10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2018

OR

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

For the transition period from to

Commission file number: 000-55195

GI DYNAMICS, INC.

(Exact name of registrant as specified in its charter)

Delaware	84-1621425
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
PO Box 51915
Boston, Massachusetts	02205
(Address of Principal Executive Offices)	(Zip Code)

(781) 357-3300

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files):    Yes  ☒    No  ☐

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☒

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

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

As of November 10, 2018, there were 15,333,100 shares of common stock outstanding.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

• our expectations with respect to our intellectual property position;

• our expectations with respect to our clinical trials;

• our expectations with respect to regulatory submissions and receipt and maintenance of regulatory approvals;

• our ability to commercialize our products;

• our ability to develop and commercialize new products;

• our expectation with regard to product manufacture and inventory; and

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

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

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

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

GI DYNAMICS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS

		Page
	PART I – FINANCIAL INFORMATION	1
Item 1.	Financial Statements (unaudited)	1
	Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	1
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017	2
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	3
	Notes to Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	30
	PART II – OTHER INFORMATION	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities	32
Item 6.	Exhibits	32
	Signatures	33

References

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

Currency

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

Trademarks

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

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

GI Dynamics, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	September 30,			December 31,
	2018			2017
Assets
Current assets:
Cash and cash equivalents	$	3,104		$	3,034
Restricted cash		30			30
Accounts receivable, net		—			40
Prepaid expenses and other current assets		259			265
Total current assets		3,393			3,369
Property and equipment, net		84			97
Total assets	$	3,477		$	3,466
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	749		$	1,191
Accrued expenses		1,516			1,021
Deferred revenue		11			11
Short term debt to related party, net		4,985			4,929
Total current liabilities		7,261			7,152
Warrant liability		16			29
Long term debt to related party, net		96			—
Total liabilities		7,373			7,181
Commitments (Note 11)
Stockholders’ deficit:
Preferred stock, $0.01 par value – 500,000 shares authorized; no shares issued and    outstanding at September 30, 2018 and December 31, 2017		—			—
Common stock, $0.01 par value – 50,000,000 shares authorized at September 30, 2018    and December 31, 2017, respectively; 15,333,100 and 11,157,489 shares issued and    outstanding at September 30, 2018 and December 31, 2017, respectively		154			112
Additional paid-in capital		260,695			255,294
Accumulated deficit		(264,745	)		(259,121	)
Total stockholders’ deficit		(3,896	)		(3,715	)
Total liabilities and stockholders’ deficit	$	3,477		$	3,466

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

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GI Dynamics, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenue	$	—		$	23		$	—		$	173
Cost of revenue		—			15			—			223
Gross loss		—			8			—			(50	)
Operating expenses:
Research and development		494			960			1,121			3,010
Sales and marketing		167			494			683			1,474
General and administrative		1,338			1,095			3,378			3,624
Total operating expenses		1,999			2,549			5,182			8,108
Loss from operations		(1,999	)		(2,541	)		(5,182	)		(8,158	)
Other income (expense):
Interest income		7			13			23			25
Interest expense		(201	)		(82	)		(489	)		(100	)
Foreign exchange gain (loss)		2		—				10			(6	)
Other income		—		—			—				23
Re-measurement of warrant liability		10			7			13			(33	)
Other income (expense), net		(182	)		(62	)		(443	)		(91	)
Loss before income tax expense		(2,181	)		(2,603	)		(5,625	)		(8,249	)
(Benefit from) Provision for income taxes		2			6			(1	)		9
Net loss	$	(2,183	)	$	(2,609	)	$	(5,624	)	$	(8,258	)
Basic and diluted net loss per common share		(0.17	)	$	(0.23	)		(0.46	)	$	(0.74	)
Weighted-average number of common shares used in basic and    diluted net loss per common share		12,691,797			11,157,489			12,279,294			11,143,773

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

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GI Dynamics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

	Nine Months Ended September 30,
	2018			2017
Operating activities:
Net loss	$	(5,624	)	$	(8,258	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		11			46
Loss on disposal of leasehold improvements		2		—
Amortization of debt issuance costs non-cash interest expense		141			25
Non-cash interest expense		249			73
Accretion of debt discount		96		—
Stock-based compensation expense		86			162
Re-measurement of warrant liability		(13	)		33
Change in inventory reserve		—			(76	)
Changes in operating assets and liabilities:
Accounts receivable		40			(11	)
Prepaid expenses and other current assets		6			53
Inventory		—			289
Accounts payable		(442	)		122
Accrued expenses		246			(105	)
Net cash used in operating activities		(5,202	)		(7,647	)
Investing activities
Purchases of property and equipment	—				(5	)
Net cash used in investing activities		—			(5	)
Financing activities
Proceeds from issuance of common stock, net of issuance costs		3,607			198
Debt issuance costs		(85	)		(115	)
Proceeds from long term debt, related party		1,750			5,000
Payments on short term note payable		—			(214	)
Net cash provided by financing activities		5,272			4,869
Net increase (decrease) in cash and cash equivalents		70			(2,783	)
Cash, cash equivalents and restricted cash at beginning of period		3,064			8,323
Cash, cash equivalents and restricted cash at end of period	$	3,134		$	5,540
Supplemental cash flow disclosures
Income taxes paid		25			31
Effect on retained earnings of adopting ASU No. 2016-09 in 2017		—			28
Beneficial conversion feature discount associated with 2018 Note		1,007			—
Relative fair value of warrant issued with 2018 Note		743			—

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

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GI Dynamics, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

1. Nature of Business

GI Dynamics, Inc. (the “Company”) was incorporated on March 24, 2003, as a Delaware corporation, with operations based in Boston, Massachusetts.

GI Dynamics is a clinical stage medical device company focused on the development and commercialization of EndoBarrier, a medical device indicated for treatment of patients with type 2 diabetes and obesity or obesity alone.  

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% of the worldwide diabetes population, whereas 10% of this population is diagnosed with type 1 diabetes (a form of diabetes mellitus in which not enough 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. Obesity and its comorbidities contribute to the progression of type 2 diabetes. Many experts believe obesity contributes to higher levels of insulin resistance, which creates a feedback loop that increases the severity of type 2 diabetes.

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

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

The current treatment paradigm for type 2 diabetes is primarily pharmacological, whereby treating clinicians prescribe a treatment regimen of 1–4 concurrent medications that could include insulin for patients with higher levels of blood sugar. Insulin carries a significant risk of increased mortality and directly contributes to weight gain, which in turn leads to higher levels of insulin resistance and diabetes. In other words, the primary drug used to treat severe type 2 diabetes raises risk significantly and increases the downstream progression of the disease by increasing obesity. Fewer than 50% of patients treated pharmacologically for type 2 diabetes are adequately managed, meaning that medication alone does not halt the progressive nature of diabetes for these patients.

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

Our vision is to make EndoBarrier the essential nonpharmacological and nonsurgical treatment for patients with type 2 diabetes and obesity. We intend to achieve this vision by providing a safe and effective device, focusing on patient safety, supporting treating clinicians, adding to the extensive body of clinical evidence around EndoBarrier by conducting clinical trials, gaining appropriate regulatory approvals, continuing to improve our products and systems, operating the company in a lean fashion, and maximizing shareholder value.

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

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

In the U.S., the Company received approval from the Food and Drug Administration (“FDA”), to commence its pivotal trial of EndoBarrier (the “ENDO Trial”), which the Company began in 2013. The multi-center, randomized, double-blinded study planned to enroll 500 patients with uncontrolled type 2 diabetes and obesity at 25 sites in the U.S. The primary endpoint was improvement in diabetes control as measured by HbA1c levels. In the second half of fiscal year 2015, the Company announced its decision to stop the ENDO Trial.

On August 21, 2015, the Company announced that it was reducing headcount by approximately 46% as part of its efforts to restructure its business and expenses in response to stopping the ENDO Trial and to ensure sufficient cash remained available for it to establish new priorities, continue limited market development and research, and to evaluate strategic options.

In the second and third quarters of fiscal 2016, the Company took additional actions that it thought necessary to allow the opportunity to evolve its strategic options. These actions resulted in non-recurring charges totaling approximately $1.1 million, including $0.4 million related to restructuring charges in our second quarter, $0.6 million related to employee departures in both our second and third quarters and $0.1 million related to abandonment of our former headquarters in Lexington, MA.

4

In October 2016, the Company received final cancellation notification from the Therapeutic Goods Administration (“TGA”) for the listing of EndoBarrier on the Australian Register of Therapeutic Goods (“ARTG”).

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

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

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

In August 2018, the Company received approval of an investigational device exemption (IDE) from the U.S. Food and Drug Administration (FDA) to begin enrollment in a pivotal trial evaluating the safety and efficacy of EndoBarrier in the United States pending Institutional Review Board (IRB) approval.  

From its inception in 2003 to its initial public offering (“IPO”) in 2011, the Company was financed by a series of preferred stock financings In September 2011, the Company completed its initial public offering (“IPO”) of common stock in the form of CHESS Depositary Interests (“CDIs”) in Australia. As a result of the IPO and simultaneous private placement in the U.S., the Company raised a total of approximately $72.5 million in proceeds, net of expenses and repayment of $6.0 million of the Company’s Convertible Term Promissory Notes. Additionally, in July and August 2013, the Company issued CDIs on the Australian Securities Exchange (“ASX”) through a private placement and Share Purchase Plan (“SPP”), which raised a total of approximately $52.5 million, net of expenses. In May 2014, the Company raised an additional total of approximately $30.8 million, net of expenses, when it issued CDIs on the ASX through a private placement.

On December 20, 2016, the Company completed a private placement issue of 69,865,000 CDIs (1,397,300 shares) at an issue price of $0.22 per CDI raising approximately $1.0 million, net of issuance costs. In January 2017, the Company completed the issue of 12,481,600 CDI’s (249,632 shares) to eligible investors under a Security Purchase Plan for approximately $0.83 per share (A$0.022 per CDI) resulting in net proceeds after issuance costs of approximately $0.2 million.

In June 2017, the Company completed a Convertible Term Promissory Note (the “2017 Note”) financing with its largest shareholder Crystal Amber for a gross amount of $5.0 million that accrues interest at 5% per annum compounded annually. Crystal Amber is deemed a Related Party of the Company due to the size of its ownership position. The Note is due by December 31, 2018 and contains provisions for conversion during the term of the 2017 Note (See Note 10 of the Consolidated Financial Statements for a more complete description of the terms and conditions).

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

In May 2018, the Company completed a Convertible Term Promissory Note (the “2018 Note”) and Warrant (the “2018 Warrant”) financing with its largest shareholder Crystal Amber for a gross amount of $1.75 million that accrues interest at 10% per annum compounded annually. The Note and Warrant financing was approved in a vote of the shareholders of GI Dynamics during the Annual Meeting of Stockholders held on May 24, 2018. The 2018 Note matures and the 2018 Warrant expires on May 30, 2023. Crystal Amber is deemed a Related Party of the Company due to the size of its ownership position. (See Note 10 of the Consolidated Financial Statements for a more complete description of the terms and conditions).

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

Going Concern

As of September 30, 2018, the Company’s primary source of liquidity is its cash and cash equivalents balances. The Company continues to evaluate which markets are appropriate to pursue regulatory approvals, continue pursuing reimbursement, market awareness and general market development and selling efforts. The Company continues to restructure its business and costs, establish new priorities, and evaluate strategic options. As a result, if the Company remains in business, it expects to incur significant operating losses for the next several years.

5

The Company has incurred operating losses since inception and at September 30, 2018 had an accumulated deficit of approximately $265 million, a working capital deficit of approximately $3.9 million, cash used in operating activities of approximately $5.2 millionand cash and cash equivalents of approximately $3.1 million.$2.8 million from the second and final tranche of the 2018 private placement was received in November 2018. Cash provided by these activities will be used predominantly to prepare for the Company’s clinical trial, which will result in increased expenses. The Company does not expect its current cash balances will be sufficient to operate beyond the end of the fourth quarter of 2018, as the 2017 Note is payable on December 31, 2018.Both parties are aware that if the Company is required to make this payment on the due date of December 31, 2018, it will be required either to renegotiate the due date of the loan or potentially cease operations. Crystal Amber and the Company are planning to discuss an extension of the due date of the 2017 Note, but there can be no assurance that any extension will occur. If the Company is able to amend the terms of the 2017 Note, it believes its cash and cash equivalents will be sufficient to fund operations into the earlier of the second quarter of 2019 or until the modified due date of the note. The Company will need to raise additional funds through any combination of collaborative arrangements, strategic alliances, and additional equity and debt financings or from other sources.

The Company has no guaranteed source of capital that will sustain operations beyond the fourth quarter of 2018, as the 2017 Note is currently payable on December 31, 2018. Crystal Amber and the Company are planning to discuss an amendment to the terms of the 2017 Note, but there can be no guarantee that this will happen. If the Company is able to amend the terms of the 2017 Note, it believes its cash and cash equivalents will be sufficient to fund operations into the earlier of the second quarter of 2019 or until the modified due date of the note. There can be no assurance that other potential financing opportunities will be available on acceptable terms, if at all. As such, if access to capital is not achieved to satisfy cash needs in the near term, the Company’s business, financial condition and results of operations will be materially harmed or the Company may be required to cease operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.

The accompanying consolidated financial statements have been prepared assuming the Company 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 as of September 30, 2018 and December 31, 2017 and the three and nine months ended September 30, 2018 and 2017 do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.

2. Summary of Significant Accounting Policies and Basis of Presentation

The accompanying interim consolidated financial statements and related disclosures as of September 30, 2018, and for the three and nine months ended September 30, 2018 and 2017 are unaudited and have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K (“Form 10-K”), filed with the SEC on March 28, 2018. The December 31, 2017 consolidated balance sheet included herein was derived from the audited financial statements as of that date but does not include all disclosures including notes required by GAAP for complete financial statements.

Principles of Consolidation

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

Use of Estimates

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

Cash and Cash Equivalents

The Company considers all highly liquid investment instruments with an original maturity when purchased of three months or less to be cash equivalents. Investments qualifying as cash equivalents primarily consist of money market funds and have a carrying amount that

6

approximates fair value. The amount of cash equivalents included in cash and cash equivalents was approximately $3.1 millionat September 30, 2018 and $3.0 million at December 31, 2017, respectively.

7

Inventory

The Company states inventory at the lower of first-in, first-out cost or net realizable value. When capitalizing inventory, the Company considers factors such as status of regulatory approval, alternative use of inventory, and anticipated commercial use of the product. At September 30, 2018 and December 31, 2017, the Company had a net inventory balance of $0.

Property and Equipment

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

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

Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the remaining lease term. Costs for capital assets not yet placed into service have been capitalized as construction in progress and will be depreciated in accordance with the above guidelines once placed into service. Maintenance and repair costs are expensed as incurred. The Company recorded a loss on disposal of $2 thousand in connection with the expiration of its office lease and the related leasehold improvements on April 13, 2018.

Revenue Recognition

Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) using the modified retrospective method. ASU 2014-09 is a comprehensive revenue recognition standard that superseded nearly all existing revenue recognition guidance. Upon adoption, the Company discontinued revenue deferral under the sell-through model and commenced recording revenue upon delivery to distributors, net of estimated returns. Upon adoption of ASU 2014-09, there was no impact on the Company’s financial statements. The comparative financial information presented has not been restated and continues to be reported under the accounting standards in effect for those periods.

Revenues include product sales, net of estimated returns. As of January 1, 2018, revenue is measured as the amount of consideration the Company expects to receive in exchange for product transferred. Revenue is recognized when contractual performance obligations have been satisfied and control of the product has been transferred to the customer. In most cases, the Company has a single product delivery performance obligation. Product returns are estimated based on historical data and evaluation of current information.

From January 1, 2018 to September 30, 2018, the Company did not enter into any revenue contracts with customers and did not recognize or defer any revenue related to new contracts.

At September 30, 2018 and December 31, 2017, the Company had deferred revenue of approximately $11thousand.

At December 31, 2017, following the notification by MHRA, the Company calculated an estimate for returns, reversed its revenue and recorded an accrued expense estimate of $0.2 million of product return related costs.

Shipping and Handling Costs

Shipping and handling costs are included in costs of revenue.

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 pre-approval regulatory and clinical trial expenses.

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Patent Costs

The Company expenses as incurred all costs, including legal expenses, associated with obtaining patents until the patented technology becomes feasible. All costs incurred after the patented technology is feasible will be capitalized as an intangible asset. As of September 30, 2018, and December 31, 2017, no such costs had been capitalized. The Company expensed approximately $0.1 million and $0.3 of patent costs within general and administrative expenses in the consolidated statements of operations for the nine months ended September 30, 2018 and 2017, respectively.    

Stock-Based Compensation

The Company 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 and recognized as an expense in the financial statements and that such expense be measured at the grant date fair value.

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

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

Stock awards to non-employees are accounted for in accordance with ASC 505-50, Equity-Based Payments to Non-Employees (“ASC 505-50”). The measurement date for non-employee awards is generally the date performance of services required from the non-employee is complete. For non-employee awards that vest based on service conditions, the Company expenses the value of the awards over the related service period, provided they expect the service condition to be met. The Company records the expense of services rendered by non- employees based on the estimated fair value of the stock option using the Black-Scholes option pricing model over the contractual term of the non-employee. The fair value of unvested non-employee awards is remeasured at each reporting period and expensed over the vesting term of the underlying stock options on a straight-line basis. The Company adopted ASU No. 2016-09 Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting during the year ended December 31, 2017. The Company adjusted its accumulated deficit related to the accounting policy election to recognize the impact of share-based award forfeitures only as they occur rather than by applying an estimated forfeiture rate as previously required. ASU No. 2016-09 requires that this change be applied using a modified-retrospective transition method by means of a cumulative-effect adjustment to accumulated deficit as of the beginning of the fiscal year in which the guidance is adopted. As a result of this adoption, the Company recorded a decrease to accumulated deficit of approximately $28 thousand with an offset to Additional Paid in Capital as of January 1, 2018.  

The stock-based compensation plans provide that grantees may have the right to exercise an option prior to vesting. Shares purchased upon the exercise of unvested options will be subject to the same vesting schedule as the underlying options and are subject to repurchase at the original exercise price by the Company should the grantee discontinue providing services to the Company for any reason, prior to becoming fully vested in such shares.

Impairment of Long-Lived Assets

The Company 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.

Loss Contingencies

In accordance with ASC 450, Contingencies, the Company 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, the Company accrues the minimum amount of the range.

Income Taxes

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

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

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Guarantees

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

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

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

For the nine months ended September 30, 2018, and 2017, the Company had not experienced any material losses related to these indemnification obligations, and no material claims with respect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible. As a result, no related reserves have been established.

Issuance Costs Related to Equity and Debt

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

Embedded Conversion Features

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

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

Subsequent Events

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

New Accounting Pronouncements

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

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In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance. The new standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB approved a one-year deferral of the effective date of this standard to annual reporting periods, and interim reporting periods within those years, beginning after December 15, 2017. The Company adopted this standard effective January 1, 2018 using the modified retrospective method. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.    

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (“ASU 2015- 11”). ASU 2015-11, which simplifies the measurement of inventories valued under most methods, including the Company’s inventories valued under FIFO — the first-in, first-out cost method. Inventories valued under LIFO — the last-in, first-out method — are excluded. Under this new guidance, inventories valued under these methods would be valued at the lower of cost and net realizable value, with net realizable value defined as the estimated selling price less reasonable costs to sell the inventory. This guidance is effective for annual reporting beginning after December 15, 2016, including interim periods within the year of adoption, with early application permitted. The Company adopted this standard on January 1, 2017. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which addresses the recognition, measurement, presentation and disclosure of financial assets and liabilities. This ASU primarily affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, this ASU clarifies the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. This standard became effective on January 1, 2018. This standard did not have a material impact on our consolidated financial statements and related disclosures for the nine months ended September 30, 2018.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. ASU 2016-02 requires that lessees recognize in the statement of financial position for all leases (with the exception of short-term leases) 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 adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 will simplify the income tax consequences, accounting for forfeitures and classification on the statements of consolidated cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The Company elected to adopt ASU 2016-09 in the first quarter of 2017 retrospectively to January 1, 2017. As a result of adopting ASU No. 2016-09 during the year ended December 31, 2017, the Company adjusted its accumulated deficit related to the accounting policy election to recognize the impact of share-based award forfeitures only as they occur rather than by applying an estimated forfeiture rate as previously required. ASU No. 2016-09 requires that this change be applied using a modified-retrospective transition method by means of a cumulative-effect adjustment to accumulated deficit as of the beginning of the fiscal year in which the guidance is adopted. As a result of this adoption, the Company recorded a decrease to accumulated deficit of approximately $28 thousand with an offset to Additional Paid-in Capital as of January 1, 2017.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), or ASU 2016-15. The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under FASB Accounting Standards Codification 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. We have evaluated the impact of ASU No. 2016-15 and noted it had no impact on our consolidated financial statements for the nine months ended September 30, 2018.  

