Table of Contents

191

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q10-Q/A

Amendment No. 1

(Mark One)

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

For the quarterly period ended September 30, 2018March 31, 2019

OR

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

For the transition period from                 to                 

Commission file number: 000-55195

GI DYNAMICS, INC.

(Exact name of registrant as specified in its charter)

(781) 357-3300

(Registrant’s telephone number, including area code)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

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

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

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

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

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

As of NovemberMay 10, 2018,2019, there were 15,333,10019,277,545 shares of common stock outstanding.

Table of Contents

Explanatory Note

This amendment No. 1 to the Quarterly Report on Form 10-Q/A (the “Amendment”) of GI Dynamics, Inc. (“the Company”) is being filed to amend the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2019, which was originally filed with the Securities and Exchange Commission on May 16, 2019 (the “Original Filing”). The Amendment corrects a numerical error that resulted from a publishing software tabulation error in the Statement of Cash Flows on the Debt issuance costs line item and a subsequent rounding effect in a table within the Original Filing. No other changes have been made to the Amendment.  

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- Q10-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:

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

These forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. These forward-looking statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward- lookingforward-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- lookingforward-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- lookingforward-looking statements that we make.

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

Table of Contents

GI DYNAMICS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2018MARCH 31, 2019

TABLE OF CONTENTS

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 “$”, “US$” or “dollars” refer to United States dollars, the lawful currency of the United States of America. References to “A$” refer to Australian dollars, the lawful currency of the Commonwealth of Australia. References to “€” or “euros” means euros, the single currency of Participating Member States of the European Union.

Trademarks

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

Table of Contents

PART I – FINANCIFINANCIAL AL INFORMATION

Item 1. Financial Statements

GI Dynamics, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

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

1

Table of Contents

GI Dynamics, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(unaudited)

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

2

Table of Contents

GI Dynamics, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Deficit

(In thousands, except share and per share amounts)

(unaudited)

3

Table of Contents

GI Dynamics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

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

��

34

Table of Contents

GI Dynamics, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

1. Nature of Business

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

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

Diabetes mellitus type 2 (also known as type 2 diabetes) is a long-term progressive metabolic disorder characterized by high blood sugar, insulin resistance, and reduced insulin production. PeopleAccording to the Centers for Disease Control and Prevention (CDC), people with type 2 diabetes represent 90% of the worldwide diabetes population, whereas 10% of this population is diagnosed with type 1 diabetes (a form of diabetes mellitus in which not enough insulin is produced).

Being overweight is a condition where the patient’s body mass index (BMI) is greater than 25 (kg/m²); obesity is a condition where the patient’s BMI is greater than 30.30, according to the CDC. Obesity and its comorbidities contribute to the progression of type 2 diabetes. Many experts believe obesity contributes to higher levels of insulin resistance, which creates a feedback loop that increases the severity of type 2 diabetes.

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

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

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

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

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

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

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

EndoBarrier History

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

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

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

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

4

Table of Contents

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

5

Table of Contents

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

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

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

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

Financing History

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

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

In June 2017, the Company completed a Convertible Term Promissory Note (the “2017 Note”) secured financing with its largest shareholder Crystal Amber Fund Limited (“Crystal Amber”) for a gross amount of $5.0 million thatmillion. The 2017 Note accrues interest at 5% per annum compounded annually. Crystal Amber is deemed a Related Party of the Company for ASX purposes due to the size of its ownership position. The 2017 Note iswas originally due byon December 31, 2018 and contains provisions for conversion during theits term of the 2017 Noteand is also subject to security arrangements in favor Crystal Amber (See Note 10 of the Consolidated Financial Statements for a more complete description of the terms and conditions)conditions of the financing).

