the Company will have or maintain adequate internal control over financial reporting in future periods. Any failure to have or to maintain such internal control could harm the Company’s operating results, and investors could lose confidence in the Company’s financial reports, which could adversely affect the value of the Company.
Fluctuations in foreign currency exchange rates could adversely affect the Company’s financial results.
In the past, when GI Dynamics sold EndoBarrier outside of the U.S., the Company’s activities produced revenues and GI Dynamics incurred expenses in a variety of different currencies, which exposed the Company to significant exchange rate risk. If GI Dynamics is successful in once again obtaining CE Mark designation or other foreign regulatory approvals that will allow it to sell EndoBarrier outside of the U.S., the Company will again be exposed to significant exchange rate risk. Additionally, expenses may be incurred in foreign currencies, subjecting the Company to exchange rate risk at the time of cash disbursement. Exchange rate risk may affect the Company’s financial performance and position. Furthermore, some of the Company’s funds may be held in euros, Australian dollars or other currencies, while the Company’s functional currency is U.S. dollars. GI Dynamics is not currently hedging against exchange rate fluctuations, and consequently will be at the risk of any adverse movement in the U.S. dollar exchange rate if the Company exchanges funds held in one currency into another currency.
Risks Related to the Medical Device Industry
The medical device industry is subject to rapid technology change, which may result in obsolescence of the Company’s products.
The medical device industry is subject to rapid technology change. For the Company to remain competitive and to retain and build market share, it must continually develop new products as well as improve its existing ones. Accordingly, The Company must devote substantial resources to research, development and commercialization activities.
There can be no assurance that GI Dynamics will be successful in developing competitive new products and/or improving existing products so that such products remain competitive and avoid obsolescence. There can also be no assurance that any or all Company research and development projects for new products will demonstrate safety and efficacy and result in commercial products, or that if such products are successfully designed and launched, they will be profitable.
Health care reform legislation could adversely affect the Company’s future revenue and financial condition.
In recent years, there have been numerous initiatives by governments throughout the world for comprehensive reforms affecting the delivery of and payment for health care. GI Dynamics cannot predict the changes that will be made and the effect such changes will have on the use of EndoBarrier. Decisions to increase or decrease reimbursement or coverage for treatments for type 2 diabetes and/or obesity could have a material impact on the Company’s business and results of operations.
CE Mark designation requires ongoing compliance, reporting and testing requirements established by regulatory agencies. While the Company has adopted comprehensive compliance programs to attempt to comply with these regulations, it is possible that some of its business activities could be subject to challenge. Furthermore, the regulations may become more stringent in the future and historical data may or may not suffice in meeting the new regulations. If the Company’s past or present operations, or those of its former independent sales agents and distributors, are found to be in violation of any of such applicable governmental regulations, GI Dynamics may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from health care reimbursement, product recall, or retraction of approval to market the Company’s product.
New legislation in the U.S. has also been enacted that imposes additional reporting requirements and penalties on the medical device industry. While GI Dynamics has adopted comprehensive compliance programs to attempt to comply with these regulations, it is possible that some of the Company’s business activities could be subject to challenge under one or more of such laws. If the Company’s past or present operations, or those of its former independent sales agents and distributors, are found to be in violation of any of such laws or any other applicable governmental regulations, GI Dynamics may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from health care reimbursement, product recall, or retraction of approval to market the Company’s product.
Subsequent to future regulatory approvals for EndoBarrier, pricing pressures in the health care industry could lead to demands for price concessions, which could have an adverse effect on the Company’s business, financial condition or results of operations.
Due to the significant rise in health care costs over the past decade, numerous initiatives and reforms initiated by governments and third-party payers to curb these costs have resulted in difficulties in maintaining or raising the number and price of procedures. The increase in pricing pressure is driven by the competitive environment in the medical device industry as many larger companies cut prices as they struggle to retain market share.
The type 2 diabetes and obesity market has seen increasing resistance from payers regarding local and national reimbursement coverage. GI Dynamics expects that market demand, government regulation, third-party reimbursement policies and societal pressures could exert downward pressure on the prices of the Company’s products in the future after regulatory approval is granted and may adversely impact the Company’s business, financial condition or results of operations on a country by country basis.
Manufacturing facilities for medical devices must comply with applicable regulatory requirements.
Completion of the Company’s current and future clinical trials and commercialization of its products requires access to manufacturing facilities that meet applicable regulatory standards to manufacture an adequate supply of the Company’s products. The third-party manufacturer and suppliers of components and parts that the Company intends to use to manufacture its products must also comply with applicable regulatory requirements, which often require significant time, money, resources and record-keeping and quality assurance efforts and subject the Company, its third-party manufacturer and its suppliers to potential regulatory inspections and stoppages.
Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by regulatory authorities. Failure by the Company, its third-party manufacturer or its suppliers to comply with regulatory requirements or failure to take satisfactory corrective action in response to an adverse inspection could result in enforcement actions, including a public warning letter, a shutdown of, or restrictions on, the Company’s ability to obtain sufficient quantities of its products, delays in approving or clearing a product, refusal to permit the import or export of its products or other enforcement action.
Critical elements of the manufacturing process may be found to be hazardous and alternative technologies may cost more and/or may be less effective.
Numerous materials are used in the process of manufacturing a patient-ready device. As chemical testing and empirical data collection continues, certain chemicals or processes may be declared hazardous and while suitable alternatives will be sought, there may be a period of short or no availability before a replacement chemical or process is adopted. For example, a widespread process used in medical device manufacture is the use of ethylene oxide (“EtO”) for low temperature gas sterilization. In early 2019, a large EtO sterilization plant was closed by state-level authorities over health concerns. The medical device industry, the contract manufacturing industry, state authorities, federal authorities, and scientists are seeking a suitable alternative. Until such a suitable replacement is found, there is a risk that there will be a shortage of sterilization options, which may require design changes, process changes or which may cause a delay in device production.
Inadequate funding or pandemic-related limitations for the FDA, the SEC and other government agencies could hinder their ability to hire and retain key leadership and other personnel, prevent EndoBarrier from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal business functions on which the operation of the Company’s business rely, which could negatively impact the Company’s business.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of the SEC and other government agencies on which the Company’s operations may rely, including those that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new drugs and medical devices to be reviewed and/or approved by necessary government agencies, which would adversely affect the Company’s business. For example, over the last several years, including beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA and the SEC, have had to furlough critical FDA, SEC and other government employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly affect the ability of the FDA to timely review and process the Company’s regulatory submissions, which could have a material adverse effect on the Company’s business. Further, in the Company’s operations as a public company, future government shutdowns could impact the ability to access the public markets and obtain necessary capital in order to properly capitalize and continue operations.
Risks Related to GI Dynamics common stock
There is no current trading market for GI Dynamics common stock and no such market may develop.