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In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issue Task Force), or ASU 2016-18. This new standard addresses the diversity that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within the year of adoption, with early adoption permitted. Our consolidated financial statements reflect this standard for the nine months ended September 30, 2018 and 2017.  

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (ASC 260) Distinguishing Liabilities from Equity (ASC 480) Derivatives and Hedging (ASC 815),” which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. For public business entities, the amendments in Part I of ASU 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has chosen to early adopt this standard on April 1, 2018 with retroactive restatement of comparative periods. The Company has concluded that the retroactive provisions of ASU 2017-11 had no impact on the accounting for the Company’s previously outstanding warrant which had been issued to the warrant holder as stock compensation.

3. Net Loss per Common Share

Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Potential common stock equivalents are determined using the treasury stock method. For diluted net loss per share purposes, the Company excludes stock options and other stock-based awards, including shares issued as a result of option exercises but which are subject to repurchase by the Company, whose effect would be anti-dilutive from the calculation. During the three and nine months ended September 30, 2018 and 2017, common stock equivalents were excluded from the calculation of diluted net loss per common share, as their effect was anti-dilutive due to the net loss incurred. Therefore, basic and diluted net loss per share was the same in all periods presented.

The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares outstanding as of September 30, 2018 and 2017, as they would be anti-dilutive:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Warrants to purchase common stock		1,972,976		28,532		1,972,976		28,532
Options to purchase common stock and other stock-based    awards		1,545,719		1,504,938		1,545,719		1,504,938
Total		3,518,695		1,533,470		3,518,695		1,533,470

4. Warrants to Purchase Common Stock and CDIs

On May 4, 2016, the Company entered into a consulting agreement pursuant to which a consulting firm provides strategic advisory, finance, accounting, human resources and administrative functions, including chief financial officer services, to the Company. In connection with the consulting agreement, the Company granted the consulting firm a warrant (“Consultant Warrant”) to purchase up to 28,532 shares of the Company’s common stock at an exercise price per share equal to $0.64. The Consultant Warrant vests on a monthly basis over two years and has a term of five years. The Company has reserved 28,532 shares of common stock related to the Consultant Warrant. As of September 30, 2018, the Consultant Warrants had not been exercised.

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The Company accounts for the Warrants under Accounting Standards Codification 815, Derivatives and Hedging (“ASC 815”). The Consultant Warrant contains a cashless exercise provision which meets the net settlement criteria of ASC 815 and is therefore considered a derivative and is classified as a liability.

The Consultant Warrant is classified as a liability and as such the fair value of the Warrant must be remeasured at each reporting period. At the time the Warrant was issued, the Company estimated the fair value of the Warrant using the Black-Scholes option pricing model. The Company remeasures the fair value of the Warrant at each reporting period using current assumptions. Changes in value are recorded as other income or expense (Note 5).

On May 30, 2018, the Company entered into a Note and Warrant Purchase agreement that included a warrant to purchase 97,222,200 CDIs (representing 1,944,444 shares of common stock). The exercise price is US$0.018 per CDI and the warrants can be exercised with cash or as a net exercise. The warrants are immediately exercisable on issuance and expire on May 30, 2023.

5. Fair Value of Financial Instruments

The tables below present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 and indicates the fair value hierarchy of the valuation techniques the Company used to determine such fair value. In general, fair values determined by Level 1 inputs utilize observable inputs such as quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are either directly or indirectly observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, requiring the Company to develop its own assumptions for the asset or liability.

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

			Fair Value Measurements at
			Reporting Date Using
			Quoted Pricesin		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	September 30, 2018		(Level 1)		(Level 2)		(Level 3)
Assets
Money market funds (included in cash and cash equivalents)	$	1,091	$	1,091	$	—	$	—
Total assets	$	1,091	$	1,091	$	—	$	—
Liabilities
Warrant liability	$	16	$	—	$	—	$	16
Total liabilities	$	16	$	—	$	—	$	16

			Fair Value Measurements at
			Reporting Date Using
			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	December 31, 2017		(Level 1)		(Level 2)		(Level 3)
Assets
Money market funds (included in cash and cash equivalents)	$	2,584	$	2,584	$	—	$	—
Total assets	$	2,584	$	2,584	$	—	$	—
Liabilities
Warrant liability	$	29	$	—	$	—	$	29
Total liabilities	$	29	$	—	$	—	$	29

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The assumptions used in the Black-Scholes option pricing model to determine the fair value of the Consultant Warrant as of September 30, 2018, and December 31, 2017 were as follows:

	September 30,			December 31,
	2018			2017
Exercise price (A$55.00 at the then current exchange rate)	$	0.64		$	0.64
Fair value of common stock	$	0.72		$	0.60
Expected volatility		135.0	%		142.6	%
Expected term (in years)	2.61			3.34
Risk-free interest rate		2.9	%		2.0	%
Expected dividend yield		—	%		—	%

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

Balance at December 31, 2017	$	29
Decrease in fair value of warrants upon re-measurement included in    other income (expense), net		(13	)
Balance at September 30, 2018	$	16

Cash, cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, deferred revenue and short-term debt to Crystal Amber Fund Limited, a related party, at September 30, 2018 and December 31, 2017 are carried at amounts that approximate fair value due to their short-term maturities and highly liquid nature of these instruments. The carrying value of the Company’s long-term debt to Crystal Amber Fund Limited, a related party, at September 30, 2018 approximates fair value based on certain industry studies obtained by the Company.

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

Financial instruments that subject the Company to credit risk primarily consists of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents balances with high quality financial institutions, and consequently, the Company believes that such funds are subject to minimal credit risk.

Accounts receivable primarily consists of amounts due from customers, including distributors and health care providers in different countries. In light of the current economic state of many foreign countries, the Company continues to monitor the creditworthiness of its customers.

In May 2017, the Company entered into a sales arrangement with certain distributors totaling $517 thousand of EndoBarrier inventory. Due to certain extended right of return periods and payment terms, the Company determined that the revenue and related product costs associated with this transaction should be deferred for accounting purposes. As a result, the Company has recorded an adjustment to accounts receivable of $559 thousand for the unpaid portion of deferred revenue which includes an adjustment of approximately $40 thousand for revaluation of receivables denominated in foreign currency at December 31, 2017.

The Company did not have any accounts receivable at September 30, 2018. At December 31, 2017, four health care providers accounted for approximately 100% of the Company’s accounts receivable balance, of approximately equal sums.

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

The following table shows the components of the Company’s accounts receivable at September 30, 2018 and December 31, 2017 (in thousands):

	September 30,		December 31,
	2018		2017
Accounts receivable	$	—	$	85
Less: allowance for doubtful accounts		—		(42	)
Less: allowance for sales returns		—		(3	)
Total	$	—	$	40

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

	Nine Months Ended September 30,
	2018			2017
Beginning balance	$	42		$	16
Net charges to expenses		(42	)		48
Utilization of allowances		—			(22	)
Ending balance	$	—		$	42

7. Inventory

The Company states inventory at the lower of first-in, first-out cost or net realizable value. When capitalizing inventory, the Company considers factors such as status of regulatory approval, alternative use of inventory, and anticipated commercial use of the product.

The determination of obsolete or excess inventory requires the Company to estimate the future demand for its products within appropriate time horizons. The estimated future demand is compared to inventory levels to determine the amount, if any, of obsolete and excess inventory. The demand forecast includes the Company’s estimates of market growth and various internal estimates and is based on assumptions that are consistent with the plans and estimates the Company is using to manage its underlying business and short-term manufacturing plans. Forecasting demand for EndoBarrier in a market in which there are few, if any, comparable approved devices and for which reimbursement from third-party payers is limited is challenging. To the extent the Company’s demand forecast is less than its inventory on-hand, the Company could be required to record additional reserves for excess, expired or obsolete inventory in the future.

During 2017, the Company charged the remaining balance of its inventory in the normal course of business to cost of sales. As of December 31, 2017, the Company has fully reserved for its inventory on hand and expects to utilize the reserved inventory to meet its future strategic goals.

Inventory, net of reserves of approximately $5 million, is $0 at September 30, 2018 and December 31, 2017.

8. Property and Equipment

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

	September 30,			December 31,
	2018			2017
Laboratory and manufacturing equipment	$	591		$	591
Computer equipment and software		1,179			1,179
Office furniture and equipment		183			183
Leasehold improvements		—			21
		1,953			1,974
Less accumulated depreciation and amortization		(1,869	)		(1,877	)
Total	$	84		$	97

Depreciation and amortization expense of property and equipment totaled approximately $0 and $11 thousand for the three months ended September 30, 2018 and September 30, 2017, respectively and $11 and $46 thousand for the nine months ended September 30, 2018 and 2017, respectively.  

The Company recorded a loss on disposal of $2 thousand in connection with the expiration of its office lease and the related leasehold improvements on April 13, 2018.

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9. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

	September 30,		December 31,
	2018		2017
Payroll and related liabilities	$	268	$	181
Professional fees		639		421
Credit refunds		175		279
Interest payable		386		136
Other		48		4
Total	$	1,516	$	1,021

10. Related Party Convertible Notes

2017 Convertible Note Financing

On June 15, 2017, the Company entered into a Note Purchase Agreement by and between the Company, as borrower, and Crystal Amber Fund Limited, as purchaser (the “Purchaser”). Pursuant to the Note Purchase Agreement, the Company issued and sold to the Purchaser a Senior Secured Convertible Promissory Note in an aggregate original principal amount of $5.0 million (the “2017 Note”). The Purchaser is a related party and is the Company’s largest shareholder.

The 2017 Note accrues interest at a rate equal to 5% per annum, compounded annually, other than during the continuance of an event of default, when the 2017 Note accrues interest at a rate of 8% per annum. The entire outstanding principal balance and all unpaid accrued interest thereon is due on the maturity date, December 31, 2018. The 2017 Note is secured by a first priority security interest in substantially all personal property assets of the Company, including intellectual property.

The entire outstanding principal balance under the 2017 Note and all unpaid accrued interest thereon is convertible into CHESS Depositary Interests (“CDIs”), each representing 1/50th of a share of the Company’s common stock, (i) at the option of the Purchaser at a conversion price calculated based on the five-day volume weighted average closing price of the Company’s CDIs on the ASX (“Optional Conversion Price”), or (ii) automatically upon the occurrence of an equity financing in which the Company raises at least $10 million (a “Qualified Financing”) at the price per CDI of the CDIs issued and sold in such financing.

In the event that the Borrower issues additional CDIs in a subsequent equity financing at a price per CDI that is less than the then-effective optional conversion price (based on the five-day volume weighted average price on the ASX), the Purchaser has a 30-day option to convert at an adjusted conversion price reflecting, on a weighted average basis, the lower price per CDI. The number of CDIs that the Purchaser may acquire upon conversion of the 2017 Note at this adjusted conversion price is limited to the number that maintains the Purchaser’s fully-diluted ownership percentage of the Company at the same level as existed immediately preceding the applicable subsequent equity financing.

In addition, upon a change of control of the Company (other than a change of control resulting from a Qualified Financing) in which the Company’s stockholders receive cash consideration, the Company is obligated to prepay all accrued and unpaid interest plus 110% of the remaining outstanding unconverted principal balance. If the consideration received for such change of control is a non-cash consideration, the Purchaser may convert the entire outstanding principal balance under the 2017 Note and all unpaid accrued interest thereon into CDIs at the abovementioned Optional Conversion Price. Other than as described above, the Company may not prepay the 2017 Note without the consent of the Purchaser.

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

The Company recorded the $5 million 2017 Note, net of debt issuance costs of $115 thousand and will amortize the debt issuance costs over the life of the 2017 Note. For the three and nine months ended September 30, 2018, the Company recognized interest expense of $67 thousand and $191 thousand and amortization of debt issuance costs of $19 thousand and $56 thousand, respectively, related to the 2017 Note.

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Due to the timing of the finalization of the 2017 Note financing in 2017, the 2017 Note was issued without stockholder approval. As a consequence, while the 2017 Note contains conversion provisions, the Purchaser had, for a period of time, no right to exercise those rights until such rights of exercise were approved by the stockholders of the Company. Stockholder approval of the Purchaser’s right to convert the 2017 Note was obtained at the Company’s Annual Meeting on May 24, 2018. As of the date of this report, the 2017 Note has not been converted by the Purchaser.

2018 Convertible Note and Warrant Financing

On May 30, 2018, the Company entered into a Note Purchase Agreement by and between the Company, as borrower, and Crystal Amber Fund Limited, as purchaser (the “Purchaser”). Pursuant to the Note Purchase Agreement, the Company issued and sold to the Purchaser a Senior Unsecured Convertible Promissory Note in an aggregate original principal amount of $1.75 million (the “2018 Note”). The Purchaser is a related party and is the Company’s largest shareholder.

The 2018 Note accrues interest at a rate equal to 10% per annum, compounded annually, other than during the continuance of an event of default, when the 2018 Note accrues interest at a rate of 16% per annum. The entire outstanding principal balance and all unpaid accrued interest thereon is due on the maturity date, May 30, 2023.

The entire outstanding principal balance under the 2018 Note and all unpaid accrued interest thereon is convertible into CHESS Depositary Interests (“CDIs”), each representing 1/50th of a share of the Company’s common stock, at the option of the Purchaser at a conversion price of $0.018 per CDI. In the event that the Borrower issues additional CDIs in a subsequent equity financing at a price per CDI that is less than $0.018 the conversion price of the 2018 Note will adjust to the lower CDI conversion price. In addition, upon a change of control of the Company, the Purchaser may demand prepayment of accrued and unpaid interest plus 110% of the remaining outstanding unconverted principal balance of the 2018 Note.

The 2018 Note contains customary events of default including a failure to perform obligations under the 2018 Note Purchase Agreement, bankruptcy, a decision by the board of directors of the Company to wind up the Company, or if the Company otherwise ceases to carry on its ongoing business operations. If a default occurs and is not cured within the applicable cure period or is not waived, any outstanding obligations under the 2018 Note may be accelerated. The 2018 Note Purchase Agreement and related 2018 Note documents also contain additional representations and warranties, covenants and conditions, in each case customary for transactions of this type.

In connection with the issuance of the 2018 Note, the Company also issued to the Purchaser a warrant to purchase 97,222,200 CDIs at an initial exercise price of $0.018 per CDI, subject to adjustment as described in the warrant, which warrant expires on May 30, 2023 (the “2018 Warrant”). The 2018 Warrant may be exercised at any time on a cash or cashless basis. The 2018 Warrant includes a price protection clause. If the Company issues securities in a subsequent financing at a per CDI price of less than $0.018, the exercise price of the 2018 Warrant will be reduced to the lowest such price per CDI (or the equivalent for shares of common stock) at which the newly issued securities were sold.

The Company has evaluated the guidance ASC 480-10 Distinguishing Liabilities from Equity, ASC 815-40 Contracts in an Entity's Own Equity and ASC 470-20 Debt with Conversion and Other Options to determine the appropriate classification of the 2018 Note and 2018 Warrant. The 2018 Warrant was determined to be a freestanding instrument meeting the requirements for equity classification.  Accordingly, the relative fair value estimated for the 2018 Warrant, totaling approximately $743 thousand, has been recorded as a discount to the debt with the offset to additional paid in capital. The 2018 Note was also evaluated for beneficial conversion feature ("BCF") subsequent to the allocation of proceeds among the 2018 Note and 2018 Warrant. Based upon the effective conversion price of the 2018 Note after considering the stock price at the date of issuance and the allocation of estimated fair value to the 2018 Warrant, it was determined that the 2018 Note contained a BCF. The value of the BCF was computed to be approximately $1.2 million but has been capped at approximately $1.0 million so as to not exceed the total proceeds from the 2018 Note after deducting the value allocated to the 2018 Note and 2018 Warrant. The effective interest rate on the note after the discounts is 26.4%, respectively.

The Company recorded the 2018 Note, net of the total debt discount of $1.75 million and will amortize the debt discount over the life of the 2018 Note. For the three and nine months ended September 30, 2018, the Company recognized interest expense of $44 thousand and $58 thousand and amortization of the debt discount of $70 thousand and $95 thousand, respectively. For the three and nine months ended September 30, 2018, the Company recognized interest expense derived from issuance costs of $0 and $85 thousand, respectively.

11. Commitments and Contingencies

Lease Commitments

In June 2016, the Company entered into a noncancelable agreement to lease approximately 4,200 square feet of office and laboratory space in Boston, Massachusetts. The lease commenced in June 2016 and expired in April 2018. Rent during the term was $11,900 per month.

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Rent expense on noncancelable operating leases was $0 and $36 thousand for the three months ended September 30, 2018 and 2017, respectively and $37 and $107 thousand for the nine months ended September 30, 2018 and 2017, respectively.The Company has secured office space at a WeWork location in Boston on a 6-month lease term, which can potentially be extended. Rent expense for this location for the three and nine months ended September 30, 2018 was $21 thousand.

12. Stockholders’ Equity (Deficit)

On May 22, 2017, the Stockholders of the Company approved an increase of its authorized shares of Common Stock from 13,000,000 to 50,000,000 and to eliminate Class B shares of Common Stock of the Company. As of September 30, 2018, the authorized capital stock of the Company consists of 50,500,000 shares, of which 50,000,000 shares are designated as Common Stock and 500,000 shares are designated as Preferred Stock.

In 2018, the Company received commitments for two private placements to sophisticated and professional investors in Australia, the United States and the United Kingdom, consisting of U.S. and non-U.S. persons (as defined in Regulation S (“Regulation S”) of the Securities Act of 1933 (the “Securities Act”)) to raise up to approximately $6.61 million (the “2018 Placements”).  The first placement (“First Quarter 2018 Placement”) consisted of a total of 406,002,869 fully paid CDIs of the Company (representing 8,120,057 shares of common stock) at an issue price of A$0.035 per CDI. The issue of CDIs under the First Quarter 2018 Placement occurred in two tranches. The first tranche closed on January 22, 2018 (US EST), pursuant to which the Company issued 28,467,063 CDIs (representing 569,341 shares of common stock) resulting in gross proceeds of approximately $781 thousand and related issuance costs of $63 thousand.  The closing of the second tranche of the First Quarter 2018 Placement resulted in the raising of $824 thousand and related issuance costs of $39 thousand by the issue of 30,313,556 CDIs (606,271 shares) following stockholder approval granted on February 27, 2018. There were two participants in the First Quarter 2018 Placement second tranche; Crystal Amber Fund, a related party, purchased 27,391,756 CDIs. A Board member of the Company purchased 2,921,800 CDIs.

The second placement (“Autumn 2018 Placement”) consisted of a total of 347,222,250 fully paid CDIs of the Company (representing 6,944,445 shares of common stock) at an issue price of A$0.020 per CDI.  The investors in the Autumn 2018 Placement included certain existing investors.  The issue of these CDIs occurred in two tranches. The first tranche closed on September 20, 2018 (US EST), pursuant to which the Company issued 150,000,000 CDIs (representing 3,000,000 shares of common stock) resulting in gross proceeds of approximately $2.2 million and related issuance costs of $56 thousand. The closing of the second tranche resulted in the raising of $2.8 million by the issue of 197,222,250 CDIs (representing 3,944,445 shares of common stock) following stockholder approval at the adjourned Special Meeting of stockholders on October 29, 2018. There were three participants in the second tranche; Crystal Amber Fund, a related party, purchased 168,194,450 CDIs. Existing investors in the United States and Australia also purchased 23,819,450 and 5,208,350 CDIs, respectively. All second tranche CDIs are expected to be allotted to investors in November 2018..  

13. Stock Plans

The Company has two stock-based compensation plans under which incentive stock options, nonqualified stock options, restricted and unrestricted stock awards, and other stock-based awards are available for grant to employees, directors and consultants of the Company. At September 30, 2018, there were 1,545,719 shares available for future grant under the 2011 plan.

The 2011 Employee, Director and Consultant Equity Incentive Plan (the “2011 Plan,” together with the 2003 Omnibus Stock Plan, the “Plans”) allows for an annual increase in the number of shares available for issue under the 2011 Plan commencing on the first day of each fiscal year during the period beginning in fiscal year 2012 and ending in fiscal year 2020. The annual increase in the number of shares shall be equal to the lowest of:

a. 500,000 shares;

b. 4% of the number of common shares outstanding as of such date; and

c. an amount determined by the Board of Directors or the Company’s compensation committee.