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

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

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

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

In March 2019, the Company completed a Convertible Term Promissory Note (the “March 2019 Note”) and Warrant (the “March 2019 Warrant”) financing with its largest shareholder, Crystal Amber, for a gross amount of $1.0 million. The March 2019 Note accrues interest at 10% per annum compounded annually. Certain specific terms associated with the conversion of the March 2019 Note and issuance of the March 2019 Warrant require shareholder approval, which will be sought in a vote of the stockholders of the Company during the Annual Meeting of Stockholders anticipated to be held in May or June 2019. The March 2019 Note matures on March 15, 2024 and the March 2019 Warrant, if issued, will expire on the fifth anniversary of the date of issuance. Crystal Amber is deemed a Related Party of the Company for ASX purposes due to the size of its ownership position. (See Note 10 of the Consolidated Financial Statements for a more complete description of the terms and conditions of the financing).

In March 2019, the maturity date of the 2017 Note was extended to May 1, 2019. In April 2019, the maturity date of the 2017 Note was extended to July 1, 2019.

In May 2019, the Company completed a Convertible Term Promissory Note (the “May 2019 Note”) and Warrant (the “May 2019 Warrant”) financing with its largest shareholder, Crystal Amber, for a gross amount of up to $3.0 million. The May 2019 Note accrues interest at 10% per annum,

6

Table of Contents

computed daily until the date upon which full funding under the May 2019 Note is anticipated to be received, regardless of whether full funding is made on such date (the “Full Funding Date”) and compounded annually beginning on the Full Funding Date. The $3.0 million payment will be made in several tranches. Certain specific terms associated with the conversion of the May 2019 Note and issuance of the May 2019 Warrant require shareholder approval, which will be sought in a vote of the stockholders of the Company during the Annual Meeting of Stockholders anticipated to be held in May or June 2019. The May 2019 Note matures and the May 2019 Warrant, if issued, will expire on the fifth anniversary of the Full Funding Date. Crystal Amber is deemed a Related Party of the Company for ASX purposes due to the size of its ownership position. (See Note 10 of the Consolidated Financial Statements for a more complete description of the terms and conditions of the financing).

Going Concern

As of September 30, 2018,March 31, 2019, the Company’s primary source of liquidity is its cash and cash equivalents balances. The Company continues to evaluate which markets are appropriate to pursue regulatory approvals, continue pursuing reimbursement, market awareness and general market development and selling efforts. The Company continues to restructure its business and costs, establish new priorities, and evaluate strategic options. As a result, if the Company remains in business, it expects to incur significant operating losses for the next several years.

5

Table of Contents

The Company has incurred operating losses since inception and at September 30, 2018March 31, 2019 had an accumulated deficit of approximately $265$270 million, a working capital deficit of approximately $3.9$5.5 million, cash used in operating activities of approximately $5.2$3.5 million and cash and cash equivalents of approximately $3.1$1.3 million. $2.8 million from the second and final tranche of the 2018 private placement was received in November 2018. Cash provided by these activities will be used predominantly to prepare for the Company’s clinical trial, which will result in increased expenses. The Company does not expect its current cash balances will be sufficient to operate beyond the end of the fourth quarter of 2018, asJuly 1, 2019 if cash is required to settle the 2017 Note is payable on December 31, 2018.that date. Both parties to the 2017 Note are aware that if the Company is required to make this payment on the due date of December 31, 2018, itJuly 1, 2019, the Company will be required either to renegotiate the due date of the loan or potentially cease operations. Crystal Amber and the Company are planningin discussions to discuss an extensionextend of the due date of the 2017 Note, but there can be no assurance that any extension will occur. If the Company is able to amend the terms of the 2017 Note, it believes its cash and cash equivalents will be sufficient to fund operations intoto the earlierend of the second quarter ofAugust 2019, or until the modified due date of the note. The Company will need to raise additional funds through any combination of collaborative arrangements, strategic alliances, and additional equity and debt financings or from other sources. 

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

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and liabilities and commitments in the normal course of business. The consolidated financial statements as of September 30, 2018March 31, 2019 and December 31, 20172018 and the three and nine months ended September 30,March 31, 2019 and 2018 and 2017 do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.