Subsequent to the Company’s removal from the official list of the Australian Securities Exchange on July 22, 2020, there is no current trading market for the Company’s securities. Should at some stage in the future, GI Dynamics submit a listing application with Nasdaq (or any other exchange) to list its common stock on the Nasdaq Capital Market (or any other exchange), Nasdaq may not approve the listing application. Even if Nasdaq (or such other exchange) approves the Company’s listing application, an active trading market for the Company’s common stock may never develop in the U.S. (or other relevant country) and stockholders may not be able to transfer or resell their common stock at its fair value, or at all.
Changes in economic conditions may adversely affect the Company’s business.
Changes in the general economic climate in which the Company operates may adversely affect its financial performance and the value of its assets. Factors that contribute to that general economic climate include:
● contractions in the world economy or increases in the rate of inflation;
● international currency fluctuations;
● Economic impact of any world health and public safety concerns and resulting policies;
● changes in interest rates;
● new or increased government taxes or duties or changes in taxation laws; or
● changes in government regulatory policy.
Some current stockholders can exert control over the Company and may not make decisions that are in the best interests of all stockholders.
At December 31, 2020, Crystal Amber owned approximately 93% of the Company’s outstanding shares of common stock and would be able to exert a significant degree of influence over the Company’s management of its affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. The second largest stockholder, on matters on which Crystal Amber was ineligible to vote, would have approximately 46% of the voting power, and would be able to exert a significant degree of influence over the Company’s management of its affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may harm the value of the Company’s common stock by delaying or preventing a change in control, even if a change is in the best interests of other stockholders. This concentration of ownership may also delay, deter, or prevent acts that may be favored by other stockholders, as the interests of these controlling stockholders may not always coincide with the interests of other stockholders.
Provisions of the Company’s certificate of incorporation, the Company’s bylaws and Delaware law could make an acquisition of the Company more difficult.
Certain provisions of the Company’s certificate of incorporation and bylaws could discourage, delay or prevent a merger, acquisition or other change of control that the Company’s stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their common stock. These provisions could also limit the price that investors might be willing to pay in the future for the common stock, thereby depressing the market price of these securities. Stockholders who wish to participate in these transactions may not have the opportunity to do so. In addition, GI Dynamics is incorporated in the State of Delaware and, as such, is governed by the provisions of Section 203 of the Delaware General Corporation Law, which may, unless certain criteria are met, prohibit large stockholders, in particular those owning 15% or more of the voting rights on GI Dynamics common stock, from merging or combining with the Company for a prescribed period of time.
GI Dynamics does not intend to pay cash dividends on its common stock in the foreseeable future.
GI Dynamics has never declared or paid any cash dividends on its shares of common stock, and it currently does not anticipate paying any cash dividends in the foreseeable future. The Company intends to retain any earnings to finance the development and expansion of the Company’s products and business. Accordingly, the Company’s stockholders will not realize a return on their investment unless the trading price of GI Dynamics common stock appreciates.
The Company’s ability to use its net operating loss carryforwards and certain other tax attributes may be limited.
The Company’s ability to utilize its federal net operating losses and federal tax credits may be limited under Sections 382 and 383 of the Internal Revenue Code. The limitations apply if an ownership change, as defined by Section 382, occurs. Generally, an ownership change occurs when certain stockholders increase their aggregated ownership by more than 50 percentage points over their lowest ownership percentage in a testing period (typically three years). The Company may already be subject to Section 382 limitations due to previous ownership changes. In addition, future changes in stock ownership may also trigger an ownership change and, consequently, a Section 382 limitation. Due to the significant complexity and cost associated with a change in control study, and the expectation of continuing to incur losses whereby the net operating losses and federal tax credits are not anticipated to be used in the foreseeable future, the Company has not assessed whether there have been changes in control since its formation. If GI Dynamics has experienced changes in control at any time since its formation, utilization of its net operating losses and research and development credit carryforwards would be subject to annual limitations under Sections 382 and 383, respectively. Any limitation may result in expiration of a portion of the net operating loss or research and development credit carryforwards before utilization, which would reduce the Company’s gross deferred tax assets and corresponding valuation allowance. As a result, if GI Dynamics earns net taxable income, its ability to use the pre-change net operating loss carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to the Company.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
On April 22, 2019, GI Dynamics entered into a lease for 3,520 square feet of office space in Boston, Massachusetts. The lease period commenced on May 1, 2019 and expires in May 2022.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
GI Dynamics is currently not involved in any litigation that it believes could have a materially adverse effect on its financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of the Company or any of its subsidiaries, threatened against or affecting the Company, its common stock, any of its subsidiaries or of the Company’s or its subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect. From time to time, the Company may become involved legal proceedings, lawsuits, claims and regulations in the ordinary course of its business.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
GI Dynamics CDIs, each representing one-fiftieth of one share of GI Dynamics common stock, were listed on the ASX under the trading symbol “GID” from September 7, 2011 to July 22, 2020. No public market for the Company’s securities existed prior to September 7, 2011 or after July 22, 2020.
On July 22, 2020, the last reported sale price of GI Dynamics CDIs was A$0.002 per CDI, or $0.07 per share of common stock.
As of December 31, 2020, 491,636 shares of common stock were subject to outstanding options and warrants to purchase shares of common stock.
Holders
At March 5, 2021, the Company had 88,095,659 shares of common stock issued and outstanding with 716 registered holders of record.
The Company’s transfer agent and registrar for its common stock is American Stock Transfer & Trust Company, LLC, 6201 15th Avenue, Brooklyn, New York 11219.
Equity Compensation Plan Information
The information required to be disclosed by Item 201(d) of Regulation S-K, “Securities Authorized for Issuance Under Equity Compensation Plans” is referenced under Item 12 of Part III of this Annual Report on Form 10-K.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Not applicable.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s Consolidated Financial Statements and related notes to those financial statements appearing elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. You should review the “Risk Factors” section of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.
Overview
GI Dynamics is a clinical stage medical device company located in Boston, Massachusetts. The Company has developed EndoBarrier, a medical device intended to treat patients with type 2 diabetes and to reduce obesity. GI Dynamics is taking the steps necessary to obtain the regulatory approvals required to market this product. In order to market EndoBarrier in the U.S., GI Dynamics must obtain approval from the FDA. In order to market EndoBarrier outside of the U.S., GI Dynamics is required to comply with various regulations imposed by the countries in which it seeks to sell the product.
In 2010, EndoBarrier received CE Marking for sale in the European Union and in 2011, EndoBarrier was listed on the Australian Register of Therapeutic Goods. As a result, during 2013 and 2014, the Company received approximately $2.8 million and $2.3 million, respectively, in revenue from the sale of EndoBarrier in Europe, South America and the Asia Pacific region. In the U.S. in 2013, the Company began enrollment of patients in the initial pivotal trial of EndoBarrier, which is referred to as the ENDO trial.
