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

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

Securities registered ~~or to be registered~~ pursuant to Section 12(b) of the Exchange Act: None

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 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 ☐ ~~Yes~~No ☒ No

~~As of August 10, 2019, there were 28,349,745 shares of common stock outstanding.~~

This Quarterly Report on Form 10-Q contains forward-looking statements ~~concerning our~~as defined in Section 27A of the United States Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These forward-looking statements concern Company business, operations, financial performance and condition as well as ~~our~~ plans, objectives and expectations for ~~our~~Company 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:~~about the Company’s:

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,” ~~“vision”~~“vision,” or the negative thereof and similar expressions intended to identify forward-looking statements.

These forward-looking statements are based on current expectations, estimates, forecasts and projections about ~~our~~the Company’s business and the industry in which ~~we operate~~the Company operates 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~~the Company’s control. As a result, any or all ~~of our~~ forward-looking statements in this Quarterly Report on Form 10-Q may later become inaccurate. WeThe Company may not actually achieve the plans, intentions or expectations disclosed in ~~our~~the 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~~made. The Company has 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~~the Company’s 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.~~made by the Company.

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~~the Company’s Annual Report on Form 10-K completely and with the understanding that ~~our~~ actual future results may be materially different from what ~~we expect.~~is stated as expectation. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Unless required by law, ~~we do~~the Company does 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~~described in the reports wethe Company will file from time to time with the SEC after the date of this Quarterly Report on Form 10-Q.

		Page

	PART I – FINANCIAL INFORMATION	1

Item 1.	Financial Statements (unaudited)	1
	Consolidated Balance Sheets as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019	1
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, ~~2019~~2020 and ~~2018~~2019	2
	Consolidated Statements of Changes in Stockholders’ Deficit for the Three and Six Months Ended June 30, ~~2019~~2020 and ~~2018~~2019	3
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, ~~2019~~2020 and ~~2018~~2019	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22 19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27 28

	PART II – OTHER INFORMATION	29

Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 6.	Exhibits	29
	Signatures	30

~~Signatures~~

~~Table of Contents~~References

~~References~~

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

Dates

Unless indicated otherwise in this Quarterly Report on Form 10-Q, all dates are stated as the date representing business hours in the Eastern Daylight Time zone or Eastern Standard Time zones.

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 – FINANCIAL INFORMATION

Item 1. Financial ~~Statements~~Statements.

GI Dynamics, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(unaudited)

June 30,

December 31,

2019

2018

Assets

Current assets:

Cash and cash equivalents

$
2,427

$
3,806

Restricted cash

30

30

Prepaid expenses and other current assets

734

530

Total current assets

3,191

4,366

Property and equipment, net

51

63

Right-of-use assets, net of amortization

497

—

Total assets

$
3,739

$
4,429

Liabilities and stockholders’ deficit

Current liabilities:

Accounts payable

$
914

$
1,050

Accrued expenses

902

1,645

Short term debt to related party, net of debt discount

5,000

4,960

Derivative liabilities

14

51

Short term lease liabilities

179

—

Total current liabilities

7,009

7,706

Long term debt to related party, net of debt discount

—

168

Long term lease liabilities

318

—

Total liabilities

7,327

7,874

Commitments

Stockholders’ deficit:

Preferred stock, $0.01 par value – 500,000 shares authorized; no shares issued and
outstanding at June 30, 2019 and December 31, 2018

—

—

Common stock, $0.01 par value – 50,000,000 shares authorized; 19,277,545 shares issued
and outstanding at June 30, 2019 and December 31, 2018, respectively

193

193

Common stock – subscribed but unissued, 9,072,197 shares

5,991

—

Additional paid-in capital

269,476

263,521

Accumulated deficit

(279,248
)

(267,159
)
Total stockholders’ deficit

(3,588
)

(3,445
)
Total liabilities and stockholders’ deficit

$
3,739

$
4,429

	June 30,			December 31,
	2020			2019
Assets
Current assets:
Cash	$	733		$	2,499
Restricted cash		30			30
Prepaid expenses and other current assets		3,698			1,230
Total current assets		4,461			3,759
Property and equipment, net		27			42
Operating lease right-of-use assets, net of amortization		316			386
Total assets	$	4,804		$	4,187
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	901		$	636
Accrued expenses		1,230			1,353
Short term debt to related party		5,784			5,000
Short term debt, other		195			—
Derivative liabilities		—			10
Short term operating lease liabilities		171			169
Total current liabilities		8,281			7,168
Long term debt to related party, net of debt discount		2,088			—
Long term lease liabilities		145			217
Total liabilities		10,514			7,385
Commitments and contingencies
Stockholders’ deficit:
Common stock, $0.01 par value – 75,000,000 shares authorized; 36,598,291 shares issued and outstanding		366			366
Additional paid-in capital		284,089			280,928
Accumulated deficit		(290,165	)		(284,492	)
Total stockholders’ deficit		(5,710	)		(3,198	)
Total liabilities and stockholders’ deficit	$	4,804		$	4,187

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

~~Table of Contents~~

GI Dynamics, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(unaudited)

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

2019

2018

Operating expenses:

Research and development

$
810

$
254

$
1,620

$
627

Sales and marketing

6

312

22

516

General and administrative

1,393

855

2,737

2,040

Total operating expenses

2,209

1,421

4,379

3,183

Loss from operations

(2,209
)

(1,421
)

(4,379
)

(3,183
)

Other income (expense):

Interest income

—

9

3

16

Interest expense

(5,912
)

(207
)

(6,089
)

(288
)
Foreign exchange gain (loss)

15

(2
)

6

8

Gain on write-off of accounts payable

61

—

90

—

Re-measurement of derivative liabilities

(1,687
)

2

(1,688
)

3

Other income (expense), net

(7,523
)

(198
)

(7,678
)

(261
)
Loss before benefit from income taxes

(9,732
)

(1,619
)

(12,057
)

(3,444
)
(Benefit from) Provision for income taxes

26

15

32

(3
)
Net loss

$
(9,758
)

$
(1,634
)

$
(12,089
)

$
(3,441
)

Basic and diluted net loss per common share

$
(0.51
)

$
(0.13
)

$
(0.63
)

$
(0.29
)
Weighted-average number of common shares used in basic and
diluted net loss per common share

19,277,545

12,333,101

19,277,545

12,069,624

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Operating expenses:
Research and development	$	858		$	810		$	2,031		$	1,620
Sales and marketing		—			6			—			22
General and administrative		1,628			1,393			3,171			2,737
Total operating expenses		2,486			2,209			5,202			4,379
Loss from operations		(2,486	)		(2,209	)		(5,202	)		(4,379	)

Other income (expense):
Interest income		—			—			—			3
Interest expense		(352	)		(5,912	)		(636	)		(6,089	)
Foreign exchange gain (loss)		(2	)		15			(12	)		6
Gain on write-off of accounts payable		—			61			—			90
Re-measurement of derivative liabilities		—			(1,687	)		—			(1,688	)
Other income		13			—			187			—
Other income (expense), net		(341	)		(7,523	)		(461	)		(7,678	)
Loss before income taxes		(2,827	)		(9,732	)		(5,663	)		(12,057	)
Provision for income taxes		5			26			10			32
Net loss	$	(2,832	)	$	(9,758	)	$	(5,673	)	$	(12,089	)

Basic and diluted net loss per common share	$	(0.08	)	$	(0.51	)	$	(0.16	)	$	(0.63	)
Weighted-average number of common shares used in basic and diluted net loss per common share		36,598,291			19,277,545			36,598,291			19,277,545

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

~~Table of Contents~~

GI Dynamics, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Deficit

(In thousands, except share ~~and per share~~ amounts)

(unaudited)

Common Stock

Common Stock subscribed but unissued

THREE MONTHS ENDED JUNE 2019

Shares

Par Value

Shares

Carrying Value

Additional
Paid-in
Capital

Accumulated
Deficit

Total
Stockholders'
Deficit

Balance at April 1, 2019

19,277,545

$
193

—

$
—

$
263,580

$
(269,490
)

$
(5,717
)
Reclassification of derivative liabilities to
  additional paid-in capital upon stockholder approval

—

—

—

—

5,784

—

5,784

Conversion of notes payable to related party

—

—

9,072,197

5,991

—

—

5,991

2017 Note modification

—

—

—

—

55

—

55

Stock-based compensation expense

—

—

—

—

57

—

57

Net loss

—

—

—

—

—

(9,758
)

(9,758
)
Balance at June 30, 2019

19,277,545

$
193

9,072,197

$
5,991

$
269,476

$
(279,248
)

$
(3,588
)

Common Stock

Common Stock subscribed but unissued

THREE MONTHS ENDED JUNE 2018

Shares

Par Value

Shares

Carrying Value

Additional
Paid-in
Capital

Accumulated
Deficit

Total
Stockholders'
Deficit

Balance at April 1, 2018

12,333,101

$
124

—

$
—

$
256,814

$
(260,929
)

$
(3,991
)
Beneficial conversion feature discount associated with
  2018 Note

—

—

—

—

1,007

—

1,007

Relative fair value of warrant issued with 2018 Note

—

—

—

—

743

—

743

Stock-based compensation expense

—

—

—

—

35

—

35

Net loss

—

—

—

—

—

(1,634
)

(1,634
)
Balance at June 30, 2018

12,333,101

$
124

—

$
—

$
258,599

$
(262,562
)