2. Summary of Significant Accounting Policies and Basis of Presentation

The accompanying interim consolidated financial statements and related disclosures as of September 30, 2018,March 31, 2019, and for the three and nine months ended September 30,March 31, 2019 and 2018, and 2017 are unaudited and have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K (“Form 10-K”), filed with the SEC on March 28, 2018.13, 2019. The December 31, 20172018 consolidated balance sheet included herein was derived from the audited financial statements as of that date but does not include all disclosures including notes required by GAAP for complete financial statements.

Principles of Consolidation

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

Use of Estimates

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

7

Table of Contents

Cash and Cash Equivalents

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

6

Table of Contents

approximates fair value. The amount of cash equivalents included in cash and cash equivalents was approximately $3.1 million$4 thousand at September 30, 2018March 31, 2019 and $3.0$1.1 million at December 31, 2017, respectively.

7

Table of Contents

Inventory2018.

The Company stateshas $30 thousand in restricted cash used to secure a corporate credit card account.

Inventory

When the Company resumes commercial activity, the Company will state inventory at the lower of first-in, first-out cost or net realizable value. When capitalizing inventory, the Company considerswill consider factors such as status of regulatory approval, alternative use of inventory, and anticipated commercial use of the product. At September 30, 2018March 31, 2019 and December 31, 2017,2018, there was no inventory or reserves against inventory on the Company had a net inventory balance of $0.sheet.  

Property and Equipment

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

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

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

Revenue Recognition

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

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

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

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

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

Shipping and Handling Costs

Shipping and handling costs are included in costs of revenue.

Research and Development Costs

Research and development costs are expensed when incurred. Research and development costs include costs of all basic research activities as well as other research, engineering, and technical effort required to develop a new product or service or make significant improvement to an existing product or manufacturing process.

Research and development costs also include pre-approvalpreapproval regulatory and clinical trial expenses.

8

Table of Contents

Patent Costs

The Company expenses as incurred all costs, including legal expenses, associated with obtaining patents until the patented technology becomes feasible. All costs incurred after the patented technology is feasible will be capitalized as an intangible asset. As of September 30, 2018,March 31, 2019, and December 31, 2017,2018, no such costs had been capitalized. The Company expensed approximately $0.1 million and $0.3 ofno patent costs within general and administrative expenses in the consolidated statements of operations for the nine monthseach quarter ended September 30,March 31, 2019 and 2018, and 2017, respectively.    

Stock-Based Compensation

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

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

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

We periodically issuesissue performance-based awards. For these awards, vesting will occur upon the achievement of certain milestones. When achievement of the milestone is deemed probable, the Company expenseswe expense the compensation of the respective awardsstock award over the implicit service period.

Stock awards to non-employees are accounted for in accordance with ASC 505-50, Equity-Based Payments to Non-Employees(“ (“ASC 505-50”). The measurement date for non-employee awards is generally the date performance of services required from the non-employee is complete. For non-employee awards

8

Table of Contents

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

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

Impairment of Long-Lived Assets

The Company regularly reviews the carrying amount of its long-lived assets to determine whether indicators of impairment may exist that warrant adjustments to carrying values or estimated useful lives. If indications of impairment exist, projected future undiscounted cash flows associated with the asset are compared to the carrying amount to determine whether the asset’s value is recoverable. If the carrying value of the asset exceeds such projected undiscounted cash flows, the asset will be written down to its estimated fair value.

Loss Contingencies

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

Income Taxes

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

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

9

Table of Contents

Guarantees

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

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

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

For the ninethree months ended September 30,March 31, 2019 and 2018, and 2017, the Company had not experienced any material losses related to these indemnification obligations, and no material claims with respect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible. As a result, no related reserves have been established.

Issuance Costs Related to Equity and Debt

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

Embedded Conversion Features

The Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options.” Under the ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost.