In the third quarter of 2015, the Company announced its decision to discontinue the ENDO trial because patients were experiencing a higher than previously observed level of hepatic (liver) abscesses. In the fourth quarter of 2016, GI Dynamics received formal notification from the TGA of the Australian government of the cancellation of EndoBarrier’s inclusion on the ARTG. In the fourth quarter of 2017 the Company received formal notification of CE mark withdrawal from its notified body in Europe, preventing the sale of EndoBarrier in Europe and select Middle Eastern countries. The Company undertook comprehensive cost-cutting measures throughout 2015 and 2016, including significantly reducing the number of its employees.
Following the decision to discontinue the ENDO trial, GI Dynamics undertook significant investigational and scientific analyses with the goal of reducing the incidence rate and severity of hepatic abscess concurrent with the EndoBarrier treatment. This investigational work focused on understanding the root cause of hepatic abscess and how to reduce the rate of occurrence. This included: DNA analysis of normal EndoBarrier removals as well as hepatic abscess EndoBarrier removals, numerous meta-analyses and responder cohort analyses, investigation into the contributing factors represented by proton pump inhibitors (PPIs), leaky gut syndrome and microbiome analyses, among other research. This allowed the Company to modify the medications utilized with EndoBarrier, most notably discontinuation of chronic double-dose PPI usage during EndoBarrier implant.
As a result of the efforts described above, in August 2018, GI Dynamics received an IDE from the FDA to begin enrollment in a pivotal trial evaluating the safety and efficacy of EndoBarrier in the United States pending IRB approval, which was received on February 13, 2019. In this report, the Company refers to this pivotal trial as the GI Dynamics STEP-1 clinical trial. On January 27, 2020, the first patient was randomized into the STEP-1 Trial Protocol.
For financial reporting purposes, the Company have one reportable segment, which designs, manufactures and plans to market EndoBarrier.
To date, GI Dynamics has devoted substantially all of its efforts to research and development, business planning, clinical research, clinical study management, reimbursement development, product commercialization, acquiring operating assets and raising capital. GI Dynamics has incurred significant operating losses since its inception in 2003. As of December 31, 2020, the Company had an accumulated deficit of approximately $296 million. The Company expects to incur net losses for the next several years while it continues to evaluate which markets are appropriate to continue pursuing reimbursement, market awareness and general market development efforts, and continues to restructure its business and costs, establish new priorities, continue limited research, and evaluate strategic options.
GI Dynamics has raised net proceeds of approximately $283 million through sales of the Company’s equity and placement of debt, of which $9.5 million was received in 2020 that included the debt portion of the 2019 financing and the Initial Close of the September 2020 Financing.
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 for a gross amount of $1 million. The March 2019 Note compounded interest annually at 10% and, subject to Stockholder Approval required under ASX Listing Rules, Crystal Amber was conferred the right to optionally convert all unpaid principal and interest to CDIs at $0.0127 per CDI before the Note Maturity date in March 2024. Per the March 2019 NPA, the Company agreed to issue a warrant (the “March 2019 Warrant”) to Crystal Amber, pending Stockholder Approval, to purchase 78,984,823 CDIs (representing 1,579,696 shares of common stock) at an initial exercise price of $0.0127 per CDI. The issuance of the March 2019 Warrant required the approval of stockholders and was not exercisable until it was approved on June 30, 2019. (See Note 9 of the 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. Further extensions of the maturity date of the 2017 Note are 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 for a gross amount of $3 million. The May 2019 Note compounded interest annually at 10% and, subject to Stockholder Approval required under ASX Listing Rules, Crystal Amber was conferred the right to optionally convert all unpaid principal and interest to CDIs at $0.0127 per CDI before the Note Maturity date in May 2024. Per the May 2019 NPA, the Company agreed to issue a warrant (the “May 2019 Warrant”) to Crystal Amber, pending Stockholder Approval, to purchase 236,220,472 CDIs (representing 4,724,409 shares of common stock) at an initial exercise price of $0.0127 per CDI. The issuance of the May 2019 Warrant required the approval of stockholders and was not exercisable until it was approved on June 30, 2019. (See Note 9 of the 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 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 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 was comprised of existing warrant exercises scheduled between August 25, 2019 and November 15, 2019. Exercises included the 2018 Warrant, the March 2019 Warrant, and the May 2019 Warrant issued to Crystal Amber, as further detailed above. The remaining amount of the August 2019 funding was represented by a Convertible Term Promissory Note (“August 2019 Note”) of up to approximately $4.6 million and a related Warrant (“August 2019 Warrant”) in substantially the same form as the March 2019 and May 2019 convertible term promissory note. Under the terms of the August 2019 SPA and August 2019 Note, the Company, at its sole discretion, could elect to request any of the $4.6 million to be funded at any date on or before December 6, 2019. The conversion feature allows the conversion of the August 2019 Note’s unpaid principal and interest at $0.02 per CDI and the August 2019 Warrant, upon its issue, allowed the purchase for $0.02 per CDI a number of CDIs represented by the August 2019 Note principal divided by $0.02 per CDI. (See Note 9 of the 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 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 exercised the remaining portion of the March 2019 Warrant and a portion of the May 2019 Warrant 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 a related party and the cash was received on October 1, 2019.
On October 31, 2019, Crystal Amber 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.
On November 15, 2019, Crystal Amber exercised the final portion of the May 2019 Warrant in accordance with the August 2019 SPA. For an aggregate cash payment of approximately $0.4 million, 31,740,748 CDIs (representing approximately 634,814 shares of common stock) were issued on November 18, 2019 at $0.0127 per CDI under the May 2019 Warrant. Cash was received on November 15, 2019.
On December 2, 2019, GI Dynamics provided notice to Crystal Amber that the Company elected to place the August 2019 Note at the full amount, on or before December 6, 2019. In December, the Company and Crystal Amber agreed to confer the right to tranche the funding of the August 2019 Note in amounts and per timing chosen solely by Crystal Amber, provided the August 2019 Note total was funded on or before January 15, 2020.
On December 16, 2019, GI Dynamics’ stockholders approved the August 2019 Note conversion feature and the issuance of the August 2019 Warrant, pending funding of the August 2019 Note by Crystal Amber.
On January 13, 2020, GI Dynamics received approximately $4.6 million in cash representing the full funding of the August 2019 Note. As stockholder approval had been obtained in December 2019, the August 2019 Note became convertible at Crystal Amber’s sole discretion until maturity in January 2025. Additionally, the August 2019 Warrant was issued to Crystal Amber, providing for the purchase of up to 229,844,650 CDIs (representing 4,596,893 shares of common stock) at $0.02 per CDI.