Accordingly, in the first quarter of fiscal 2018, 446,299 options available for future grant were added to the 2011 Plan.

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Stock-Based Compensation

Stock-based compensation is reflected in the consolidated statements of operations as follows for the three and nine months ended September 30, 2018 and 2017 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Research and development	$	1	$	11	$	6	$	24
Sales and marketing		5		38		15		67
General and administrative		16		32		65		71
	$	22	$	81	$	86	$	162

The stock options granted under the Plans generally vest over a four-year period and expire ten years from the date of grant. From time to time, the Company grants stock options to purchase common stock subject to performance-based milestones. The vesting of these stock options 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 option over the implicit service period.

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

Determining the fair value of stock-based awards using the Black-Scholes option-pricing model requires the use of highly subjective assumptions, including the expected term of the award and expected stock price volatility. The weighted-average assumptions used to estimate the fair value of employee stock options using the Black-Scholes option-pricing model were as follows for the three and nine months ended September 30, 2018 and 2017:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Expected volatility		120.3	%		88.2	%		120.3	%		87.8	%
Expected term (in years)		6.05			6.05			6.05			6.05
Risk-free interest rate		3.0	%		2.1	%		3.0	%		2.1	%
Expected dividend yield		0	%		0	%		0	%		0	%

Stock Options

The following table summarizes share-based activity under the Company’s stock option plans for the nine months ended September 30, 2018:

	Shares of Common Stock Attributable to Options			Weighted- Average Exercise Price		Weighted- Average Contractual Life		Aggregate Intrinsic Value
						(in years)		(in thousands)
Outstanding at December 31, 2017		992,221		$	10.71	5.72		$	63
Granted		122,500		$	—			$	—
Exercised	—			$	—			$	—
Cancelled		(381,043	)	$	5.31			$	—
Outstanding at September 30, 2018		733,678		$	4.67		5.96	$	16
Vested or expected to vest at September 30, 2018		733,678		$	4.67		5.96	$	16
Exercisable at September 30, 2018		337,063		$	—		—	—

As of September 30, 2018, there was approximately $299 thousand of unrecognized stock-based compensation related to unvested stock option grants having service-based vesting under the Plans which is expected to be recognized over a weighted-average period of 2.6 years. The intrinsic value in the table above represents the difference between the fair value of the Company’s common stock on the measurement date and the exercise price of the stock option.

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The stock-based compensation plans provide that grantees may have the right to exercise an option prior to vesting. Shares purchased upon the exercise of unvested options will be subject to the same vesting schedule as the underlying options and are subject to repurchase at the original exercise price by the Company should the grantee discontinue providing services to the Company for any reason, prior to becoming fully vested in such shares.

Restricted Stock Units & Performance Stock Units

Each restricted stock unit and performance stock unit (“RSU & PSU”) issued under the Company Plans represents a contingent right to receive one share of the Company’s common stock. The RSUs & PSUs outstanding at September 30, 2018 vest upon the achievement of certain product revenue, regulatory and reimbursement milestones. There is no consideration payable on the vesting of RSUs & PSUs issued. Upon vesting, RSUs and PSUs are exercised automatically and settled in shares of the Company’s common stock.

The following table summarizes information related to RSU & PSU activity for the nine months ended September 30, 2018:

	Number of Units			Weighted- Average Contractual Life		Aggregate Intrinsic Value
				(in years)		(in thousands)
Outstanding at December 31, 2017		392,659			8.27	$	429
Granted	—
Exercised	—
Cancelled		(142,659	)	—		—
Outstanding at September 30, 2018		250,000			7.48	$	208

The aggregate intrinsic value at September 30, 2018 and December 31, 2017 noted in the table above represents the closing price of the Company’s common stock multiplied by the number of RSUs and PSUs outstanding. The fair value of each RSU and PSU award equals the closing price of the Company’s common stock on the date of grant

At September 30, 2018, all RSUs and PSUs outstanding are subject to performance-based vesting criteria as described in the applicable award agreement. For these awards, vesting will occur upon the achievement of certain product revenue, regulatory and reimbursement milestones. When achievement of the milestone is deemed probable, the Company expenses the compensation of the respective stock award over the implicit service period.

At September 30, 2018 and 2017, no RSUs and PSUs that have performance-based vesting criteria are considered probable of achievement. For the three and nine months ended September 30, 2018 and 2017, the Company did not recognize any stock-based compensation for RSUs and PSUs subject to performance-based vesting criteria.

As of September 30, 2018, there remains approximately $150 thousand of unrecognized stock-based compensation.

14. Segment Reporting

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

Geographic Reporting

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

At September 30, 2018, long-lived assets, comprised of property and equipment, of approximately $0.1 million are all held in the U.S.

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Product sales by geographic location for the three and nine months ended September 30, 2018 and 2017 are listed in the table below (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Europe	$	—	$	23	$	—	$	155
Middle East		—		-		—		18
Total	$	—	$	23	$	—	$	173

The Company did not have revenue for the three and nine months ended September 30, 2018.

Germany was a significant component of revenue in Europe for the three and nine months ended September 30, 2017.

Major Customers

The Company did not recognize any revenue for the three and nine months ended September 30, 2018.

For the three months ended September 30, 2017, the Company recognized as revenue a reversal of prior rebate accruals of approximately $27 thousand originally granted to health care providers which was deemed to no longer be required, in addition the Company deferred a previously recognized sale.  

For the nine months ended September 30, 2017, two customers accounted for 21% and 15% of the Company’s revenue.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2017 included in our Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve significant risks, uncertainties and assumptions. As a result of many factors, such as those set forth under “Risk Factors” Item 1A. of our Annual Report on Form 10-K, which are incorporated herein by reference, our actual results may differ materially from the results described in or implied by the forward- looking statements described in the following discussion and analysis.

Overview

We are a clinical-stage medical device company headquartered in Boston, Massachusetts, which is dedicated to restoring health and improving quality of life through the design and application of device and disease management solutions for treatment of metabolic disease.

Our vision is to make our product, EndoBarrier ®, the essential nonpharmacological and non-anatomy-altering treatment for patients with type 2 diabetes and obesity. We intend to achieve this vision by providing a safe and effective device, focusing on optimal patient care, supporting treating clinicians, adding to the extensive body of clinical evidence around EndoBarrier, gaining appropriate regulatory approvals, continuing to improve our products and systems, operating the company in a lean fashion, and maximizing shareholder value.

In the U.S., we commenced enrollment of patients in our pivotal trial of EndoBarrier, the ENDO Trial, in 2013. In the third quarter of 2015, we announced our decision to stop the ENDO Trial. On August 21, 2015, we announced that we were reducing headcount by approximately 46% as part of our efforts to restructure our business and expenses in response to stopping the ENDO Trial and to ensure sufficient cash remained available for us to establish new priorities, continue market development and research, and to evaluate strategic options.

As part of our reorganization efforts in the third quarter of 2015, we decided to focus sales activity on a limited number of countries while disengaging from others. As a result, we focused on the commercialization of EndoBarrier in selected countries in Europe and the Middle East.

On May 10, 2016, we announced that we were further reducing headcount by approximately 30% as part of our previously announced efforts to restructure our expenses in order to extend our cash runway.

On September 14, 2016, we announced that we received formal notification from the TGA of the cancellation of the EndoBarrier device’s inclusion on the ARTG, taking effect on October 12, 2016. As a result, with effect from October 12, 2016, we are not permitted to supply the EndoBarrier device in Australia, outside of approved trials.

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

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

In December 2017, the Company received notification from the Medicines and Healthcare Products Regulatory Agency (“MHRA”) that all EndoBarrier delivery systems (Liners) in customers’ inventory need to be returned to the Company.

In August 2018, the Company received approval of an investigational device exemption from the U.S. Food and Drug Administration (FDA) to begin enrollment in a pivotal trial evaluating the safety and efficacy of EndoBarrier in the United States pending Institutional Review Board (IRD) approval.  

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

To date, we have devoted substantially all our efforts to research and development, business planning, clinical research, clinical study management, reimbursement development, product commercialization, acquiring operating assets and raising capital. We have incurred significant operating losses since our inception in 2003. As of September 30, 2018, we had an accumulated deficit of approximately $265 million. We expect to incur net losses for the next several years while we continue to evaluate which markets are appropriate to continue pursuing reimbursement, market awareness and general market development efforts, and continue to restructure our business and costs, establish new priorities, continue limited research, and evaluate strategic options. In January and March 2018, the Company raised approximately $1.6 million in an offering of our CDIs to sophisticated and professional investors, including certain existing investors, in

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Australia, the United States and the United Kingdom. In September and November 2018, the Company raised approximately $5 million in an offering of our CDIs to sophisticated and professional investors, including certain existing investors, in Australia, the United States and the United Kingdom.

To date, the Company has raised net proceeds of approximately $246 million through the issuance of convertible debt and sales of our equity. On June 15, 2017, the Company issued a Senior Secured Convertible Promissory Note (“2017 Note”) to a single note holder, Crystal Amber Fund Limited, who is our largest shareholder and a related party, for gross proceeds of approximately $5.0 million. On May 30, 2018, the Company entered into a $1.75 million convertible note and warrant financing (“2018 Note Financing”) with Crystal Amber Fund Limited. The 2018 Note Financing was approved in a vote of the shareholders of the Company during the Annual Meeting held on May 24, 2018.

Our corporate headquarters are in Boston, Massachusetts. The Company has secured office space at a WeWork location in Boston on a 6-month lease term, which can potentially be extended.

Critical Accounting Policies and Estimates

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

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) using the modified retrospective method. The adoption of ASU 2014-09 had no material impact on our consolidated financial statements and related disclosures for the nine months ended September 30, 2018.

On April 1, 2018, the Company early adopted ASU 2017-11, “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815),” which addresses the complexity of accounting for certain financial instruments with down round features. The Company has concluded that the retroactive provisions of ASU 2017-11 had no impact on the accounting for the Company’s previously outstanding warrant which had been issued to the warrant holder as stock compensation.  

ASU 2017-11 changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. ASU 2017-11 also clarifies existing disclosure requirements for equity- classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, “Debt—Debt with Conversion and Other Options”), including related EPS guidance (ASC 260). Part II of ASU 2017-11 recharacterize the indefinite deferral of certain provisions of ASC 480 that now are presented as pending content in the ASC, to a scope exception. Those amendments do not have an accounting effect.

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Prior to the early adoption of ASU 2017-11, an equity-linked financial instrument with a down round feature that otherwise is not required to be classified as a liability under the guidance in ASC 480 is evaluated under the guidance in ASC 815, “Derivatives and Hedging,” to determine whether it meets the definition of a derivative. If it meets that definition, the instrument (or embedded feature) is evaluated to determine whether it is indexed to an entity’s own stock as part of the analysis of whether it qualifies for a scope exception from derivative accounting. Generally, for warrants and conversion options embedded in financial instruments that are deemed to have a debt host (assuming the underlying shares are readily convertible to cash or the contract provides for net settlement such that the embedded conversion option meets the definition of a derivative), the existence of a down round feature results in an instrument not being considered indexed to an entity’s own stock. This results in a reporting entity being required to classify the freestanding financial instrument or the bifurcated conversion option as a liability, which the entity must measure at fair value initially and at each subsequent reporting date.

ASU 2017-11 revises the guidance for instruments with down round features in ASC 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity,” which is considered in determining whether an equity-linked financial instrument qualifies for a scope exception from derivative accounting. An entity still is required to determine whether instruments would be classified in equity under the guidance in ASC 815-40 in determining whether they qualify for that scope exception. If they do qualify, freestanding instruments with down round features are no longer classified as liabilities and embedded conversion options with down round features are no longer bifurcated.

For entities that present EPS in accordance with ASC 260, and when the down round feature is included in an equity-classified freestanding financial instrument, the value of the effect of the down round feature is treated as a dividend when it is triggered and as a numerator adjustment in the basic EPS calculation. This reflects the occurrence of an economic transfer of value to the holder of the instrument, while alleviating the complexity and income statement volatility associated with fair value measurement on an ongoing basis. Convertible instruments are unaffected by ASU 2017-11.

Part I of ASU 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. ASU 2017-11 Part 1 should be applied retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs ASC 250-10-45-5 through 45-10.

The Company has determined that there were no previously outstanding financial instruments that fall under the scope of ASU 2017-11. Therefore, the Company has not determined and has not recorded a cumulative-effect adjustment to the balance sheet.

ASU 2017-11 Part II does not require any transition guidance because those amendments do not have an accounting effect.

The Company considered the impact of Part 1 of ASU 2017-11 and determined the Company had no financial instruments previously carried as derivative liabilities that were deemed to be such on the basis of embedded features containing down round provisions, resulting in the strike price being reduced on the basis of the pricing of future equity offerings. As a result, upon the early adoption provisions of ASU 2017-11, the Company did not record any adjustment to its books to account for any transition accounting issues.

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Results of Operations

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(in thousands)						(in thousands)
Revenue	$	—		$	23		$	—		$	173
Cost of revenue		—			15			—			223
Gross loss		—			8			—			(50	)
Operating expenses:
Research and development		494			960			1,121			3,010
Sales and marketing		167			494			683			1,474
General and administrative		1,338			1,095			3,378			3,624
Total operating expenses		1,999			2,549			5,182			8,108
Loss from operations		(1,999	)		(2,541	)		(5,182	)		(8,158	)
Other income (expense):
Interest income		7			13			23			25
Interest expense		(201	)		(82	)		(489	)		(100	)
Foreign exchange gain (loss)		2		—				10			(6	)
Other income		—		—			—				23
Re-measurement of warrant liability		10			7			13			(33	)
Other income (expense), net		(182	)		(62	)		(443	)		(91	)
Loss before income tax expense		(2,181	)		(2,603	)		(5,625	)		(8,249	)
(Benefit from) Provision for income taxes		2			6			(1	)		9
Net loss	$	(2,183	)	$	(2,609	)	$	(5,624	)	$	(8,258	)
Basic and diluted net loss per common share		(0.17	)	$	(0.23	)		(0.46	)	$	(0.74	)
Weighted-average number of common shares used in    basic and diluted net loss per common share		12,691,797			11,157,489			12,279,294			11,143,773

Three and nine months ended September 30, 2018 compared to three and nine months ended September 30, 2017

	Three Months Ended										Nine Months Ended
	September 30,				Change						September 30,					Change
	2018		2017		$			%			2018		2017			$			%
	(dollars in thousands)										(dollars in thousands)
Revenue	$	—	$	23	$	(23	)		(100.0	)%	$	—	$	173		$	(173	)		(100.0	)%
Cost of revenue		—		15		(15	)		(100.0	)%		—		223			(223	)		(100.0	)%
Gross loss		—		8		(8	)		(100.0	)%		—		(50	)		50			(100.0	)%

Revenue. The decrease in revenue for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017 was primarily due to the suspension of CE Mark in May 2017 and subsequent notification from SGS on November 10, 2017 that SGS was withdrawing the Certificate of Conformance for EndoBarrier, ending the CE Marking of EndoBarrier in Europe and select Middle East countries.

We believe the following factors continue to adversely affect our commercial activities:

• stopping the ENDO Trial in 2015 and the regulatory-related questions arising out of that decision;

• our decision, as part of our reorganization efforts, to reduce the number of sales related employees and focus sales activity on a limited number of markets while disengaging from others; and

• suspension and later withdrawal of the Company’s CE Certificate of Conformity.

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In the near-term, we intend to focus our efforts on clinical activities continuing to support efforts in collecting additional clinical evidence via the numerous ongoing investigator-initiated studies around the world, many of which are randomized controlled trials. The Company received its investigational device exemptionfrom the FDA in August 2018 and expects to complete enrollment of Stage I of the study during the first half of 2019.

Cost of Revenue. The decrease in cost of revenue for the three and nine months ended September 30, 2018 compared to the same period in the prior year was primarily due to the suspension of CE Mark in May 2017 and subsequent notification from SGS on November 10, 2017 that SGS was withdrawing the Certificate of Conformance for EndoBarrier, ending the CE Marking of EndoBarrier in Europe and select Middle East countries.

Operating expenses

	Three Months Ended										Nine Months Ended
	September 30,				Change						September 30,				Change
	2018		2017		$			%			2018		2017		$			%
	(dollars in thousands)										(dollars in thousands)
Research and development    expense	$	494	$	960	$	(466	)		(48.5	)%	$	1,121	$	3,010	$	(1,889	)		(62.8	)%
Sales and marketing expense		167		494		(327	)		(66.2	)%		683		1,474		(791	)		(53.7	)%
General and administrative    expense		1,338		1,095		243			22.2	%		3,378		3,624		(246	)		(6.8	)%
Total operating expenses	$	1,999	$	2,549	$	(550	)		(21.6	)%	$	5,182	$	8,108	$	(2,926	)		(36.1	)%

Research and Development Expense. The decrease in research and development expense for both the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017 was primarily due to significantly lower consulting fees. The Company relied heavily upon a team of quality system consultants to help revamp its quality system during the nine months ended September 30, 2017.

Sales and Marketing Expense. The decrease in sales and marketing expense for both the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017 was primarily due to reduced compensation and employee related costs caused by lower headcount in Germany, consulting fees, and international travel. The Company’s Vice President, International and Office Manager are no longer with the company as of September 30, 2018, along with several German consultants. These departures also lowered international travel expenses.    

General and Administrative Expense. The increase in general and administrative expense for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 was primarily a result of increased legal corporate and patent expenses in addition to increased salary and employee related costs primarily due to milestone bonuses earned and paid in relation to the Company’s approval of an investigational device exemption from the FDA in August 2018.

The decrease in general and administrative expense for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 was primarily due to compensation and employee related costs caused by lower headcount, consulting fees, rent and utilities expense and board of directors’ fees.

We continue to look for ways to realize a more efficient cost structure in order to extend our cash runway. We may not be able to achieve cost reductions in all instances as we look to build and support our organization for the potential of the future. We expect operating expenses for the fourth quarter of 2018 to approximate those of the third quarter in 2018.

	Three Months Ended												Nine Months Ended
	September 30,						Change						September 30,						Change
	2018			2017			$			%			2018			2017			$			%
	(dollars in thousands)												(dollars in thousands)
Other income (expense):
Interest income	$	7		$	13		$	(6	)		(46.2	)%	$	23		$	25		$	(2	)		(8.0	)%
Interest expense		(201	)		(82	)		(119	)		145.1	%		(489	)		(100	)		(389	)		389.0	%
Foreign exchange gain (loss)		2		—				2			100.0	%		10			(6	)		16			(266.7	)%
Other income		—		—			—				0.0	%	—				23			(23	)		(100.0	)%
Re-measurement of warrant    liability		10			7			3			42.9	%		13			(33	)		46			(139.4	)%
Total other income    (expense), net	$	(182	)	$	(62	)	$	(120	)		193.5	%	$	(443	)	$	(91	)	$	(352	)		386.8	%

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Other income (expense). The change to other income (expense), net, for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017 is primarily due to interest expense related to the Company’s 2017 Convertible Note Financing and the 2018 Convertible Note and Warrant Financing.

Liquidity and Capital Resources

The Company has incurred losses since our inception in March 2003 and, as of September 30, 2018, we had an accumulated deficit of approximately $265 million. We have financed our operations from a combination of sales of equity securities and issuances of convertible term notes. As of September 30, 2018, we had approximately $3.1 million of cash and cash equivalents.

In January 2017, we raised approximately $0.2 million, net of expenses, in an offering of our CDIs to eligible shareholders with a registered address in Australia or New Zealand. On June 15, 2017, we entered into a Note Purchase Agreement by and between the Company, as borrower, and Crystal Amber Fund Limited, as purchaser (the “Purchaser”). Pursuant to the Note Purchase Agreement, we issued and sold to the Purchaser a Senior Secured Convertible Promissory Note in an aggregate original principal amount of $5.0 million (the “2017 Note”). The Purchaser is a related party and our largest shareholder.

The 2017 Note accrues interest at a rate equal to 5% per annum, compounded annually, other than during the continuance of an event of default, when the 2017 Note accrues interest at a rate of 8% per annum. The entire outstanding principal balance and all unpaid accrued interest thereon is due on the maturity date, December 31, 2018. The Note is secured by a first priority security interest in substantially all of our personal property assets, including intellectual property and is convertible into the Company’s CDIs on the terms set forth therein.

