Attached files

file filename
EX-32.1 - EX-32.1 - GI DYNAMICS, INC.d79520dex321.htm
EX-31.1 - EX-31.1 - GI DYNAMICS, INC.d79520dex311.htm
EX-32.2 - EX-32.2 - GI DYNAMICS, INC.d79520dex322.htm
EX-31.2 - EX-31.2 - GI DYNAMICS, INC.d79520dex312.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2015

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)

25 Hartwell Avenue

Lexington, Massachusetts

  02421
(Address of Principal Executive Offices)   (Zip Code)

(781) 357-3300

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer  

x  (Do not check if a smaller reporting company)

   Smaller reporting company   ¨

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

As of July 31, 2015 there were 9,484,671 shares of common stock outstanding.

 

 

 


Table of Contents

NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

 

    our expectations with respect to regulatory submissions and approvals;

 

    our expectations with respect to our clinical trials, including the consequences of terminating the ENDO Trial (as defined herein);

 

    our expectations with respect to our intellectual property position;

 

    our ability to commercialize our products;

 

    our ability to develop and commercialize new products;

 

    our expectation with regard to 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,” “potential,” “aims,” “assumes,” “goal,” “intends,” “objective,” “potential,” “positioned,” “target,” “continue,” “seek” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

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 at the date of this Quarterly Report on Form 10-Q. Unless required by law, we do not intend to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this Quarterly Report on Form 10-Q.


Table of Contents

GI DYNAMICS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2015

TABLE OF CONTENTS

 

         Page
  PART I – FINANCIAL INFORMATION   
Item 1.   Financial Statements (unaudited)   
  Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014      1
  Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2015 and 2014      2
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014      3
  Notes to Condensed Consolidated Financial Statements      4
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    18
Item 3.   Quantitative and Qualitative Disclosures About Market Risk    25
Item 4.   Controls and Procedures    26
  PART II – OTHER INFORMATION   
Item 1A.       Risk Factors    27
Item 2.   Unregistered Sales of Equity Securities    28
Item 6.   Exhibits    28
  Signatures    29


Table of Contents

References

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

Currency

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

Trademarks

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


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

GI Dynamics, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(unaudited)

 

     June 30,
2015
    December 31,
2014
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 32,819      $ 51,191   

Accounts receivable, net

     283        470   

Inventory

     3,225        5,488   

Prepaid expenses and other current assets

     1,005        1,165   
  

 

 

   

 

 

 

Total current assets

     37,332        58,314   

Property and equipment, net

     954        1,089   

Other long-term assets

     97        97   
  

 

 

   

 

 

 

Total assets

   $ 38,383      $ 59,500   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 1,194      $ 882   

Accrued expenses

     5,574        7,674   

Deferred revenue

     116        412   

Other current liabilities

     179        175   
  

 

 

   

 

 

 

Total current liabilities

     7,063        9,143   

Deferred rent, net of current portion

     86        166   

Other liabilities

     5        4   

Warrants to purchase common stock

     19        9   

Commitments (Note 10)

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value – 500,000 shares authorized; no shares issued and outstanding at June 30, 2015 and December 31, 2014

     —          —     

Common stock, $0.01 par value – 13,000,000 shares authorized; 9,484,671 shares issued and 9,481,171 shares outstanding at June 30, 2015 and 9,483,671 shares issued and 9,480,171 shares outstanding at December 31, 2014

     95        95   

Class B common stock, $0.01 par value – 1,000,000 shares authorized; no shares issued and outstanding at June 30, 2015 and December 31, 2014

     —          —     

Additional paid-in capital

     251,624        250,009   

Accumulated deficit

     (220,509     (199,926
  

 

 

   

 

 

 

Total stockholders’ equity

     31,210        50,178   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 38,383      $ 59,500   
  

 

 

   

 

 

 

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

 

1


Table of Contents

GI Dynamics, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

(In thousands, except share and per share amounts)

(unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2015     2014     2015     2014  

Revenue

   $ 310      $ 840      $ 926      $ 1,746   

Cost of revenue

     2,012        550        2,898        1,453   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross (loss) profit

     (1,702     290        (1,972     293   

Operating expenses:

      

Research and development

     4,631        7,516        10,277        12,860   

Sales and marketing

     1,482        3,074        3,142        5,562   

General and administrative

     2,437        2,341        4,731        4,606   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     8,550        12,931        18,150        23,028   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (10,252     (12,641     (20,122     (22,735

Other income (expense):

      

Interest income

     24        124        54        176   

Interest expense

     —          —          —          (1

Foreign exchange gain (loss)

     28        224        (465     427   

Remeasurement of warrant liability

     (8     15        (10     195   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net

     44        363        (421     797   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax expense

     (10,208     (12,278     (20,543     (21,938

Income tax expense

     26        22        40        43   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (10,234   $ (12,300   $ (20,583   $ (21,981
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per common share

   $ (1.08   $ (1.38   $ (2.17   $ (2.58
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of common shares used in basic and diluted net loss per common share

     9,481,171        8,921,886        9,481,099        8,511,467   

Comprehensive loss

   $ (10,234   $ (12,300   $ (20,583   $ (21,981
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

2


Table of Contents

GI Dynamics, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 

     Six Months Ended
June 30,
 
     2015     2014  

Operating activities

    

Net loss

   $ (20,583   $ (21,981

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     312        320   

Stock-based compensation expense

     1,613        2,208   

Remeasurement of warrant liability

     10        (195

Change in inventory reserve

     1,487        (105

Changes in operating assets and liabilities:

    

Accounts receivable

     187        (214

Prepaid expenses and other current assets

     160        103   

Inventory

     776        (62

Accounts payable

     312        272   

Accrued expenses

     (2,111     1,468   

Deferred revenue

     (296     27   

Deferred rent

     (71     127   
  

 

 

   

 

 

 

Net cash used in operating activities

     (18,204     (18,032

Investing activities

    

Purchases of property and equipment

     (169     (182
  

 

 

   

 

 

 

Net cash used in investing activities

     (169     (182

Financing activities

    

Proceeds from exercise of stock options

     2        522   

Net proceeds from issuance of common stock

     —          30,782   

Payments on capital lease

     (1     —     

Payments on long-term debt

     —          (39
  

 

 

   

 

 

 

Net cash provided by financing activities

     1        31,265   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (18,372     13,051   

Cash and cash equivalents at beginning of period

     51,191        58,616   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 32,819      $ 71,667   
  

 

 

   

 

 

 

Supplemental cash flow disclosures

    

Cash paid for interest

   $ —        $ 1   

Income taxes paid

   $ 52      $ 24   

Equipment acquired under capital lease

   $ 8      $ —     

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

 

3


Table of Contents

GI Dynamics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Nature of Business

GI Dynamics, Inc. (the “Company”) was incorporated on March 24, 2003, as a Delaware corporation, with operations based in Lexington, Massachusetts. The Company is dedicated to restoring health and improving quality of life, through the design and application of device and management solutions for treatment of metabolic disease. The Company’s near-term goal is to establish EndoBarrier Therapy as a valued treatment option for patients suffering from type 2 diabetes and obesity by restoring more manageable blood sugar levels and reducing body weight. The Company is the developer of EndoBarrier, the first endoscopically-delivered device therapy approved for the treatment of obese type 2 diabetes with BMI > 30 kg/m2, or obese patients with BMI > 30 kg/m2 with > 1 comorbidities, or obese patients with BMI >35 kg/m2. EndoBarrier is the only incision-free, non-anatomy altering solution designed to specifically mimic the duodenal-jejunal exclusion created by gastric bypass surgery. Since incorporation, the Company has devoted substantially all of its efforts to research and development, business planning, clinical research, clinical study management, reimbursement development, product commercialization, acquiring operating assets, and raising capital. The Company currently operates in one reportable business segment which designs, manufactures and markets medical devices.