On March 31, 2020, the maturity date of the 2017 Note was extended to May 1, 2020. On April 30, 2020, the maturity date of the 2017 Note was extended to May 15, 2020. On May 15, 2020, the maturity date of the 2017 Note was extended to June 15, 2020. On June 15, 2020, the maturity date of the 2017 Note was extended to June 29, 2020. On June 29, 2020, the maturity date of the 2017 Note was extended to July 31, 2020.
On May 11, 2020, the Company received approximately $200 thousand from a lender under the Paycheck Protection Program (“PPP”) Loan program of the 2020 CARES Act. The PPP loan accrues interest at 1% with payments deferred for six months and a maturity date two years from loan approval. The Company may apply for loan forgiveness subject to completion of an application and appropriate use of the loan proceeds as defined in the PPP loan structure. The Company must use a defined portion of the proceeds for payroll and the remainder for qualified facilities expenses during a defined measurement period. The Company has completed the measurement period and believes all conditions for forgiveness were met. The lender through which the Company received the PPP Loan has been resolving implications of ongoing legislative updates, the most recently being in December 2020, and as such, the Company has not been able to submit an application for forgiveness. The ability to submit forgiveness applications has been frozen as of February 16, 2021, but the Company will apply for forgiveness when the lender accepts forgiveness applications.
On June 18, 2020, the Company entered into a Note Purchase Agreement (“June 2020 NPA”) with Crystal Amber, pursuant to which, the Company issued and sold to Crystal Amber, a Convertible Promissory Note in an aggregate original principal amount of $750 thousand (the “June 2020 Note”). The note and accrued interest mandatorily converted at the September 4, 2020 Initial Close of the September 2020 Financing into approximately 10.6 million shares of Series A Preferred Stock.
On July 13, 2020, Crystal Amber provided the Company with a notice of optional conversion of the 2017 Note, thereby converting the principal of $5 million and the accrued and unpaid interest of $390 thousand into 2,574,873,400 CDIs, which is equal to 51,497,468 shares of Common Stock. On receipt of the notice of conversion, the Company did not have sufficient authorized shares to allow full conversion. The available 38,401,704 shares were issued to CDN, allowing the allotment of 1,920,085,200 CDIs to Crystal Amber and a Right to Shares and Waiver Agreement in which the Company agreed to issue the remaining 13,095,764 shares of Common Stock owed under the conversion when the Company has 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.
On July 22, 2020, GI Dynamics was removed from the Official List of the ASX and all CDIs were converted to shares of Common Stock. Although the Company’s securities are not traded on any exchange, the Company remains subject to SEC reporting requirements.
On August 4, 2020, the Company entered into a Note Purchase Agreement (“August 2020 NPA”) with Crystal Amber, pursuant to which, the Company issued and sold to Crystal Amber, a Convertible Promissory Note in an aggregate original principal amount of $500 thousand (the “August 2020 Note”). The note and accrued interest mandatorily converted at the September 4, 2020, Initial Close of the September 2020 Financing into approximately 7.1 million shares of Series A Preferred Stock.
On September 3, 2020, Shareholders approved an increase in shares of authorized Common Stock to 280 million and authorized 118 million shares of a new Series A Preferred class of capital stock. The approval for the increase in the authorized shares of Common Stock allowed for the immediate issuance of the remaining 13,095,764 shares of Common Stock owed to Crystal Amber under the Right to Shares and Waiver Agreement.
On September 4, 2020, the Company executed a series of financing-related agreements (“the September 2020 Financing”) which included the cancellation of the August 2019 Warrant, the restructuring of the August 2019 Note into the September 2020 Note (see below for a detailed description of the September 2020 Note and the accounting classification of the August 2019 Note restructuring into the September 2020 Note), the conversion of the June and August 2020 Convertible Notes into shares of Series A Preferred Stock (see below for a detailed description of the June and August 2020 Notes and Note 10 to the Consolidated Financial Statements for a description of the Series A Preferred Stock), and the sale of $8.75 million of Series A Preferred Stock to Crystal Amber under the Series A Preferred Stock Purchase Agreement (the “Series A SPA”, see Note 11 to the Consolidated Financial Statements for a description of the Series A SPA terms). The Initial Close of the September 2020 Financing occurred on September 4, 2020, and included all components of the September 2020 Financing, including the Crystal Amber purchase of 42,310,730 shares of Series A Preferred Stock for gross proceeds of $3.75. Pursuant to the Series A SPA and subsequent amendments, the Second Close was originally to occur on October 31, 2020 but through a series of extensions, was extended until February 24, 2021. On February 24, 2021, an individual investor closed the purchase of 600,000 shares of Series A Preferred Stock for approximate proceeds of $53 thousand. Effective February 24, 2021, Crystal Amber executed a contract amendment restructuring the Second Close to include the sale of 16,924,292 shares of Series A Preferred Stock for proceeds of $1.5 million to close on March 4, 2021, the sale of 11,282,861 shares of Series A Preferred Stock for proceeds of $1.0 million to close no later than March 25, 2021, and the remaining 27,607,153 shares of Series A Preferred Stock for proceeds of $2.45 million to close no later than May 28, 2021.
The Company’s costs include employee salaries and benefits, compensation paid to consultants, materials and supplies for research, costs associated with development activities including materials, sub-contractors, travel and administration, legal expenses, sales and marketing costs, general and administrative expenses, and other costs associated with a clinical and emerging commercial stage medical technology company. At March 11, 2021, GI Dynamics has 12 full-time employees. The number of employees required to support the Company’s activities as it moves the EndoBarrier through the GI Dynamics STEP-1 and the I-step clinical trials, as well as in the areas of research and development, sales and marketing, and general and administrative functions, may increase. GI Dynamics expects to continue to incur consulting expenses related to technology development that will increase as it enters into the recruitment phase of the STEP-1 and I -Step clinical trials, and the Company expects to continue to incur expenses to protect its intellectual property.
The amount that GI Dynamics spends for any specific purpose may vary significantly from quarter to quarter or year to year, and could depend on a number of factors including, but not limited to, the pace of progress of the GI Dynamics STEP-1 and I-Step clinical trials, commercialization and development efforts and actual needs with respect to development and research.
Research, development, and commercial acceptance of new medical technologies are, by their nature, unpredictable. Although the Company will undertake development and commercialization efforts with reasonable diligence, there can be no assurance that the net proceeds from the Company’s securities offerings will be sufficient to enable the Company to develop the Company’s technology to the extent needed to create future sales to sustain operations. If the net proceeds from these offerings are insufficient for this purpose, GI Dynamics will consider other options to continue its path to commercialization, including, but not limited to, additional financing through follow-on equity offerings, debt financing, co-development agreements, sale or licensing of developed intellectual or other property, or other alternatives.