In May 2018, the Company issued a Senior Unsecured Convertible Promissory Note in an aggregate original principal amount of $1.75 million (the “2018 Note”) and Warrant (the “2018 Warrant”) to its largest shareholder, Crystal Amber Fund Limited, which 2018 Note accrues interest at 10% per annum compounded annually. The entire outstanding principal balance of the 2018 Note and all unpaid accrued interest thereon is due on the maturity date, May 30, 2023. The issue of the 2018 Note and the 2018 Warrant, and the right of Crystal Amber Fund Limited to convert the 2018 Note, was approved by the shareholders of GI Dynamics during the Annual Meeting of Stockholders held on May 24, 2018.

In 2018, the Company received commitments for two private placements to sophisticated and professional investors in Australia, the United States and the United Kingdom, consisting of U.S. and non-U.S. persons (as defined in Regulation S (“Regulation S”) of the Securities Act of 1933 (the “Securities Act”)) to raise up to approximately $6.61 million (the “2018 Placements”). The first placement (“First Quarter 2018 Placement”) consisted of a total of 406,002,869 fully paid CDIs of the Company (representing 8,120,057 shares of common stock) at an issue price of A$0.035 per CDI. The issue of CDIs under the First Quarter 2018 Placement occurred in two tranches. The first tranche closed on January 22, 2018 (US EST), pursuant to which the Company issued 28,467,063 CDIs (representing 569,341 shares of common stock) resulting in gross proceeds of approximately $781 thousand and related issuance costs of $63 thousand.  The closing of the second tranche of the First Quarter 2018 Placement resulted in the raising of $824 thousand and related issuance costs of $39 thousand by the issue of 30,313,556 CDIs (606,271 shares) following stockholder approval granted on February 27, 2018. There were two participants in the First Quarter 2018 Placement second tranche; Crystal Amber Fund, a related party, purchased 27,391,756 CDIs. A Board member of the Company purchased 2,921,800 CDIs.

The second placement (“Autumn 2018 Placement”) consisted of a total of 347,222,250 fully paid CDIs of the Company (representing 6,944,445 shares of common stock) at an issue price of A$0.020 per CDI.  The investors in the Autumn 2018 Placement included certain existing investors.  The issue of these CDIs occurred in two tranches. The first tranche closed on September 20, 2018 (US EST), pursuant to which the Company issued 150,000,000 CDIs (representing 3,000,000 shares of common stock) resulting in gross proceeds of approximately $2.2 million and related issuance costs of $56 thousand. The closing of the second tranche resulted in the raising of $2.8 million by the issue of 197,222,250 CDIs (representing 3,944,445 shares of common stock) following stockholder approval at the adjourned Special Meeting of stockholders on October 29, 2018. There were three participants in the second tranche; Crystal Amber Fund, a related party, purchased 168,194,450 CDIs. Existing investors in the United States and Australia also purchased 23,819,450 and 5,208,350 CDIs, respectively. All second tranche CDIs are expected to be allotted to investors in November 2018.

During the nine months ended September 30, 2018, our cash and cash equivalents balance slightly increased as a result of funds utilized to support our operations offset by proceeds from financing activities.  

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

	Nine Months Ended
	2018			2017
	(in thousands)
Net cash (used in) provided by:
Operating activities	$	(5,202	)	$	(7,647	)
Investing activities		—			(5	)
Financing activities		5,272			4,869
Net increase (decrease) in cash and cash equivalents	$	70		$	(2,783	)

Cash Flows From Operating Activities

The primary uses of cash used in operating activities for the nine months ended September 30, 2018 were:

• to fund our net loss of approximately $5.6 million and;

• a net negative adjustment to cash flow from changes in working capital of approximately $0.1 million resulting primarily from a decrease in accounts payable offset by an increase in accrued expenses.

The primary uses of cash used in operating activities for the nine months ended September 30, 2017 were:

• to fund our net loss of approximately $8.3 million and;

• a net positive adjustment to cash flow from changes in working capital of approximately $0.3 million resulting primarily from decreases in inventory and prepaid expenses.  

Cash Flows From Investing Activities

No cash was used in investing activities for the nine months ended September 30, 2018.

Cash used in investing activities for the nine months ended September 30, 2017 totaled approximately $5 thousand and resulted from the purchase from equipment.

Cash Flows From Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2018 totaled approximately $5.3 million and primarily resulted from proceeds received in May 2018 from the 2018 Note payable to a related party and net proceeds from our private placement of CDIs offset by related issuance costs.

Cash provided by financing activities for the nine months ended September 30, 2017 is due to the net proceeds from the approximately $5 million 2017 Note the Company issued in June 2017 and to a lesser extent, issuance of common stock in January 2017 offset by payments on our short-term 2017 Note payable to a related party.  

Funding Requirements

As of September 30, 2018, our primary source of liquidity was our cash and cash equivalents balances of approximately $3.1 million.  

As a result of our focus on a new pivotal clinical trial in the United States, and due to the lack of regulatory approval in the EU and other jurisdictions, we are focused on the generation of clinical data and regulatory approvals and are not currently focused on revenue-generating operations. As a result, we expect to incur significant operating losses for the next several years. We do not expect our current cash balances will be sufficient to enable us to conduct an additional clinical trial in the U.S. for the purpose of seeking regulatory approval from the FDA. The Company continues to restructure our costs and believes that our current cash and cash equivalents will not be sufficient to fund our operations beyond the fourth quarter of 2018, as the 2017 Note is currently payable on December 31, 2018. Both parties are aware that if the Company is required to make this payment on the due date of December 31, 2018, it will be required either to renegotiate the due date of the loan or potentially cease operations. Crystal Amber and the Company are planning to discuss an extension of the due date of the 2017 Note, but there can be no assurance that any extension will occur. If the Company is able to amend the terms of the 2017 Note, it believes its cash and cash equivalents will be sufficient to fund operations into the earlier of the second quarter of 2019 or until the modified due date of the note.

Our forecast of the period of time through which our financial resources will be adequate to support our operations are forward-looking statements and involve risks and uncertainties, and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in the “Risk Factors” in Item 1A. of our Annual Report on Form 10-K, which is incorporated by reference

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herein. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

Due to the numerous risks and uncertainties associated with securing regulatory approval for EndoBarrier, at this time we are unable to estimate precisely the amounts of capital outlays and operating expenditures necessary to complete the task of obtaining regulatory approval for EndoBarrier. Our funding requirements will depend on many factors, including, but not limited to, the following:

• the rate of progress and cost of our commercialization activities;

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

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

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

• the success of our research and development efforts;

• 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.

We will continue to manage our capital structure and to consider all financing opportunities, whenever they may occur, that could strengthen our long-term liquidity profile. Any such capital transactions may or may not be similar to transactions in which we have engaged in the past and the ownership interests of our existing stockholders may be materially diluted. There can be no assurance that any such financing opportunities will be available on acceptable terms, if at all. In addition, the Company could be required to cease operations if it is unable to raise capital when needed.

Off–Balance Sheet Arrangements

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

Contractual Obligations and Commitments

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

There have been no material changes from the contractual commitments and obligations previously disclosed in our Annual Report on Form 10-K.

Recent Accounting Pronouncements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We conduct business in foreign countries and our cash flows are exposed to market risk from changes in currency exchange and interest rates.

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Interest Rate Sensitivity

Our cash and cash equivalents of approximately $3.1 million at September 30, 2018, consisted of cash and money market funds, all of which will be used for working capital purposes. We do not enter into investments for trading or speculative purposes. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of interest rates in the U.S. and Australia. Because of the short-term nature of our cash and cash equivalents, we do not believe that we have any material exposure to changes in their fair values as a result of changes in interest rates. The continuation of historically low interest rates in the U.S. will limit our earnings on investments held in U.S. dollars.

Foreign Currency Risk

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

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

All proceeds from our 2011, 2013, 2014, and 2016 offerings, along with a portion of our 2017 and 2018 offerings, were denominated in Australian dollars and as of September 30, 2018, we held the equivalent of approximately US $24 thousand denominated in Australian dollars and approximately US $109 thousand denominated in euros. Accordingly, we have had and will continue to have exposure to foreign currency exchange rate fluctuations. A change of 10% or more in foreign currency exchange rates of the Australian dollar or the euro would not have a material impact on our financial position and results of operations.

Effects of Inflation

We do not believe that inflation and changing prices over the three and nine months ended September 30, 2018 and 2017 had a significant impact on our results of operations.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, or the Exchange Act, our management, including our principal executive officer and our principal financial and accounting officer, conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and such information required to be disclosed by us in the reports we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate to allow timely decisions regarding required disclosure. Our principal executive officer and principal financial and accounting officer have concluded that, based on and as of the time of such evaluation, our disclosure controls and procedures were not effective at the reasonable assurance level. This conclusion was based on the material weaknesses in our internal control over financial reporting further described below.

Material Weakness in Internal Control Over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected and corrected on a timely basis. In connection with the preparation of our interim financial statements for the three and nine months ended September 30, 2018, we identified the following material weaknesses in our internal control over financial reporting:

• Failure to review transactions before posting to general ledger; and

• Lack of effective controls to adequately restrict access and segregate duties. Specifically, due to the limited number of staff in our accounting function;

o Reconciliations, trial balances, and financial statements are prepared and reviewed by the principal financial and accounting officer.

o The principal financial and accounting officer has administrative rights to the financial reporting system.

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o The principal financial and accounting officer is able to generate, print and sign checks up to a certain threshold, record the payments, and reconcile the main bank account.

• Lack of requisite accounting knowledge and inadequate written policies and procedures surrounding complex debt and equity arrangements with respect to both GAAP and the guidelines of the SEC.

Upon identifying these material weaknesses, we performed additional procedures to evaluate the impact on the financial statements. Based on these procedures, we believe the material weaknesses did not result in any material misstatements to our financial statements and we believe the consolidated financial statements included in this Quarterly Report present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles. However, these material weaknesses could result in a misstatement of our accounts or disclosures that would result in a material misstatement of our financial statements that would not be prevented or detected. In September 2018, the Company hired a part-time consultant who is a seasoned medical technology CFO to advise the CEO and finance team. We intend to remedy our material weakness with regard to insufficient segregation of duties by hiring additional employees in order to segregate duties in a manner that establishes effective internal controls once resources become available.

Additionally, in the three months ended September 30, 2018, we identified the following material weakness in our internal controls over financial reporting: our internal controls failed to prevent or timely detect unauthorized cash disbursements made from August 2016 through May 2018. Specifically, due to (i) a lack of controls within our bank portal to prevent manual edits to wire payment templates and (ii) ineffective reporting of payables to detect duplicate payments, these controls were not adequate to safeguard our cash assets from duplicate payments being diverted by a former employee to a personal account. The material weakness in our controls resulted in the inability to prevent and timely detect the fraud loss. The Company performed additional procedures to evaluate the impact on its financial statements. Based on these procedures, the Company believes that the material weaknesses did not result in any material misstatements to our consolidated financial statements for the years ended December 31, 2017 and 2016, and for the quarters ended March 31, 2016 through September 30, 2018. The Company has investigated these incidents and expects that the amount of the loss will be covered by our insurance. We have begun implementing the following to remediate this material weakness:

• Elimination of non-template electronic payment initiation, editing by initiator, and initiation of two-party review of new recipient entries, including bank information;

• Management reporting reformatting to highlight invoice and payment duplications and unusual payables, including recent activity reporting by vendor; and,

• increase internal communications to improve security awareness and to emphasize the importance of exercising professional skepticism.

Changes in Internal Control

As required by Rule 13a-15(d) of the Exchange Act, our management, including our principal executive officer and our principal financial and accounting officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our principal executive officer and principal financial and accounting officer concluded that changes in internal control outlined above could materially affect our internal control over financial reporting.

Inherent Limitations on Controls and Procedures

Our management, including our principal executive officer and principal financial and accounting officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Thus, misstatements due to error or fraud may occur and not be detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of controls.

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PART II – OTHER INFORMATION

Item 1A. Risk Factors:

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

Item 2. Unregistered Sales of Equity Securities:

In September 2018, the Company received commitments for a private placement of 347,222,250 fully paid CDIs of the Company (representing 6,944,445 shares of common stock) at an issue price of A$0.020 per CDI to sophisticated and professional investors, including certain existing investors, in Australia, the United States and the United Kingdom consisting of U.S. and non-U.S. persons (as defined in Regulation S (“Regulation S”) of the Securities Act of 1933, as amended (the “Securities Act”)). The issue of these CDIs under this placement occurred in two tranches. The first tranche closed on September 20, 2018 (US EST), pursuant to which the Company issued 150,000,000 CDIs (representing 3,000,000 shares of common stock) resulting in gross proceeds of approximately $2.2 million.  The closing of the second tranche resulted in the raising of $2.8 million by the issue of 197,222,250 CDIs (representing 3,944,445 shares of common stock) following stockholder approval at the adjourned Special Meeting of stockholders on October 29, 2018. There were three participants in the second tranche; Crystal Amber Fund, a related party, purchased 168,194,450 CDIs. All second tranche CDIs are expected to be allotted to investors in November 2018. Existing investors in the United States and Australia also purchased 23,819,450 and 5,208,350 CDIs, respectively. The securities sold in this private placement were issued in reliance on an exemption from the registration requirements of the Securities Act afforded by Rule 506 of Regulation D under the Securities Act with respect to purchasers who are U.S.-persons and Regulation S with respect to purchasers who are non-U.S. purchasers.

Item 6.Exhibits

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

EXHIBIT INDEX

Exhibit No:	Description
31.1*	Certification of principal executive officer pursuant to Rules 13a-14 or 15d-14 of the Exchange Act
31.2*	Certification of principal financial officer pursuant to Rules 13a-14 or 15d-14 of the Exchange Act
32.1‡	Certification of principal executive officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350
32.2‡	Certification of principal financial officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Database
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

* Filed herewith.

‡ Furnished herewith.

† Management contract or compensatory plan or arrangement.

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SIGNATURES

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

	GI Dynamics, Inc.
Date: November 14, 2018	By:	/s/ SCOTT W. SCHORER
		Scott W. Schorer
		President and Chief Executive Officer
		(principal executive officer)
Date: November 14, 2018	By:	/s/ DAVE BRUCE
		Dave Bruce Director of Finance, Secretary
		(principal financial and accounting officer)

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EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT

TO RULES 13a-14(a) OR 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Scott W. Schorer, certify that:

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

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

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

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

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

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

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

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

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

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

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

Date: November 14, 2018

/s/ SCOTT W. SCHORER

Scott W. Schorer

Chief Executive Officer

(principal executive officer)

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT

TO RULES 13a-14(a) OR 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Dave Bruce, certify that:

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

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

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

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

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

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

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

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

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

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

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

Date: November 14, 2018

/s/ DAVE BRUCE

Dave Bruce

Director of Finance, Secretary

(principal accounting and financial officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of GI Dynamics, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scott W. Schorer, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:

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

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

/s/ SCOTT W. SCHORER

Scott W. Schorer

Chief Executive Officer

(principal executive officer)

November 14, 2018

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

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of GI Dynamics, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dave Bruce, Director of Finance of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:

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

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

/s/ DAVE BRUCE

Dave Bruce

Director of Finance, Secretary

(principal accounting and financial officer)

November 14, 2018

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

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2018	Nov. 10, 2018
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2018
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q3
Trading Symbol	GIDYL
Entity Registrant Name	GI DYNAMICS, INC.
Entity Central Index Key	0001245791
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	true
Entity Ex Transition Period	true
Entity Common Stock, Shares Outstanding		15,333,100

XML

Consolidated Balance Sheets - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Current assets:
Cash and cash equivalents	$ 3,104,000	$ 3,034,000
Restricted cash	30,000	30,000
Accounts receivable, net	0	40,000
Prepaid expenses and other current assets	259,000	265,000
Total current assets	3,393,000	3,369,000
Property and equipment, net	84,000	97,000
Total assets	3,477,000	3,466,000
Current liabilities:
Accounts payable	749,000	1,191,000
Accrued expenses	1,516,000	1,021,000
Deferred revenue	11,000	11,000
Short term debt to related party, net	4,985,000	4,929,000
Total current liabilities	7,261,000	7,152,000
Warrant liability	16,000	29,000
Long term debt to related party, net	96,000
Total liabilities	7,373,000	7,181,000
Commitments (Note 11)
Stockholders’ deficit:
Preferred stock, $0.01 par value – 500,000 shares authorized; no shares issued and outstanding at September 30, 2018 and December 31, 2017
Common stock, $0.01 par value – 50,000,000 shares authorized at September 30, 2018 and December 31, 2017, respectively; 15,333,100 and 11,157,489 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively	154,000	112,000
Additional paid-in capital	260,695,000	255,294,000
Accumulated deficit	(264,745,000)	(259,121,000)
Total stockholders’ deficit	(3,896,000)	(3,715,000)
Total liabilities and stockholders’ deficit	$ 3,477,000	$ 3,466,000

XML

Consolidated Balance Sheets (Parenthetical) - $ / shares	Sep. 30, 2018	Dec. 31, 2017
Statement Of Financial Position [Abstract]
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	500,000	500,000
Preferred stock, issued	0	0
Preferred stock, outstanding	0	0
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	50,000,000	50,000,000
Common stock, shares issued	15,333,100	11,157,489
Common stock, shares outstanding	15,333,100	11,157,489

XML

Consolidated Statements of Operations - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Income Statement [Abstract]
Revenue	$ 0	$ 23,000	$ 0	$ 173,000
Cost of revenue		15,000		223,000
Gross loss		8,000		(50,000)
Operating expenses:
Research and development	494,000	960,000	1,121,000	3,010,000
Sales and marketing	167,000	494,000	683,000	1,474,000
General and administrative	1,338,000	1,095,000	3,378,000	3,624,000
Total operating expenses	1,999,000	2,549,000	5,182,000	8,108,000
Loss from operations	(1,999,000)	(2,541,000)	(5,182,000)	(8,158,000)
Other income (expense):
Interest income	7,000	13,000	23,000	25,000
Interest expense	(201,000)	(82,000)	(489,000)	(100,000)
Foreign exchange gain (loss)	2,000		10,000	(6,000)
Other income				23,000
Re-measurement of warrant liability	10,000	7,000	13,000	(33,000)
Other income (expense), net	(182,000)	(62,000)	(443,000)	(91,000)
Loss before income tax expense	(2,181,000)	(2,603,000)	(5,625,000)	(8,249,000)
(Benefit from) Provision for income taxes	2,000	6,000	(1,000)	9,000
Net loss	$ (2,183,000)	$ (2,609,000)	$ (5,624,000)	$ (8,258,000)
Basic and diluted net loss per common share	$ (0.17)	$ (0.23)	$ (0.46)	$ (0.74)
Weighted-average number of common shares used in basic and diluted net loss per common share	12,691,797	11,157,489	12,279,294	11,143,773

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	1 Months Ended	3 Months Ended		9 Months Ended		12 Months Ended
	Jan. 31, 2017	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Operating activities:
Net loss				$ (5,624)	$ (8,258)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization				11	46
Loss on disposal of leasehold improvements				2
Amortization of debt issuance costs non-cash interest expense				141	25
Non-cash interest expense				249	73
Accretion of debt discount				96
Stock-based compensation expense				86	162
Re-measurement of warrant liability		$ (10)	$ (7)	(13)	33
Change in inventory reserve					(76)
Changes in operating assets and liabilities:
Accounts receivable				40	(11)
Prepaid expenses and other current assets				6	53
Inventory					289
Accounts payable				(442)	122
Accrued expenses				246	(105)
Net cash used in operating activities				(5,202)	(7,647)
Investing activities
Purchases of property and equipment					(5)
Net cash used in investing activities					(5)
Financing activities
Proceeds from issuance of common stock, net of issuance costs	$ 200			3,607	198
Debt issuance costs				(85)	(115)
Proceeds from long term debt, related party				1,750	5,000
Payments on short term note payable					(214)
Net cash provided by financing activities				5,272	4,869
Net increase (decrease) in cash and cash equivalents				70	(2,783)
Cash, cash equivalents and restricted cash at beginning of period	$ 8,323			3,064	8,323	$ 8,323
Cash, cash equivalents and restricted cash at end of period		$ 3,134	$ 5,540	3,134	5,540	$ 3,064
Supplemental cash flow disclosures
Income taxes paid				25	31
Effect on retained earnings of adopting ASU No. 2016-09 in 2017					$ 28
Beneficial conversion feature discount associated with 2018 Note				1,007
Relative fair value of warrant issued with 2018 Note				$ 743

XML

Nature of Business

9 Months Ended

Sep. 30, 2018

Accounting Policies [Abstract]

Nature of Business

1. Nature of Business

GI Dynamics, Inc. (the “Company”) was incorporated on March 24, 2003, as a Delaware corporation, with operations based in Boston, Massachusetts.