In 2011, the Company began commercial sales of EndoBarrier, which is currently sold in select markets in Europe, South America, the Asia Pacific region and the Middle East.

In the U.S., the Company received approval from the Food and Drug Administration (“FDA”), to commence its pivotal trial of EndoBarrier Therapy (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.

On March 5, 2015, the Company announced that the FDA recommended discontinuing placement of any additional devices in the ENDO Trial as a result of, at that date, four cases of hepatic abscess among the 325 subjects then enrolled in the ENDO Trial. Hepatic abscess, a bacterial infection of the liver, is a known event related to the use of EndoBarrier. As a result, the Company halted enrollment in the ENDO Trial, although monitoring and data collection of patients then enrolled in the ENDO Trial continued.

On July 30, 2015, the Company announced its decision to discontinue the ENDO Trial. The decision followed discussions with the FDA regarding resumption of ENDO Trial enrollment, which despite collaborative efforts by both parties were unable to yield a feasible path forward for the mitigation of a higher than anticipated incidence of hepatic abscess. The Company concluded that terminating the ENDO Trial, effective immediately, was in the best interest of all stakeholders.

The Company is subject to a number of risks similar to other medical device companies, including, but not limited to, market acceptance of the Company’s products, development by its competitors of new technological innovations, safety and efficacy of the products in clinical trials, the regulatory approval process governing medical devices and protection of proprietary technology. In addition, the Company will require additional funding to support its long-term operations. Any such financing may or may not be similar to transactions in which it has engaged in the past and there can be no assurance that any such financing opportunities will also be available on acceptable terms, if at all.

The Company has incurred operating losses since inception and at June 30, 2015, had an accumulated deficit of approximately $220.5 million. Based on the Company’s decision to conclude the ENDO Trial, it has begun efforts to evaluate which markets are appropriate to continue pursuing reimbursement, market awareness and general market development efforts, and initiated efforts to restructure its business and costs, establish new priorities, continue limited market development and research, and evaluate strategic options. As a result, the Company expects to incur significant operating losses for the next several years. At June 30, 2015, the Company had approximately $32.8 million in cash and cash equivalents, which it believes is sufficient to fund its operations through September 2016. The Company does not expect its current cash balances will be sufficient to enable it to complete development of an improved EndoBarrier for its current use and potential new indications. The Company will need to raise additional funding in order to continue to fund its operations beyond September 2016. The Company may seek to raise additional funds through a combination of collaborative arrangements, strategic alliances, and additional equity and debt financings or from other sources. There can be no assurance that any such financing opportunities will also be available on acceptable terms, if at all. If the Company is unable to raise capital when needed, it could be forced to significantly delay, scale back or discontinue research and development activities and further commercialization of EndoBarrier.

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

 

4


Table of Contents

GI Dynamics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

 

Promissory Notes. Additionally, in July and August 2013, the Company sold CDIs on the Australian Securities Exchange (“ASX”) through a private placement and Share Purchase Plan (“SPP”), which raised a total of approximately $52.5 million, net of expenses. In May 2014, the Company raised an additional approximately $30.8 million, net of expenses, when it sold CDIs on the ASX through a private placement.

2. Summary of Significant Accounting Policies and Basis of Presentation

The accompanying condensed consolidated financial statements and the related disclosures as of June 30, 2015 and for the three and six months ended June 30, 2015 and 2014 are unaudited and have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K (“Form 10-K”). The December 31, 2014 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by GAAP for complete financial statements.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company’s financial position as of June 30, 2015, results of its operations for the three and six months ended June 30, 2015 and 2014, and its cash flows for the six months ended June 30, 2015 and 2014. The interim results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

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

Principles of Consolidation

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

Use of Estimates

The preparation of consolidated financial statements in accordance with GAAP requires the Company’s management to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, the Company’s management evaluates its estimates, including those related to revenue recognition, 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, 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.

 

5


Table of Contents

GI Dynamics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

 

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

 

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.

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

As of June 30, 2015 and December 31, 2014, 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.

Reverse Stock Split

In November 2014, the Company’s stockholders approved a one-for-ten reverse stock split of the Company’s common stock that was effective April 9, 2015. All share and per share amounts in the condensed consolidated financial statements and notes thereto have been retroactively adjusted, where necessary, to reflect this reverse stock split. Because the par value of the Company’s shares of common stock remain unchanged after the date of the split, the total stated par value and additional paid-in capital changed by offsetting amounts. The stated par value was reduced to one-tenth of the amount before the split and the additional paid-in capital was increased the same amount.

Subsequent Events

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

Reclassifications

Certain reclassifications related to the presentation of the change in inventory in the condensed consolidated statements of cash flows have been made to prior year amounts to conform with current year presentation.

New Accounting Pronouncements

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

 

6


Table of Contents

GI Dynamics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

 

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

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The new standard will be effective for the Company for reporting periods beginning after December 15, 2017. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. Management is currently evaluating the impact of the pending adoption of ASU 2014-09 on the Company’s consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). This new standard gives a company’s management the final responsibilities to decide whether there’s substantial doubt about the company’s ability to continue as a going concern and to provide related footnote disclosures. The standard provides guidance to management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that companies commonly provide in their footnotes. Under the new standard, management must decide whether there are conditions or events, considered in the aggregate, that 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, or within one year after the date that the financial statements are available to be issued when applicable. 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 adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (“ASU 2015-05”). This new standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 will be effective for the Company for reporting periods beginning after December 15, 2015. Early adoption is permitted and a company can elect to adopt ASU 2015-05 either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. Accordingly, the standard is effective for the Company on January 1, 2016. The adoption of this guidance is not expected to have a material 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 adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

3. Net Loss per Common Share

Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Potential common stock equivalents are determined using the treasury stock method. For diluted net loss per share purposes, the Company excludes stock options and other stock-based awards, including shares issued as a result of option exercises but which are subject to repurchase by the Company, whose effect would be anti-dilutive from the calculation. During the three and six months ended June 30, 2015 and 2014, 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.

 

7


Table of Contents

GI Dynamics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

 

3. Net Loss per Common Share (continued)

 

The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares outstanding as of June 30, 2015 and 2014, as they would be anti-dilutive:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2015      2014      2015      2014  

Warrants to purchase common stock

     50,000         50,000         50,000         50,000   

Options to purchase common stock and other stock-based awards

     1,506,880         1,027,202         1,506,880         1,027,202   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,556,880         1,077,202         1,556,880         1,077,202   
  

 

 

    

 

 

    

 

 

    

 

 

 

4. Common Stock Warrants

In connection with the Company’s IPO in September 2011, the Company issued warrants in an aggregate amount of 50,000 shares of common stock at an exercise price of A$55.00 per share to the lead manager of the IPO and certain other investors. The warrants will expire on the fifth anniversary of their date of grant. The warrants may be converted on a cashless basis at the option of the holder. The Company has reserved 50,000 shares of common stock related to these warrants.