$
(3,839
)

Common Stock

Common Stock subscribed but unissued

SIX MONTHS ENDED JUNE 2019

Shares

Par Value

Shares

Carrying Value

Additional
Paid-in
Capital

Accumulated
Deficit

Total
Stockholders'
Deficit

Balance at January 1, 2019

19,277,545

$
193

—

$
—

$
263,521

$
(267,159
)

$
(3,445
)
Reclassification of derivative liabilities to
  additional paid-in capital upon stockholder approval

—

—

—

—

5,784

—

5,784

Conversion of notes payable to related party

—

—

9,072,197

5,991

—

—

5,991

2017 Note modification

—

—

—

—

55

—

55

Stock-based compensation expense

—

—

—

—

116

—

116

Net loss

—

—

—

—

—

(12,089
)

(12,089
)
Balance at June 30, 2019

19,277,545

$
193

9,072,197

$
5,991

$
269,476

$
(279,248
)

$
(3,588
)

Common Stock

Common Stock subscribed but unissued

SIX MONTHS ENDED JUNE 2018

Shares

Par Value

Shares

Carrying Value

Additional
Paid-in
Capital

Accumulated
Deficit

Total
Stockholders'
Deficit

Balance at January 1, 2018

11,157,489

$
112

—

$
—

$
255,294

$
(259,121
)

$
(3,715
)
Issuance of shares upon private placement, net
  of issuance costs

1,175,612

12

—

—

1,491

—

1,503

Beneficial conversion feature discount associated with
  2018 Note

—

—

—

—

1,007

—

1,007

Relative fair value of warrant issued with 2018 Note

—

—

—

—

743

—

743

Stock-based compensation expense

—

—

—

—

64

—

64

Net loss

—

—

—

—

—

(3,441
)

(3,441
)
Balance at June 30, 2018

12,333,101

$
124

—

$
—

$
258,599

$
(262,562
)

$
(3,839
)

	Common Stock				Common Stock subscribed but unissued				Additional					Total
THREE MONTHS ENDED JUNE 30, 2020	Shares		Par Value		Shares		Carrying Value		Paid-in Capital		Accumulated Deficit			Stockholders’ Deficit
Balance at April 1, 2020		36,598,291	$	366		—	$	—	$	283,905	$	(287,333	)	$	(3,062	)
Stock-based compensation expense		—		—		—		—		184		—			184
Net loss		—		—		—		—		—		(2,832	)		(2,832	)
Balance at June 30, 2020		36,598,291	$	366		—	$	—	$	284,089	$	(290,165	)	$	(5,710	)

	Common Stock				Common Stock subscribed but unissued				Additional					Total
THREE MONTHS ENDED JUNE 30, 2019	Shares		Par Value		Shares		Carrying Value		Paid-in Capital		Accumulated Deficit			Stockholders’ Deficit
Balance at April 1, 2019		19,277,545	$	193		—	$	—	$	263,580	$	(269,490	)	$	(5,717	)
Reclassification of derivative liabilities to additional paid-in capital upon stockholder approval		—		—		—		—		5,784		—			5,784
Conversion of notes payable to related party		—		—		9,072,197		5,991				—			5,991
2017 Note modification		—		—		—		—		55		—			55
Stock-based compensation expense		—		—		—		—		57		—			57
Net loss		—		—		—		—		—		(9,758	)		(9,758	)
Balance at June 30, 2019		19,277,545	$	193		9,072,197	$	5,991	$	269,476	$	(279,248	)	$	(3,588	)

	Common Stock				Common Stock subscribed but unissued				Additional					Total
SIX MONTHS ENDED JUNE 30, 2020	Shares		Par Value		Shares		Carrying Value		Paid-in Capital		Accumulated Deficit			Stockholders’ Deficit
Balance at January 1, 2020		36,598,291	$	366		—	$	—	$	280,928	$	(284,492	)	$	(3,198	)
Relative fair value of warrants and beneficial conversion feature in connection with August 2019 Note		—		—		—		—		2,765		—			2,765
Stock-based compensation expense		—		—		—		—		396		—			396
Net loss		—		—		—		—		—		(5,673	)		(5,673	)
Balance at June 30, 2020		36,598,291	$	366		—	$	—	$	284,089	$	(290,165	)	$	(5,710	)

	Common Stock				Common Stock subscribed but unissued				Additional					Total
SIX MONTHS ENDED JUNE 30, 2019	Shares		Par Value		Shares		Carrying Value		Paid-in Capital		Accumulated Deficit			Stockholders’ Deficit
Balance at January 1, 2019		19,277,545	$	193		—	$	—	$	263,521	$	(267,159	)	$	(3,445	)
Reclassification of derivative liabilities to additional paid-in capital upon stockholder approval		—		—		—		—		5,784		—			5,784
Conversion of notes payable to related party		—		—		9,072,197		5,991		—		—			5,991
2017 Note modification		—		—		—		—		55		—			55
Stock-based compensation expense		—		—		—		—		116		—			116
Net loss		—		—		—		—		—		(12,089	)		(12,089	)
Balance at June 30, 2019		19,277,545	$	193		9,072,197	$	5,991	$	269,476	$	(279,248	)	$	(3,588	)

~~Table~~The accompanying notes are an integral part of ~~Contents~~these unaudited consolidated financial statements

GI Dynamics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

	Six Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2020			2019
Operating activities:
Net loss	$	(12,089	)	$	(3,441	)	$	(5,673	)	$	(12,089	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		17			11			15			17
Re-measurement of derivative liabilities		1,688			(3	)		—			1,688
Loss on disposal of leasehold improvements		—			2
Amortization of debt issuance costs non-cash interest expense		—			122
Reclassification of warrant from derivative liabilities to other income								(10	)		—
Non-cash interest expense		6,086			163			633			6,086
Stock-based compensation expense		116			64			396			116
Non-cash change in accrued compensation		(22	)		—			—			(22	)
Changes in operating assets and liabilities:
Accounts receivable		—			40
Prepaid expenses and other current assets		(204	)		27			(2,468	)		(204	)
Accounts payable		(136	)		(484	)		265			(136	)
Accrued expenses		(743	)		(43	)		(466	)		(743	)
Net cash used in operating activities		(5,287	)		(3,542	)		(7,308	)		(5,287	)
Investing activities
Purchases of property and equipment		(5	)		—			—			(5	)
Net cash used in investing activities		(5	)		—			—			(5	)
Financing activities
Proceeds from issuance of common stock, net of issuance costs		—			1,503
Debt issuance costs		(87	)		(85	)		—			(87	)
Proceeds from Paycheck Protection Program loan								195			—
Proceeds from short term and long term debt, related party		4,000			1,750			5,347			4,000
Net cash provided by financing activities		3,913			3,168			5,542			3,913
Net decrease in cash and cash equivalents		(1,379	)		(374	)
Cash, cash equivalents and restricted cash at beginning of period		3,836			3,064
Cash, cash equivalents and restricted cash at end of period	$	2,457		$	2,690
Supplemental cash flow disclosures
Net decrease in cash								(1,766	)		(1,379	)
Cash and restricted cash at beginning of period								2,529			3,836
Cash and restricted cash at end of period							$	763		$	2,457
Supplemental disclosures of cash flow information and non-cash activities
Income taxes paid		32			23			10			32
Beneficial conversion feature discount associated with 2018 Note		—			1,007
Relative fair value of warrant issued with 2018 Note		—			743
Interest paid		394			—			3			394
Warrants issuance recorded to APIC and debt discount								2,330			—
Beneficial conversion feature discount associated with August 2019 Note								435			—
Modification of 2017 Note		55			—			—			55
Right-of-use asset obtained in exchange for lease liability		509			—			—			509
Conversion of notes payable to related party		5,991			—			—			5,991
Reclassification of warrant from derivative liabilities to additional paid-in capital		5,784			—			—			5,784
Fair value of warrants issued with Notes to Related Party		4,072			—			—			4,072

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

~~Table of Contents~~

GI Dynamics, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

1. Nature of Business

GI Dynamics^® is a clinical stage medical device company focused on the development and commercialization of EndoBarrier, a medical device intended ~~for treatment of~~to treat patients with type 2 diabetes and to reduce 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. ~~According to the Centers for Disease Control and Prevention (CDC), people~~People with type 2 diabetes represent ~~90%~~90-95% of the worldwide diabetes ~~population, whereas 10%~~population; only 5-10% of this population is diagnosed with type 1 diabetes (a form of diabetes mellitus ~~in which not enough~~wherein little to no insulin is produced).

Being overweight is a condition where the patient’s ~~body mass index (BMI)~~BMI is greater than 25 (kg/m²); obesity is a condition where the patient’s BMI is greater than ~~30, according to the CDC.~~30. Obesity and its comorbidities contribute to the progression of type 2 diabetes. Many experts believe obesity contributes to higher levels of insulin resistance, which creates a feedback loop that increases the severity of type 2 diabetes.

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

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

The current treatment paradigm for type 2 diabetes is lifestyle therapy combined with pharmacological treatment, whereby treating clinicians prescribe a treatment regimen of one to four concurrent medications that could include insulin for patients with higher levels of blood sugar. Insulin carries a significant risk of increased mortality and may contribute to weight gain, which in turn may lead to higher levels of insulin resistance and increased levels of blood sugar. Fewer than 50% of patients treated pharmacologically for type 2 diabetes are adequately managed, meaning that medication does not lower blood sugar adequately and does not halt the progressive nature of diabetes of these patients.