GI Dynamics is a clinical stage medical device company focused on the development and commercialization of EndoBarrier, a medical device indicated for treatment of patients with type 2 diabetes and obesity or obesity alone.  

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% of the worldwide diabetes population, whereas 10% of this population is diagnosed with type 1 diabetes (a form of diabetes mellitus in which not enough 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. Obesity and its comorbidities contribute to the progression of type 2 diabetes. Many experts believe obesity contributes to higher levels of insulin resistance, which creates a feedback loop that increases the severity of type 2 diabetes.

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

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

The current treatment paradigm for type 2 diabetes is primarily pharmacological, whereby treating clinicians prescribe a treatment regimen of 1–4 concurrent medications that could include insulin for patients with higher levels of blood sugar. Insulin carries a significant risk of increased mortality and directly contributes to weight gain, which in turn leads to higher levels of insulin resistance and diabetes. In other words, the primary drug used to treat severe type 2 diabetes raises risk significantly and increases the downstream progression of the disease by increasing obesity. Fewer than 50% of patients treated pharmacologically for type 2 diabetes are adequately managed, meaning that medication alone does not halt the progressive nature of diabetes for these patients.

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

Our vision is to make EndoBarrier the essential nonpharmacological and nonsurgical treatment for patients with type 2 diabetes and obesity. We intend to achieve this vision by providing a safe and effective device, focusing on patient safety, supporting treating clinicians, adding to the extensive body of clinical evidence around EndoBarrier by conducting clinical trials, gaining appropriate regulatory approvals, continuing to improve our products and systems, operating the company in a lean fashion, and maximizing shareholder value.

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

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

In the U.S., the Company received approval from the Food and Drug Administration (“FDA”), to commence its pivotal trial of EndoBarrier (the “ENDO Trial”), which the Company began in 2013. The multi-center, randomized, double-blinded study planned to enroll 500 patients with uncontrolled type 2 diabetes and obesity at 25 sites in the U.S. The primary endpoint was improvement in diabetes control as measured by HbA1c levels. In the second half of fiscal year 2015, the Company announced its decision to stop the ENDO Trial.

On August 21, 2015, the Company announced that it was reducing headcount by approximately 46% as part of its efforts to restructure its business and expenses in response to stopping the ENDO Trial and to ensure sufficient cash remained available for it to establish new priorities, continue limited market development and research, and to evaluate strategic options.

In the second and third quarters of fiscal 2016, the Company took additional actions that it thought necessary to allow the opportunity to evolve its strategic options. These actions resulted in non-recurring charges totaling approximately $1.1 million, including $0.4 million related to restructuring charges in our second quarter, $0.6 million related to employee departures in both our second and third quarters and $0.1 million related to abandonment of our former headquarters in Lexington, MA.

In October 2016, the Company received final cancellation notification from the Therapeutic Goods Administration (“TGA”) for the listing of EndoBarrier on the Australian Register of Therapeutic Goods (“ARTG”).

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

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

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

In August 2018, the Company received approval of an investigational device exemption (IDE) from the U.S. Food and Drug Administration (FDA) to begin enrollment in a pivotal trial evaluating the safety and efficacy of EndoBarrier in the United States pending Institutional Review Board (IRB) approval.  

From its inception in 2003 to its initial public offering (“IPO”) in 2011, the Company was financed by a series of preferred stock financings In September 2011, the Company completed its initial public offering (“IPO”) of common stock in the form of CHESS Depositary Interests (“CDIs”) in Australia. As a result of the IPO and simultaneous private placement in the U.S., the Company raised a total of approximately $72.5 million in proceeds, net of expenses and repayment of $6.0 million of the Company’s Convertible Term Promissory Notes. Additionally, in July and August 2013, the Company issued CDIs on the Australian Securities Exchange (“ASX”) through a private placement and Share Purchase Plan (“SPP”), which raised a total of approximately $52.5 million, net of expenses. In May 2014, the Company raised an additional total of approximately $30.8 million, net of expenses, when it issued CDIs on the ASX through a private placement.

On December 20, 2016, the Company completed a private placement issue of 69,865,000 CDIs (1,397,300 shares) at an issue price of $0.22 per CDI raising approximately $1.0 million, net of issuance costs. In January 2017, the Company completed the issue of 12,481,600 CDI’s (249,632 shares) to eligible investors under a Security Purchase Plan for approximately $0.83 per share (A$0.022 per CDI) resulting in net proceeds after issuance costs of approximately $0.2 million.

In June 2017, the Company completed a Convertible Term Promissory Note (the “2017 Note”) financing with its largest shareholder Crystal Amber for a gross amount of $5.0 million that accrues interest at 5% per annum compounded annually. Crystal Amber is deemed a Related Party of the Company due to the size of its ownership position. The Note is due by December 31, 2018 and contains provisions for conversion during the term of the 2017 Note (See Note 10 of the Consolidated Financial Statements for a more complete description of the terms and conditions).

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

In May 2018, the Company completed a Convertible Term Promissory Note (the “2018 Note”) and Warrant (the “2018 Warrant”) financing with its largest shareholder Crystal Amber for a gross amount of $1.75 million that accrues interest at 10% per annum compounded annually. The Note and Warrant financing was approved in a vote of the shareholders of GI Dynamics during the Annual Meeting of Stockholders held on May 24, 2018. The 2018 Note matures and the 2018 Warrant expires on May 30, 2023. Crystal Amber is deemed a Related Party of the Company due to the size of its ownership position. (See Note 10 of the Consolidated Financial Statements for a more complete description of the terms and conditions).

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

Going Concern

As of September 30, 2018, the Company’s primary source of liquidity is its cash and cash equivalents balances. The Company continues to evaluate which markets are appropriate to pursue regulatory approvals, continue pursuing reimbursement, market awareness and general market development and selling efforts. The Company continues to restructure its business and costs, establish new priorities, and evaluate strategic options. As a result, if the Company remains in business, it expects to incur significant operating losses for the next several years.

The Company has incurred operating losses since inception and at September 30, 2018 had an accumulated deficit of approximately $265 million, a working capital deficit of approximately $3.9 million, cash used in operating activities of approximately $5.2 million and cash and cash equivalents of approximately $3.1 million. $2.8 million from the second and final tranche of the 2018 private placement was received in November 2018. Cash provided by these activities will be used predominantly to prepare for the Company’s clinical trial, which will result in increased expenses. The Company does not expect its current cash balances will be sufficient to operate beyond the end of the fourth quarter of 2018, as the 2017 Note is payable on December 31, 2018. Both parties are aware that if the Company is required to make this payment on the due date of December 31, 2018, it will be required either to renegotiate the due date of the loan or potentially cease operations. Crystal Amber and the Company are planning to discuss an extension of the due date of the 2017 Note, but there can be no assurance that any extension will occur. If the Company is able to amend the terms of the 2017 Note, it believes its cash and cash equivalents will be sufficient to fund operations into the earlier of the second quarter of 2019 or until the modified due date of the note. The Company will need to raise additional funds through any combination of collaborative arrangements, strategic alliances, and additional equity and debt financings or from other sources.

The Company has no guaranteed source of capital that will sustain operations beyond the fourth quarter of 2018, as the 2017 Note is currently payable on December 31, 2018. Crystal Amber and the Company are planning to discuss an amendment to the terms of the 2017 Note, but there can be no guarantee that this will happen. If the Company is able to amend the terms of the 2017 Note, it believes its cash and cash equivalents will be sufficient to fund operations into the earlier of the second quarter of 2019 or until the modified due date of the note. There can be no assurance that other potential financing opportunities will be available on acceptable terms, if at all. As such, if access to capital is not achieved to satisfy cash needs in the near term, the Company’s business, financial condition and results of operations will be materially harmed or the Company may be required to cease operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.

The accompanying consolidated financial statements have been prepared assuming the Company 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 as of September 30, 2018 and December 31, 2017 and the three and nine months ended September 30, 2018 and 2017 do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.

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Summary of Significant Accounting Policies and Basis of Presentation

9 Months Ended

Sep. 30, 2018

Accounting Policies [Abstract]

Summary of Significant Accounting Policies and Basis of Presentation

2. Summary of Significant Accounting Policies and Basis of Presentation

The accompanying interim consolidated financial statements and related disclosures as of September 30, 2018, and for the three and nine months ended September 30, 2018 and 2017 are unaudited and have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K (“Form 10-K”), filed with the SEC on March 28, 2018. The December 31, 2017 consolidated balance sheet included herein was derived from the audited financial statements as of that date but does not include all disclosures including notes required by GAAP for complete financial statements.

Principles of Consolidation

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

Use of Estimates

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

Cash and Cash Equivalents

The Company considers all highly liquid investment instruments with an original maturity when purchased of three months or less to be cash equivalents. Investments qualifying as cash equivalents primarily consist of money market funds and have a carrying amount that approximates fair value. The amount of cash equivalents included in cash and cash equivalents was approximately $3.1 millionat September 30, 2018 and $3.0 million at December 31, 2017, respectively.

Inventory

The Company states inventory at the lower of first-in, first-out cost or net realizable value. When capitalizing inventory, the Company considers factors such as status of regulatory approval, alternative use of inventory, and anticipated commercial use of the product. At September 30, 2018 and December 31, 2017, the Company had a net inventory balance of $0.

Property and Equipment

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

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

Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the remaining lease term. Costs for capital assets not yet placed into service have been capitalized as construction in progress and will be depreciated in accordance with the above guidelines once placed into service. Maintenance and repair costs are expensed as incurred. The Company recorded a loss on disposal of $2 thousand in connection with the expiration of its office lease and the related leasehold improvements on April 13, 2018.

Revenue Recognition

Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) using the modified retrospective method. ASU 2014-09 is a comprehensive revenue recognition standard that superseded nearly all existing revenue recognition guidance. Upon adoption, the Company discontinued revenue deferral under the sell-through model and commenced recording revenue upon delivery to distributors, net of estimated returns. Upon adoption of ASU 2014-09, there was no impact on the Company’s financial statements. The comparative financial information presented has not been restated and continues to be reported under the accounting standards in effect for those periods.

Revenues include product sales, net of estimated returns. As of January 1, 2018, revenue is measured as the amount of consideration the Company expects to receive in exchange for product transferred. Revenue is recognized when contractual performance obligations have been satisfied and control of the product has been transferred to the customer. In most cases, the Company has a single product delivery performance obligation. Product returns are estimated based on historical data and evaluation of current information.

From January 1, 2018 to September 30, 2018, the Company did not enter into any revenue contracts with customers and did not recognize or defer any revenue related to new contracts.

At September 30, 2018 and December 31, 2017, the Company had deferred revenue of approximately $11thousand.

At December 31, 2017, following the notification by MHRA, the Company calculated an estimate for returns, reversed its revenue and recorded an accrued expense estimate of $0.2 million of product return related costs.

Shipping and Handling Costs

Shipping and handling costs are included in costs of revenue.

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 pre-approval regulatory and clinical trial expenses.

Patent Costs

The Company expenses as incurred all costs, including legal expenses, associated with obtaining patents until the patented technology becomes feasible. All costs incurred after the patented technology is feasible will be capitalized as an intangible asset. As of September 30, 2018, and December 31, 2017, no such costs had been capitalized. The Company expensed approximately $0.1 million and $0.3 of patent costs within general and administrative expenses in the consolidated statements of operations for the nine months ended September 30, 2018 and 2017, respectively.    

Stock-Based Compensation

The Company 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 and recognized as an expense in the financial statements and that such expense be measured at the grant date fair value.

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

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

Stock awards to non-employees are accounted for in accordance with ASC 505-50, Equity-Based Payments to Non-Employees (“ASC 505-50”). The measurement date for non-employee awards is generally the date performance of services required from the non-employee is complete. For non-employee awards that vest based on service conditions, the Company expenses the value of the awards over the related service period, provided they expect the service condition to be met. The Company records the expense of services rendered by non- employees based on the estimated fair value of the stock option using the Black-Scholes option pricing model over the contractual term of the non-employee. The fair value of unvested non-employee awards is remeasured at each reporting period and expensed over the vesting term of the underlying stock options on a straight-line basis. The Company adopted ASU No. 2016-09 Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting during the year ended December 31, 2017. The Company adjusted its accumulated deficit related to the accounting policy election to recognize the impact of share-based award forfeitures only as they occur rather than by applying an estimated forfeiture rate as previously required. ASU No. 2016-09 requires that this change be applied using a modified-retrospective transition method by means of a cumulative-effect adjustment to accumulated deficit as of the beginning of the fiscal year in which the guidance is adopted. As a result of this adoption, the Company recorded a decrease to accumulated deficit of approximately $28 thousand with an offset to Additional Paid in Capital as of January 1, 2018.  

The stock-based compensation plans provide that grantees may have the right to exercise an option prior to vesting. Shares purchased upon the exercise of unvested options will be subject to the same vesting schedule as the underlying options and are subject to repurchase at the original exercise price by the Company should the grantee discontinue providing services to the Company for any reason, prior to becoming fully vested in such shares.

Impairment of Long-Lived Assets

The Company 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.

Loss Contingencies

In accordance with ASC 450, Contingencies, the Company 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, the Company accrues the minimum amount of the range.

Income Taxes

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

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

Guarantees

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

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

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

For the nine months ended September 30, 2018, and 2017, the Company had not experienced any material losses related to these indemnification obligations, and no material claims with respect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible. As a result, no related reserves have been established.

Issuance Costs Related to Equity and Debt

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

Embedded Conversion Features

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

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

Subsequent Events

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

New Accounting Pronouncements

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

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance. The new standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB approved a one-year deferral of the effective date of this standard to annual reporting periods, and interim reporting periods within those years, beginning after December 15, 2017. The Company adopted this standard effective January 1, 2018 using the modified retrospective method. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.    

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (“ASU 2015- 11”). ASU 2015-11, which simplifies the measurement of inventories valued under most methods, including the Company’s inventories valued under FIFO — the first-in, first-out cost method. Inventories valued under LIFO — the last-in, first-out method — are excluded. Under this new guidance, inventories valued under these methods would be valued at the lower of cost and net realizable value, with net realizable value defined as the estimated selling price less reasonable costs to sell the inventory. This guidance is effective for annual reporting beginning after December 15, 2016, including interim periods within the year of adoption, with early application permitted. The Company adopted this standard on January 1, 2017. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which addresses the recognition, measurement, presentation and disclosure of financial assets and liabilities. This ASU primarily affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, this ASU clarifies the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. This standard became effective on January 1, 2018. This standard did not have a material impact on our consolidated financial statements and related disclosures for the nine months ended September 30, 2018.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. ASU 2016-02 requires that lessees recognize in the statement of financial position for all leases (with the exception of short-term leases) 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 adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 will simplify the income tax consequences, accounting for forfeitures and classification on the statements of consolidated cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The Company elected to adopt ASU 2016-09 in the first quarter of 2017 retrospectively to January 1, 2017. As a result of adopting ASU No. 2016-09 during the year ended December 31, 2017, the Company adjusted its accumulated deficit related to the accounting policy election to recognize the impact of share-based award forfeitures only as they occur rather than by applying an estimated forfeiture rate as previously required. ASU No. 2016-09 requires that this change be applied using a modified-retrospective transition method by means of a cumulative-effect adjustment to accumulated deficit as of the beginning of the fiscal year in which the guidance is adopted. As a result of this adoption, the Company recorded a decrease to accumulated deficit of approximately $28 thousand with an offset to Additional Paid-in Capital as of January 1, 2017.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), or ASU 2016-15. The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under FASB Accounting Standards Codification 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. We have evaluated the impact of ASU No. 2016-15 and noted it had no impact on our consolidated financial statements for the nine months ended September 30, 2018.  

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issue Task Force), or ASU 2016-18. This new standard addresses the diversity that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within the year of adoption, with early adoption permitted. Our consolidated financial statements reflect this standard for the nine months ended September 30, 2018 and 2017.  

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (ASC 260) Distinguishing Liabilities from Equity (ASC 480) Derivatives and Hedging (ASC 815),” which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. For public business entities, the amendments in Part I of ASU 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has chosen to early adopt this standard on April 1, 2018 with retroactive restatement of comparative periods. The Company has concluded that the retroactive provisions of ASU 2017-11 had no impact on the accounting for the Company’s previously outstanding warrant which had been issued to the warrant holder as stock compensation.

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Net Loss per Common Share

9 Months Ended

Sep. 30, 2018

Earnings Per Share [Abstract]

Net Loss per Common Share

3. Net Loss per Common Share

Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Potential common stock equivalents are determined using the treasury stock method. For diluted net loss per share purposes, the Company excludes stock options and other stock-based awards, including shares issued as a result of option exercises but which are subject to repurchase by the Company, whose effect would be anti-dilutive from the calculation. During the three and nine months ended September 30, 2018 and 2017, common stock equivalents were excluded from the calculation of diluted net loss per common share, as their effect was anti-dilutive due to the net loss incurred. Therefore, basic and diluted net loss per share was the same in all periods presented.

The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares outstanding as of September 30, 2018 and 2017, as they would be anti-dilutive:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Warrants to purchase common stock		1,972,976		28,532		1,972,976		28,532
Options to purchase common stock and other stock-based    awards		1,545,719		1,504,938		1,545,719		1,504,938
Total		3,518,695		1,533,470		3,518,695		1,533,470

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Warrants to Purchase Common Stock and CDIs

9 Months Ended

Sep. 30, 2018

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Warrants to Purchase Common Stock and CDIs

4. Warrants to Purchase Common Stock and CDIs

On May 4, 2016, the Company entered into a consulting agreement pursuant to which a consulting firm provides strategic advisory, finance, accounting, human resources and administrative functions, including chief financial officer services, to the Company. In connection with the consulting agreement, the Company granted the consulting firm a warrant (“Consultant Warrant”) to purchase up to 28,532 shares of the Company’s common stock at an exercise price per share equal to $0.64. The Consultant Warrant vests on a monthly basis over two years and has a term of five years. The Company has reserved 28,532 shares of common stock related to the Consultant Warrant. As of September 30, 2018, the Consultant Warrants had not been exercised.

The Company accounts for the Warrants under Accounting Standards Codification 815, Derivatives and Hedging (“ASC 815”). The Consultant Warrant contains a cashless exercise provision which meets the net settlement criteria of ASC 815 and is therefore considered a derivative and is classified as a liability.

The Consultant Warrant is classified as a liability and as such the fair value of the Warrant must be remeasured at each reporting period. At the time the Warrant was issued, the Company estimated the fair value of the Warrant using the Black-Scholes option pricing model. The Company remeasures the fair value of the Warrant at each reporting period using current assumptions. Changes in value are recorded as other income or expense (Note 5).

On May 30, 2018, the Company entered into a Note and Warrant Purchase agreement that included a warrant to purchase 97,222,200 CDIs (representing 1,944,444 shares of common stock). The exercise price is US$0.018 per CDI and the warrants can be exercised with cash or as a net exercise. The warrants are immediately exercisable on issuance and expire on May 30, 2023.

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Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2018

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

5. Fair Value of Financial Instruments

The tables below present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 and indicates the fair value hierarchy of the valuation techniques the Company used to determine such fair value. In general, fair values determined by Level 1 inputs utilize observable inputs such as quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are either directly or indirectly observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, requiring the Company to develop its own assumptions for the asset or liability.

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

			Fair Value Measurements at
			Reporting Date Using
			Quoted Pricesin		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	September 30, 2018		(Level 1)		(Level 2)		(Level 3)
Assets
Money market funds (included in cash and cash equivalents)	$	1,091	$	1,091	$	—	$	—
Total assets	$	1,091	$	1,091	$	—	$	—
Liabilities
Warrant liability	$	16	$	—	$	—	$	16
Total liabilities	$	16	$	—	$	—	$	16

			Fair Value Measurements at
			Reporting Date Using
			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	December 31, 2017		(Level 1)		(Level 2)		(Level 3)
Assets
Money market funds (included in cash and cash equivalents)	$	2,584	$	2,584	$	—	$	—
Total assets	$	2,584	$	2,584	$	—	$	—
Liabilities
Warrant liability	$	29	$	—	$	—	$	29
Total liabilities	$	29	$	—	$	—	$	29

The assumptions used in the Black-Scholes option pricing model to determine the fair value of the Consultant Warrant as of September 30, 2018, and December 31, 2017 were as follows:

	September 30,			December 31,
	2018			2017
Exercise price (A$55.00 at the then current exchange rate)	$	0.64		$	0.64
Fair value of common stock	$	0.72		$	0.60
Expected volatility		135.0	%		142.6	%
Expected term (in years)	2.61			3.34
Risk-free interest rate		2.9	%		2.0	%
Expected dividend yield		—	%		—	%

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

Balance at December 31, 2017	$	29
Decrease in fair value of warrants upon re-measurement included in    other income (expense), net		(13	)
Balance at September 30, 2018	$	16

Cash, cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, deferred revenue and short-term debt to Crystal Amber Fund Limited, a related party, at September 30, 2018 and December 31, 2017 are carried at amounts that approximate fair value due to their short-term maturities and highly liquid nature of these instruments. The carrying value of the Company’s long-term debt to Crystal Amber Fund Limited, a related party, at September 30, 2018 approximates fair value based on certain industry studies obtained by the Company.