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

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 June 30, 2015 and December 31, 2014, 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.

 

8


Table of Contents

GI Dynamics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

 

5. Fair Value of Financial Instruments (continued)

 

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

 

            Fair Value Measurements at
Reporting Date Using
 

Description

   June 30,
2015
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets

           

Money market funds (included in cash and cash equivalents)

   $ 24,215       $ 24,215       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 24,215       $ 24,215       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Warrants to purchase common stock

   $ 19       $ —         $ —         $ 19   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 19       $ —         $ —         $ 19   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            Fair Value Measurements at
Reporting Date Using
 

Description

   December 31,
2014
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets

           

Money market funds (included in cash and cash equivalents)

   $ 38,454       $ 38,454       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 38,454       $ 38,454       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Warrants to purchase common stock

   $ 9       $ —         $ —         $ 9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 9       $ —         $ —         $ 9   
  

 

 

    

 

 

    

 

 

    

 

 

 

The assumptions used in the Black-Scholes option pricing model to determine the fair value of the common stock warrants at June 30, 2015 and December 31, 2014 were as follows:

 

     June 30,
2015
    December 31,
2014
 

Exercise price (A$55.00 at current exchange rate)

   $ 42.24      $ 45.10   

Fair value of common stock

   $ 5.76      $ 9.80   

Expected volatility

     113.9     62.2

Expected term (in years)

     1.2        1.7   

Risk-free interest rate

     0.3     0.5

Expected dividend yield

     —       —  

 

9


Table of Contents

GI Dynamics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

 

5. Fair Value of Financial Instruments (continued)

 

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, 2014

   $ 9   

Increase in fair value of warrants upon remeasurement included in other income (expense)

     10   
  

 

 

 

Balance at June 30, 2015

   $ 19   
  

 

 

 

Cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities at June 30, 2015 and December 31, 2014 are carried at amounts that approximate fair value due to their short-term maturities and highly liquid nature of these instruments.

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

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

Accounts receivable primarily consist of amounts due from customers, 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.

At June 30, 2015 and December 31, 2014, one distributor accounted for approximately 18% and 32%, respectively, of the Company’s accounts receivable. No other customer accounted for greater than 10% of the Company’s accounts receivable at June 30, 2015 and December 31, 2014.

The Company grants credit to customers in the normal course of business but generally does not require collateral or any other security to support its receivables. The Company makes judgments as to its ability to collect outstanding receivables and provides an allowance for receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices and the overall quality and age of those invoices not individually reviewed. To date, the Company has not had any write-offs of bad debt; however, as of June 30, 2015, the Company had approximately $0.1 million of accounts receivable where collection is deemed to be doubtful, and as such, the Company has established an allowance for doubtful accounts. At December 31, 2014, the Company had an allowance for doubtful accounts of approximately $41,000.

In certain circumstances the Company allows customers to return defective or nonconforming products for credit or replacement products. Defective or nonconforming products typically consist of 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 June 30, 2015 and December 31, 2014 (in thousands):

 

     June 30,
2015
     December 31,
2014
 

Accounts receivable

   $ 433       $ 555   

Less: allowance for doubtful accounts

     (114      (41

Less: allowance for sales returns

     (36      (44
  

 

 

    

 

 

 

Total

   $ 283       $ 470   
  

 

 

    

 

 

 

 

10


Table of Contents

GI Dynamics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

 

7. Inventory

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

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 has been difficult. To the extent the Company’s demand forecast is less than its inventory on-hand, the Company could be required to record reserves for excess inventory.

In June of 2015, the Company performed an analysis of its inventory on hand and due to current evidence that the utility of certain amounts of the raw material sleeve inventory as it was expected to be used will be less than its cost, recorded an approximately $1.4 million charge for excess inventory. Factors contributing to the inventory write-down included: the effect that the ENDO Trial enrollment hold and related uncertainty around the timing and success of the Company’s ENDO Trial had on commercial activity and the Company’s inventory levels, the expected timing of third-party payer reimbursement in its commercial markets, its conclusion that certain inventory will not be used for sales inside or outside the U.S. and the historical accuracy of its demand forecasts. As of June 30, 2015, the Company has a reserve totaling approximately $3.0 million for raw material sleeve inventory. The Company continues to review any evidence that may indicate that the utility of additional amounts of the raw material sleeve inventory, as it was expected to be used, will be less than cost.

Inventory at June 30, 2015 and December 31, 2014 was as follows (in thousands):

 

     June 30,
2015
     December 31,
2014
 

Finished goods

   $ 609       $ 733   

Work-in-process

     1,681         2,401   

Raw materials

     935         2,354   
  

 

 

    

 

 

 

Total

   $ 3,225       $ 5,488   
  

 

 

    

 

 

 

The Company has entered into consignment arrangements in which the Company delivers product to the customer but retains title to the product until it is implanted or otherwise consumed. At June 30, 2015 and December 31, 2014, approximately 8% and 4%, respectively, of the finished goods inventory was at customer locations pursuant to these arrangements.

8. Property and Equipment

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

 

     June 30,
2015
     December 31,
2014
 

Laboratory equipment and manufacturing equipment

   $ 545       $ 545   

Computer equipment and software

     1,119         1,125   

Office furniture and equipment

     229         221   

Construction in process

     217         48   

Leasehold improvements

     921         921   
  

 

 

    

 

 

 
     3,031         2,860   

Less accumulated depreciation and amortization

     (2,077      (1,771
  

 

 

    

 

 

 

Total

   $ 954       $ 1,089   
  

 

 

    

 

 

 

 

11


Table of Contents

GI Dynamics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

 

8. Property and Equipment (continued)

 

In January 2015, the Company entered into a capital lease for certain office equipment. As of June 30, 2015, the Company had approximately $8,000 of assets under capital leases with a minimal accumulated amortization balance.

Depreciation and amortization expense of property and equipment, including equipment recorded under capital leases, was approximately $0.1 million for the three months ended June 30, 2015 and approximately $0.2 million for the three months ended June 30, 2014. Depreciation and amortization expense of property and equipment, including equipment recorded under capital leases, was approximately $0.3 million for each of the six months ended June 30, 2015 and 2014.

9. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

     June 30,
2015
     December 31,
2014
 

Clinical trials

   $ 2,869       $ 3,906   

Payroll and related liabilities

     1,374         2,629   

Professional fees

     686         634   

Deferred rent, current portion

     160         151   

Current portion of capital lease obligation

     2         —     

Other

     483         354   
  

 

 

    

 

 

 

Total

   $ 5,574       $ 7,674   
  

 

 

    

 

 

 

Included in payroll and related liabilities at June 30, 2015, is a total of approximately $0.4 million of separation expenses which will be paid out through March 2016.

10. Commitments and Contingencies

Lease Commitments

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

In March 2012, the Company’s subsidiary, GID Germany GmbH, entered into a noncancelable operating lease for office space in Dusseldorf, Germany. The lease was renewed in September 2013 and again in January 2015 and was extended through April 2016. The agreement was extended under substantially the same terms as the original agreement and is subject to earlier termination based on certain terms and conditions. The rent expense, inclusive of the free rent periods, is recognized on a straight-line basis over the term of the current lease agreement.