GI Dynamics cannot assure that its technology will be accepted, that it will ever earn revenues sufficient to support its operations, or that it will ever be profitable. Furthermore, the Company has no committed source of financing and cannot assure that it will be able to raise money as and when it needs it to continue operations. If the Company cannot raise funds as and when it needs them, it may be required to scale back development plans by reducing expenditures for employees, consultants, business development and marketing efforts or to otherwise severely curtail, or even to cease, business operations.
The Company’s corporate headquarters are located in Boston, Massachusetts. The Company leases 3,520 square feet of office space with a lease expiration in May 2022. This space is adequate for current operations.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations is based upon the Company’s Consolidated Financial Statements prepared in accordance with generally accepted accounting principles in the United States. GI Dynamics believes that its application of the following accounting policies, each of which require significant judgments and estimates on the part of management, are the most critical to aid in fully understanding and evaluating the Company’s reported financial results. The Company’s significant accounting policies are more fully described in Note 2, “Summary of Significant Accounting Policies and Basis of Presentation”, to the Company’s Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K.
Use of Estimates
The preparation of Consolidated Financial Statements in accordance with generally accepted accounting principles in the U.S. 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, contingencies, valuation of any 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.
Going Concern Evaluation and Presentation
GI Dynamics analyzes its ability to continue as a going concern in each reporting period, assessing the likelihood that the company will be able to fund operations for the twelve months after the filing date of the financial statements. For further information regarding the Company’s funding requirements, see Note 1, “Nature of Business - Going Concern Evaluation”, to the Company’s consolidated financial statements. The Company has concluded and disclosed that there is substantial doubt in its ability to continue a going concern for a twelve-month period after the filing of this Annual Report on Form 10-K.
While there remains substantial doubt of the Company continuing as a going concern, the Company is seeking alternative financing sources and evaluating contingency plans that, while not guaranteed to yield the ability to fund operations at current levels, provide a reasonable probability that the Company will be able to maintain at least a subset of business operations. Therefore, the accompanying Consolidated Financial Statements have been prepared assuming GI Dynamics will continue as a going concern, which contemplates the realization of assets and liabilities and commitments in the normal course of business. The Consolidated Financial Statements for the year ended December 31, 2020 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 Consolidated Financial Statements are issued.
Fair Value of Derivative Instruments and Debt Instruments
GI Dynamics examines all financial instruments to determine if the financial instrument or any component feature that is a derivative requires liability treatment, predominantly due to a cash settlement feature. Such derivative liabilities are initially recorded at fair value with subsequent changes in value recorded in other income (expense) in the statements of operations. If the derivative instruments subsequently meet the requirements for classification as equity, the Company reclassifies the then fair value of the instrument to equity. The Company values free-standing warrants and any other derivative liabilities identified using the Black-Scholes option pricing model. If multiple outcomes are probable, management assigns probability adjustments to determine the most likely probability adjusted fair value.
GI Dynamics examines all debt to determine if any component feature of the debt requires fair value measurement or requires fair value measurement to allocate debt proceeds to the various components and features. When assumptions are reasonably known, the net present value of the cash flows of the debt are used to estimate the fair value of the note component, while a Black-Scholes option pricing model is used to value warrants and beneficial conversion features are measured at the intrinsic value of the effective conversion price.
Research and Development Costs
Research and development costs are expensed when incurred. Research and development costs include costs of all basic research activities as well as other research, engineering, and technical effort required to develop a new product or service or make significant improvement to an existing product or manufacturing process. Research and development costs also include preapproval regulatory and clinical trial expenses.
Stock-Based Compensation
GI Dynamics accounts for stock-based compensation in accordance with the Financial Accounting Standards Board, (“FASB”) Accounting Standards Codification (“ASC”) 718, Stock Compensation (“ASC 718”), which requires that stock-based compensation be measured at the grant date fair value and recognized as an expense in the consolidated financial statements.
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 the Company uses different assumptions, its 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. Because the Company does not have a sufficient stable history to estimate the expected term, the simplified method for estimating the expected term is used. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. The Company uses the Company’s stock equivalents or that of comparable companies to estimate historical price volatility. GI Dynamics has not paid and does not anticipate paying cash dividends on shares of common stock; therefore, the expected dividend yield is assumed to be zero. The Company accounts for forfeitures as they occur, rather than applying an estimated forfeiture rate to the value of the grant on the grant date.
GI Dynamics periodically issues performance-based awards. For these awards, vesting will occur upon the achievement of certain milestones. When achievement of the milestone is deemed probable, the Company expenses the compensation of the respective stock award over the implicit service period.
Stock awards to non-employees are accounted for in accordance with ASC 718, as the Company adopted FASB Accounting Standards Update (“ASU”) No. 2018-07, Compensation - Stock Compensation (Topic 718: Improvements to nonemployee share-based payment accounting) (“ASU 2018-07”) on January 1, 2019. This ASU provides measurement provisions and clarifications for the accounting for Non-employee Share-Based Payments (“NESBP”). Most of the guidance within ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, now applies to NESBP. The Company elects to use the contractual term of each award as the expected term for NESBP awards. At December 31, 2020, the Company had options to purchase 15,000 shares of common stock granted to non-employees.
Impairment of Long-Lived Assets
GI Dynamics regularly reviews the carrying amount of its long-lived assets to determine whether indicators of impairment may exist that warrant adjustments to carrying values or estimated useful lives. If indications of impairment exist, projected future undiscounted cash flows associated with the asset are compared to the carrying amount to determine whether the asset’s value is recoverable. If the carrying value of the asset exceeds such projected undiscounted cash flows, the asset will be written down to its estimated fair value.
Smaller Reporting Company Status
The Securities and Exchange Commission amended regulation S-K, section 210 in September 2018 to reduce the scale of Smaller Reporting Companies. Smaller Reporting Companies are defined based on public capital and revenue limits and GI Dynamics qualifies as a Smaller Reporting Company for the year ended December 31, 2020. As a result, the Company’s reporting is compliant with the Smaller Reporting Company requirements.
Results of Operations
The following is a description of significant components of the Company’s operations, including significant trends and uncertainties that are believed to be important to an understanding of the Company’s business and results of operations.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
GI Dynamics did not record any revenue in the years ended December 31, 2020 or 2019.
Operating Expenses
Years Ended
December 31, Change
$ %
(dollars in thousands)
Research and development expense $ 3,484 $ 4,225 $ (741 ) (17.5 )%
Sales and marketing expense - (22 ) (100 )%
General and administrative expense 5,621 5,295 6.2 %
Total operating expenses $ 9,105 $ 9,542 $ (437 ) (4.6 )%
Research and Development Expense. The decrease in research and development expense of approximately $741 thousand for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to a decrease in spending on internal and external resources as the COVID-19 pandemic caused clinical pauses on trial enrollment and slowed international regulatory reviews to start the I-Step Trial and perform CE mark certification audits. In 2019 the Company incurred expenses to prepared for and initiate the STEP-1 clinical trial in the United States, the I-STEP trial in India (under joint venture with Apollo Sugar) and prepare for audits related to filing for its CE Mark designation.