9

Table of Contents

The effect of ASC 470-20 on the accounting for our convertible debt instruments is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on the consolidated balance sheets and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component of the notes. As a result, we are required to record non-cash interest expense as a result of the amortization of the discounted carrying value of the convertible debt to their face amount over the term of the convertible debt. We report higher interest expense in our financial results because ASC 470-20 requires interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest.

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

Subsequent Events

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

On April 22, 2019, the Company entered into a right of use lease (see Note 11).

On April 30, 2019, the Company entered into an amendment to its 2017 Note and Warrant Purchase Agreement and its 2017 Senior Secured Convertible Promissory Note (see Note 10).

On May 8, 2019, the Company entered into a Note and Warrant Purchase Agreement and issued a Senior Unsecured Convertible Promissory Note (see Notes 4 and 10).

New Accounting Pronouncements

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

10

Table of Contents

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

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

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

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. ASU 2016-02 requires that lessees recognize in the statement of financial position for all leases (with the exception of short-term leases) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset representing the lessee’s right to use the underlying asset for the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. TheWe have elected not to apply the guidance to short-term leases and the adoption of this guidance is not expected to have a significantASU 2016-02 has no impact on our consolidated financial statements.statements as of December 31, 2018 and March 31, 2019 and for the three months ended March 31, 2019 and 2018.

In March 2016,September 2017, the FASB issued ASU No. 2016-09,2017-13, Compensation—Stock CompensationRevenue Recognition (Topic 718): Improvements605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842) - Amendments to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 will simplifySEC Paragraphs Pursuant to the income tax consequences, accountingStaff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments. This new standard allows for forfeitures and classification on the statements of consolidated cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The Company electedan extension to certain public business entities to adopt the series of ASU’s defining revenue recognition and ASU 2016-09 in2016-02 regarding Leases. We qualify as a Public Business Entity and do not qualify for the first quarter of 2017 retrospectively to January 1, 2017. As a result of adopting ASU No. 2016-09 during the year ended December 31, 2017, the Company adjusted its accumulated deficit related to the accounting policy election to recognize the impact of share-based award forfeitures only as they occur rather than by applying an estimated forfeiture rate as previously required. ASU No. 2016-09 requires that this change be applied using a modified-retrospective transition method by means of a cumulative-effect adjustment to accumulated deficit as of the beginning of the fiscal year in which the guidance is adopted. As a result of this adoption, the Company recorded a decrease to accumulated deficit of approximately $28 thousand with an offset to Additional Paid-in Capital as of January 1, 2017.extensions.

In August 2016,June 2018, the FASB issued ASU No. 2016-15,2018-07, Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)Compensation – Stock Compensation (Topic 718), or ASU 2016-15. The2018-07, which provides measurement provisions and clarifications for the accounting for Non-employee Share-Based Payments (“NESBP”). Changes within the amendments ininclude grant-date fair value measurement of awards, probability adjustment of satisfying performance requirements for payment, and the elimination of the need to reclass awards on vesting. Additionally, ASU 2016-15 address eight2018-07 amends guidance specific cash flow issues andto non-public entities, which do not apply to all entities that are required to presentgiven our status as a statement of cash flows under FASB Accounting Standards Codification 230, Statement of Cash Flows. The amendments inpublic entity. ASU 2016-15 are2018-07 is effective for public business entities for fiscal years beginning after December 15, 2017, and2018, including interim periods within those fiscal years. Earlyyears, with early adoption is permitted includingbut not in advance of adoption duringof Topic 606. Remeasurement should only be performed on liability classified awards that have not been settled as of the date of adoption or which have no established measurement date. Remeasurement will result in an interim period. We have evaluatedadjustment to retained earnings as of the impactbeginning of the fiscal year of adoption. Upon transition, those open awards are remeasured as of the date of adoption. The Company had no unvested or unearned NESBPs outstanding as of March 31, 2019.