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

 

12


Table of Contents

GI Dynamics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

 

10. Commitments and Contingencies (continued)

 

Rent expense on noncancelable operating leases was approximately $0.1 million for each of the three-month periods ended June 30, 2015 and 2014, respectively. Rent expense on noncancelable operating leases was approximately $0.3 million for each of the six-month periods ended June 30, 2015 and 2014, respectively.

In March 2015, the Company entered into a capital lease for certain office equipment totaling approximately $8,000. The capital lease has a three-year term and an interest rate of 14.1%.

Future minimum lease payments under all noncancelable lease arrangements at June 30, 2015, are as follows (in thousands):

 

Year Ending December 31,

  

2015

   $ 319   

2016

     626   

2017

     3   

2018

     1   
  

 

 

 

Total

   $ 949   
  

 

 

 

11. Stockholders’ Equity

On April 9, 2015, the Company amended its certificate of incorporation to reflect the one-for-ten reverse stock split approved by its shareholders. After giving effect to the reverse stock split, the authorized capital stock of the Company now consists of 14,500,000 shares, of which 13,000,000 shares are designated as common stock, 1,000,000 shares are designated as Class B common stock, and 500,000 shares are designated as preferred stock.

Common Stock

The Company authorized Class B common stock in order meet the Listing Rules of the ASX so far as they apply to escrowed securities. In the event that holders of common stock, who were subject to ASX-imposed escrow, breached the terms of their escrow agreement or the Listing Rules as they apply to escrowed securities, their common stock would have been automatically converted into Class B common stock until the earlier to occur of the expiration of the escrow period or the breach being rectified. The Class B common stock is identical to and ranks equally with the common stock except that Class B common stock has no voting rights and is not entitled to any dividends. No shares of common stock are currently subject to such an escrow.

12. Stock Plans

The Company has two stock-based compensation plans under which stock options, restricted and unrestricted stock awards, restricted stock units, and other share-based awards are available for grant to employees, directors and consultants of the Company. At June 30, 2015, there were 480,632 shares available for future grant under both plans.

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:

 

    500,000 shares;

 

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

 

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

Accordingly, during the six months ended June 30, 2015, 379,346 shares were added to the 2011 Plan.

 

13


Table of Contents

GI Dynamics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

 

12. Stock Plans (continued)

 

Stock-Based Compensation

Stock-based compensation is reflected in the condensed consolidated statements of comprehensive loss as follows for the three and six months ended June 30, 2015 and 2014 (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2015      2014      2015      2014  

Cost of revenue

   $ 25       $ 32       $ 47       $ 60   

Research and development

     162         333         348         640   

Sales and marketing

     111         413         256         826   

General and administrative

     621         368         962         682   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 919       $ 1,146       $ 1,613       $ 2,208   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the six months ended June 30, 2015, the Company modified the post-employment exercise period of stock awards previously granted to the Company’s former chief financial officer in relation to his separation from the Company. The modification extended the exercise period to December 8, 2015. The modification resulted in an approximately $19,000 increase in stock-based compensation for the six months ended June 30, 2015. The Company accounted for the modification of these stock awards in accordance with the provisions of ASC 718, Stock Compensation (“ASC 718”).

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

Determining the fair value of stock-based awards using the Black-Scholes option-pricing model requires the use of highly subjective assumptions, including the expected term of the award and expected stock price volatility. The weighted-average assumptions used to estimate the fair value of employee stock options using the Black-Scholes option-pricing model were as follows for the three and six months ended June 30, 2015 and 2014:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2015     2014     2015     2014  

Expected volatility

     56.8     62.0     56.8     62.8

Expected term (in years)

     6.04        6.05        6.04        6.05   

Risk-free interest rate

     1.6     1.9     1.6     2.0

Expected dividend yield

     —       —       —       —  

The Company uses historical data to estimate forfeiture rates. The Company’s estimated forfeiture rates were 10% and 5% at June 30, 2015 and 2014, respectively.

 

14


Table of Contents

GI Dynamics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

 

12. Stock Plans (continued)

 

Stock Options

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

 

     Shares of
Common
Stock
Attributable
to Options
     Weighted-
Average
Exercise
Price
     Weighted-
Average
Contractual
Life
     Aggregate
Intrinsic
Value
 
                   (in years)      (in thousands)  

Outstanding at December 31, 2014

     1,201,496       $ 26.36         6.41       $ 1,406   

Granted

     246,604       $ 5.42         

Exercised

     (1,000    $ 1.50         

Cancelled

     (252,027    $ 30.89         
  

 

 

          

Outstanding at June 30, 2015

     1,195,073       $ 21.11         6.88       $ 374   
  

 

 

    

 

 

    

 

 

    

 

 

 

Vested or expected to vest at June 30, 2015

     1,126,526       $ 21.17         6.76       $ 367   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable at June 30, 2015

     509,536       $ 22.41         4.24       $ 302   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2015, there was approximately $5.7 million of unrecognized stock-based compensation, net of estimated forfeitures, 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 2.75 years. The total unrecognized stock-based compensation cost will be adjusted for future changes in estimated forfeitures.

The weighted-average grant date fair value of options granted during the three months ended June 30, 2015 and 2014 was $2.89 and $13.25, respectively, and $2.91 and $20.40 for the six months ended June 30, 2015 and 2014, respectively. The total intrinsic value of options exercised during the three months ended June 30, 2015 and 2014 was none and $0.2 million, respectively, and approximately $10,000 and $4.3 million for the six months ended June 30, 2015 and 2014, respectively. The intrinsic value represents the difference between the fair value of the Company’s common stock on the date of exercise and the exercise price of the stock option. Cash received from option exercises during the three months ended June 30, 2015 and 2014 was none and approximately $37,000, respectively. Cash received from option exercises during the six months ended June 30, 2015 and 2014 was approximately $1,500 and $0.5 million, respectively. No tax benefits were realized from options and other stock-based payment arrangements during these periods.

The stock-based compensation plans provide that grantees may have the right to exercise an option prior to vesting. Shares purchased upon the exercise of unvested options will be subject to the same vesting schedule as the underlying options, and are subject to repurchase at the original exercise price by the Company should the grantee discontinue providing services to the Company for any reason, prior to becoming fully vested in such shares. At June 30, 2015 and December 31, 2014, there were 3,500 shares of common stock issued pursuant to the exercise of unvested options that remain unvested and subject to repurchase by the Company. The exercise of these shares is not substantive and as a result, the cash paid of approximately $0.1 million for the exercise price is considered a deposit or prepayment of the exercise price and is recorded as a liability. Additionally, while the shares of common stock subject to repurchase are included in the legally issued shares, they are excluded from the calculation of outstanding shares.

 

15


Table of Contents

GI Dynamics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

 

12. Stock Plans (continued)

 

Restricted Stock Units

Each restricted stock unit (“RSU”) represents a contingent right to receive one share of the Company’s common stock. The RSUs outstanding as of June 30, 2015 vest on the first anniversary of the issuance date, vest on a pro-rata basis on each anniversary of the issuance date over four years or vest upon the achievement of certain product revenue, regulatory and reimbursement milestones. There is no consideration payable on the vesting of RSUs issued under the Plans. Upon vesting, the RSUs are exercised automatically and settled in shares of the Company’s common stock.