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

~~Our~~

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

EndoBarrier^®is intended for the treatment of type 2 diabetes and to reduce 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 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”). The Company announced its decision to stop the ENDO Trial in the second half of fiscal year 2015 and thereafter announced that it was reducing headcount by approximately 46% as part of its efforts to restructure its business and expenses 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 evolve 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 the early exit from our former headquarters in Lexington, MA.

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

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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 inventory needed to be returned to the Company.

In August 2018, the Company received approval of an investigational device exemption (“IDE”) from the 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, 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 financings. In September 2011, the Company completed its IPO of common stock in the form of CHESS Depositary Interests (“CDIs”) in Australia. As a result of the IPO and simultaneous private placement in the U.S., the Company raised a total of approximately $72.5 million in proceeds, net of expenses and repayment of $6.0 million of the Company’s convertible term promissory notes. Additionally, in July and August 2013, the Company issued CDIs on the Australian Securities Exchange (“ASX”) through a private placement and share purchase plan, 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 A$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 CDIs (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 stockholder Crystal Amber Fund Limited (“Crystal Amber”) for a gross amount of $5.0 million. 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 was originally due on December 31, 2018 and contains provisions for conversion during its term and 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 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 stockholder Crystal Amber for a gross amount of $1.75 million. The 2018 Note accrued annually compounded interest at 10% per annum until its conversion into CDIs on June 30, 2019 (as described further below). The 2018 Warrant will expire 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 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 stockholder approval, which was obtained in October 2018. Cash proceeds from the second tranche 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 stockholder, Crystal Amber, for a gross amount of $1.0 million. The March 2019 Note accrued annually compounded interest at 10% until its conversion into CDIs on June 30, 2019 (as described further below). Certain specific conversion terms related to the March 2019 Note and issuance of the March 2019 Warrant required stockholder approval, which was obtained during the Annual Meeting of Stockholders held on June 30, 2019 (at which stage the March 2019 Warrant was immediately issued). The March 2019 Warrant will expire on June 30, 2024. 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. A further extension of the maturity date of the 2017 Note is described below.

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May 10, 2019 and June 28, 2019, during which period 10% per annum interest was accrued on daily outstanding principal balances. Upon funding completion on June 28, 2019, accrued interest began to compound annually at a rate of 10% per annum until its conversion into CDIs on June 30, 2019 (as described further below). Certain specific terms associated with the conversion of the May 2019 Note and issuance of the May 2019 Warrant required stockholder approval, which was obtained during the Annual Meeting of Stockholders held on June 30, 2019 (at which stage the May 2019 Warrant was immediately issued). The May 2019 Warrant will expire on June 30, 2024. 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 June 2019, the maturity date of the 2017 Note was extended to October 1, 2019.~~

On June 30, 2019, Crystal Amber elected to convert the 2018 Note, the March 2019 Note and the May 2019 Note to CDIs. Under the terms of the respective notes, an aggregate of 453,609,963 CDIs (representing approximately 9,072,197 common shares) were subscribed but unissued on conversion and concurrent cancellation of the 2018 Note, the March 2019 Note and the May 2019 Note.

Going Concern Evaluation

As of June 30, ~~2019,~~2020, the Company’s primary source of liquidity is its cash and restricted cash ~~equivalents~~ balances. GI Dynamics is currently focused primarily on obtaining CE mark approval to allow commercialization in select markets and on conducting its clinical trials which will support future regulatory submissions and potential commercialization activities. Until the Company is successful in gaining regulatory approvals, including CE mark, it is unable to sell the Company’s product in any market at this time. Without revenues, GI Dynamics is reliant on funding obtained from investment in the Company to maintain business operations until the Company can generate positive cash flows from operations. The Company ~~continues~~cannot predict the extent of future operating losses and accumulated deficit, and it may never generate sufficient revenues to ~~evaluate which markets are appropriate to pursue regulatory approvals, pursue reimbursement, raise market awareness~~achieve or sustain profitability.

GI Dynamics has incurred operating losses since inception and ~~conduct general market development~~at June 30, 2020, had an accumulated deficit of approximately $290 million and ~~selling efforts.~~a working capital deficit of approximately $3.8 million. 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. At June 30, 2020, the Company had approximately $760 thousand in cash and restricted cash.

The Company ~~has incurred operating losses~~

~~since inception and at June 30, 2019 had~~completed an ~~accumulated deficit~~initial public offering on the Australian Securities Exchange (“ASX”) on September 2, 2011. The Company’s Chess Depository Interests (“CDIs”), which represented 1/50^th of ~~approximately $279 million,~~ a ~~working capital deficit~~share of ~~approximately $3.8 million, cash used in operating activities of approximately $5.3 million and cash and cash equivalents of approximately $2.5 million.~~ ~~Cash provided by these activities will be used predominantly to prepare for and conduct~~ the Company’s ~~clinical trial,~~Common Stock were publicly traded until July 22, 2020, when the Company completed all requirements and was removed from the Official List of the ASX (the “Delisting”, described more fully in Note 10 of the consolidated financial statements). On Delisting, all CDIs were automatically converted to shares of Common Stock with any resulting fractional shares being redeemed by the Company for cash payment. Although the Company is not listed on any public exchange, the Company remains subject to all SEC reporting requirements.

Currently, the Company and Crystal Amber Fund Limited (“Crystal Amber”) have executed a non-binding term sheet for the sale of up to $10 million of shares of Series A Preferred Stock (the “Proposed Offering”) which is expected to close in August or September 2020. Additionally, Crystal Amber has purchased the June 2020 Convertible Note and the August 2020 Convertible Note (together the “2020 Notes”, individually described in detail in Note 8 of the consolidated financial statements) which is expected to fund operations until the anticipated Series A Preferred Stock offering initial close date (the “Initial Close”). On Initial Close, Crystal Amber will ~~result~~provide $5 million, less the 2020 Notes principal balance and any legal fees incurred by Crystal Amber to be paid by the Company in ~~increased expenses.~~connection with the Proposed Offering. Crystal Amber may sell a portion of the remaining $5 million in the Proposed Offering to additional investors and will purchase any shares of the Proposed Offering that remain unsubscribed by additional investors at October 31, 2020. The Company ~~does not expect its current~~expects that the cash ~~balances~~received in the Proposed Offering will be sufficient to ~~operate beyond~~fund the ~~end~~Company’s operations through the later of ~~September 2019. The Company will need to raise~~obtaining of CE mark approval or March 31, 2021, after which additional ~~funds through any combination of collaborative arrangements, strategic alliances, and additional equity and debt financings or from other sources.~~

~~Furthermore, if the Company raises insufficient funds and is required to make payment to Crystal Amber under the 2017 Note on its maturity date of October 1, 2019. the Company~~financing will be required ~~either~~ to ~~renegotiate~~continue the ~~maturity date of~~Company’s operations. Further additional financing will be required to fund operations until the ~~loan or to potentially cease operations. The~~ Company ~~expects to discuss further extension of the maturity date of the 2017 Note with Crystal Amber, but there~~achieves sustainably positive cash flow. There can be no assurance that any ~~extension will occur.~~

~~The Company has no guaranteed source of capital that will sustain operations beyond September 2019. There can be no assurance that other~~ potential financing opportunities will be available on acceptable terms, if at all. ~~As such, if access~~If the Company is unable to raise sufficient capital ~~is not achieved to satisfy cash needs in the near term,~~on the Company’s ~~business, financial condition~~required timelines and ~~results~~on acceptable terms to stockholders and the Board of Directors, it could be forced to reduce or cease operations ~~will be materially harmed~~that may include activities essential to support regulatory applications to commercialize EndoBarrier, file for bankruptcy, or undertake a combination of the ~~Company may be required to cease operations.~~ foregoing.

These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these consolidated financial statements are issued.

The accompanying consolidated financial statements have been prepared assuming ~~the Company~~GI Dynamics will continue as a going concern, which contemplates the realization of assets and liabilities and commitments in the normal course of business. The accompanying consolidated financial statements ~~as of June 30, 2019 and December 31, 2018 and the three and six months ended June 30, 2019 and 2018~~ 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.~~concern.

2. ~~Summary of~~ Significant Accounting Policies and Basis of Presentation

The ~~accompanying interim~~ consolidated financial statements and related ~~disclosures as of June 30, 2019, and for the three and six months ended June 30, 2019 and 2018, are unaudited and~~notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the ~~U.S.~~United States of America (“GAAP”) ~~and the applicable~~have been omitted pursuant to such 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.regulations. These interim consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto ~~contained~~included in the Company’s Annual Report on Form 10-K ~~(“Form 10-K”),~~for the year ended December 31, 2019 filed with the SEC on March ~~13, 2019.~~27, 2020. The Company’s balance sheet at December 31, ~~2018 consolidated balance sheet included herein was~~2019 has been derived from the audited financial statements ~~as of~~at that date but does not include all ~~disclosures including notes~~the information and footnotes 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 impairment of long-lived assets, income taxes including the valuation allowance for deferred tax assets, research and development, contingencies, lease liabilities, valuation of derivative liabilities, estimates used to assess its ability to continue as a going concern and stock-based compensation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the

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carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.