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Concentrations of Credit Risk, Accounts Receivable and Related Valuation Account

9 Months Ended

Sep. 30, 2018

Receivables [Abstract]

Concentrations of Credit Risk, Accounts Receivable and Related Valuation Accounts

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

Financial instruments that subject the Company to credit risk primarily consists of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents balances with high quality financial institutions, and consequently, the Company believes that such funds are subject to minimal credit risk.

Accounts receivable primarily consists of amounts due from customers, including distributors and health care providers in different countries. In light of the current economic state of many foreign countries, the Company continues to monitor the creditworthiness of its customers.

In May 2017, the Company entered into a sales arrangement with certain distributors totaling $517 thousand of EndoBarrier inventory. Due to certain extended right of return periods and payment terms, the Company determined that the revenue and related product costs associated with this transaction should be deferred for accounting purposes. As a result, the Company has recorded an adjustment to accounts receivable of $559 thousand for the unpaid portion of deferred revenue which includes an adjustment of approximately $40 thousand for revaluation of receivables denominated in foreign currency at December 31, 2017.

The Company did not have any accounts receivable at September 30, 2018. At December 31, 2017, four health care providers accounted for approximately 100% of the Company’s accounts receivable balance, of approximately equal sums.

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

The following table shows the components of the Company’s accounts receivable at September 30, 2018 and December 31, 2017 (in thousands):

	September 30,		December 31,
	2018		2017
Accounts receivable	$	—	$	85
Less: allowance for doubtful accounts		—		(42	)
Less: allowance for sales returns		—		(3	)
Total	$	—	$	40

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

	Nine Months Ended September 30,
	2018			2017
Beginning balance	$	42		$	16
Net charges to expenses		(42	)		48
Utilization of allowances		—			(22	)
Ending balance	$	—		$	42

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Inventory

9 Months Ended

Sep. 30, 2018

Inventory Disclosure [Abstract]

Inventory

7. Inventory

The Company states inventory at the lower of first-in, first-out cost or net realizable value. When capitalizing inventory, the Company considers factors such as status of regulatory approval, alternative use of inventory, and anticipated commercial use of the product.

The determination of obsolete or excess inventory requires the Company to estimate the future demand for its products within appropriate time horizons. The estimated future demand is compared to inventory levels to determine the amount, if any, of obsolete and excess inventory. The demand forecast includes the Company’s estimates of market growth and various internal estimates and is based on assumptions that are consistent with the plans and estimates the Company is using to manage its underlying business and short-term manufacturing plans. Forecasting demand for EndoBarrier in a market in which there are few, if any, comparable approved devices and for which reimbursement from third-party payers is limited is challenging. To the extent the Company’s demand forecast is less than its inventory on-hand, the Company could be required to record additional reserves for excess, expired or obsolete inventory in the future.

During 2017, the Company charged the remaining balance of its inventory in the normal course of business to cost of sales. As of December 31, 2017, the Company has fully reserved for its inventory on hand and expects to utilize the reserved inventory to meet its future strategic goals.

Inventory, net of reserves of approximately $5 million, is $0 at September 30, 2018 and December 31, 2017.

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Property and Equipment

9 Months Ended

Sep. 30, 2018

Property Plant And Equipment [Abstract]

Property and Equipment

8. Property and Equipment

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

	September 30,			December 31,
	2018			2017
Laboratory and manufacturing equipment	$	591		$	591
Computer equipment and software		1,179			1,179
Office furniture and equipment		183			183
Leasehold improvements		—			21
		1,953			1,974
Less accumulated depreciation and amortization		(1,869	)		(1,877	)
Total	$	84		$	97

Depreciation and amortization expense of property and equipment totaled approximately $0 and $11 thousand for the three months ended September 30, 2018 and September 30, 2017, respectively and $11 and $46 thousand for the nine months ended September 30, 2018 and 2017, respectively.  

The Company recorded a loss on disposal of $2 thousand in connection with the expiration of its office lease and the related leasehold improvements on April 13, 2018.

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Accrued Expenses

9 Months Ended

Sep. 30, 2018

Payables And Accruals [Abstract]

Accrued Expenses

9. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

	September 30,		December 31,
	2018		2017
Payroll and related liabilities	$	268	$	181
Professional fees		639		421
Credit refunds		175		279
Interest payable		386		136
Other		48		4
Total	$	1,516	$	1,021

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Related Party Convertible Notes

9 Months Ended

Sep. 30, 2018

Debt Disclosure [Abstract]

Related Party Convertible Notes

10. Related Party Convertible Notes

2017 Convertible Note Financing

On June 15, 2017, the Company entered into a Note Purchase Agreement by and between the Company, as borrower, and Crystal Amber Fund Limited, as purchaser (the “Purchaser”). Pursuant to the Note Purchase Agreement, the Company issued and sold to the Purchaser a Senior Secured Convertible Promissory Note in an aggregate original principal amount of $5.0 million (the “2017 Note”). The Purchaser is a related party and is the Company’s largest shareholder.

The 2017 Note accrues interest at a rate equal to 5% per annum, compounded annually, other than during the continuance of an event of default, when the 2017 Note accrues interest at a rate of 8% per annum. The entire outstanding principal balance and all unpaid accrued interest thereon is due on the maturity date, December 31, 2018. The 2017 Note is secured by a first priority security interest in substantially all personal property assets of the Company, including intellectual property.

The entire outstanding principal balance under the 2017 Note and all unpaid accrued interest thereon is convertible into CHESS Depositary Interests (“CDIs”), each representing 1/50th of a share of the Company’s common stock, (i) at the option of the Purchaser at a conversion price calculated based on the five-day volume weighted average closing price of the Company’s CDIs on the ASX (“Optional Conversion Price”), or (ii) automatically upon the occurrence of an equity financing in which the Company raises at least $10 million (a “Qualified Financing”) at the price per CDI of the CDIs issued and sold in such financing.

In the event that the Borrower issues additional CDIs in a subsequent equity financing at a price per CDI that is less than the then-effective optional conversion price (based on the five-day volume weighted average price on the ASX), the Purchaser has a 30-day option to convert at an adjusted conversion price reflecting, on a weighted average basis, the lower price per CDI. The number of CDIs that the Purchaser may acquire upon conversion of the 2017 Note at this adjusted conversion price is limited to the number that maintains the Purchaser’s fully-diluted ownership percentage of the Company at the same level as existed immediately preceding the applicable subsequent equity financing.

In addition, upon a change of control of the Company (other than a change of control resulting from a Qualified Financing) in which the Company’s stockholders receive cash consideration, the Company is obligated to prepay all accrued and unpaid interest plus 110% of the remaining outstanding unconverted principal balance. If the consideration received for such change of control is a non-cash consideration, the Purchaser may convert the entire outstanding principal balance under the 2017 Note and all unpaid accrued interest thereon into CDIs at the abovementioned Optional Conversion Price. Other than as described above, the Company may not prepay the 2017 Note without the consent of the Purchaser.

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

The Company recorded the $5 million 2017 Note, net of debt issuance costs of $115 thousand and will amortize the debt issuance costs over the life of the 2017 Note. For the three and nine months ended September 30, 2018, the Company recognized interest expense of $67 thousand and $191 thousand and amortization of debt issuance costs of $19 thousand and $56 thousand, respectively, related to the 2017 Note.

Due to the timing of the finalization of the 2017 Note financing in 2017, the 2017 Note was issued without stockholder approval. As a consequence, while the 2017 Note contains conversion provisions, the Purchaser had, for a period of time, no right to exercise those rights until such rights of exercise were approved by the stockholders of the Company. Stockholder approval of the Purchaser’s right to convert the 2017 Note was obtained at the Company’s Annual Meeting on May 24, 2018. As of the date of this report, the 2017 Note has not been converted by the Purchaser.   

2018 Convertible Note and Warrant Financing

On May 30, 2018, the Company entered into a Note Purchase Agreement by and between the Company, as borrower, and Crystal Amber Fund Limited, as purchaser (the “Purchaser”). Pursuant to the Note Purchase Agreement, the Company issued and sold to the Purchaser a Senior Unsecured Convertible Promissory Note in an aggregate original principal amount of $1.75 million (the “2018 Note”). The Purchaser is a related party and is the Company’s largest shareholder.

The 2018 Note accrues interest at a rate equal to 10% per annum, compounded annually, other than during the continuance of an event of default, when the 2018 Note accrues interest at a rate of 16% per annum. The entire outstanding principal balance and all unpaid accrued interest thereon is due on the maturity date, May 30, 2023.

The entire outstanding principal balance under the 2018 Note and all unpaid accrued interest thereon is convertible into CHESS Depositary Interests (“CDIs”), each representing 1/50th of a share of the Company’s common stock, at the option of the Purchaser at a conversion price of $0.018 per CDI. In the event that the Borrower issues additional CDIs in a subsequent equity financing at a price per CDI that is less than $0.018 the conversion price of the 2018 Note will adjust to the lower CDI conversion price. In addition, upon a change of control of the Company, the Purchaser may demand prepayment of accrued and unpaid interest plus 110% of the remaining outstanding unconverted principal balance of the 2018 Note.

The 2018 Note contains customary events of default including a failure to perform obligations under the 2018 Note Purchase Agreement, bankruptcy, a decision by the board of directors of the Company to wind up the Company, or if the Company otherwise ceases to carry on its ongoing business operations. If a default occurs and is not cured within the applicable cure period or is not waived, any outstanding obligations under the 2018 Note may be accelerated. The 2018 Note Purchase Agreement and related 2018 Note documents also contain additional representations and warranties, covenants and conditions, in each case customary for transactions of this type.

In connection with the issuance of the 2018 Note, the Company also issued to the Purchaser a warrant to purchase 97,222,200 CDIs at an initial exercise price of $0.018 per CDI, subject to adjustment as described in the warrant, which warrant expires on May 30, 2023 (the “2018 Warrant”). The 2018 Warrant may be exercised at any time on a cash or cashless basis. The 2018 Warrant includes a price protection clause. If the Company issues securities in a subsequent financing at a per CDI price of less than $0.018, the exercise price of the 2018 Warrant will be reduced to the lowest such price per CDI (or the equivalent for shares of common stock) at which the newly issued securities were sold.

The Company has evaluated the guidance ASC 480-10 Distinguishing Liabilities from Equity, ASC 815-40 Contracts in an Entity's Own Equity and ASC 470-20 Debt with Conversion and Other Options to determine the appropriate classification of the 2018 Note and 2018 Warrant. The 2018 Warrant was determined to be a freestanding instrument meeting the requirements for equity classification.  Accordingly, the relative fair value estimated for the 2018 Warrant, totaling approximately $743 thousand, has been recorded as a discount to the debt with the offset to additional paid in capital. The 2018 Note was also evaluated for beneficial conversion feature ("BCF") subsequent to the allocation of proceeds among the 2018 Note and 2018 Warrant. Based upon the effective conversion price of the 2018 Note after considering the stock price at the date of issuance and the allocation of estimated fair value to the 2018 Warrant, it was determined that the 2018 Note contained a BCF. The value of the BCF was computed to be approximately $1.2 million but has been capped at approximately $1.0 million so as to not exceed the total proceeds from the 2018 Note after deducting the value allocated to the 2018 Note and 2018 Warrant. The effective interest rate on the note after the discounts is 26.4%, respectively.

The Company recorded the 2018 Note, net of the total debt discount of $1.75 million and will amortize the debt discount over the life of the 2018 Note. For the three and nine months ended September 30, 2018, the Company recognized interest expense of $44 thousand and $58 thousand and amortization of the debt discount of $70 thousand and $95 thousand, respectively. For the three and nine months ended September 30, 2018, the Company recognized interest expense derived from issuance costs of $0 and $85 thousand, respectively.

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2018

Commitments And Contingencies Disclosure [Abstract]

Commitments and Contingencies

11. Commitments and Contingencies

Lease Commitments

In June 2016, the Company entered into a noncancelable agreement to lease approximately 4,200 square feet of office and laboratory space in Boston, Massachusetts. The lease commenced in June 2016 and expired in April 2018. Rent during the term was $11,900 per month.

Rent expense on noncancelable operating leases was $0 and $36 thousand for the three months ended September 30, 2018 and 2017, respectively and $37 and $107 thousand for the nine months ended September 30, 2018 and 2017, respectively.The Company has secured office space at a WeWork location in Boston on a 6-month lease term, which can potentially be extended. Rent expense for this location for the three and nine months ended September 30, 2018 was $21 thousand.     

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Stockholders' Equity (Deficit)

9 Months Ended

Sep. 30, 2018

Equity [Abstract]

Stockholders' Equity (Deficit)

12. Stockholders’ Equity (Deficit)

On May 22, 2017, the Stockholders of the Company approved an increase of its authorized shares of Common Stock from 13,000,000 to 50,000,000 and to eliminate Class B shares of Common Stock of the Company. As of September 30, 2018, the authorized capital stock of the Company consists of 50,500,000 shares, of which 50,000,000 shares are designated as Common Stock and 500,000 shares are designated as Preferred Stock.

In 2018, the Company received commitments for two private placements to sophisticated and professional investors in Australia, the United States and the United Kingdom, consisting of U.S. and non-U.S. persons (as defined in Regulation S (“Regulation S”) of the Securities Act of 1933 (the “Securities Act”)) to raise up to approximately $6.61 million (the “2018 Placements”).  The first placement (“First Quarter 2018 Placement”) consisted of a total of 406,002,869 fully paid CDIs of the Company (representing 8,120,057 shares of common stock) at an issue price of A$0.035 per CDI. The issue of CDIs under the First Quarter 2018 Placement occurred in two tranches. The first tranche closed on January 22, 2018 (US EST), pursuant to which the Company issued 28,467,063 CDIs (representing 569,341 shares of common stock) resulting in gross proceeds of approximately $781 thousand and related issuance costs of $63 thousand.  The closing of the second tranche of the First Quarter 2018 Placement resulted in the raising of $824 thousand and related issuance costs of $39 thousand by the issue of 30,313,556 CDIs (606,271 shares) following stockholder approval granted on February 27, 2018. There were two participants in the First Quarter 2018 Placement second tranche; Crystal Amber Fund, a related party, purchased 27,391,756 CDIs. A Board member of the Company purchased 2,921,800 CDIs.

The second placement (“Autumn 2018 Placement”) consisted of a total of 347,222,250 fully paid CDIs of the Company (representing 6,944,445 shares of common stock) at an issue price of A$0.020 per CDI.  The investors in the Autumn 2018 Placement included certain existing investors.  The issue of these CDIs occurred in two tranches. The first tranche closed on September 20, 2018 (US EST), pursuant to which the Company issued 150,000,000 CDIs (representing 3,000,000 shares of common stock) resulting in gross proceeds of approximately $2.2 million and related issuance costs of $56 thousand. The closing of the second tranche resulted in the raising of $2.8 million by the issue of 197,222,250 CDIs (representing 3,944,445 shares of common stock) following stockholder approval at the adjourned Special Meeting of stockholders on October 29, 2018. There were three participants in the second tranche; Crystal Amber Fund, a related party, purchased 168,194,450 CDIs. Existing investors in the United States and Australia also purchased 23,819,450 and 5,208,350 CDIs, respectively. All second tranche CDIs are expected to be allotted to investors in November 2018..  

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Stock Plans

9 Months Ended

Sep. 30, 2018

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Stock Plans

13. Stock Plans

The Company has two stock-based compensation plans under which incentive stock options, nonqualified stock options, restricted and unrestricted stock awards, and other stock-based awards are available for grant to employees, directors and consultants of the Company. At September 30, 2018, there were 1,545,719 shares available for future grant under the 2011 plan.

The 2011 Employee, Director and Consultant Equity Incentive Plan (the “2011 Plan,” together with the 2003 Omnibus Stock Plan, the “Plans”) allows for an annual increase in the number of shares available for issue under the 2011 Plan commencing on the first day of each fiscal year during the period beginning in fiscal year 2012 and ending in fiscal year 2020. The annual increase in the number of shares shall be equal to the lowest of:

a. 500,000 shares;

b. 4% of the number of common shares outstanding as of such date; and

c. an amount determined by the Board of Directors or the Company’s compensation committee.

Accordingly, in the first quarter of fiscal 2018, 446,299 options available for future grant were added to the 2011 Plan.

Stock-Based Compensation

Stock-based compensation is reflected in the consolidated statements of operations as follows for the three and nine months ended September 30, 2018 and 2017 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Research and development	$	1	$	11	$	6	$	24
Sales and marketing		5		38		15		67
General and administrative		16		32		65		71
	$	22	$	81	$	86	$	162

The stock options granted under the Plans generally vest over a four-year period and expire ten years from the date of grant. From time to time, the Company grants stock options to purchase common stock subject to performance-based milestones. The vesting of these stock options 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 option over the implicit service period.

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

Determining the fair value of stock-based awards using the Black-Scholes option-pricing model requires the use of highly subjective assumptions, including the expected term of the award and expected stock price volatility. The weighted-average assumptions used to estimate the fair value of employee stock options using the Black-Scholes option-pricing model were as follows for the three and nine months ended September 30, 2018 and 2017:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Expected volatility		120.3	%		88.2	%		120.3	%		87.8	%
Expected term (in years)		6.05			6.05			6.05			6.05
Risk-free interest rate		3.0	%		2.1	%		3.0	%		2.1	%
Expected dividend yield		0	%		0	%		0	%		0	%

Stock Options

The following table summarizes share-based activity under the Company’s stock option plans for the nine months ended September 30, 2018:

	Shares of Common Stock Attributable to Options			Weighted- Average Exercise Price		Weighted- Average Contractual Life		Aggregate Intrinsic Value
						(in years)		(in thousands)
Outstanding at December 31, 2017		992,221		$	10.71	5.72		$	63
Granted		122,500		$	—			$	—
Exercised	—			$	—			$	—
Cancelled		(381,043	)	$	5.31			$	—
Outstanding at September 30, 2018		733,678		$	4.67		5.96	$	16
Vested or expected to vest at September 30, 2018		733,678		$	4.67		5.96	$	16
Exercisable at September 30, 2018		337,063		$	—		—	—

As of September 30, 2018, there was approximately $299 thousand of unrecognized stock-based compensation related to unvested stock option grants having service-based vesting under the Plans which is expected to be recognized over a weighted-average period of 2.6 years. The intrinsic value in the table above represents the difference between the fair value of the Company’s common stock on the measurement date and the exercise price of the stock option.

The stock-based compensation plans provide that grantees may have the right to exercise an option prior to vesting. Shares purchased upon the exercise of unvested options will be subject to the same vesting schedule as the underlying options and are subject to repurchase at the original exercise price by the Company should the grantee discontinue providing services to the Company for any reason, prior to becoming fully vested in such shares.

Restricted Stock Units & Performance Stock Units

Each restricted stock unit and performance stock unit (“RSU & PSU”) issued under the Company Plans represents a contingent right to receive one share of the Company’s common stock. The RSUs & PSUs outstanding at September 30, 2018 vest upon the achievement of certain product revenue, regulatory and reimbursement milestones. There is no consideration payable on the vesting of RSUs & PSUs issued. Upon vesting, RSUs and PSUs are exercised automatically and settled in shares of the Company’s common stock.

The following table summarizes information related to RSU & PSU activity for the nine months ended September 30, 2018:

	Number of Units			Weighted- Average Contractual Life		Aggregate Intrinsic Value
				(in years)		(in thousands)
Outstanding at December 31, 2017		392,659			8.27	$	429
Granted	—
Exercised	—
Cancelled		(142,659	)	—		—
Outstanding at September 30, 2018		250,000			7.48	$	208

The aggregate intrinsic value at September 30, 2018 and December 31, 2017 noted in the table above represents the closing price of the Company’s common stock multiplied by the number of RSUs and PSUs outstanding. The fair value of each RSU and PSU award equals the closing price of the Company’s common stock on the date of grant

At September 30, 2018, all RSUs and PSUs outstanding are subject to performance-based vesting criteria as described in the applicable award agreement. For these awards, vesting will occur upon the achievement of certain product revenue, regulatory and reimbursement milestones. When achievement of the milestone is deemed probable, the Company expenses the compensation of the respective stock award over the implicit service period.