The following table summarizes information related to the RSUs and activity during the six months ended June 30, 2015:

 

     Number of Units      Weighted-
Average
Contractual
Life
     Aggregate
Intrinsic
Value
 
            (in years)      (in thousands)  

Outstanding at December 31, 2014

     205,740         5.43       $ 2,016   

Granted

     143,506         

Vested/Exercised

     —           

Cancelled

     (40,939      
  

 

 

       

Outstanding at June 30, 2015

     308,307         5.07       $ 1,776   
  

 

 

    

 

 

    

 

 

 

The aggregate intrinsic value at June 30, 2015 noted in the table above represents the closing price of the Company’s common stock multiplied by the number of RSUs outstanding.

The fair value of each RSU award equals the closing price of the Company’s common stock on the date of grant. The weighted average grant date fair value per share of RSUs granted during the three and six months ended June 30, 2015 was $5.39. The weighted average grant date fair value per share of RSUs granted during the six months ended June 30, 2014 was $37.79. No RSUs were granted in the three months ended June 30, 2014.

At June 30, 2015, 218,763 of the RSUs outstanding are subject to performance-based vesting criteria as described above. For these awards, the 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. During the three months ended June 30, 2015 the Company did not recognize any stock-based compensation for RSUs subject to performance-based vesting criteria. During the six months ended June 30, 2015 the Company determined that a milestone previously deemed probable was now not probable of being achieved prior to the expiration of the award. This change in estimate was recognized through a cumulative adjustment in the first six months of 2015, resulting in a reduction of stock-based compensation of approximately $0.3 million. In the three and six months ended June 30, 2014, stock-based compensation expense associated with RSUs subject to performance-based vesting criteria was approximately $67,000 and $0.1 million, respectively, as certain milestones were deemed probable of achievement at that time. Stock-based compensation for RSUs that have service-based vesting was approximately $0.1 million and $0.2 million for the three and six months ended June 30, 2015, respectively. There was no stock-based compensation for RSUs that have service-based vesting in the three and six months ended June 30, 2014.

As of June 30, 2015, there was approximately $1.2 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested RSU awards that have service-based vesting. This expense is expected to be recognized over a weighted average period of 3.2 years. At June 30, 2015, no RSUs that have performance-based vesting criteria are considered probable of achievement and there remains approximately $3.0 million of unrecognized stock-based compensation, including the amount of the cumulative adjustment above.

 

16


Table of Contents

GI Dynamics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (continued)

(unaudited)

 

13. Segment Reporting

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

Geographic Reporting

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

At June 30, 2015, long-lived assets, comprised of property and equipment, of approximately $1.0 million are primarily held in the U.S. Total long-lived assets held outside of the U.S. represent less than 1% of total long-lived assets.

Product sales by geographic location for the three and six months ended June 30, 2015 and 2014 are listed in the table below (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2015      2014      2015      2014  

Europe

   $ 242       $ 527       $ 683       $ 1,048   

Middle East

     17         20         118         228   

South America

     5         134         34         221   

Asia Pacific

     46         159         91         249   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Revenue

   $ 310       $ 840       $ 926       $ 1,746   
  

 

 

    

 

 

    

 

 

    

 

 

 

Major Customers

In the three months ended June 30, 2015, one distributor and one health care provider each accounted for approximately 10% of the Company’s revenue. In the three months ended June 30, 2014, one distributor accounted for approximately 16% of the Company’s revenue, and one health care provider accounted for approximately 11% of the Company’s revenue. No other customer accounted for greater than 10% of the Company’s revenue during the three months ended June 30, 2015 and 2014.

In the six months ended June 30, 2015, one distributor accounted for approximately 18% of the Company’s revenue. In the six months ended June 30, 2014, one distributor accounted for approximately 13% of the Company’s revenue and one health care provider accounted for approximately 12% of the Company’s revenue. No other customer accounted for greater than 10% of the Company’s revenue during the six months ended June 30, 2015 and 2014.

 

17


Table of Contents

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

Forward-Looking Information

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2014 included in our Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” in Item 1A. of our 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 medical device company headquartered in Lexington, Massachusetts, which is dedicated to restoring health and improving quality of life through the design and application of device and management solutions for treatment of metabolic disease. Our near-term goal is to establish EndoBarrier Therapy as a valued treatment option for patients suffering from type 2 diabetes and obesity by restoring more manageable blood sugar levels and reducing body weight. We are the developer of EndoBarrier, the first endoscopically-delivered device therapy approved for the treatment of obese type 2 diabetes with BMI > 30 kg/m2, or obese patients with BMI > 30 kg/m2 with > 1 comorbidities, or obese patients with BMI >35 kg/m2. EndoBarrier is the only incision-free, non-anatomy altering solution designed to specifically mimic the duodenal-jejunal exclusion created by gastric bypass surgery. We have commercially launched EndoBarrier which is now being sold in select markets in Europe and South America, as well as the Asia Pacific region and the Middle East.

Currently, we are focused on the commercialization of EndoBarrier in selected countries in Europe, South America, the Asia Pacific region and the Middle East. In certain geographies where reimbursement is necessary for clinical acceptance and commercial uptake, such as in Europe, we are already receiving partial reimbursement in certain markets at a local or national level, but we have not yet achieved full or national reimbursement in any market. In self-pay markets where we have regulatory approval, we are currently focusing on expanding both the product use per center and the number of centers.

In the U.S., we commenced enrollment of patients in our pivotal trial of EndoBarrier Therapy, the ENDO Trial, 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. On March 5, 2015, at the recommendation of the Food and Drug Administration, or FDA, as a result of the higher than anticipated incidence of hepatic abscess, a bacterial infection of the liver, we halted enrollment in the ENDO Trial, although monitoring and data collection of patients then enrolled in the ENDO Trial continued.

On July 30, 2015, we announced our decision to discontinue the ENDO Trial. The decision followed discussions with the FDA regarding resumption of ENDO Trial enrollment, which despite collaborative efforts by both parties were unable to yield a feasible path forward for the mitigation of a higher than anticipated incidence of hepatic abscess. We concluded that terminating the ENDO Trial, effective immediately, was in the best interest of all stakeholders. With seven cases of hepatic abscess in the ENDO Trial, the incidence rate was approximately 3.5%, which exceeded a previously established safety threshold of 2%. The incidence of hepatic abscess in markets outside the U.S. is approximately 0.73% based on experience with approximately 3,000 units shipped commercially since 2009. A preliminary review of available efficacy data suggests a likely outcome (>90% probability) would have been a statistically significant benefit of EndoBarrier Therapy that exceeded the predefined trial endpoint for efficacy as measured by reduction of HbA1c blood sugar levels.

Based on our decision to conclude the ENDO Trial, we have begun efforts to evaluate which markets are appropriate to continue pursuing reimbursement, market awareness and general market development efforts.

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

To date, we have devoted substantially all of our efforts to 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 June 30, 2015, we had an accumulated deficit of approximately $220.5 million. We expect to incur net losses for the next several years while we close out our ENDO Trial, initiate efforts to restructure our business and costs, establish new priorities, continue limited market development and research, and evaluate strategic options.

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

 

18


Table of Contents

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

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

Critical Accounting Policies and Estimates

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

During the three months ended June 30, 2015, there were no material changes to our critical accounting policies as reported in our Annual Report on Form 10-K.