~~Cash and Cash Equivalents~~

The Company considers all highly liquid investment instruments with an original maturity when purchased of three months or less to be cash equivalents. Investments qualifying as cash equivalents primarily consist of money market funds and have a carrying amount that approximates fair value. The amount of cash equivalents included in cash and cash equivalents was approximately $4 thousand at June 30, 2019 and $1.1 million at December 31, 2018.

~~The Company has $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 will consider factors such as status of regulatory approval, alternative use of inventory, and anticipated commercial use of the product. At June 30, 2019 and December 31, 2018, there was no inventory or reserves against inventory on the balance 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 are capitalized as construction in progress and will be subsequently depreciated in accordance with the above guidelines once placed into service. Maintenance and repair costs are expensed as incurred.

~~Lease Liabilities and Related Assets~~

~~The Company adopted Accounting Standards Codification (“ASC”), Topic 842,~~ ~~Leases~~ (“ASC 842”) on January 1, 2019, but had no long-term leases to which it would apply. In May 2019, the Company entered into the first Right of Use Lease requiring the adoption of Accounting Standards Codification (“ASC”), Topic 842, ~~Leases~~ ~~(“ASC 842”).~~

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. The Company has elected not to recognize on the balance sheet leases with terms of one year or less. Leases with a non-cancellable term greater than one year are recognized on the balance sheet as lease assets, short-term lease liabilities and long-term lease liabilities. Using criteria defined in ASC 842, the Company determines whether the lease is a Financing Lease or an Operating Lease.

Lease liabilities and their corresponding Right-of-Use assets are recorded based on the present value of lease payments over the expected remaining lease term. Options to renew an Operating lease are not included in the Company’s initial lease term assessment unless there is reasonable certainty that the Company will renew. However, certain adjustments to the Right-of-Use operating asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes an estimated incremental borrowing rate, which is the rate it is expected to incur to borrow an amount equal to the lease payments on a collateralized basis (or on an unsecured basis if existing debt covenants prevent further securitization) over a similar term in a similar economic environment.

In accordance with the guidance in ASC 842, components of a lease are split into lease components and non-lease components. A policy election is available pursuant to which an entity may elect to not separate lease and non-lease components. For new and amended leases beginning in 2019 and after, the Company has not made the election to combine lease and non-lease components.

~~Research and Development Costs~~

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

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~~Patent Costs~~

The Company expenses as incurred all costs, including legal expenses, associated with obtaining patents until the patented technology becomes feasible. All costs incurred after the patented technology is feasible will be capitalized as an intangible asset. As of June 30, 2019 and December 31, 2018, no such costs had been capitalized. The Company expensed patent costs within general and administrative expenses of $54 and $41 thousand for the three months ended June 30, 2019 and 2018, respectively, and $95 and $80 thousand for the six months ended June 30, 2019 and 2018, respectively.

~~Stock-Based Compensation~~

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

For awards that vest based on service conditions, we 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, 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 issue performance-based awards. For these awards, vesting will occur upon the achievement of certain milestones. When achievement of the milestone is deemed probable, we expense the compensation of the stock 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 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.

~~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~~opinion, the consolidated financial statements ~~by applying a more-likely-than-not threshold~~included herein contain all adjustments necessary to present fairly our financial position as of June 30, 2020 and the results of our operations and cash flows for ~~financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.~~

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~~Guarantees~~

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

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

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

~~For~~ the three and six months ended June 30, ~~2019~~2020 and 2018, 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 value2019. Such adjustments are of ~~these obligations is negligible. As~~ a ~~result, no related reserves~~normal recurring nature. In addition, certain reclassifications of prior period balances have been ~~established.~~made to conform to the current period presentation.

~~Issuance Costs Related~~

Accounting policy relating to ~~Equity~~authorized share allocation to outstanding shares and ~~Debt~~instruments

~~The Company allocates issuance costs between~~

In determining 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 proceedssufficiency of the ~~offering. Any~~number of shares of common stock authorized by shareholders for 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~~all issued and outstanding shares of common stock as ~~liabilities measured at amortized cost and amortizes the resulting debt discount to interest expense using the effective interest method over the expected term~~well as all shares 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~~common stock underlying any convertible ~~debt under ASC 815 “Derivatives and Hedging”~~or exercisable instruments. In order to determine ~~whether~~ the ~~embedded~~sufficiency of authorized shares of common stock, the authorized shares are allotted first to the issued and outstanding shares, then sequentially to any additional relevant instruments in order of decreasing time to maturity or termination. Any instrument that does not have sufficient authorized shares of common stock to allow conversion ~~feature(s) should be bifurcated from the host instrument and accounted for~~or exercise is reclassified, if needed, as a ~~derivative~~liability recorded at fair value ~~with changes~~until sufficient shares of common stock are authorized, at which time the classification returns to the classification determined 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 ASC 470-20, an entity must separately account for the liability and equity componentsoriginal accounting analysis of the convertible debt instruments that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for our convertible debt instruments is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on the consolidated balance sheets and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component of the notes. Therefore, we are required to record as non-cash interest expense the amortization of the discounted carrying value of the convertible debt to the 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.instrument.

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

~~Subsequent Events~~

The Company evaluates events occurring after the date of its consolidated balance sheet for potential recognition or disclosure in its consolidated financial statements. There have been no 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.

~~New~~Recently Adopted Accounting Pronouncements

~~In July 2018, the FASB issued ASU No. 2018-09,~~ ~~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 Extinguishments~~ 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~~

~~Table of Contents~~

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 a net basis for those portfolios in which financial assets and financial liabilities and nonfinancial instruments are managed and valued together; 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 August 2018, the ~~FASB~~Financial Accounting Standards Board issued ~~ASU~~Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13, which provides guidance focused on the disclosure requirements for disclosing fair value estimates, assumptions, and methodology. ~~Requirements~~This ASU removed ~~include the requirement~~requirements to disclose details around amount and reasoning for level 1 to level 2 transfers, timing policies for transfer between levels and the valuation processes for level 3 fair value measurements. ~~Requirements modified~~Modified requirements include details regarding net asset redemption restrictions and timing related to uncertainty disclosures. ~~Requirement~~Further, this ASU added ~~include~~required disclosures of changes in unrealized gains and losses for recurring level 3 measurements held as of the reporting date and disclosures around the range and weighted average of significant inputs used to develop level 3 fair value measurements. These amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty ~~will~~should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments ~~will~~should be applied retrospectively to all periods presented upon their effective date. Early adoption iswas permitted upon issuance of this ~~Update and an entity is permitted to~~update, however the Company declined early ~~adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date.~~adoption. The Company ~~has not elected early adoption~~adopted this ASU on January 1, 2020 and ~~is currently evaluating the individual components and as these are disclosure refinements, expects~~concluded that it had no impact toon its consolidated financial ~~statements on adoption.~~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 of Common Stock 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 are excluded, 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. For diluted net loss per share purposes, derivatives to purchase shares of common stock or CDIs are treated identically because shares of common stock and CDIs are interchangeable at the sole election of the stockholder. For diluted net loss per share purposes, options and warrants conferring the right to purchase shares of common stock or CDIs are excluded from diluted net loss per share calculations as inclusion would have an anti-dilutive effect. During the three and six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, 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~~weighted- average shares outstanding as of June 30, ~~2019~~2020 and ~~2018,~~2019, as they would be anti-dilutive:

	As of June 30,				Six Months Ended June 30,
	2019		2018		2020		2019
Warrants to purchase common stock		8,277,081		1,972,976		4,625,425		8,277,081
Options to purchase common stock and other stock-based awards		1,545,719		1,668,219		3,274,221		1,545,719
Total		9,822,800		3,641,195		7,899,646		9,822,800

4. Warrants to Purchase Common Stock or CDIs

The following series of warrants were outstanding and exercisable at June 30, 2020 and 2019 (warrants to purchase CDIs presented as shares at a 50 CDI per share ratio):

		Number of underlying		Exercise price per		June 30,
Warrant Series	Issue Date	shares		share		2020		2019
Consultant warrant	May 4, 2016		28,532	$	0.64		28,532		28,532
2018 Warrant (1)	May 24, 2018		1,944,444	$	0.72		—		1,944,444
August 2019 Warrant (2)	January 13, 2020		4,596,893	$	1.00		4,596,893		—
March 2019 Warrant	March 15, 2019		1,579,696	$	0.64		—		1,579,696
May 2019 Warrant	May 8, 2019		4,724,409	$	0.64		—		4,724,409
Total Outstanding and Exercisable							4,625,425		8,277,081
Weighted average exercise price						$	1.00	$	0.66

(1)

Exercise price was initially $0.90 per share, but was adjusted to $0.72 in November 2018

(2)

Financing arranged in August 2019, but funding and the associated issuance of the related warrant did not occur until January 13, 2020

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 is fully vested and expires on May 4, 2021. ~~The Company has reserved 28,532 shares of common stock related to the Consultant Warrant.~~ As of June 30, ~~2019,~~2020, the Consultant Warrants had not been exercised.