At September 30, 2018 and 2017, no RSUs and PSUs that have performance-based vesting criteria are considered probable of achievement. For the three and nine months ended September 30, 2018 and 2017, the Company did not recognize any stock-based compensation for RSUs and PSUs subject to performance-based vesting criteria.

As of September 30, 2018, there remains approximately $150 thousand of unrecognized stock-based compensation.

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Segment Reporting

9 Months Ended

Sep. 30, 2018

Segment Reporting [Abstract]

Segment Reporting

14. Segment Reporting

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

Geographic Reporting

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

At September 30, 2018, long-lived assets, comprised of property and equipment, of approximately $0.1 million are all held in the U.S.

Product sales by geographic location for the three and nine months ended September 30, 2018 and 2017 are listed in the table below (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Europe	$	—	$	23	$	—	$	155
Middle East		—		-		—		18
Total	$	—	$	23	$	—	$	173

The Company did not have revenue for the three and nine months ended September 30, 2018.

Germany was a significant component of revenue in Europe for the three and nine months ended September 30, 2017.

Major Customers

The Company did not recognize any revenue for the three and nine months ended September 30, 2018.

For the three months ended September 30, 2017, the Company recognized as revenue a reversal of prior rebate accruals of approximately $27 thousand originally granted to health care providers which was deemed to no longer be required, in addition the Company deferred a previously recognized sale.  

For the nine months ended September 30, 2017, two customers accounted for 21% and 15% of the Company’s revenue.

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Summary of Significant Accounting Policies and Basis of Presentation (Policies)

9 Months Ended

Sep. 30, 2018

Accounting Policies [Abstract]

Principles of Consolidation

Principles of Consolidation

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

Use of Estimates

Use of Estimates

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

Cash and Cash Equivalents

Cash and Cash Equivalents

The Company considers all highly liquid investment instruments with an original maturity when purchased of three months or less to be cash equivalents. Investments qualifying as cash equivalents primarily consist of money market funds and have a carrying amount that approximates fair value. The amount of cash equivalents included in cash and cash equivalents was approximately $3.1 millionat September 30, 2018 and $3.0 million at December 31, 2017, respectively.

Inventory

Inventory

The Company states inventory at the lower of first-in, first-out cost or net realizable value. When capitalizing inventory, the Company considers factors such as status of regulatory approval, alternative use of inventory, and anticipated commercial use of the product. At September 30, 2018 and December 31, 2017, the Company had a net inventory balance of $0.

Property and Equipment

Property and Equipment

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

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

Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the remaining lease term. Costs for capital assets not yet placed into service have been capitalized as construction in progress and will be depreciated in accordance with the above guidelines once placed into service. Maintenance and repair costs are expensed as incurred. The Company recorded a loss on disposal of $2 thousand in connection with the expiration of its office lease and the related leasehold improvements on April 13, 2018.

Revenue Recognition

Revenue Recognition

Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) using the modified retrospective method. ASU 2014-09 is a comprehensive revenue recognition standard that superseded nearly all existing revenue recognition guidance. Upon adoption, the Company discontinued revenue deferral under the sell-through model and commenced recording revenue upon delivery to distributors, net of estimated returns. Upon adoption of ASU 2014-09, there was no impact on the Company’s financial statements. The comparative financial information presented has not been restated and continues to be reported under the accounting standards in effect for those periods.

Revenues include product sales, net of estimated returns. As of January 1, 2018, revenue is measured as the amount of consideration the Company expects to receive in exchange for product transferred. Revenue is recognized when contractual performance obligations have been satisfied and control of the product has been transferred to the customer. In most cases, the Company has a single product delivery performance obligation. Product returns are estimated based on historical data and evaluation of current information.

From January 1, 2018 to September 30, 2018, the Company did not enter into any revenue contracts with customers and did not recognize or defer any revenue related to new contracts.

At September 30, 2018 and December 31, 2017, the Company had deferred revenue of approximately $11thousand.

At December 31, 2017, following the notification by MHRA, the Company calculated an estimate for returns, reversed its revenue and recorded an accrued expense estimate of $0.2 million of product return related costs.

Shipping and Handling Costs

Shipping and Handling Costs

Shipping and handling costs are included in costs of revenue.

Research and Development Costs

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 pre-approval regulatory and clinical trial expenses.

Patent Costs

Patent Costs

The Company expenses as incurred all costs, including legal expenses, associated with obtaining patents until the patented technology becomes feasible. All costs incurred after the patented technology is feasible will be capitalized as an intangible asset. As of September 30, 2018, and December 31, 2017, no such costs had been capitalized. The Company expensed approximately $0.1 million and $0.3 of patent costs within general and administrative expenses in the consolidated statements of operations for the nine months ended September 30, 2018 and 2017, respectively.    

Stock-Based Compensation

Stock-Based Compensation

The Company 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 and recognized as an expense in the financial statements and that such expense be measured at the grant date fair value.

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

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

Stock awards to non-employees are accounted for in accordance with ASC 505-50, Equity-Based Payments to Non-Employees (“ASC 505-50”). The measurement date for non-employee awards is generally the date performance of services required from the non-employee is complete. For non-employee awards that vest based on service conditions, the Company expenses the value of the awards over the related service period, provided they expect the service condition to be met. The Company records the expense of services rendered by non- employees based on the estimated fair value of the stock option using the Black-Scholes option pricing model over the contractual term of the non-employee. The fair value of unvested non-employee awards is remeasured at each reporting period and expensed over the vesting term of the underlying stock options on a straight-line basis. The Company adopted ASU No. 2016-09 Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting during the year ended December 31, 2017. The Company adjusted its accumulated deficit related to the accounting policy election to recognize the impact of share-based award forfeitures only as they occur rather than by applying an estimated forfeiture rate as previously required. ASU No. 2016-09 requires that this change be applied using a modified-retrospective transition method by means of a cumulative-effect adjustment to accumulated deficit as of the beginning of the fiscal year in which the guidance is adopted. As a result of this adoption, the Company recorded a decrease to accumulated deficit of approximately $28 thousand with an offset to Additional Paid in Capital as of January 1, 2018.  

The stock-based compensation plans provide that grantees may have the right to exercise an option prior to vesting. Shares purchased upon the exercise of unvested options will be subject to the same vesting schedule as the underlying options and are subject to repurchase at the original exercise price by the Company should the grantee discontinue providing services to the Company for any reason, prior to becoming fully vested in such shares.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

The Company 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.

Loss Contingencies

Loss Contingencies

In accordance with ASC 450, Contingencies, the Company 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, the Company accrues the minimum amount of the range.

Income Taxes

Income Taxes

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

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

Guarantees

Guarantees

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

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

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

For the nine months ended September 30, 2018, and 2017, the Company had not experienced any material losses related to these indemnification obligations, and no material claims with respect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible. As a result, no related reserves have been established.

Issuance Costs Related to Equity and Debt

Issuance Costs Related to Equity and Debt

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

Embedded Conversion Features

Embedded Conversion Features

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

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

Subsequent Events

Subsequent Events

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

New Accounting Pronouncements

New Accounting Pronouncements

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

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance. The new standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB approved a one-year deferral of the effective date of this standard to annual reporting periods, and interim reporting periods within those years, beginning after December 15, 2017. The Company adopted this standard effective January 1, 2018 using the modified retrospective method. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.    

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (“ASU 2015- 11”). ASU 2015-11, which simplifies the measurement of inventories valued under most methods, including the Company’s inventories valued under FIFO — the first-in, first-out cost method. Inventories valued under LIFO — the last-in, first-out method — are excluded. Under this new guidance, inventories valued under these methods would be valued at the lower of cost and net realizable value, with net realizable value defined as the estimated selling price less reasonable costs to sell the inventory. This guidance is effective for annual reporting beginning after December 15, 2016, including interim periods within the year of adoption, with early application permitted. The Company adopted this standard on January 1, 2017. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which addresses the recognition, measurement, presentation and disclosure of financial assets and liabilities. This ASU primarily affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, this ASU clarifies the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. This standard became effective on January 1, 2018. This standard did not have a material impact on our consolidated financial statements and related disclosures for the nine months ended September 30, 2018.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. ASU 2016-02 requires that lessees recognize in the statement of financial position for all leases (with the exception of short-term leases) 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 adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 will simplify the income tax consequences, accounting for forfeitures and classification on the statements of consolidated cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The Company elected to adopt ASU 2016-09 in the first quarter of 2017 retrospectively to January 1, 2017. As a result of adopting ASU No. 2016-09 during the year ended December 31, 2017, the Company adjusted its accumulated deficit related to the accounting policy election to recognize the impact of share-based award forfeitures only as they occur rather than by applying an estimated forfeiture rate as previously required. ASU No. 2016-09 requires that this change be applied using a modified-retrospective transition method by means of a cumulative-effect adjustment to accumulated deficit as of the beginning of the fiscal year in which the guidance is adopted. As a result of this adoption, the Company recorded a decrease to accumulated deficit of approximately $28 thousand with an offset to Additional Paid-in Capital as of January 1, 2017.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), or ASU 2016-15. The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under FASB Accounting Standards Codification 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. We have evaluated the impact of ASU No. 2016-15 and noted it had no impact on our consolidated financial statements for the nine months ended September 30, 2018.  

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issue Task Force), or ASU 2016-18. This new standard addresses the diversity that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within the year of adoption, with early adoption permitted. Our consolidated financial statements reflect this standard for the nine months ended September 30, 2018 and 2017.  

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (ASC 260) Distinguishing Liabilities from Equity (ASC 480) Derivatives and Hedging (ASC 815),” which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. For public business entities, the amendments in Part I of ASU 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has chosen to early adopt this standard on April 1, 2018 with retroactive restatement of comparative periods. The Company has concluded that the retroactive provisions of ASU 2017-11 had no impact on the accounting for the Company’s previously outstanding warrant which had been issued to the warrant holder as stock compensation.

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Net Loss per Common Share (Tables)

9 Months Ended

Sep. 30, 2018

Earnings Per Share [Abstract]

Potentially Dilutive Securities Excluded from Computation of Diluted Weighted Average Shares

The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares outstanding as of September 30, 2018 and 2017, as they would be anti-dilutive:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Warrants to purchase common stock		1,972,976		28,532		1,972,976		28,532
Options to purchase common stock and other stock-based    awards		1,545,719		1,504,938		1,545,719		1,504,938
Total		3,518,695		1,533,470		3,518,695		1,533,470

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Fair Value of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2018

Fair Value Disclosures [Abstract]

Fair Value of Assets and Liabilities Measured on Recurring Basis

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

			Fair Value Measurements at
			Reporting Date Using
			Quoted Pricesin		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	September 30, 2018		(Level 1)		(Level 2)		(Level 3)
Assets
Money market funds (included in cash and cash equivalents)	$	1,091	$	1,091	$	—	$	—
Total assets	$	1,091	$	1,091	$	—	$	—
Liabilities
Warrant liability	$	16	$	—	$	—	$	16
Total liabilities	$	16	$	—	$	—	$	16

			Fair Value Measurements at
			Reporting Date Using
			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	December 31, 2017		(Level 1)		(Level 2)		(Level 3)
Assets
Money market funds (included in cash and cash equivalents)	$	2,584	$	2,584	$	—	$	—
Total assets	$	2,584	$	2,584	$	—	$	—
Liabilities
Warrant liability	$	29	$	—	$	—	$	29
Total liabilities	$	29	$	—	$	—	$	29

Assumptions Used in the Black-Scholes Option Pricing Model to Determine the Fair Value of the Common Stock Warrants

The assumptions used in the Black-Scholes option pricing model to determine the fair value of the Consultant Warrant as of September 30, 2018, and December 31, 2017 were as follows:

	September 30,			December 31,
	2018			2017
Exercise price (A$55.00 at the then current exchange rate)	$	0.64		$	0.64
Fair value of common stock	$	0.72		$	0.60
Expected volatility		135.0	%		142.6	%
Expected term (in years)	2.61			3.34
Risk-free interest rate		2.9	%		2.0	%
Expected dividend yield		—	%		—	%

Rollforward of Fair Value of Warrants

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

Balance at December 31, 2017	$	29
Decrease in fair value of warrants upon re-measurement included in    other income (expense), net		(13	)
Balance at September 30, 2018	$	16

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Concentrations of Credit Risk, Accounts Receivable and Related Valuation Accounts (Tables)

9 Months Ended

Sep. 30, 2018

Receivables [Abstract]

Components of Company's Accounts Receivable

The following table shows the components of the Company’s accounts receivable at September 30, 2018 and December 31, 2017 (in thousands):

	September 30,		December 31,
	2018		2017
Accounts receivable	$	—	$	85
Less: allowance for doubtful accounts		—		(42	)
Less: allowance for sales returns		—		(3	)
Total	$	—	$	40

Rollforward of Allowance for Doubtful Accounts

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

	Nine Months Ended September 30,
	2018			2017
Beginning balance	$	42		$	16
Net charges to expenses		(42	)		48
Utilization of allowances		—			(22	)
Ending balance	$	—		$	42

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Property and Equipment (Tables)

9 Months Ended

Sep. 30, 2018

Property Plant And Equipment [Abstract]

Property and Equipment

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

	September 30,			December 31,
	2018			2017
Laboratory and manufacturing equipment	$	591		$	591
Computer equipment and software		1,179			1,179
Office furniture and equipment		183			183
Leasehold improvements		—			21
		1,953			1,974
Less accumulated depreciation and amortization		(1,869	)		(1,877	)
Total	$	84		$	97

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Accrued Expenses (Tables)

9 Months Ended

Sep. 30, 2018

Payables And Accruals [Abstract]

Accrued Expenses

Accrued expenses consisted of the following (in thousands):

	September 30,		December 31,
	2018		2017
Payroll and related liabilities	$	268	$	181
Professional fees		639		421
Credit refunds		175		279
Interest payable		386		136
Other		48		4
Total	$	1,516	$	1,021

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Stock Plans (Tables)

9 Months Ended

Sep. 30, 2018

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Stock-Based Compensation

Stock-based compensation is reflected in the consolidated statements of operations as follows for the three and nine months ended September 30, 2018 and 2017 (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Research and development	$	1	$	11	$	6	$	24
Sales and marketing		5		38		15		67
General and administrative		16		32		65		71
	$	22	$	81	$	86	$	162

Weighted-average Assumptions used to Estimate Fair Value of Stock Options

The weighted-average assumptions used to estimate the fair value of employee stock options using the Black-Scholes option-pricing model were as follows for the three and nine months ended September 30, 2018 and 2017:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Expected volatility		120.3	%		88.2	%		120.3	%		87.8	%
Expected term (in years)		6.05			6.05			6.05			6.05
Risk-free interest rate		3.0	%		2.1	%		3.0	%		2.1	%
Expected dividend yield		0	%		0	%		0	%		0	%

Share-Based Activity

The following table summarizes share-based activity under the Company’s stock option plans for the nine months ended September 30, 2018:

	Shares of Common Stock Attributable to Options			Weighted- Average Exercise Price		Weighted- Average Contractual Life		Aggregate Intrinsic Value
						(in years)		(in thousands)
Outstanding at December 31, 2017		992,221		$	10.71	5.72		$	63
Granted		122,500		$	—			$	—
Exercised	—			$	—			$	—
Cancelled		(381,043	)	$	5.31			$	—
Outstanding at September 30, 2018		733,678		$	4.67		5.96	$	16
Vested or expected to vest at September 30, 2018		733,678		$	4.67		5.96	$	16
Exercisable at September 30, 2018		337,063		$	—		—	—

Restricted Stock Units and Performance Stock Units Activity

The following table summarizes information related to RSU & PSU activity for the nine months ended September 30, 2018:

	Number of Units			Weighted- Average Contractual Life		Aggregate Intrinsic Value
				(in years)		(in thousands)
Outstanding at December 31, 2017		392,659			8.27	$	429
Granted	—
Exercised	—
Cancelled		(142,659	)	—		—
Outstanding at September 30, 2018		250,000			7.48	$	208

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Segment Reporting (Tables)

9 Months Ended

Sep. 30, 2018

Segment Reporting [Abstract]

Product Sales by Geographic Location

Product sales by geographic location for the three and nine months ended September 30, 2018 and 2017 are listed in the table below (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Europe	$	—	$	23	$	—	$	155
Middle East		—		-		—		18
Total	$	—	$	23	$	—	$	173

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Nature of Business - Additional Information (Detail) $ / shares in Units, $ in Thousands			1 Months Ended									2 Months Ended	3 Months Ended	6 Months Ended	9 Months Ended		12 Months Ended
	Dec. 20, 2016 USD ($) $ / shares shares	Aug. 21, 2015	Nov. 30, 2018 USD ($)	Sep. 30, 2018 USD ($)	May 30, 2018 USD ($)	Mar. 31, 2018 USD ($)	Jan. 31, 2018 USD ($)	Jun. 30, 2017 USD ($)	Jan. 31, 2017 USD ($) $ / shares shares	May 31, 2014 USD ($)	Sep. 30, 2011 USD ($)	Aug. 31, 2013 USD ($)	Jun. 30, 2016 USD ($)	Sep. 30, 2016 USD ($)	Sep. 30, 2018 USD ($) Segment Patient Site	Sep. 30, 2017 USD ($)	Dec. 31, 2018 USD ($)	Dec. 31, 2017 USD ($)	Jan. 31, 2017 $ / shares
Nature Of Operations [Line Items]
Number of reportable segments | Segment															1
Number of patients to enroll under double-blinded study plan with uncontrolled type 2 diabetes and obesity | Patient															500
Number of sites consider for trial of EndoBarrier Therapy | Site															25
Percentage of reducing headcount		46.00%
Non-recurring charges														$ 1,100
Issuance of shares, value						$ 1,600	$ 1,600			$ 30,800	$ 72,500	$ 52,500
Repayment of convertible term promissory notes											$ 6,000					$ 214
Common stock issued, price per share | (per share)									$ 0.83										$ 0.022
Private placement amount received	$ 1,000
Proceeds from issuance of common stock									$ 200						$ 3,607	198
Accumulated deficit				$ (264,745)											(264,745)			$ (259,121)
Working capital deficit				(3,900)											(3,900)
Cash used in operating activities															(5,202)	$ (7,647)
Cash and cash equivalents				3,104											$ 3,104			$ 3,034
Tranche One
Nature Of Operations [Line Items]
Private placement amount received				2,200
Private Placement
Nature Of Operations [Line Items]
Issuance of shares, value				$ 5,000
Scenario, Forecast | Tranche Two
Nature Of Operations [Line Items]
Private placement amount received			$ 2,800
Scenario, Forecast | Private Placement
Nature Of Operations [Line Items]
Private placement amount received																	$ 6,610
2017 Senior Secured Convertible Promissory Note
Nature Of Operations [Line Items]
Debt principal amount								$ 5,000
Interest rate during period								5.00%
Maturity Date								Dec. 31, 2018
2018 Senior Secured Convertible Promissory Note and Warrant
Nature Of Operations [Line Items]
Debt principal amount					$ 1,750
Interest rate during period					10.00%
Maturity Date					May 30, 2023
Common stock
Nature Of Operations [Line Items]
Stock issued, shares | shares	1,397,300								249,632
CHESS Depositary Interests
Nature Of Operations [Line Items]
Stock issued, shares | shares	69,865,000								12,481,600
Common stock issued, price per share | $ / shares	$ 0.22
Restructuring Charges
Nature Of Operations [Line Items]
Non-recurring charges													$ 400
Employee Severance
Nature Of Operations [Line Items]
Non-recurring charges														600
Facility Closing
Nature Of Operations [Line Items]
Non-recurring charges														$ 100

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Summary of Significant Accounting Policies and Basis of Presentations - Additional Information (Detail) - USD ($)		3 Months Ended		9 Months Ended
	Apr. 13, 2018	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Jan. 01, 2018	Dec. 31, 2017	Jan. 01, 2017
Summary Of Significant Accounting Policies [Line Items]
Inventory, net		$ 0		$ 0			$ 0
Loss on disposal of leasehold improvements	$ 2,000			2,000
Contract with customer, liability, revenue recognized				0
Deferred revenue		11,000		11,000			11,000
Estimated accrued expense for product return related costs							200,000
General and administrative		1,338,000	$ 1,095,000	3,378,000	$ 3,624,000
Accounting Standards Update 2016-09
Summary Of Significant Accounting Policies [Line Items]
Decrease in accumulated deficit						$ 28,000		$ 28,000
Patents
Summary Of Significant Accounting Policies [Line Items]
General and administrative				100,000	$ 300,000
Cash and Cash Equivalents
Summary Of Significant Accounting Policies [Line Items]
Cash equivalents		$ 3,100,000		$ 3,100,000			$ 3,000,000