Sales and Marketing Expense. The decrease in sales and marketing expense of approximately $22 thousand for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to limited spending on sales and marketing given COVID-19 pandemic delays and the focus of resources on a marketing project that remains a prepaid expense until fully implemented.
General and Administrative Expense. The increase in general and administrative expense of approximately $326 thousand for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily related to increased compensation expenses offset by reductions in travel-related expenses due to COVID-19, board of directors related expenses and costs associates with public listing on the ASX.
GI Dynamics continues to look for ways to streamline the Company’s expenses, especially in General and Administrative departments.
Other Income (Expense), Net
Years Ended
December 31, Change
$ %
(dollars in thousands)
Other income (expense):
Interest income $ - $ 3 $ (3 ) N/A
Interest expense (1,547 ) (6,178 ) (4,631 ) (75 )%
Foreign exchange gain (loss) (18 ) (29 ) (254 )%
Loss on extinguishment of debt (678 ) - (678 ) N/A
Re-measurement of derivative liabilities - (1,683 ) 1,683 N/A
Gain on write-off of accounts payable - (101 ) N/A
Other income - N/A
Total other expense, net $ (2,007 ) $ (7,746 ) $ 5,739 (36 )%
Interest income. The decrease in interest income of approximately $3 thousand for the year ended December 31, 2020 compared to the year ended December 31, 2019 was due to lower average cash balances in 2020.
Interest expense. Interest expense decreased by approximately $4.6 million as the debt discount amortization in the year ended December 31, 2020 was less than the aggregate debt discount amortization in the year ended December 31, 2019 and non-cash interest expenses related to the June 2019 conversion of the 2018, March 2019 and May 2019 Notes payable to Crystal Amber.
Foreign exchange gain (loss). The $29 thousand difference in the foreign exchange gain (loss) reflects foreign exchange rate fluctuations on immaterially changed balances.
Loss on extinguishment of debt. The $678 thousand loss related to the restructuring of the August 2019 Note and cancellation of the August 2019 Warrant into the September 2020 Note which occurred in the year ended December 31, 2020 with no similar transaction in the year ended December 31, 2019.
Re-measurement of derivative liabilities. There were no re-measurements of derivative liabilities in 2020, while re-measurement of derivative liabilities totaled approximately $1.7 million for the year ended December 31, 2019, which was primarily due to the revaluation of the March and May 2019 warrants prior to stockholder approval. During the intervening period between Note issuance and derivative remeasurement, the market price per CDI increased significantly which resulted in a higher value driven by the widened spread between the exercise price and the market price and less so in the increased volatility resulting from the change in the price of the CDIs.
Gain on write-off of accounts payable. The change in the gain on write off of accounts payable reflects approximately $101 thousand of settled accounts payable in 2019 versus none in 2020.
Other expenses (income). The $236 thousand of Other Income recorded in the year ended December 31, 2020 is predominantly the $165 reversal of reserves for product returns given the expiration of all product previously eligible for return, $42 thousand in foreign COVID-19 related payroll assistance programs, and $10 thousand redemption of credit card cash back rewards. There were no similar transactions in the year ended December 31, 2019.
Liquidity and Capital Resources
As of December 31, 2020, the Company’s primary source of liquidity is its cash and restricted cash balances. GI Dynamics is currently focused on obtaining an EndoBarrier CE mark and enrolling the Company’s clinical trials, which will support future regulatory submissions and potential commercialization activities. Until the Company is successful in gaining regulatory approvals, 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 cannot predict the extent of future operating losses and accumulated deficit, and it may never generate sufficient revenues to achieve or sustain profitability.
The Company has incurred operating losses since inception and at December 31, 2020 and had an accumulated deficit of approximately $296 million. The Company expects to incur significant operating losses for the next several years. At December 31, 2020, the Company had approximately $1.2 million in cash and restricted cash.
The Company will need to arrange additional financing before August 1, 2021 in order to continue to pursue its current business objectives as planned and to continue to fund its operations. The Company is looking to raise additional funds through any combination of additional equity and debt financings or from other sources, however, the Company has no guaranteed source of capital that will sustain operations past August 1, 2021. There can be no assurance that any such potential financing opportunities will be available on acceptable terms, if at all. If the Company is unable to raise sufficient capital on the Company’s required timelines and on acceptable terms to stockholders and the Board of Directors, it could be forced to cease operations, including activities essential to support regulatory applications to commercialize EndoBarrier. If access to capital is not achieved in the near term, it will materially harm the Company’s business, financial condition and results of operations to the extent that the Company may be required to cease operations altogether, file for bankruptcy, or undertake any combination of the 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.
In addition, if the Company does not meet its payment obligations to third parties as they become due, the Company may be subject to litigation claims and its credit worthiness would be adversely affected. Even if the Company is successful in defending these claims, litigation could result in substantial costs and would be a distraction to management and may have other unfavorable results that could further adversely impact the Company’s financial condition.
As a result of the factors described above, the Company’s Consolidated Financial Statements include a going-concern disclosure.
During the year ended December 31, 2020, the Company’s cash and restricted cash balance decreased by approximately $1.3 million primarily due to cash payments related to, among other things, research and development and general and administrative expenses as GI Dynamics continued to focus on clinical and regulatory strategies that exceeded its various financings.
The following table sets forth the major sources and uses of cash for each of the periods set forth below:
Years Ended December 31,
(in thousands)
Net cash (used in) provided by:
Operating activities $ (10,846 ) $ (10,612 )
Investing activities - (11 )
Financing activities 9,506 9,316
Net decrease in cash and restricted cash $ (1,340 ) $ (1,307 )
Cash Flows used in Operating Activities
Net cash used in operating activities totaled approximately $10.8 million for the year ended December 31, 2020. The primary uses of cash were:
● to fund the Company’s net loss of approximately $11.1 million;
● a net negative adjustment to cash flow from changes in working capital of approximately $2.6 million resulting primarily from increases in prepaid expenses related to a directors and officers liability insurance run-off policy offset by a reduction of the prepaid balance on other liability insurance policies, the funding of a severance escrow account, and material decreases in accounts payable and accrued expenses ; and
● a net positive adjustment to cash flow from non-cash items of approximately $2.8 million, primarily from non-cash interest expense, loss on extinguishment of debt, and stock-based compensation.
Net cash used in operating activities totaled approximately $10.6 million for the year ended December 31, 2019. The primary uses of cash were:
● to fund the Company’s net loss of approximately $17.3 million;
● a net negative adjustment to cash flow from changes in working capital of approximately $1.6 million resulting primarily from increases in prepaid expenses and decreases in accounts payable and accrued expenses; and
● a net positive adjustment to cash flow from non-cash items of approximately $8.3 million, primarily from non-cash interest expense, change in derivative valuation and stock-based compensation.