On ~~May 30, 2018, the Company~~August 21, 2019, GI Dynamics and Crystal Amber entered into a ~~Note~~securities purchase agreement for a total funding of up to approximately $10 million (the “August 2019 SPA”) comprised of the scheduled exercise of the 2018 Warrant, the March 2019 Warrant, and the May 2019 Warrant ~~Purchase agreement that included a warrant to purchase 97,222,200 CDIs (representing 1,944,444~~(totaling 8,248,549 shares of common ~~stock). The exercise price was initially US$0.018 per CDI~~stock purchased for approximately $5.4 million) and the ~~exercise price was subsequently reset~~issue and sale of an Unsecured Convertible Note for up to ~~US$0.0144 when the Company issued securities at the lower price in September 2018. The~~approximately $4.6 million (the “August 2019 Note”), which included an agreement to issue a warrant ~~can be exercised with cash or as a net exercise. The warrant was immediately exercisable on issuance and expires on May 30, 2023.~~

~~On March 15,~~(the “August 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 warrant was subsequently approved by stockholders and issued on June 30, 2019. 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 was immediately exercisable on issuance and will expire on June 30, 2024.

~~Table of Contents~~

~~On May 8, 2019, the Company entered into a Note and Warrant Purchase agreement that included a form of warrant~~Warrant”) to purchase up to ~~236,220,472~~229,844,650 CDIs (representing ~~4,724,409~~4,596,893 shares of common stock)~~, or a lesser number~~ for an exercise price of CDIs proportional to the amount finally funded under the simultaneously issued $3 million note. The Note was fully funded and the warrant for the maximum number of CDIs was subsequently both approved by stockholders and$0.02 per CDI issued on ~~June 30, 2019. The warrant’s exercise price is US$0.0127 per CDI, and~~exercise. On December 16, 2019, stockholders approved the ~~warrant can be exercised with cash or as a net exercise. The warrant~~issuance of the August 2019 Warrant, which was ~~immediately exercisable~~issued on ~~issuance and will expire on June 30, 2024.~~January 13, 2020 upon funding of the August 2019 Note.

5. Fair Value ~~of Assets and Liabilities~~Measurements

~~The tables below present information~~

Information about the Company’s assets and liabilities that are measured at fair value initially or on a recurring basis as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 is provided below and ~~indicates~~includes 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~~

On March 31, 2020, the ~~assets~~classification of the Consultant Warrant was re-evaluated, and ~~liabilities~~ the Company ~~has measured at fair value on~~re-classified it as an equity instrument. On March 31, 2020, this reclassification resulted in a ~~recurring basis (in thousands):~~credit to Other Income.

Fair Value Measurements at

Reporting Date Using

Quoted Prices in

Significant Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Description

June 30, 2019

(Level 1)

(Level 2)

(Level 3)

Assets

Money market funds (included in cash and cash equivalents)

$
4

$
4

$
—

$
—

Total assets

$
4

$
4

$
—

$
—

Liabilities

Derivative liability

$
14

$
—

$
—

$
14

Total liabilities

$
14

$
—

$
—

$
14

Fair Value Measurements at

Reporting Date Using

Quoted Prices in

Significant Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Description

December 31, 2018

(Level 1)

(Level 2)

(Level 3)

Assets

Money market funds (included in cash and cash equivalents)

$
1,097

$
1,097

$
—

$
—

Total assets

$
1,097

$
1,097

$
—

$
—

Liabilities

Derivative liability

$
51

$
—

$
—

$
51

Total liabilities

$
51

$
—

$
—

$
51

~~The assumptions used~~On June 18, 2020, a convertible note was issued to Crystal Amber, the terms of which included a mandatory conversion of outstanding principal and interest into shares issued in the ~~Black-Scholes option pricing model~~next Qualified Financing, and currently expected to ~~determine~~be the Series A Preferred Stock contemplated in the Proposed Financing, at a conversion price equal to 80% of the price per share of Series A Preferred Stock. The fair value of the ~~common stock warrants as~~convertible note was determined using directly observable Level 2 inputs including the time period to the Proposed Offering, accrued interest and the fixed conversion premium. The Company has elected the interest method of accretion to approximate fair value, so the June ~~30, 2019, and December 31, 2018 were as follows:~~

June 30,

December 31,

2019

2018

Exercise price (A$55.00 at the then current exchange rate)

$
0.64

$
0.64

Fair value of common stock

$
0.77

$
0.57

Expected volatility

169.0
%

134.0
%
Expected term (in years)

1.86

2.35

Risk-free interest rate

1.8
%

2.5
%
Expected dividend yield

0%

0%

~~Table of Contents~~2020 Note is not re-measured on a recurring basis.

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

Balance at December 31, 2018

$
51

Increase in fair value of warrants upon re-measurement

1,715

Amortization of conversion rights

(40
)
Fair value of warrants issued with Notes to Related Party

4,072

Reclassification of warrants to additional paid-in caputal

(5,784
)
Balance at June 30, 2019

$
14

Cash, ~~cash equivalents,~~ restricted cash, prepaid expenses and other current assets, ~~right of use assets,~~ accounts payable, accrued expenses, short-term ~~lease liabilities and short-term~~ debt to ~~Crystal Amber Fund Limited, a~~ related party, excluding the June 2020 convertible note, and other current liabilities at June 30, ~~2019~~2020 and December 31, ~~2018~~2019 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 December 31, 2018, and long-term lease liabilities at June 30, 2019 approximates fair value based on commonly applied estimation methodologies, published market data and industry studies obtained by the Company.

6. Concentrations of Credit Risk and Related Valuation ~~Accounts~~Account

Financial instruments that subject the Company to credit risk primarily consist of cash and ~~cash equivalents and~~ restricted cash. ~~The Company maintains its cash and cash equivalent~~Cash balances are maintained with high quality financial institutions, and consequently, ~~while the balances may exceed federally insured limits,~~ 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~~GI Dynamics has adopted an investment policy that limits the amounts ~~the Company~~it may invest in any one type of investment and requires all ~~investments~~ held ~~by the Company~~investments to hold at least an A rating from a recognized credit rating agency, thereby reducing credit risk concentration.

When the Company had regulatory approval to sell EndoBarrier in select markets, the Company granted unsecured credit to customers in the normal course of business. The Company made judgments as to its ability to collect outstanding receivables and provided an allowance for receivables when collection became doubtful. Provisions were made based upon a specific review of all significant outstanding invoices and the overall quality and age of those invoices not individually reviewed. Amounts determined to be uncollectible are written off against the total reserve. After regulatory approval for EndoBarrier was suspended, the Company deemed certain remaining accounts receivable uncollectible and recorded write-offs of uncollectible accounts receivable of $42 thousand in the six months ended June 30, 2018. As of June 30, 2019 and December 31, 2018, 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):~~

Six Months Ended June 30,

2019

2018

Beginning balance

$
—

$
42

Net charges to expenses

—

—

Utilization of allowances

—

(42
)
Ending balance

$
—

$
—

7. ~~Inventory~~

The Company assessed the probability and timing of regulatory approval and appropriate inventory life span and deemed the inventory on hand as of December 31, 2017 to be obsolete and subsequently wrote off all inventory and reserves in 2018. There is no inventory or reserves against inventory on the balance sheet at June 30, 2019 and December 31, 2018, respectively.

~~8. Property and Equipment~~

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

June 30,

December 31,

2019

2018

Laboratory and manufacturing equipment

$
591

$
591

Computer equipment and software

1,187

1,182

Office furniture and equipment

183

183

1,961

1,956

Less accumulated depreciation and amortization

(1,910
)

(1,893
)
Total

$
51

$
63

~~Table of Contents~~

Depreciation and amortization expense of property and equipment totaled approximately $9 thousand and $0 for the three months ended June 30, 2019 and 2018, respectively and $17 and $11 thousand for the six months ended June 30, 2019 and 2018, respectively.

~~At June 30, 2019 and December 31, 2018, the Company had no property and equipment assets financed in any capital lease arrangement.~~

~~9. Accrued Expenses~~

Accrued expenses consisted of the following (in thousands):

	June 30,		December 31,		June 30,		December 31,
	2019		2018		2020		2019
Payroll and related liabilities	$	259	$	386	$	362	$	531
Professional fees		312		573		162		335
Credit refunds		167		186		—		164
Interest		124		494
Interest payable						594		250
Other		40		6		112		73
Total	$	902	$	1,645	$	1,230	$	1,353

~~10.~~In 2017, following notification by the Medicines and Healthcare Products Regulatory Agency (“MHRA”), the Company notified its customers to return their inventory on hand. The Company calculated an estimate for returns, reversed its revenue and recorded an accrued expense estimate of $202 thousand of product return related costs in addition to $77 thousand of credit memos granted to customers. Through December 31, 2019, this reserve had various claims and adjustments of $115 thousand. On March 31, 2020, the Company reversed the remaining accrual for $164 thousand and recognized Other Income as the Company concluded that the likelihood that further claims will be made was remote, given the amount of time having lapsed since product expiry, during which the Company has not received any such claims.

Accrued interest at June 30, 2020 includes interest on the 2017 Note since January 1, 2019, the August 2019 Note since January 13, 2020, and the June 2020 Note since June 18, 2020.

8. Notes Payable

2017 Convertible Note Financing

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

The 2017 Note accrues interest at aan annually compounded rate ~~equal to~~of 5% per annum, ~~compounded annually,~~ other than during the continuance of an event of default, when the 2017 Note accrues interest at a rate of 8% per annum. The entire outstanding principal balance and all unpaid accrued interest thereon was initially due on the original maturity date of December 31, 2018, ~~but~~and, as announced on July 1, 2020, was most recently amended to extend the maturity date ~~was extended multiple times as described below.~~to July 31, 2020.