In July 2018, the FASB issued ASU No. 2016-152018-09, Codification Improvements, or ASU 2018-09, which affects a wide variety of topics, including the following: Amendments to Subtopic 220-10, Income Statement— Reporting Comprehensive Income—Overall relates to income taxes not payable in cash; Amendments to Subtopic 470-50, Debt—Modifications and noted it had no impactExtinguishments relates to debt extinguishment and requires that the net carrying amount of extinguished fair value elected debt equals its fair value at reacquisition and related gains or losses in other comprehensive income must be included in net income upon extinguishment of the debt; Amendments to Subtopic 480-10, Distinguishing Liabilities from Equity—Overall relates to combinations of freestanding financial instruments with non-controlling interests; Amendments to Subtopic 718-740, Compensation—Stock Compensation—Income Taxes relate to recognition timing clarification for excess tax benefits or deficiencies for compensation expense;Amendments to Subtopic 805-740, Business Combinations— Income Taxes relate to allocating tax provisions to an acquired entity;Amendments to Subtopic 815-10, Derivatives and Hedging— Overall relate to accounting for offsetting derivatives; Amendments to Subtopic 820-10, Fair Value Measurement— Overall relate to the wording with respect to how transfer restrictions effect the fair value of an asset and adds explicit wording to allow entities to measure fair value on our consolidateda net basis for those portfolios in which financial statements for the nine months ended September 30, 2018.  assets and financial liabilities and nonfinancial instruments are managed and valued together;

1110

Table of Contents

Amendments to Subtopic 940-405, Financial Services—Brokers and Dealers—Liabilities relate to guidance about offsetting on the balance sheet; and Amendments to Subtopic 962-325, Plan Accounting—Defined Contribution Pension Plans—Investments—Other relate to plan evaluation of whether a readily determinable fair value exists to determine whether those investments may qualify for the practical expedient to measure at net asset value in accordance with Topic 820. The transition and selection of an effective date is based on the facts and circumstances of each amendment, but many of the amendments have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities.  The Company is currently evaluating the relevance of each component and potential impact of ASU 2018-09 components on its consolidated financial statements.

In November 2016,July 2018, the FASB issued ASU No. 2016-18,2018-11, Statement of Cash FlowsLeases (Topic 230): Restricted Cash (a consensus of842), Targeted Improvements, or ASU 2018-11, which primarily provides the ability to elect not to implement a modified retrospective presentation in the financial statements during transition periods and provides guidance to lessors on contract component separation. The Company declines the election and doing so has no impact on its consolidated financial statements.

In August 2018, the FASB Emerging Issue Task Force)issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2016-18. This new standard addresses2018-13, which provides guidance focused on the diversity that exists indisclosure requirements for disclosing fair value estimates, assumptions, and methodology. Removed requirements to disclose details around amount and reasoning for level 1 to level 2 transfers, timing policies for transfer between levels, and the classificationvaluation processes for level 3 fair value measurements. Modified requirements include details regarding net asset redemption restrictions and presentationtiming related to uncertainty disclosures. Added requirements to include disclosures of changes in restricted cash onunrealized gains and losses for recurring level 3 measurements held as of the statementreporting date and disclosures around the range and weighted average of cash flows. Thesignificant inputs used to develop level 3 fair value measurements. These amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance isare effective for fiscal years beginning after December 15, 2017, including interim periods within the year of adoption, with early adoption permitted. Our consolidated financial statements reflect this standard for the nine months ended September 30, 2018 and 2017.  

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (ASC 260) Distinguishing Liabilities from Equity (ASC 480) Derivatives and Hedging (ASC 815),” which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity forall entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. For public business entities, the amendments in Part I of ASU 2017-11 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.2019. The Company has chosenamendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this standard on April 1, 2018 with retroactive restatementUpdate and delay adoption of comparative periods.the additional disclosures until their effective date. The Company has concluded thatis currently evaluating the retroactive provisionsindividual components and as these are disclosure refinements, expects no impact to its consolidated financial statements on adoption.