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Potentially Dilutive Securities Excluded from Computation of Diluted Weighted Average Shares (Detail) - shares	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share	3,518,695	1,533,470	3,518,695	1,533,470
Warrant
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share	1,972,976	28,532	1,972,976	28,532
Options to purchase common stock and other stock-based awards
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities excluded from computation of earnings per share	1,545,719	1,504,938	1,545,719	1,504,938

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Warrants to Purchase Common Stock and CDIs - Additional Information (Detail) - $ / shares		9 Months Ended
	May 04, 2016	Sep. 30, 2018	May 30, 2018
2018 Senior Secured Convertible Promissory Note and Warrant
Class of Warrant or Right [Line Items]
Warrant expiration date			May 30, 2023
2018 Senior Secured Convertible Promissory Note and Warrant | CHESS Depositary Interests
Class of Warrant or Right [Line Items]
Common stock warrants, shares issued			97,222,200
Common stock warrant, exercise price			$ 0.018
Common stock | 2018 Senior Secured Convertible Promissory Note and Warrant
Class of Warrant or Right [Line Items]
Common stock warrants, shares issued			1,944,444
Consulting Agreement | Consultant Warrant
Class of Warrant or Right [Line Items]
Common stock warrants, shares issued	28,532
Common stock warrant, exercise price	$ 0.64
Vesting period of warrants	2 years
Contractual life of warrants	5 years
Common stock warrant, share reserved	28,532
Common stock warrant, shares exercised		0

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Fair Value of Assets and Liabilities Measured on Recurring Basis (Detail) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Warrant liability	$ 16	$ 29
Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total assets	1,091	2,584
Warrant liability	16	29
Total liabilities	16	29
Fair Value, Measurements, Recurring | Money Market Funds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	1,091	2,584
Fair Value, Measurements, Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total assets	1,091	2,584
Fair Value, Measurements, Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | Money Market Funds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	1,091	2,584
Fair Value, Measurements, Recurring | Significant Unobservable Inputs (Level 3)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Warrant liability	16	29
Total liabilities	$ 16	$ 29

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Assumptions Used in the Black-Scholes Option Pricing Model to Determine the Fair Value of the Common Stock Warrants (Detail)	Sep. 30, 2018 $ / shares $ / shares	Dec. 31, 2017 $ / shares $ / shares
Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques [Line Items]
Fair value of common stock	$ 0.72	$ 0.60
Exercise Price
Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques [Line Items]
Valuation assumptions measurement input	55.00	55.00
Expected Volatility
Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques [Line Items]
Valuation assumptions measurement input	135.0	142.6
Expected Term
Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques [Line Items]
Valuation assumptions expected term	2 years 7 months 9 days	3 years 4 months 2 days
Risk-free Interest Rate
Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques [Line Items]
Valuation assumptions measurement input	2.9	2.0
Expected Dividend Yield
Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques [Line Items]
Valuation assumptions measurement input	0	0

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Assumptions Used in the Black-Scholes Option Pricing Model to Determine the Fair Value of the Common Stock Warrants (Parenthetical) (Detail)	Sep. 30, 2018 $ / shares	Sep. 30, 2018 $ / shares	Dec. 31, 2017 $ / shares	Dec. 31, 2017 $ / shares
Exercise Price
Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques [Line Items]
Valuation assumptions measurement input	0.64	55.00	0.64	55.00

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Rollforward of Fair Value of Warrants (Detail) - Warrant $ in Thousands	9 Months Ended
	Sep. 30, 2018 USD ($)
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Beginning balance	$ 29
Decrease in fair value of warrants upon re-measurement included in other income (expense), net	(13)
Ending balance	$ 16

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Concentrations of Credit Risk, Accounts Receivable and Related Valuation Accounts - Additional Information (Detail)	1 Months Ended	9 Months Ended		12 Months Ended
	May 31, 2017 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2017 USD ($)	Dec. 31, 2017 USD ($) Customer
Accounts Notes And Loans Receivable [Line Items]
Adjustment to account receivable		$ (40,000)	$ 11,000
Accounts receivable		$ 0		$ 40,000
Accounts Receivable | Credit Concentration Risk | Four Health Care Providers
Accounts Notes And Loans Receivable [Line Items]
Number of customers | Customer				4
Concentration risk percentage				100.00%
Sales Arrangement
Accounts Notes And Loans Receivable [Line Items]
Sales arrangement entered	$ 517,000
Adjustment to account receivable				$ 559,000
Sales Arrangement | Foreign Currency
Accounts Notes And Loans Receivable [Line Items]
Adjustment to account receivable				$ 40,000

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Components of Company's Accounts Receivable (Detail) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Accounts Notes Loans And Financing Receivable Gross Allowance And Net [Abstract]
Accounts receivable		$ 85,000
Less: allowance for doubtful accounts		(42,000)
Less: allowance for sales returns		(3,000)
Total	$ 0	$ 40,000

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Rollforward of Allowance for Doubtful Accounts (Detail) - Allowance for Doubtful Accounts - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Valuation and Qualifying Accounts Disclosure [Line Items]
Beginning balance	$ 42	$ 16
Net charges to expenses	$ (42)	48
Utilization of allowances		(22)
Ending balance		$ 42

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Inventory - Additional Information (Detail) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Inventory Disclosure [Abstract]
Inventory reserve	$ 5,000,000	$ 5,000,000
Inventory, net of reserves	$ 0	$ 0

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Property and Equipment (Detail) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Property Plant And Equipment [Line Items]
Property Plant and equipment gross	$ 1,953	$ 1,974
Less accumulated depreciation and amortization	(1,869)	(1,877)
Total	84	97
Laboratory and manufacturing equipment
Property Plant And Equipment [Line Items]
Property Plant and equipment gross	591	591
Computer equipment and software
Property Plant And Equipment [Line Items]
Property Plant and equipment gross	1,179	1,179
Office furniture and equipment
Property Plant And Equipment [Line Items]
Property Plant and equipment gross	$ 183	183
Leasehold Improvements
Property Plant And Equipment [Line Items]
Property Plant and equipment gross		$ 21

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Property and Equipment - Additional Information (Detail) - USD ($) $ in Thousands		3 Months Ended		9 Months Ended
	Apr. 13, 2018	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Property Plant And Equipment [Abstract]
Depreciation and amortization expense		$ 0	$ 11	$ 11	$ 46
Loss on disposal of leasehold improvements	$ 2			$ 2

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Accrued Expenses (Detail) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Payables And Accruals [Abstract]
Payroll and related liabilities	$ 268	$ 181
Professional fees	639	421
Credit refunds	175	279
Interest payable	386	136
Other	48	4
Total	$ 1,516	$ 1,021

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Related Party Convertible Notes - Additional Information (Detail) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2018	Sep. 30, 2017	May 30, 2018	Jun. 15, 2017
Debt Instrument [Line Items]
Amortization of the issuance costs		$ 141	$ 25
Debt instrument, convertible, beneficial conversion feature		1,007
2018 Warrant
Debt Instrument [Line Items]
Estimated fair value of warrant	$ 743	$ 743
2018 Senior Unsecured Convertible Promissory Note
Debt Instrument [Line Items]
Debt principal amount				$ 1,750
Interest rate during period		10.00%
Interest rate during default	16.00%	16.00%
Maturity Date		May 30, 2023
Interest expense	$ 44	$ 58
Debt instrument, convertible, beneficial conversion feature		$ 1,200
Debt instrument, effective interest rate	26.40%	26.40%
Amortization of debt discount	$ 70	$ 95
Interest expense derived from issuance costs	$ 0	85
2018 Senior Unsecured Convertible Promissory Note and Warrant
Debt Instrument [Line Items]
Debt instrument, convertible, beneficial conversion feature		$ 1,000
Chess Deposit Interest | 2018 Warrant
Debt Instrument [Line Items]
Warrant to purchase CDIs				97,222,200
Warrant initial exercise price per CDI				$ 0.018
Warrant expiration date				May 30, 2023
Chess Deposit Interest | 2018 Senior Unsecured Convertible Promissory Note
Debt Instrument [Line Items]
Debt instrument conversion ratio		0.02
Debt instrument conversion description		The entire outstanding principal balance under the 2018 Note and all unpaid accrued interest thereon is convertible into CHESS Depositary Interests (“CDIs”), each representing 1/50th of a share of the Company’s common stock, at the option of the Purchaser at a conversion price of $0.018 per CDI. In the event that the Borrower issues additional CDIs in a subsequent equity financing at a price per CDI that is less than $0.018 the conversion price of the 2018 Note will adjust to the lower CDI conversion price. In addition, upon a change of control of the Company, the Purchaser may demand prepayment of accrued and unpaid interest plus 110% of the remaining outstanding unconverted principal balance of the 2018 Note.
Debt instrument conversion price per CDI	$ 0.018	$ 0.018
Percentage of remaining outstanding unconverted principal payment obligation upon change of control	110.00%	110.00%
2017 Senior Secured Convertible Promissory Note
Debt Instrument [Line Items]
Debt principal amount					$ 5,000
Interest rate during period		5.00%
Interest rate during default	8.00%	8.00%
Maturity Date		Dec. 31, 2018
Debt issuance costs					$ 115
Interest expense	$ 67	$ 191
Amortization of the issuance costs	$ 19	56
2017 Senior Secured Convertible Promissory Note | Chess Deposit Interest
Debt Instrument [Line Items]
Qualified financing least amount raised		$ 10,000

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Commitments and Contingencies - Additional Information (Detail)	1 Months Ended	3 Months Ended		9 Months Ended
	Jun. 30, 2016 USD ($) ft²	Sep. 30, 2018 USD ($)	Sep. 30, 2017 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2017 USD ($)
Loss Contingencies [Line Items]
Rentable area of leased premises | ft²	4,200
Lease commenced date	2016-06
Lease expiration date	2018-04
Rent expense	$ 11,900	$ 0	$ 36,000	$ 37,000	$ 107,000
WeWork Location Boston | Massachusetts
Loss Contingencies [Line Items]
Rent expense		$ 21,000		$ 21,000
Lease term		6 months		6 months

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Stockholders' Equity (Deficit) - Additional Information (Detail) $ / shares in Units, $ in Thousands						1 Months Ended			3 Months Ended		12 Months Ended
	Oct. 29, 2018 USD ($) shares	Sep. 20, 2018 USD ($) shares	Feb. 27, 2018 USD ($) shares	Jan. 22, 2018 USD ($) shares	Dec. 20, 2016 USD ($) $ / shares shares	Nov. 30, 2018 USD ($) $ / shares	Sep. 30, 2018 USD ($) shares	Jan. 31, 2017 $ / shares shares	Nov. 30, 2018 $ / shares shares	Mar. 31, 2018 $ / shares shares	Dec. 31, 2018 USD ($) PrivatePlacement	Dec. 31, 2017 shares	May 22, 2017 shares	Jan. 31, 2017 $ / shares	Dec. 31, 2016 shares
Class of Stock [Line Items]
Common stock, shares authorized							50,000,000					50,000,000	50,000,000		13,000,000
Capital stock, shares authorized							50,500,000
Preferred stock, shares authorized							500,000					500,000
Common stock issued, price per share | (per share)								$ 0.83						$ 0.022
Private placement amount received | $					$ 1,000
Common stock
Class of Stock [Line Items]
Stock issued, shares					1,397,300			249,632
CHESS Depositary Interests
Class of Stock [Line Items]
Stock issued, shares					69,865,000			12,481,600
Common stock issued, price per share | $ / shares					$ 0.22
Tranche One
Class of Stock [Line Items]
Private placement amount received | $							$ 2,200
Tranche Two | Scenario, Forecast
Class of Stock [Line Items]
Private placement amount received | $						$ 2,800
First Quarter 2018 Placement | Common stock
Class of Stock [Line Items]
Stock issued, shares										8,120,057
First Quarter 2018 Placement | CHESS Depositary Interests
Class of Stock [Line Items]
Stock issued, shares										406,002,869
Common stock issued, price per share | $ / shares										$ 0.035
First Quarter 2018 Placement | Tranche One
Class of Stock [Line Items]
Private placement amount received | $				$ 781
Stock issuance costs | $				$ 63
First Quarter 2018 Placement | Tranche One | Common stock
Class of Stock [Line Items]
Stock issued, shares				569,341
First Quarter 2018 Placement | Tranche One | CHESS Depositary Interests
Class of Stock [Line Items]
Stock issued, shares				28,467,063
First Quarter 2018 Placement | Tranche Two
Class of Stock [Line Items]
Private placement amount received | $			$ 824
Stock issuance costs | $			$ 39
First Quarter 2018 Placement | Tranche Two | Common stock
Class of Stock [Line Items]
Stock issued, shares			606,271
First Quarter 2018 Placement | Tranche Two | CHESS Depositary Interests
Class of Stock [Line Items]
Stock issued, shares			30,313,556
First Quarter 2018 Placement | Tranche Two | CHESS Depositary Interests | Board Member
Class of Stock [Line Items]
Stock issued, shares			2,921,800
First Quarter 2018 Placement | Tranche Two | CHESS Depositary Interests | Crystal Amber Fund
Class of Stock [Line Items]
Stock issued, shares			27,391,756
Private Placement | Scenario, Forecast
Class of Stock [Line Items]
Private placement amount received | $											$ 6,610
Number of private placements | PrivatePlacement											2
Autumn 2018 Placement | Common stock | Scenario, Forecast
Class of Stock [Line Items]
Stock issued, shares									6,944,445
Autumn 2018 Placement | CHESS Depositary Interests | Scenario, Forecast
Class of Stock [Line Items]
Stock issued, shares									347,222,250
Autumn 2018 Placement | CHESS Depositary Interests | Existing Investors | Scenario, Forecast
Class of Stock [Line Items]
Common stock issued, price per share | $ / shares						$ 0.020			$ 0.020
Autumn 2018 Placement | Tranche One
Class of Stock [Line Items]
Private placement amount received | $		$ 2,200
Stock issuance costs | $		$ 56
Autumn 2018 Placement | Tranche One | Common stock
Class of Stock [Line Items]
Stock issued, shares		3,000,000
Autumn 2018 Placement | Tranche One | CHESS Depositary Interests
Class of Stock [Line Items]
Stock issued, shares		150,000,000
Autumn 2018 Placement | Tranche Two
Class of Stock [Line Items]
Private placement amount received | $	$ 2,800
Autumn 2018 Placement | Tranche Two | Common stock
Class of Stock [Line Items]
Stock issued, shares	3,944,445
Autumn 2018 Placement | Tranche Two | CHESS Depositary Interests
Class of Stock [Line Items]
Stock issued, shares	197,222,250
Autumn 2018 Placement | Tranche Two | CHESS Depositary Interests | Existing Investors | United States | Subsequent Event
Class of Stock [Line Items]
Stock issued, shares	23,819,450
Autumn 2018 Placement | Tranche Two | CHESS Depositary Interests | Existing Investors | Australia | Subsequent Event
Class of Stock [Line Items]
Stock issued, shares	5,208,350
Autumn 2018 Placement | Tranche Two | CHESS Depositary Interests | Crystal Amber Fund | Subsequent Event
Class of Stock [Line Items]
Stock issued, shares	168,194,450

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Stock Plans - Additional Information (Detail)	3 Months Ended			9 Months Ended
	Sep. 30, 2018 USD ($) CompensationPlan shares	Mar. 31, 2018 shares	Sep. 30, 2017 USD ($) shares	Sep. 30, 2018 USD ($) CompensationPlan shares	Sep. 30, 2017 USD ($) shares	Dec. 31, 2017 shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of stock-based compensation plans | CompensationPlan	2			2
Annual increase in number of shares available for grant				500,000
Percentage of common shares outstanding				4.00%
Number of shares available for issue, additional shares		446,299
Stock options, vesting period				4 years
Stock options, expire period				10 years
Unrecognized stock-based compensation | $	$ 299,000			$ 299,000
Stock-based compensation expense | $				$ 86,000	$ 162,000
Stock Option
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Recognized weighted-average period years				2 years 7 months 6 days
Restricted Stock Units (RSUs) and Performance Stock Units (PSUs)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares of common stock to be received, per restricted stock unit and performance stock unit	1			1
Restricted stock units outstanding	250,000			250,000		392,659
Restricted Stock Units (RSUs) and Performance Stock Units (PSUs) Subject to Performance-based Vesting
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Restricted stock units outstanding	0		0	0	0
Stock-based compensation expense | $	$ 0		$ 0	$ 0	$ 0
Performance Shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized stock based compensation | $	$ 150,000			$ 150,000
Stock Incentive Plan 2011
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares available for future grants	1,545,719			1,545,719

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Stock-Based compensation Reflected in Consolidated Statements of Operations (Detail) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation expense	$ 22	$ 81	$ 86	$ 162
Research and Development Expense
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation expense	1	11	6	24
Sales and marketing
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation expense	5	38	15	67
General and Administrative Expense
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation expense	$ 16	$ 32	$ 65	$ 71

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Weighted-average Assumptions used to Estimate Fair Value of Stock Options (Detail)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]
Expected volatility	120.30%	88.20%	120.30%	87.80%
Expected term (in years)	6 years 18 days	6 years 18 days	6 years 18 days	6 years 18 days
Risk-free interest rate	3.00%	2.10%	3.00%	2.10%
Expected dividend yield	0.00%	0.00%	0.00%	0.00%

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Share-Based Activity (Detail) - USD ($) $ / shares in Units, $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Options
Outstanding, beginning balance	992,221
Granted	122,500
Exercised	0
Cancelled	(381,043)
Outstanding, ending balance	733,678	992,221
Vested or expected to vest at September 30, 2018	733,678
Exercisable at September 30, 2018	337,063
Weighted Average Exercise Price
Outstanding, beginning balance	$ 10.71
Granted	0
Exercised	0
Cancelled	5.31
Outstanding, ending balance	4.67	$ 10.71
Vested or expected to vest at September 30, 2018	4.67
Exercisable at September 30, 2018	$ 0
Weighted Average Contractual Life (in Years)
Outstanding at end of period	5 years 11 months 15 days	5 years 8 months 19 days
Vested or expected to vest at September 30, 2018	5 years 11 months 15 days
Exercisable at September 30, 2018	0 years
Aggregate Intrinsic Value
Outstanding at end of period	$ 16	$ 63
Vested or expected to vest at September 30, 2018	16
Exercisable at September 30, 2018	$ 0

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Restricted Stock Units and Performance Stock Units Activity (Detail) - Restricted Stock Units (RSUs) and Performance Stock Units (PSUs) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Number of Units
Outstanding, beginning balance	392,659
Granted	0
Exercised	0
Cancelled	(142,659)
Outstanding, ending balance	250,000	392,659
Weighted Average Contractual Life (in years)
Outstanding at end of period	7 years 5 months 23 days	8 years 3 months 7 days
Aggregate Intrinsic Value
Outstanding Aggregate Intrinsic Value	$ 208	$ 429

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Segment Reporting - Additional Information (Detail)	3 Months Ended		9 Months Ended
	Sep. 30, 2018 USD ($)	Sep. 30, 2017 USD ($)	Sep. 30, 2018 USD ($) Segment	Sep. 30, 2017 USD ($) Customer
Revenues from External Customers and Long-Lived Assets [Line Items]
Number of reportable segments | Segment			1
Long-lived assets	$ 100,000		$ 100,000
Revenue	0	$ 23,000	0	$ 173,000
Major Customers
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenue	$ 0		$ 0
Sales Revenue, Net | Credit Concentration Risk | Customer One
Revenues from External Customers and Long-Lived Assets [Line Items]
Number of customers | Customer				1
Concentration risk percentage				21.00%
Sales Revenue, Net | Credit Concentration Risk | Customer Two
Revenues from External Customers and Long-Lived Assets [Line Items]
Number of customers | Customer				1
Concentration risk percentage				15.00%
Sales Revenue, Net | Customer Concentration Risk
Revenues from External Customers and Long-Lived Assets [Line Items]
Rebate accrual recognised as revenue		$ 27,000

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Product Sales by Geographic Location (Detail) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenue	$ 0	$ 23,000	$ 0	$ 173,000
Europe
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenue		$ 23,000		155,000
Middle East
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenue				$ 18,000