Cash Flows used in Investing Activities
No cash was used in investing activities for the year ended December 31, 2020.
Cash used in investing activities for the year ended December 31, 2019 totaled approximately $11 thousand from the purchase of office equipment.
Cash Flows provided by Financing Activities
Cash provided by financing activities for the year ended December 31, 2020 totaled approximately $9.5 million and primarily resulted from the proceeds from short and long-term debt from a related party and the net proceeds from the sale of Series A Preferred Stock.
Cash provided by financing activities for the year ended December 31, 2019 totaled approximately $9.3 million and primarily resulted from the exercise of related party warrants and proceeds from short and long-term debt from a related party.
Funding Requirements
As of December 31, 2020, the Company’s primary source of liquidity is its cash and restricted cash balances. GI Dynamics is currently focused on obtaining an EndoBarrier CE mark and enrolling the Company’s clinical trials, which will support future regulatory submissions and potential commercialization activities. Until the Company is successful in gaining regulatory approvals, 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 cannot predict the extent of future operating losses and accumulated deficit, and it may never generate sufficient revenues to achieve or sustain profitability.
The Company has incurred operating losses since inception and at December 31, 2020 and had an accumulated deficit of approximately $296 million. The Company expects to incur significant operating losses for the next several years. At December 31, 2020, the Company had approximately $1.2 million in cash and restricted cash.
Due to the numerous risks and uncertainties associated with securing regulatory approval for EndoBarrier, at this time GI Dynamics is unable to estimate precisely the amounts of capital outlays and operating expenditures necessary to complete the task of obtaining regulatory approval for EndoBarrier. Funding requirements will depend on many factors, including, but not limited to, the following:
● the timing, cost, and resulting success of research and development efforts, including the impact of COVID-19 related restrictions and complications in conducting clinical trials and regulatory reviews;
● the rate of progress and cost of commercialization activities after regulatory approval;
● the expenses the Company may incur in marketing and selling EndoBarrier subject to future regulatory approvals;
● the timing and decisions of payer organizations related to reimbursement;
● the revenue generated by sales of EndoBarrier;
● the safety and efficacy of the Company’s product in treating diabetes and reducing obesity;
● the success of the Company’s investment in its manufacturing and supply chain infrastructure;
● the time and costs involved in obtaining regulatory approvals for EndoBarrier in new markets;
● the costs associated with any additional clinical trial(s) required in the U.S. and other countries on a case by case basis;
● 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.
GI Dynamics will continue to manage its capital structure and to consider all financing opportunities, whenever they may occur, that could strengthen its long-term liquidity profile. Any such capital transactions may or may not be similar to transactions in which the Company has engaged in the past and the ownership interests of existing stockholders may be materially diluted.
Off-Balance Sheet Arrangements
GI Dynamics does 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, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if it had engaged in those types of relationships. GI Dynamics enters into guarantees in the ordinary course of business related to the guarantee of its own performance and the performance of its subsidiaries.
Contractual Obligations and Commitments
The Company’s commitments for operating leases relate to the lease of office space in Boston, Massachusetts which expires in May 2022.
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 the Company’s Consolidated Financial Statements included in this Annual Report on Form 10-K.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GI Dynamics is focused on developing clinical data and regulatory approvals for EndoBarrier and the Company earnings and cash flows are exposed to market risk from changes in currency exchange rates and interest rates.
Interest Rate Sensitivity
The Company’s cash and restricted cash balance of $1.2 million at December 31, 2020 consisted of cash and restricted cash, all of which will be used for working capital purposes. Because of the short-term nature of the Company’s cash and restricted cash, GI Dynamics does not believe that it has any material exposure to changes in their fair values as a result of changes in interest rates.
Foreign Currency Risk
GI Dynamics conducts business in foreign countries. For U.S. reporting purposes, all assets and liabilities of non-U.S. entities are remeasured at the period-end exchange rate and income and expenses at the average exchange rates in effect during the periods. The net effect of these remeasurement adjustments is shown in the accompanying Consolidated Financial Statements as a component of net loss. Continued fluctuation of these exchange rates could result in financial results that are not comparable from quarter to quarter. The Company does not currently utilize foreign currency contracts to mitigate the gains and losses generated by the remeasurement of non-functional currency assets and liabilities and does not currently hold material cash reserves in foreign currencies in which certain expenditures are denominated.
Effects of Inflation
GI Dynamics does not believe that inflation and changing prices over the years ended December 31, 2020 and 2019 had a significant impact on its results of operations.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company’s consolidated financial statements, together with the independent registered public accounting firm report thereon, appear on pages through of this Annual Report on Form 10-K.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15d-15(f), GI Dynamics carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company’s Certifying Officers concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2020 in enabling GI Dynamics to record, process, summarize and report information required to be included in its periodic SEC filings within the required time period.
Management’s Annual Report on Internal Control over Financial Reporting
As a company registered with the SEC in the U.S., GI Dynamics is required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, to furnish a report by management on, among other things, the effectiveness of its internal control over financial reporting as of the end of the fiscal year. The controls and other procedures are designed to ensure that information required to be disclosed by the Company in the reports that the Company files with the SEC is disclosed accurately and is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The Company’s first report on compliance with Section 404 was furnished in connection with the GI Dynamics financial statements for the year ended December 31, 2014. As a former emerging growth company and a current smaller reporting company, the Company has been and currently is exempted from the requirement to include an external auditor opinion on the Company’s internal controls in its filings. GI Dynamics continues to update, document and evaluate its internal control over financial reporting to the requirements of Section 404.
The Company’s Certifying Officers are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act.
Internal control over financial reporting is a process designed by, or under the supervision of, the Certifying Officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
● pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets;
● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and
● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition or disposition of the Company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. It is a process that involves human diligence and compliance and is subject to lapses in judgment or breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. While process safeguards can reduce risks, because of inherent limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company, under the supervision and with the participation of the Certifying Officers, has evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 based upon the framework in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on such evaluations, the Certifying Officers have concluded that the Company’s internal control over financial reporting was effective as of December 31, 2020.
Changes in Internal Control Over Financial Reporting
As required by Rule 13a-15(d) of the Exchange Act, the Certifying Officers conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The evaluation performed by the Certifying Officers resulted in a conclusion that such changes occurred. In the third quarter, a material weakness was identified related to reconciliation of accrued interest which has been address by changing the mandatory review and approval processes related to period closure and journal entries, including those related to accrued interest. Also in the third quarter, a material weakness was identified related to stock based compensation charges relating to an inaccurate interpretation of a contractual vesting clause which has been addressed by implementing a formal legal review of contracts whose terms may impact financial reporting, including stock award vesting and cancellation clauses.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Certain information required by this Item 10 relating to the Company’s directors and executive officers is incorporated by reference herein to the Company’s Proxy Statement to be filed with the SEC in connection with its 2021 Annual Meeting of Stockholders or an amendment to this report filed under cover of Form 10-K/A not later than 120 days after the end of the fiscal year ended December 31, 2020.