In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842), Codification Improvements, or ASU 2019-01, which provides guidance focused on lessor accounting which is not applicable to us as we provide no leases to other parties, and also includes an explicit exception to a disclosure requirement for interim periods within the year of adoption. ASU 2017-11 had2019-01 has no impact on the accounting for the Company’s previously outstanding warrant which had been issued to the warrant holder as stock compensation.quarterly 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 nine months ended September 30,March 31, 2019 and 2018, and 2017, common stock equivalents were excluded from the calculation of diluted net loss per common share, as their effect was anti-dilutive due to the net loss incurred. Therefore, basic and diluted net loss per share was the same in all periods presented.

The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares outstanding as of September 30,March 31, 2019 and 2018, and 2017, as they would be anti-dilutive:

4. Warrants to Purchase Common Stock and CDIs

On May 4, 2016, the Company entered into a consulting agreement pursuant to which a consulting firm provides strategic advisory, finance, accounting, human resources and administrative functions, including chief financial officer services, to the Company. In connection with the consulting agreement, the Company granted the consulting firm a warrant (“Consultant Warrant”) to purchase up to 28,532 shares of the Company’s common stock at an exercise price per share equal to $0.64. The Consultant Warrant vestsis fully vested and expires on a monthly basis over two years and has a term of five years.May 4, 2021. The Company has reserved 28,532 shares of common stock related to the Consultant Warrant. As of September 30, 2018,March 31, 2019, the Consultant Warrants had not been exercised.

12

Table of Contents

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

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

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

11

Table of Contents

On March 15, 2019, the Company entered into a Note and Warrant Purchase agreement that included a form of warrant to purchase 78,984,823 CDIs (representing 1,579,696 shares of common stock). The issuance of the warrant requires shareholder approval, which will be sought in a vote of the stockholders of the Company during the Annual Meeting of Stockholders anticipated to be held in May or June 2019. If issued, the warrant’s exercise price is US$0.0127 per CDI, and the warrant can be exercised with cash or as a net exercise. The warrant is immediately exercisable on issuance and will expire (if issued) on the fifth anniversary of the date of issuance.

On May 8, 2019, the Company entered into a Note and Warrant Purchase agreement that included a form of warrant to purchase 236,220,472 CDIs (representing 4,724,409 shares of common stock), or a lesser number of CDIs proportion to the amount finally funded under the simultaneously issued $3 million note. The issuance of the warrant requires shareholder approval, which will be sought in a vote of the stockholders of the Company during the Annual Meeting of Stockholders anticipated to be held in May or June 2019. If issued, the warrant’s exercise price is US$0.0127 per CDI, and the warrant can be exercised with cash or as a net exercise. The warrant is immediately exercisable on issuance and will expire on the fifth anniversary of the Full Funding Date (as defined in Note 1 to these Consolidated Financial Statements).

5. Fair Value of Financial Instruments

The tables below present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2018March 31, 2019 and December 31, 20172018 and indicates the fair value hierarchy of the valuation techniques the Company used to determine such fair value. In general, fair values determined by Level 1 inputs utilize observable inputs such as quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are either directly or indirectly observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, requiring the Company to develop its own assumptions for the asset or liability.

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

1312

Table of Contents

The assumptions used in the Black-Scholes option pricing model to determine the fair value of the Consultant Warrantcommon stock warrants as of September 30, 2018,March 31, 2019, and December 31, 20172018 were as follows:

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

Cash, cash equivalents, accounts receivable,restricted cash, prepaid expenses and other current assets, accounts payable, accrued expenses deferred revenue and short-term debt to Crystal Amber Fund Limited, a related party, at September 30, 2018March 31, 2019 and December 31, 20172018 are carried at amounts that approximate fair value due to their short-term maturities and highly liquid nature of these instruments. The carrying value of the Company’s long-term debt to Crystal Amber Fund Limited, a related party, at September 30,March 31, 2019 and December 31, 2018 approximates fair value based on certaincommonly applied estimation methodologies and industry studies obtained by the Company.