Results of Operations

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2015      2014      2015      2014  

Revenue

   $ 310       $ 840       $ 926       $ 1,746   

Cost of revenue

     2,012         550         2,898         1,453   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit (loss)

     (1,702      290         (1,972      293   

Operating expenses:

           

Research and development

     4,631         7,516         10,277         12,860   

Sales and marketing

     1,482         3,074         3,142         5,562   

General and administrative

     2,437         2,341         4,731         4,606   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     8,550         12,931         18,150         23,028   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from operations

     (10,252      (12,641      (20,122      (22,735

Other income (expense):

           

Interest income

     24         124         54         176   

Interest expense

     —           —           —           (1

Foreign exchange gain (loss)

     28         224         (465      427   

Remeasurement of warrant liability

     (8      15         (10      195   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other income (expense), net

     44         363         (421      797   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss before income tax expense

     (10,208      (12,278      (20,543      (21,938

Income tax expense

     26         22         40         43   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

   $ (10,234    $ (12,300    $ (20,583    $ (21,981
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

Three and Six Months Ended June 30, 2015 Compared to Three and Six Months Ended June 30, 2014

 

     Three Months Ended
June 30,
     Change     Six Months Ended
June 30,
     Change  
     2015     2014      $     %     2015     2014      $     %  
     (dollars in thousands)     (dollars in thousands)  

Revenue

   $ 310      $ 840       $ (530     (63.1 )%    $ 926      $ 1,746       $ (820     (47.0 )% 

Cost of revenue

     2,012        550         1,462        265.8     2,898        1,453         1,445        99.4
  

 

 

   

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

Gross profit (loss)

   $ (1,702   $ 290       $ (1,992     (686.9 )%    $ (1,972   $ 293       $ (2,265     (773.0 )% 
  

 

 

   

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

Revenue. The decrease in revenue of approximately $0.5 million for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 was primarily due to decreased revenue across all markets. Revenue decreased approximately 18%, 54%, 71% and 96% in the Middle East, Europe, Asia Pacific region and South America, respectively, primarily as a result of lower unit volume.

The decrease in revenue of approximately $0.8 million for the six months ended June 30, 2015 compared to the six months ended June 30, 2014 was primarily due to decreased revenue across all markets. Revenue decreased approximately 35%, 48%, 64% and 84% in Europe, the Middle East, Asia Pacific region and South America, respectively, primarily as a result of lower unit volume.

We believe that the ENDO Trial enrollment hold and related uncertainty around the timing and success of the ENDO Trial was the primary factor adversely affecting revenue in the three months ended June 30, 2015 as compared to other market factors. We believe that our decision to terminate the ENDO Trial will likely continue to adversely affect sales. In general, we believe the Notified Body request to stop shipment of CE Mark product in late 2014, followed by the ENDO Trial enrollment hold, have together adversely affected our commercial operations, and that the recent decision to terminate the ENDO Trial will continue to adversely affect our commercial operations.

Cost of Revenue. Cost of revenue increased by approximately $1.5 million for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. Cost of revenue increased approximately $1.4 million for the six months ended June 30, 2015 compared to the six months ended June 30, 2014. The increase in cost of revenue for both periods was primarily related to a charge of approximately $1.4 million for raw material sleeve inventory in excess of our currently anticipated commercial requirements for future sales of EndoBarrier due to current evidence that the utility of certain amounts of the raw material sleeve inventory, as it was expected to be used, will be less than cost. Factors contributing to the inventory write-down in the second quarter of 2015 included: the effect that the ENDO Trial enrollment hold and related uncertainty around the timing and success of the ENDO Trial had on commercial activity and our inventory levels, the expected timing of third-party payer reimbursement in our commercial markets, our conclusion that certain inventory will not be used for sales inside or outside the U.S. and the historical accuracy of our demand forecasts. The sleeves were purchased in 2013 prior to the termination of our supply agreement with Gore. Excluding the excess inventory charge, the increase in the cost of revenue was related to higher expenses related to decreased utilization of our manufacturing capacity due to lower production volume offset by lower revenue unit volume.

Gross profit decreased by approximately $2.0 million and $2.3 million for the three- and six-month periods ended June 30, 2015 compared to the three- and six-month periods ended June 30, 2014 for the reasons discussed above. We expect that our gross margin will vary, and may vary significantly, quarter to quarter and year to year due to our current stage of commercial development. Specifically, factors such as the effect on commercial operations of our decision to terminate the ENDO Trial, changes in volume of inventory production, utilization of our manufacturing capacity, changes in our manufacturing spending, and overall economies of scale may vary as revenues change.

 

20


Table of Contents

Operating Expenses

 

     Three Months Ended
June 30,
     Change     Six Months Ended
June 30,
     Change  
     2015      2014      $     %     2015      2014      $     %  
     (dollars in thousands)     (dollars in thousands)  

Research and development expense

   $ 4,631       $ 7,516       $ (2,885     (38.4 )%    $ 10,277       $ 12,860       $ (2,583     (20.1 )% 

Sales and marketing expense

     1,482         3,074         (1,592     (51.8 )%      3,142         5,562         (2,420     (43.5 )% 

General and administrative expense

     2,437         2,341         96        4.1     4,731         4,606         125        2.7
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total operating expenses

   $ 8,550       $ 12,931       $ (4,381     (33.9 )%    $ 18,150       $ 23,028       $ (4,878     (21.2 )% 
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Research and Development Expense. The decrease in research and development expense of approximately $2.9 million for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 was primarily due to a decrease of approximately $2.0 million in clinical trial and other clinical study related expenses, primarily third-party expenses related to the ENDO Trial, and decreases of approximately $0.7 million in compensation and employee related expenses, including approximately $0.2 million in lower stock-based compensation expense, due to staffing decreases, and approximately $0.1 million in consulting and outside services expenses.

The decrease in research and development expense of approximately $2.6 million for the six months ended June 30, 2015 compared to the six months ended June 30, 2014 was primarily due to a decrease of approximately $1.4 million in clinical trial and other clinical study related expenses, primarily third-party expenses related to the ENDO Trial, decreases of approximately $0.8 million in compensation and employee related expenses, including approximately $0.3 million in lower stock-based compensation expense, due to staffing decreases, and approximately $0.1 million in consulting and outside services expenses.

In July 2015, we announced our decision to discontinue the ENDO Trial. We expect this decision will result in lower costs as we begin closing out the ENDO Trial, a process we believe will take several months to complete.

Sales and Marketing Expense. The decrease in sales and marketing expense of approximately $1.6 million for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 was primarily the result of a decrease of approximately $0.9 million in compensation and employee related expenses, including an approximately $0.3 million reduction in stock-based compensation expense, associated with a lower number of sales and marketing employees, as well as a decrease of approximately $0.5 million in marketing activities to support our commercialization efforts.

The decrease in sales and marketing expense of approximately $2.4 million for the six months ended June 30, 2015 compared to the six months ended June 30, 2014 was primarily the result of a decrease of approximately $1.3 million in compensation and employee related expenses, including an approximately $0.6 million reduction in stock-based compensation expense, associated with a lower number of sales and marketing employees, as well as a decrease of approximately $0.8 million in marketing activities to support our commercialization efforts.

General and Administrative Expense. The increase in general and administrative expense of approximately $0.1 million for the three and six months ended June 30, 2015 compared to the three and six months ended June 30, 2014 was primarily a result of increased compensation and employee related expenses of approximately $0.2 million, including an approximately $0.3 million increase in stock-compensation, related to changes in our executive management team in 2014.