The 2017 Note is secured by a first priority security interest in substantially all tangible and intangible assets of the Company, including intellectual property (the “Collateral”). In the event of an uncured default, ~~the Purchaser~~Crystal Amber, is authorized to sell, transfer, assign or otherwise deal in or with the Collateral or the proceeds thereof or any related goods securing the Collateral, as fully and effectually as if ~~the Purchaser~~Crystal Amber were the absolute owner thereof.

The ASX provided the Company with a waiver to allow all asset liens (the “Security”) to be granted to ~~the Purchaser~~Crystal Amber, without the ~~normal~~customary requirement of having to obtain stockholder approval for the grant of a security to a ~~related party~~Related Party of the ~~Company (which the Purchaser is for ASX purposes).~~Company. As a result of the waiver, the Security contains a provision that provides that if an event of default occurs and ~~the Purchaser~~Crystal Amber exercises its rights under the Security, neither ~~the Purchaser~~Crystal Amber nor any of its associates can acquire any legal or beneficial interest in an asset of the Company or its subsidiaries in full or partial satisfaction of the Company’s obligations under the Security, or otherwise deal with the assets of the Company or its subsidiaries, without the Company first having complied with any applicable ASX Listing Rules, including ASX Listing Rule 10.1, other than as required by law or through a receiver, manager, or ~~receiver or manager (or~~ analogous ~~person)~~person appointed by ~~the Purchaser~~Crystal Amber exercising its power of sale under the Security and selling the assets to an unrelated third party on arm’s length commercial terms and conditions and distributing the cash proceeds to ~~the Purchaser~~Crystal Amber or any of its associates in accordance with their legal entitlements.

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

On July 13, 2020, Crystal Amber provided the ~~event that the Borrower issues additional CDIs in~~Company with a subsequent equity financing at a price per CDI that is less than the then-effective Optional Conversion Price, the Purchaser has a 30-day option to convert at an adjusted conversion price reflecting, on a weighted average basis, the lower price per CDI. The numbernotice of ~~CDIs that the Purchaser may acquire upon~~optional conversion of the 2017 ~~Note at this adjusted~~Note. On the conversion ~~price is limited to~~date, the ~~number that maintains~~principal of $5 million and the ~~Purchaser’s fully-diluted ownership percentage of the Company at the same level as existed immediately preceding the applicable subsequent equity financing.~~

In addition, upon a change of control of the Company (other than a change of control resulting from a Qualified Financing) in which the Company’s stockholders receive cash consideration, the Company is obligated to prepay all accrued and unpaid interest ~~plus 110%~~of $390,240 totaled $5,390,240. The conversion price was based on the 5-day volume weighted average close price (“VWAP”) per CDI for the 5 trading days immediately preceding the date of notice. The price per CDI closed at A$0.003 each day, making the VWAP A$0.003, which equaled $0.002093 per CDI or $0.10467 per share of Common Stock. The Note converted into 2,574,873,400 CDIs, which is equal to 51,497,468 shares of Common Stock.

On receipt of the notice of conversion, the Company did not have sufficient authorized shares to issue to CHESS Depository Nominees, Ltd. (“CDN”) to enable the required number of CDIs to be allotted to Crystal Amber. The available 38,401,704 shares were issued to CDN, allowing the allotment of 1,920,085,200 CDIs to Crystal Amber. The Company and Crystal Amber executed a Right to Shares and Waiver Agreement in which the Company agreed to issue the remaining ~~outstanding unconverted principal balance. If the consideration received for such change~~13,095,764 shares of ~~control is a non-cash consideration, the Purchaser may convert the entire outstanding principal balance~~Common Stock owed under the ~~2017 Note and all unpaid accrued interest thereon into CDIs at the abovementioned Optional Conversion Price. Other than as described above,~~conversion when the Company ~~may not prepay~~has filed an amended and restated certification of incorporation with the ~~2017 Note without~~Delaware Secretary of State in connection with the ~~consent~~consummation of the ~~Purchaser.~~

~~Table~~Proposed Financing and the Company has been delisted from the ASX. On July 22, 2020, the Company was removed from the Official List of ~~Contents~~

the ASX (“Delisted”) and the CDN trust was subsequently dissolved, causing all CDIs to automatically convert to shares of Common Stock. The ~~2017 Note Purchase Agreement contains customary events of default including a failure to perform obligations~~additional securities owed under the ~~2017 Note Purchase Agreement, bankruptcy, a decision by the board~~conversion will be issued as shares of directors of the Company to wind up the Company, or if the Company otherwise ceases to carry on its ongoing business operations. If a default occurs and is not cured within the applicable cure period or is not waived, any outstanding obligations under the 2017 Note may be accelerated. The 2017 Note Purchase Agreement and related 2017 Note documents also contain additional representations and warranties, covenants and conditions, in each case customary for transactions of this type.Common Stock.

The Company recorded the $5 million 2017 Note, net of debt issuance costs of $115 thousand and amortized the debt issuance costs over the life of the 2017 Note. For the year ended December 31, 2018, the Company accrued $257 thousand of interest expense and $71 thousand in amortization of debt issuance costs related to the 2017 Note.

Due to the timing of the finalization of the 2017 Note financing in 2017, the 2017 Note was issued without stockholder approval. As a consequence, while the 2017 Note contains conversion provisions, the Purchaser had, for a period of time, no right to exercise those rights until such rights of exercise were approved by the stockholders of the Company. Stockholder approval of the Purchaser’s right to convert the 2017 Note was obtained at the Company’s Annual Meeting on May 24, 2018.

In December 2018, the maturity date of the 2017 Note was extended to March 31, 2019 in exchange for payment of $394 thousand which was the total interest accrued for on the 2017 Note at December 31, 2018. Payment of this amount was made in January 2019. The modification extended the conversion rights and resulted in an additional $40 thousand of debt discount liability being recorded along with issuance costs of $53 thousand.

For the three and six months ended June 30, ~~2018,~~2020, the Company recognized interest expense of ~~$63~~$65 and ~~$124 thousand and amortization of debt issuance costs of $19 and $37~~$131 thousand, respectively, related to the 2017 Note.

In March 2019, the maturity date of the 2017 Note was extended to May 1, 2019. The modification extended the beneficial conversion rights and resulted in an additional debt discount liability, which was not recorded since it was determined to be immaterial to the consolidated financial statements. In April 2019, the maturity date of the 2017 Note was further extended to July 1, 2019, which resulted in $24 thousand of debt discount liability being recorded. In June 2019, the maturity date of the 2017 Note was further extended to October 1, 2019, which resulted in an additional $31 thousand of the debt discount liability being recorded. For the three and six months ended June 30, 2019, the Company recognized interest expense of $63 and $126 thousand, respectively, related to the 2017 Note as well as interest expense related to the additional debt discount liability of $55 thousand and $55 thousand, respectively.

~~2018 Convertible Note and Warrant Financing~~

August 2019 Securities Purchase Agreement

On ~~May 30, 2018,~~August 21, 2019, the Company entered into ~~a Note Purchase Agreement~~the August 2019 SPA by and between the Company ~~as borrower,~~ and Crystal Amber. The August 2019 SPA detailed a timeline wherein Crystal Amber ~~Fund Limited, as purchaser (the “Purchaser”). Pursuant~~would exercise the 2018 Warrant, the March 2019 Warrant, and the May 2019 Warrant. Additionally, pursuant to the ~~Note Purchase Agreement,~~August 2019 SPA, the Company issued and sold to ~~the Purchaser~~Crystal Amber a ~~Senior Unsecured Convertible Promissory Note~~senior unsecured convertible promissory note in an aggregate ~~original~~ principal amount of ~~$1.75~~approximately $4.6 million, or such lesser amount as may be set forth in a notice delivered by the Company to Crystal Amber (the ~~“2018~~“August 2019 Note”), to be funded on December 6, 2019, or such earlier or later date as may be requested by the Company (the “Funding Date”). In conjunction with the August 2019 Note, the Company agreed to issue to Crystal Amber a ~~maturity date~~Warrant (the “August 2019 Warrant”) to purchase CDIs, subject to the receipt of ~~May 30, 2023. Interest accrued~~required stockholder approval approving the issuance of the August 2019 Warrant and the funding of the August 2019 Note (see Note 4).

The August 2019 Note accrues interest at a rate equal to 10% per annum from the August 2019 Note Funding Date, compounded annually, other than during the continuance of an ~~annually compounded~~event of default, when the August 2019 Note accrues interest at a rate of ~~10%.~~16% per annum. The ~~Purchaser~~entire outstanding principal balance and all unpaid accrued interest thereon is ~~a related party and is~~due on the ~~Company’s largest stockholder.~~

fifth anniversary of the Funding Date. The entire outstanding principal balance under the ~~2018~~August 2019 Note and all unpaid accrued interest thereon ~~was~~is immediately convertible into ~~CHESS Depositary Interests (“CDIs”), each representing 1/50th of a share of the Company’s common stock,~~CDIs at the option of ~~the Purchaser~~Crystal Amber at a conversion price ofequal to US$~~0.018~~0.02 per CDI. ~~Subsequently,~~In the event that the Company ~~issued~~issues additional CDIs to a stockholder other than Crystal Amber in a subsequent equity financing ~~in September 2018~~ at a price per CDI ~~of US$0.0144, resulting in an adjustment of~~that is less than the conversion price under the August 2019 Note, the conversion price shall be reduced to ~~US$0.0144~~the lowest such price per CDI. In addition, upon a change of control of the Company resulting in cash proceeds, Crystal Amber may, at its option, demand that the Company prepay all accrued and unpaid interest plus 110% of the remaining outstanding unconverted principal balance. The Company may not prepay the August 2019 Note without the consent of Crystal Amber, a Related Party. If the stockholder approvals required to issue the August 2019 Warrant or to approve the conversion rights under the August 2019 Note are not obtained, the Company is obligated to prepay all accrued and unpaid interest plus 110% of the remaining outstanding unconverted principal balance on the earlier of the Funding Date or the date that is six months following the date of the stockholder meeting at which the requisite approvals were not obtained. The Company considers the change in control premium and the stockholder approval premium to each represent a cash settleable feature, thereby requiring derivative liability classification. On applying a probability adjusted present value of the premiums, the fair value was considered immaterial upon issuance and through the end of this reporting period.