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

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

Accounts receivable primarily consists of amounts due from customers, including distributors and health care providers in different countries. In light of the current economic state of many foreign countries, The Company’s short-term investments potentially subject the Company continues to monitorconcentrations of credit risk. The Company has adopted an investment policy that limits the creditworthiness of its customers.

In May 2017,amounts the Company entered into a sales arrangement with certain distributors totaling $517 thousandmay invest in any one type of EndoBarrier inventory. Due to certain extended right of return periodsinvestment and payment terms,requires all investments held by the Company determined that the revenue and related product costs associated with this transaction should be deferred for accounting purposes. Asto hold at least an A rating from a result, the Company has recorded an adjustment to accounts receivable of $559 thousand for the unpaid portion of deferred revenue which includes an adjustment of approximately $40 thousand for revaluation of receivables denominated in foreign currency at December 31, 2017.recognized credit rating agency, thereby reducing credit risk concentration.

The Company didgrants credit to customers in the normal course of business but generally does not haverequire collateral or any accounts receivable at September 30, 2018. At December 31, 2017, four health care providers accountedother security to support its receivables. The Company makes judgments as to its ability to collect outstanding receivables and provides an allowance for approximately 100%receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices and the Company’s accounts receivable balance,overall quality and age of approximately equal sums.

those invoices not individually reviewed. In certain circumstances, the Company allows customers to return defective or nonconforming products for credit or replacement products. Defective or nonconforming products typically include those products that resulted in an unsuccessful implant procedure. The Company records an estimate for product returns based upon historical trends. The associated reserve for product returns is recorded as a reduction of the Company’s accounts receivable.

Amounts determined to be uncollectible are written off against the total reserve. The following table shows the componentsCompany recorded write-offs of the Company’suncollectible accounts receivable at September 30, 2018of $38 thousand in the three months ended March 31, 2018. As of March 31, 2019 and December 31, 2017 (in thousands):

14

Table of Contents2018, the Company had no accounts receivable and no reserves for uncollectible accounts receivable.

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

7. Inventory

The Company states inventory at the lower of first-in, first-out cost or net realizable value. The Company records a provision for excess, expired, and obsolete inventory based primarily on estimates of forecasted revenues. When capitalizing inventory, the Company considers factors such as status of regulatory approval, alternative use of inventory, and anticipated commercial use of the product.

TheA 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. Currently, the determination of obsolete or excess inventory requires the Company to estimate the futureregulatory approval probability and timing and subsequent demand for its products within appropriate time horizons.approved markets. The estimated future demand is compared

13

Table of Contents

to inventory levels to determine the amount, if any, of obsolete and excess inventory. The demand forecast includesGiven the Company’s estimatesprobability and timing of market growthregulatory approval and various internal estimates and is based on assumptions that are consistent with the plans and estimates the Company is using to manage its underlying business and short-term manufacturing plans. Forecasting demand for EndoBarrier in a market in which there are few, if any, comparable approved devices and for which reimbursement from third-party payers is limited is challenging. To the extent the Company’s demand forecast is less than itsappropriate inventory on-hand, the Company could be required to record additional reserves for excess, expired or obsoletelife span, we fully reserved our inventory in the future.

During 2017, the Company charged the remaining balance of its inventory in the normal course of business to cost of sales. Asas of December 31, 2017 and subsequently wrote off all inventory and reserves in 2018 as the Company has fully reservedmaterials on hand were not expected to be usable for itsfuture sales. There is no inventory or reserves against inventory on hand and expects to utilize the reserved inventory to meet its future strategic goals.

Inventory, net of reserves of approximately $5 million, is $0balance sheet at September 30, 2018March 31, 2019 and December 31, 2017.2018, respectively.

8. Property and Equipment

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