 

21


Table of Contents

Other Income (Expense), Net

 

     Three Months Ended
June 30,
     Change     Six Months Ended
June 30,
    Change  
     2015     2014      $     %     2015     2014     $     %  
     (dollars in thousands)     (dollars in thousands)  

Other income (expense):

                 

Interest income

   $ 24      $ 124       $ (100     (80.6 )%    $ 54      $ 176      $ (122     (69.3 )% 

Interest expense

     —          —           —          —          —          (1     1        (100.0 )% 

Foreign exchange gain (loss)

     28        224         (196     (87.5 )%      (465     427        (892     (208.9 )% 

Remeasurement of warrant liability

     (8     15         (23     (153.3 )%      (10     195        (205     (105.1 )% 
  

 

 

   

 

 

    

 

 

     

 

 

   

 

 

   

 

 

   

Total other income (expense), net

   $ 44      $ 363       $ (319     (87.9 )%    $ (421   $ 797      $ (1,218     (152.8 )% 
  

 

 

   

 

 

    

 

 

     

 

 

   

 

 

   

 

 

   

Interest Income. The decrease in interest income of approximately $0.1 million for the three and six months ended June 30, 2015 compared to the three and six months ended June 30, 2014 was due to both decreases in interest rates and average cash and cash equivalents balances.

Interest Expense. The decrease in interest expense of approximately $1,000 for the six months ended June 30, 2015 compared to the six months ended June 30, 2014 was due to the repayment of our debt in August 2014.

Foreign Exchange Gain (Loss). The decrease in foreign exchange gain of approximately $0.2 million for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 and the increase in the foreign exchange loss of approximately $0.9 million for the six months ended June 30, 2015 compared to the six months ended June 30, 2014 were primarily the result of the depreciation of the Australian dollar versus the U.S. dollar during the three and six months ended June 30, 2015.

Remeasurement of Warrant Liability. The change in the remeasurement of warrant liability of approximately $23,000 and $0.2 million for the three and six months ended June 30, 2015 compared to the three and six months ended June 30, 2014, respectively, was the result of a small increase in the fair value of the warrants issued in connection with our IPO at June 30, 2015 compared to a decrease in the fair value of the warrants at June 30, 2014.

Liquidity and Capital Resources

We have incurred losses since our inception in March 2003 and, as of June 30, 2015, we had an accumulated deficit of approximately $220.5 million. We have financed our operations from a combination of sales of equity securities and issuances of convertible term notes. In June 2011, we generated approximately $6.0 million in net proceeds from the issuance of our Convertible Term Promissory Notes. In September 2011, we generated approximately $72.5 million in proceeds, net of expenses and repayment of $6.0 million of Convertible Term Promissory Notes, from our IPO in Australia and simultaneous private placement in the U.S. In July and August 2013, we generated approximately $52.5 million in proceeds, net of expenses, from a private placement and share purchase plan of our CDIs. In May 2014, we generated approximately $30.8 million in proceeds, net of expenses, from a private placement of our CDIs. As of June 30, 2015, we had approximately $32.8 million of cash and cash equivalents.

During the six months ended June 30, 2015, our cash and cash equivalents balance decreased by approximately $18.4 million as a result of funds used to support our operations and to purchase property and equipment. We made payments related to, among other things, research and development, sales and marketing, and general and administrative expenses as we continued to invest in our commercialization of EndoBarrier and fund our ENDO Trial.

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

 

     Six Months Ended June 30,  
     2015      2014  
     (in thousands)  

Net cash (used in) provided by:

     

Operating activities

   $ (18,204    $ (18,032

Investing activities

     (169      (182

Financing activities

     1         31,265   
  

 

 

    

 

 

 

Net decrease in cash and cash equivalents

   $ (18,372    $ 13,051   
  

 

 

    

 

 

 

 

22


Table of Contents

Cash Flows From Operating Activities

Net cash used in operating activities totaled approximately $18.2 million for the six months ended June 30, 2015. The primary uses of cash were:

 

    to fund our net loss of approximately $20.6 million;

 

    a net negative adjustment to cash flow from changes in working capital of approximately $1.0 million resulting primarily from decreases in inventory, accounts receivable and prepaid expenses and an increase in accounts payable, partially offset by decreases in accrued expenses, deferred revenue and deferred rent.

 

    a net positive adjustment to cash flow from non-cash items of approximately $3.4 million, primarily from stock-based compensation and increases in inventory reserves resulting from a charge of approximately $1.4 million for inventory in excess of our commercial requirements.

Due to the nature and timing of the cash flows related to our ENDO Trial, we believe that the ENDO Trial had a significant effect on our cash flows from operations for the six months ended June 30, 2015 as our clinical trial accrual decreased by approximately $1.0 million. It is likely that our decision to conclude the ENDO Trial will have a significant effect on our cash flows from operations for the remainder of 2015 as we close out the ENDO Trial and reduce the existing clinical trial accruals.

Net cash used in operating activities totaled approximately $18.0 million for the six months ended June 30, 2014. The primary uses of cash were:

 

    to fund our net loss of approximately $22 million;

 

    a net positive adjustment to cash flow from changes in working capital of approximately $1.6 million resulting primarily from increases in accrued expenses and accounts payable; and

 

    a net positive adjustment to cash flow from non-cash items of approximately $2.3 million, primarily from stock-based compensation expense.

Cash Flows From Investing Activities

Cash used in investing activities for the six months ended June 30, 2015 and 2014 totaled approximately $0.2 million in each period and resulted from the purchase of property and equipment.

Cash Flows From Financing Activities

Cash provided by financing activities for the six months ended June 30, 2015 was approximately $1,000 and resulted from proceeds received upon the exercise of stock options partially offset by payments on our capital lease.

Cash provided by financing activities for the six months ended June 30, 2014 totaled approximately $31.3 million and resulted primarily from the approximately $30.8 million in net proceeds from the issuance of CDI’s in the private equity placement in May 2014, and approximately $0.5 million in proceeds from the issuance of shares upon the exercise of stock options.

Funding Requirements

As of June 30, 2015, our primary source of liquidity was our cash and cash equivalents on hand of approximately $32.8 million. Based on our decision to conclude the ENDO Trial, we have begun efforts to evaluate which markets are appropriate to continue pursuing reimbursement, market awareness and general market development efforts, and initiated efforts to restructure our business and costs, establish new priorities, continue limited market development and research, and evaluate strategic options. As a result, we expect to incur significant operating losses for the next several years. We believe our current cash balances will be sufficient to meet our anticipated cash requirements to fund operations through September 2016. However, we do not expect our current cash balances will be sufficient to enable us to complete development of an improved EndoBarrier for its current use and potential new indications. We will need to raise additional funding in order to complete development of an improved EndoBarrier for its current use and potential new indications and to continue to fund our operations beyond that point in time.

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 are incorporated herein by reference. 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.

 

23


Table of Contents

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

 

    the rate of progress and cost of our commercialization activities;

 

    the expenses we incur in marketing and selling EndoBarrier;

 

    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 terminating the ENDO Trial;

 

    the ability to ship CE marked products;

 

    the emergence of competing or complementary developments; and

 

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

We may seek to raise additional funds through a combination of collaborative arrangements, strategic alliances, and additional equity and debt financings or from other sources. We will continue to manage our capital structure and to consider 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 also be available on acceptable terms, if at all. If we are unable to raise capital when needed, we could be forced to significantly delay, scale back or discontinue research and development activities and further commercialization of EndoBarrier.