~~In connection with~~

The August 2019 SPA contains customary events of default. If a default occurs and is not cured within the applicable cure period or is not waived, any outstanding obligations under the August 2019 Note may be accelerated. The August 2019 SPA and related August 2019 Note and August 2019 Warrant documents also contain additional representations and warranties, covenants and conditions, in each case customary for transactions of this type.

Prior to December 6, 2019, the Company notified Crystal Amber that it had elected to receive the full amount of approximately $4.6 million under the August 2019 Note, but agreed to timing extensions.

On December 16, 2019, stockholder approval was obtained pursuant to ASX Listing Rule 10.11, for the August 2019 Note conversion feature and the issuance of the ~~2018~~August 2019 Warrant, contingent on receipt of the August 2019 Note proceeds.

On January 13, 2020, the full amount of approximately $4.6 million was received as proceeds from the August 2019 Note. On receipt of funds, the August 2019 Note was immediately convertible. On January 13, 2020, the Company ~~also~~ issued to ~~the Purchaser a warrant (the “2018 Warrant”)~~Crystal Amber an immediately exercisable August 2019 Warrant to purchase ~~97,222,200~~229,844,650 CDIs (representing ~~1,944,444~~4,596,893 shares of common ~~shares) at~~stock) for an ~~initial~~ exercise price of ~~US$0.018~~$0.02 per CDI ~~as per the 2018~~(see Note conversion price, the warrant exercise price was subsequently adjusted to US$0.0144 per CDI, and is subject to further exercise price adjustment on certain conditions as described in the 2018 Warrant. The 2018 Warrant may be exercised at any time on a cash or cashless basis until the 2018 Warrant expires on May 30, 2023.4).

~~The Company has evaluated the guidance ASC 480-10~~ ~~Distinguishing Liabilities from Equity, ASC 815-40~~ ~~Contracts in an Entity's Own Equity~~ ~~and ASC 470-20~~ ~~Debt with Conversion and Other Options~~ ~~to determine the appropriate classification of the 2018 Note and 2018 Warrant.~~

On issuance, having already obtained the ~~2018~~required stockholder approval to reserve the CDIs underlying the conversion feature and the August 2019 Warrant, the August 2019 Warrant was determined to be a freestanding instrument meeting the requirements for equity ~~classification.~~classification in accordance with ASC 480-10 Distinguishing Liabilities from Equity, ASC 815-40 Contracts in an Entity’s Own Equity and ASC 470-20 Debt with Conversion and Other Options. Accordingly, proceeds from the August 2019 SPA were allocated to the August 2019 Note and Warrant based on their relative fair values. The relative fair value ~~estimated for~~of the ~~2018~~August 2019 Warrant ~~totaling~~of approximately ~~$743 thousand, has been~~$2.3 million was recorded as a debt discount with the offset to additional paid-in capital. Additionally, the Company analyzed the conversion features of the August 2019 Note to determine whether a beneficial conversion feature (BCF) existed. The Company determined a BCF with a value of $435 thousand existed and was recorded as a debt discount with the offset to additional paid-in capital. The 2018 Note was also evaluated for beneficial conversion feature ("BCF") subsequent to the allocation of proceeds among the 2018 Note and 2018 Warrant. Based upon the effective conversion price of the 2018 Note after considering the stock price at the date of issuance and the allocation of estimated fair value to the 2018 Warrant, it was determined that the 2018 Note contained a BCF. The value of the BCF was computed to be approximately $1.2 million but has been capped at approximately $1.0 million so as to not exceed the total proceeds from the 2018 Note after deducting the value allocated to the 2018 Note and 2018 Warrant. The effective interest rate on the note after the discounts is 26.4%.

~~The Company recorded the 2018 Note at issuance, net of the~~ total debt discount ~~of $1.75 million and~~will be amortized to interest expense through the ~~debt discount over the life~~January 2025 maturity of the ~~2018~~August 2019 Note.

For the three and six months ended June 30, 2020, the Company recorded accrued interest expense of $115 and $213 thousand, respectively, related to the August 2019 Note. For the three and six months ended June 30, ~~2019, the Company accrued interest expense of $47 and $91 thousand and debt discount amortization of $74 and $146 thousand. For the three and six months ended June 30, 2018,~~2020, the Company recognized interest expense of ~~$14~~$138 and $256 thousand, ~~and debt discount~~respectively, from the amortization of ~~$25 thousand, and interest expense derived from issuance costs of $85 thousand, respectively.~~

The 2018 Note was converted on June 30, 2019 to 134,852,549 CDIs (representing 2,697,050 common shares). The principal of $1.75 million converted to 121,527,777 CDIs (representing 2,430,555 common shares) and the accrued interest of $192 thousand converted to 13,324,772 CDIs (representing 266,495 common shares). Upon the conversion of the 2018 Note, the Company also recorded $1.4 million of unamortized interest expense

~~Table of Contents~~debt discount.

~~related to the unamortized debt discount. As of June 30, 2019, the conversion of the CDIs had been executed, but not yet settled with the CDIs issued and available.~~ Paycheck Protection Program (“PPP”) Loan

~~March 2019 Convertible Note and Warrant Financing~~

On March ~~15, 2019,~~27, 2020, the CARES Act was signed into law in the United States providing economic assistance for American workers and families, small businesses, and preserves jobs for American industries. On April 4, 2020, GI Dynamics submitted an application to a lending institution for a loan of approximately $200 thousand under the Paycheck Protection Program (“PPP”). In accordance with the provisions of the PPP, the loan accrues interest at a rate of 1% and all or a portion of the loan may be forgiven if it is used to pay for qualifying costs such as payroll, rent and utilities. Amounts that are not forgiven will be repaid 2 years from the date of the loan. The loan was granted by the lending institution on May 8, 2020 and funds were received into the Company’s bank account on May 11, 2020. The Company believes expenditures of the loan proceeds are fully compliant with the terms for loan forgiveness.

To date, the Company’s lender has been unable to accept forgiveness applications and the Company intends to submit a forgiveness application as soon as the lender is able to receive and process forgiveness applications.

June 2020 Convertible Note

On June 18, 2020, the Company entered into a Note Purchase Agreement (“June 2020 NPA”) by and between the Company ~~as borrower,~~ and Crystal ~~Amber Fund Limited, as purchaser (the “Purchaser”).~~Amber. Pursuant to the ~~Note Purchase Agreement,~~June 2020 NPA, the Company issued and sold to ~~the Purchaser~~Crystal Amber, a ~~Senior Unsecured~~ Convertible Promissory Note in an aggregate original principal amount of ~~$1 million~~$750,000 (the ~~“March 2019~~“June 2020 Note”).

The ~~Purchaser is a related party and is~~June 2020 Note accrues interest at an annually compounded rate of 5% per annum, other than during the ~~Company’s largest stockholder. Being a related party, certain conversion features in~~continuance of an event of default, when the ~~March 2019~~June 2020 Note ~~and the March 2019 warrant required stockholder approval, which was obtained on June 30, 2019. The March 2019 Note accrued~~accrues interest at a rate ~~equal to 10%~~of 8% per ~~annum, compounded annually. The March 2019 Note was to mature on March 15, 2024. Issuance costs related to the March 2019 Note were $50 thousand.~~

annum. The entire outstanding principal balance ~~under the March 2019 Note~~ and all unpaid accrued interest thereon ~~was convertible into CHESS Depositary Interests (“CDIs”), each representing 1/50th~~becomes immediately due and payable at the sole discretion of ~~a share~~Crystal Amber any time after December 18, 2020. The entire outstanding principal balance and all unpaid accrued interest under the June 2020 Note will mandatorily convert at the Initial Close of the ~~Company’s common stock, at the option~~Proposed Offering into shares of ~~the Purchaser~~Series A Preferred Stock at a conversion price ~~of US$0.0127 per CDI.~~

~~In conjunction with the issuance~~equal to 80% of the ~~March 2019 Note, the Company issued a warrant (the “March 2019 Warrant”) to purchase 78,984,823 CDIs (representing 1,579,696 common shares) at an initial exercise~~ price per share of ~~US$0.0127 per CDI, subject to adjustment as described~~Series A Preferred Stock sold in the March 2019 Warrant. The March 2019 Warrant required the approval of stockholders and was recorded in derivative liability as it was not exercisable until approved on June 30, 2019. The warrant is exercisable at any time on a cash or cashless basis prior to its expiration on June 30, 2024. The March 2019 Warrant includes a price protection clause such that if the Company issues securities in a subsequent financing at a per CDI price of less than US$0.0127, the exercise price of the March 2019 Warrant will be reduced to the lowest such price per CDI (or the equivalent for shares of common stock) at which the newly issued securities were sold.Proposed Offering.