Code of Business Conduct and Ethics
GI Dynamics has adopted a code of business conduct and ethics applicable to directors, executive officers and all other employees. A copy of that code is available on the Company’s corporate website at http://www.gidynamics.com. Any amendments to the code of business conduct and ethics, and any waivers thereto involving the Company executive officers, also will be available on the corporate website. A printed copy of these documents will be made available upon request. The content on the Company website is not incorporated by reference into this Annual Report on Form 10-K.
Directors of the Registrant
The following table sets forth the name, age and position of each of the Company’s directors at March 11, 2021:
Name
Age
Position
Mark Lerdal
Non-executive Chairman of the Board
Ginger Glaser
Non-executive Director
Joseph Virgilio
Non-executive Director
All three directors are members of the audit committee, the compensation committee, and the nominating and corporate governance committee. At March 11, 2021, none of the committees have elected a specific chairperson.
Mark Lerdal has served as the Chairman of the Board of Directors of GI Dynamics since August 2020. Mr. Lerdal’s extensive knowledge and experience as a board director in financial and business development, as well as a proven track record leading multiple mergers and acquisitions, makes him qualified to serve on the Company’s board of directors.
Mr. Lerdal founded KC Holdings, Inc., a company formed to take KENETECH Corporation private through a management buyout. Mr. Lerdal previously held the position as President and CEO of KENETECH Corporation, one of the world’s largest developer, constructor and operator of wind energy plants.
Mr. Lerdal currently serves as Chairman of the Board for Leaf Clean Energy, Element Markets, LLC and Empower Energies, Inc., and sits on the Board of Directors for Southern Current, Allied Minds, PLC (LSE:ALM), and acts as a consultant to Northleaf Capital Partners. Mr. Lerdal previously served on the Board of Directors to Onsite Energy Corporation, Medley Capital Corporation, Trading Emissions, PLC, TerraForm Power, Inc. and TerraForm Global, Inc.
Mr. Lerdal graduated Cum Laude from Northwestern University School of Law and earned his Bachelor of Arts in Economics from Stanford University.
Ginger Glaser has been a director of GI Dynamics since October 2020. Ms. Glaser’s 25 years of quality and regulatory experience, proven leadership of successful medical device organizations, as well as her breadth of knowledge in clinical affairs and engineering makes her qualified to serve on the Company’s board of directors.
Ms. Glaser currently is the Principal for G2 Consulting Services and the Chief Technology Officer for Monteris Medical, where she previously held vice president positions. Ms. Glaser held vice president roles with Boston Scientific and American Medical Systems, prior to its acquisition by Boston Scientific.
Ms. Glaser has a strong understanding of FDA processes and culture. She has led industry-wide task forces and helped numerous organizations obtain global regulatory approvals, including “first in the world” achievements.
Ms. Glaser graduated Cum Laude from Texas A&M University, where she earned her B.S. in Bioengineering and M.S. in Biomedical Engineering.
Joseph Virgilio has been a director and the Company’s chief executive officer since November 2020. Mr. Virgilio’s more than 20 years of sales, marketing, and general management experience in the medical device industry makes him qualified to serve on the Company’s board of directors. Mr. Virgilio possesses a proven track record of aggressive revenue growth through the development and execution of strategic sales and marketing plans with demonstrated abilities to recruit, train, and motivate a highly effective and specialized cross-functional team. His areas of expertise also include GPO/IDN contracting, organizational development and restructuring, corporate partnerships, and distribution strategies. Additionally, Mr. Virgilio possesses broad experience leading organizational turn-around and integration activities.
Prior to joining GI Dynamics, Mr. Virgilio served as President and General Manager for Amann Girrbach, a global leader in dental CAD/CAM technology Mr. Virgilio has also held the position of Vice President of Sales, The Americas at Surgical Specialties Corporation, as well as Vice President of Sales and Global Marketing at Aptus Endosystems (acquired by Medtronic). Mr. Virgilio spent the early part of his medical device career at Boston Scientific followed by almost a decade at Medtronic in roles of increasing responsibility.
Mr. Virgilio holds a Bachelor of Arts degree from Colgate University and earned continued education credits from the University of Pennsylvania, Wharton School of Business and from the University of North Carolina, Chapel Hill, Kenan-Flagler School of Business.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference herein to the Company’s Proxy Statement to be filed with the SEC in connection with its 2021 Annual Meeting of Stockholders or an amendment to this report filed under cover of Form 10-K/A not later than 120 days after the end of the fiscal year ended December 31, 2020.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information relating to security ownership of certain beneficial owners of the Company’s common stock and information relating to the security ownership of management required by this Item 12 is incorporated by reference herein to the Company’s Proxy Statement to be filed with the SEC in connection with its 2021 Annual Meeting of Stockholders or an amendment to this report filed under cover of Form 10-K/A not later than 120 days after the end of the fiscal year ended December 31, 2020.
The table below sets forth information with regard to shares authorized for issuance under the Company’s equity compensation plans as of December 31, 2020. As of December 31, 2020, GI Dynamics had three active equity compensation plans, each of which was approved by GI Dynamics stockholders:
● The GI Dynamics 2003 Omnibus Stock Plan; and
●
The GI Dynamics 2011 Employee, Director and Consultant Equity Incentive Plan; and
● The GI Dynamics 2020 Employee, Director and Consultant Equity Incentive Plan.
Plan Category
Number of
shares to be
issued upon exercise
of outstanding options or
vesting of restricted stock units
Weighted-
average exercise
price of outstanding options
Number of
shares
remaining available for
future issuance
under equity
compensation plans
Equity compensation plans approved by security holders
463,104
$ 2.04
41,710,968

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is incorporated by reference herein to the Company’s Proxy Statement to be filed with the SEC in connection with its 2021 Annual Meeting of Stockholders or an amendment to this report filed under cover of Form 10-K/A not later than 120 days after the end of the fiscal year ended December 31, 2020.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 13 is incorporated by reference herein to the Company’s Proxy Statement to be filed with the SEC in connection with its 2021 Annual Meeting of Stockholders or an amendment to this report filed under cover of Form 10-K/A not later than 120 days after the end of the fiscal year ended December 31, 2020.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of documents filed as part of this Annual Report on Form 10-K
(1) Consolidated Financial Statements listed under Part II, Item 8 and included herein by reference.
(2) Consolidated Financial Statement Schedules
No schedules are submitted because they are not applicable, not required or because the information is included in the Consolidated Financial Statements or Notes to Consolidated Financial Statements.
(3) Exhibits
The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Annual Report on Form 10-K.