Segment Reporting

The Company has one reportable segment which designs, develops, manufactures and markets medical devices for non-surgical approaches to treating type 2 diabetes.

GI Dynamics does not report geographic segments as there were no product sales in 2019 or 2018 and at December 31, 2019 and 2018, all long-lived assets comprised of property and equipment were held in the U.S.

Cash, Cash Equivalents and Restricted Cash

Cash, Cash Equivalents and Restricted Cash

GI Dynamics considers all highly liquid investment instruments with an original maturity when purchased of three months or less to be cash equivalents. Investments qualifying as cash equivalents primarily consist of money market funds and have a carrying amount that approximates fair value. The amount of cash equivalents included in cash and cash equivalents was approximately $0 and $1.1 million at December 31, 2019 and 2018, respectively.

At December 31, 2019 and 2018, GI Dynamics had approximately $2 and $0.01 million, respectively, of cash and cash equivalents denominated in Australian dollars or Euros that is subject to foreign currency gain and loss.

GI Dynamics has $30 thousand in restricted cash used to secure a corporate credit card account.

Derivative Liabilities

Derivative Liabilities

GI Dynamics examines all financial instruments to determine if the financial instrument or any component feature is a derivative under ASC 815, Derivatives and Hedging (“ASC 815”) and therefore requires liability classification. Certain warrants to purchase common stock did not meet the requirements for equity classification and are considered derivative instruments due to their cash settlement features. The derivative warrants are initially recorded at fair value with subsequent changes in fair value recorded in other income (expense) in the statements of operations. The Company estimates fair value using the Black-Scholes option pricing model. See Note 5 for inputs and assumptions used in the determination of the fair value. If the derivative instruments subsequently meet the requirements for classification as equity, the Company reclassifies the then fair value of the instrument to equity. If multiple outcomes are probable, management assigns probability adjustments to determine the most likely probability adjusted fair value.

Patent Costs

Patent Costs

GI Dynamics expenses as incurred all costs, including legal expenses, associated with obtaining patents until the patented technology becomes feasible. All costs incurred after the patented technology is feasible will be capitalized as an intangible asset. As of December 31, 2019, no such costs had been capitalized since inception of the Company. GI Dynamics has expensed approximately $200 thousand of patent costs within general and administrative expenses in the consolidated statements of operations for each of the years ended December 31, 2019 and 2018.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update, or ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. ASU 2016-02 requires that most operating leases be recorded on the balance sheet unless the practical expedient is elected for short-term operating leases. The lessee will record a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset representing the lessee’s right to use the underlying asset for the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. The Company elected to apply the practical expedient as it relates to short-term leases. The Company adopted ASU 2016-02 on January 1, 2019. There was no impact to retained earnings upon adoption as there were no long-term leases in effect at adoption (see Note 10 of the Consolidated Financial Statements for a more complete description of the lease accounting and impacts of adoption).

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718: Improvements to nonemployee share-based payment accounting), or ASU 2018-07, which provides measurement provisions and clarifications for the accounting for Non-employee Share-Based Payments (“NESBP”). As a result, most of the guidance within ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, applies to NESBP. ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted but not in advance of adoption of Topic 606. Upon transition, the entity is required to measure and record these nonemployee awards at fair value as of the adoption date without subsequent remeasurement. The Company adopted ASU 2018-07 as of January 1, 2019 and there was no impact to retained earnings or equity as no uncompleted NESBPs were outstanding when adopted. At December 31, 2019, the Company had options to purchase 120,000 shares of common stock granted to non-employees.

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13, which provides guidance focused on the disclosure requirements for disclosing fair value estimates, assumptions, and methodology. Requirements removed include the requirement to disclose details around amount and reasoning for level 1 to level 2 transfers, timing policies for transfer between levels and the valuation processes for level 3 fair value measurements. Modified requirements include details regarding net asset redemption restrictions and timing related to uncertainty disclosures. Requirements added include disclosures of changes in unrealized gains and losses for recurring level 3 measurements held as of the reporting date and disclosures around the range and weighted average of significant inputs used to develop level 3 fair value measurements. These amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this update, however the Company has declined early adoption. The Company will adopt this ASU in 2020 and expects no impact to its consolidated financial statements on adoption.

Loss Contingencies

Loss Contingencies

In accordance with ASC 450, Contingencies, GI Dynamics accrues anticipated costs of settlement, damages, and losses for loss contingencies based on historical experience or to the extent specific losses are probable and estimable. Otherwise, the Company expenses these costs as incurred. If the estimate of a probable loss is a range, and no amount within the range is more likely, GI Dynamics accrues the minimum amount of the range. No loss contingencies were recorded on the balance sheet as of December 31, 2019 or 2018.

Income Taxes

Income Taxes

GI Dynamics uses the asset and liability method of accounting for income taxes. The Company records deferred tax assets and liabilities for the expected future tax consequences of temporary differences between its financial reporting and the tax bases of assets and liabilities measured using the enacted tax rates in effect in the years in which the differences are expected to reverse. The Company regularly assesses the need for a valuation allowance against its deferred tax assets. Future realization of the Company’s deferred tax assets ultimately depends on the existence of sufficient taxable income within the available carryback or carryforward periods. Sources of taxable income include taxable income in prior carryback years, future reversals of existing taxable temporary differences, tax planning strategies, and future taxable income. The Company records a valuation allowance to reduce its deferred tax assets to an amount it believes is more-likely-than-not to be realized. Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.

The Company assesses its income tax positions and records tax benefits based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. The Company classifies interest and penalties on uncertain tax positions as income tax expense.