Off–Balance Sheet Arrangements

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

Contractual Obligations and Commitments

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

In March 2015, we entered into a capital lease for certain office equipment totaling approximately $8,000. The capital lease has a three-year term and an interest rate of 14.1%. Other than this, 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 condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The new standard will be effective for us for reporting periods beginning after December 15, 2017. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. We are currently evaluating the impact of the pending adoption of ASU 2014-09 on our consolidated financial statements.

 

24


Table of Contents

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, or ASU 2014-15. This new standard gives a company’s management the final responsibilities to decide whether there’s substantial doubt about the company’s ability to continue as a going concern and to provide related footnote disclosures. The standard provides guidance to management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that companies commonly provide in their footnotes. Under the new standard, management must decide whether there are conditions or events, considered in the aggregate, that 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, or within one year after the date that the financial statements are available to be issued when applicable. 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 adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (“ASU 2015-05”). This new standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 will be effective for the Company for reporting periods beginning after December 15, 2015. Early adoption is permitted and a company can elect to adopt ASU 2015-05 either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. Accordingly, the standard is effective for us on January 1, 2016. The adoption of this guidance is not expected to have a material impact on our 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 our 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 adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Sensitivity

Our cash and cash equivalents of approximately $32.8 million at June 30, 2015 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.

Our capital lease bears interest at a fixed rate and therefore has minimal exposure to changes in interest rates.

Foreign Currency Risk

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

 

25


Table of Contents

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

All of the proceeds from our 2011, 2013 and 2014 offerings were denominated in Australian dollars, and as of June 30, 2015 we held the equivalent of approximately US$5.0 million denominated in Australian dollars. Accordingly, we have had and will continue to have exposure to foreign currency exchange rate fluctuations. A change of 10% or more in foreign currency exchange rates of the Australian dollar or the Euro would have a material impact on our financial position and results of operations if our revenue continues to be denominated in currencies other than the U.S. dollar or if we retain a substantial portion of our cash and cash equivalents in Australian dollars. For example during the six-month period ended June 30, 2015, the Australian dollar depreciated from US$0.8202 to US$0.768 resulting in an unrealized foreign exchange loss of approximately $0.5 million.

Effects of Inflation

We do not believe that inflation and changing prices over the three months ended June 30, 2015 and 2014 had a significant impact on our results of operations.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control

As required by Rule 13a-15(d) of the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation of the internal control over financial reporting to determine whether any changes occurred during the quarter ended June 30, 2015 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 officer concluded no such changes during the quarter ended June 30, 2015 materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Controls and Procedures

Our management, including our principal executive officer and principal financial 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.

 

26


Table of Contents

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 and as set forth below, 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.

We cannot predict the outcome and timing of our current and future human clinical trials of EndoBarrier products.

The results of our current and future human clinical trials cannot be predicted. If any EndoBarrier products or other new products that we are developing and testing cause serious adverse events in our current or future human clinical trials, then these trials may need to be delayed or halted as we have done with our U.S. pivotal trial as a result of the higher than anticipated incidence of hepatic abscess, a bacterial infection of the liver. In addition, these clinical trials may not produce positive safety or efficacy results, or may produce results that are not as favorable as those seen in previous clinical trials.

Negative safety or efficacy results of our U.S. pivotal trial and any other current or future human clinical trials could require that we attempt to modify our products or technology to address these issues and there is no guarantee that any potential modifications would be able to be successfully developed.

If current or future human clinical trials of EndoBarrier products do not meet the required clinical specifications or cause serious adverse or unexpected events, such as those experienced in our U.S. pivotal trial, then these results could also materially impact product sales and reimbursement where we are currently selling our product, and could affect regulatory approvals and adoption in countries where our product is being or has been introduced or regulatory approvals to seek to expand the use of EndoBarrier. If we are not able to adequately address any adverse or unexpected events through training, education, changes in product design or product claims, this may significantly impair the commercial prospects for EndoBarrier.

In order to commercialize our products in the U.S. and certain other countries, we will need to obtain regulatory and other approvals. If we are unable to achieve or are delayed in achieving such approvals, this could have a significant effect on the time it takes to commercialize our technology in the U.S. and certain other countries.

At present, our only product that is approved for marketing and sale is EndoBarrier, which has received CE Mark approval in the E.U. and has been approved for inclusion on the Australian Register of Therapeutic Goods. There is no guarantee that we will maintain those approvals or obtain additional approvals from regulatory bodies, including the FDA in the U.S., to commercialize EndoBarrier or any of our other products. In the U.S., we have terminated our pivotal trial. Accordingly, we will not be able to obtain FDA approval to commercialize EndoBarrier in the U.S. without a new clinical trial which may be lengthy and expensive. The regulatory authorities in other countries may also require additional clinical trials. Necessary regulatory approvals could also be delayed, which could significantly impact our ability to commercialize our technology in the U.S. and other countries.

We will need substantial additional funding and may be unable to raise capital.

As we have only recently commenced commercial sales of our products, we are only generating a small amount of revenue and are not cash flow positive or profitable. Our net revenue from product sales was approximately $2.8 million for the year ended December 31, 2014 and approximately $0.9 million for the six months ended June 30, 2015. Our existing capital is insufficient to meet our requirements (including the costs of commercializing our products, conducting clinical trials, obtaining regulatory approvals and investing in the expansion of our manufacturing capacity) and cover any losses, so we will need to raise additional funds through financings or borrowings. Failure to raise additional funds could delay, reduce or halt our commercialization and clinical trial efforts.

There is no assurance that additional funding will be available to us in the future or be secured on acceptable terms. If adequate funding is not available, we may be required to significantly reduce our operations, including our commercial activities and research and development programs. If adequate funds are not available, our business will be materially and adversely affected.

 

27


Table of Contents

Item 2. Unregistered Sales of Equity Securities

None.

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.

 

28


Table of Contents

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: August 13, 2015

    By:  

/s/ MICHAEL D. DALE

      Michael D. Dale
     

President, Chief Executive Officer and Director

(principal executive officer)

Date: August 13, 2015

    By:  

/s/ ROBERT M. SOLOMON

      Robert M. Solomon
     

Vice President, Finance, Secretary and Treasurer

(principal financial officer and accounting officer)

 

29


Table of Contents

EXHIBIT INDEX

 

Exhibit No:

  

Description

    3.1.1    Certificate of Incorporation of GI Dynamics, Inc. incorporated by reference to Exhibit 3.1 of GI Dynamics, Inc.’s registration statement on Form 10, filed with the SEC on April 30, 2014
    3.1.2    Certificate of Amendment to the Restated Certificate of Incorporation of GI Dynamics, Inc. incorporated by reference to Exhibit 3.1 of GI Dynamics, Inc.’s Current Report on Form 8-K, filed with the SEC on April 9, 2015
    3.2    Bylaws of GI Dynamics, Inc. incorporated by reference to Exhibit 3.2 of GI Dynamics, Inc.’s registration statement on Form 10, filed with the SEC on April 30, 2014
  31.1*    Certification of Chief Executive Officer pursuant to Rules 13a-14 or 15d-14 of the Exchange Act
  31.2*    Certification of Chief Financial Officer pursuant to Rules 13a-14 or 15d-14 of the Exchange Act
  32.1‡    Certification of Chief Executive Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350
  32.2‡    Certification of Chief Financial Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Database
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document

 

* Filed herewith.
Furnished herewith.

 

30