The Company ~~has evaluated~~analyzed the ~~guidance~~June 2020 Note and its settlement features under ASC 480-10 Distinguishing Liabilities from Equity A~~SC 815-40~~ ~~Contracts in an Entity's Own Equity~~ , and ~~ASC 470-20~~ ~~Debt with Conversion and Other Options~~ to determine the appropriate classification of the March 2019 Note and March 2019 Warrant. On issuance, the March 2019 Warrant was determined to be a freestanding instrument meeting the requirements for liability classification due to not having stockholder approval. Accordingly, the fair value estimated for the March 2019 Warrant, totaling approximately $871 thousand, was recorded as a discount to the debt with the offset to derivative liabilities.

Upon approval of the conversion features and issuance of the warrants on June 30, 2019, the Company remeasured the warrant liability and recorded a $576 thousand other expense to the consolidated statement of operations and then reclassified $1,447 thousand of fair value of warrants from derivative liability to equity as approval of the warrant made the warrant immediately exercisable. The Company then evaluated the March 2019 Note for beneficial conversion feature ("BCF’). Based upon the effective conversion price of the March 2019 Note after considering the stock price at the date of stockholder approval and the allocation of estimated fair value to the March 2019 Warrant, it was determined that the ~~March 2019 Note contained a BCF. The value~~predominant settlement feature is the mandatory conversion into shares of Series A Preferred Stock at the close of the ~~BCF was computed to be approximately $741 thousand but has been capped at approximately $265 thousand so as to not exceed~~Proposed Financing, the ~~total proceeds from the March 2019 Note after deducting the value allocated to the March 2019~~June 2020 Note and ~~2019 Warrant.~~settlement features should be recorded at fair value as a liability. The ~~relative~~Company initially recorded the fair value of the ~~warrant upon stockholder approval was approximately $735 thousand. The total debt discount on~~June 2020 Note as the ~~March 2019~~principal value of the Note ~~upon stockholder approval was $1M.~~

~~The~~and will subsequently use the effective interest rate onmethod to accrete the value of the conversion premium, recorded as a debt discount, and nominal interest over the period to expected conversion.

Prior to December 18, 2020, if a Company change of control event generates cash proceeds for the Company, Crystal Amber may, at its option, demand that the Company pay all accrued and unpaid interest plus 110% of the remaining outstanding unconverted principal balance. The Company may not prepay the June 2020 Note ~~after~~without the ~~discounts is 29.4%.~~ consent of Crystal Amber.

For the three and six months ended June 30, ~~2019, immediately prior to the Note conversion~~2020, the Company ~~recognized accrued~~recorded interest expense of ~~$25 and $29~~$2 thousand and $34 thousand for amortization of the debt ~~discount amortized to interest expense of $52 and $60 thousand, respectively.~~discount.

August 2020 Convertible Note

On Note conversion, unamortized debt discount of $1 million was recorded as interest expense. The March 2019 Note principal of $1 million and accrued interest of $30 thousand were transferred to common stock subscribed but unissued. The conversion features of the March 2019 Note were approved on June 30, 2019 and on the same day, the March 2019 Note was converted to 81,070,003 CDIs (representing 1,621,400 common shares). The principal of $1 million converted to 78,740,157 CDIs (representing 1,574,803 common shares) and the accrued interest of approximately $30 thousand converted to 2,329,846 CDIs (representing 46,596 common shares).

~~May 2019 Convertible Note and Warrant Financing~~

~~On May 8, 2019,~~August 4, 2020, the Company entered into a Note Purchase Agreement (“August 2020 NPA”) by and between the Company ~~as borrower,~~ and Crystal ~~Amber Fund Limited, as purchaser (the “Purchaser”).~~Amber. Pursuant to the ~~Note Purchase Agreement,~~August 2020 NPA, the Company issued and sold to ~~the Purchaser~~Crystal Amber, a ~~Senior Unsecured~~ Convertible Promissory Note in an aggregate original principal amount of ~~$3 million~~$500,000 (the ~~“May 2019~~“August 2020 Note”). The ~~Purchaser is a related party and is the Company’s largest stockholder. Being a related party, certain conversion features in the May 2019 Note~~Company received $250 thousand on August 3, 2020 and the ~~May 2019 warrant required stockholder approval, which was obtained~~remaining $250 thousand on ~~June 30, 2019.~~August 6, 2020.

The ~~May 2019~~August 2020 Note ~~was funded in four tranches, starting on May 8, 2019 and the full $3 million funding was completed on June 28, 2018. The note accrued~~accrues interest at ~~10%~~an annually compounded rate of 5% per annum, ~~computed on~~other than during the ~~daily funded balance until completion~~continuance of ~~funding on~~an event of default, when the June ~~28, 2019, when~~2020 Note accrues interest ~~began to compound annually. The May 2019 Note was to mature on May 8, 2024. Issuance costs were $87 thousand.~~

at a rate of 8% per annum. The entire outstanding principal balance ~~under the May 2019 Note~~ and all unpaid accrued interest thereon ~~was convertible into CHESS Depositary Interests (“CDIs”), each representing 1/50th~~becomes immediately due and payable at the sole discretion of ~~a share~~Crystal Amber any time after February 4, 2021. The entire outstanding principal balance and all unpaid accrued interest under the June 2020 Note will mandatorily convert at the Initial Close of the ~~Company’s common stock, at the option~~Proposed Offering into shares of ~~the Purchaser~~Series A Preferred Stock at a conversion price ~~of US$0.0127 per CDI.~~

~~In conjunction with the issuance~~equal to 80% of the ~~May 2019 note, the Company issued a warrant (the “May 2019 Warrant”) to purchase 236,220,472 CDIs (representing 4,724,409 common shares) at an initial exercise~~ price per share of ~~US$0.0127 per CDI, subject to adjustment as described~~Series A Preferred Stock sold in the May 2019 Warrant. The May 2019 Warrant required the approval of stockholders and was recorded in derivative liability as it was not exercisable until approved on June 30, 2019. The warrant is exercisable at any time on a cash or cashless basis, prior to its expiration on June 30, 2024. The May 2019 Warrant includes a price

~~Table of Contents~~Proposed Offering.

protection clause such that if the Company issues securities in a subsequent financing at a per CDI price of less than US$0.0127, the exercise price of the May 2019 Warrant will be reduced to the lowest such price per CDI (or the equivalent for shares of common stock) at which the newly issued securities were sold.

The Company ~~has evaluated~~analyzed the ~~guidance~~August 2020 Note and its settlement features under ASC 480-10 Distinguishing Liabilities from Equity A~~SC 815-40~~ ~~Contracts in an Entity's Own Equity~~ , and ~~ASC 470-20~~ ~~Debt with Conversion and Other Options~~ to determine the appropriate classification of the May 2019 Note and May 2019 Warrant. On issuance, the May 2019 Warrant was determined to be a freestanding instrument meeting the requirements for liability classification due to not having stockholder approval. Accordingly, the fair value estimated for the May 2019 Warrant, totaling approximately $3.2 million, was recorded as a discount to the debt with the offset to derivative liabilities.

Upon approval of the conversion features and issuance of the warrants on June 30, 2019, the Company revalued the warrant liability and recorded a remeasurement of derivative liabilities in the amount of $1.14 million to the consolidated statements of operations and then reclassified $4,337 thousand of fair value of warrants from derivative liability to equity as approval of the warrant which made the warrant immediately exercisable. The Company then evaluated the May 2019 Note for beneficial conversion feature ("BCF’). Based upon the effective conversion price of the May 2019 Note after considering the stock price at the date of stockholder approval and the allocation of estimated fair value to the May 2019 Warrant, it was determined that the ~~May 2019 Note contained a BCF. The value~~predominant settlement feature is the mandatory conversion into shares of Series A Preferred Stock at the close of the ~~BCF was computed to be approximately $2.0 million but has been capped at approximately $844 thousand so as to not exceed~~Proposed Financing, the ~~total proceeds from the May 2019 Note after deducting the value allocated to the May 2019~~August 2020 Note and ~~May 2019 Warrant.~~settlement features should be recorded at fair value as a liability. The ~~relative~~Company initially recorded the fair value of the ~~warrant upon shareholder approval was approximately $2,136 thousand. The total debt discount on~~August 2020 Note as the ~~May 2019 note upon shareholder approval was $3 million.~~

~~The~~principal value of the Note and will subsequently use the effective interest rate onmethod to accrete the ~~Note after~~value of the ~~discounts is 29.4%. For~~conversion premium, recorded as a debt discount, and nominal interest over the ~~three and six months ended June 30, 2019, immediately prior~~period to ~~the Note conversion~~expected conversion.

Prior to February 4, 2021, if a Company change of control event generates cash proceeds for the Company, ~~recognized~~Crystal Amber may, at its option, demand that the Company pay all accrued and unpaid interest ~~expense of $19 thousand and debt discount amortized to interest expense of $180 thousand, respectively.~~

On Note conversion, unamortized debt discount of $3 million was reclassed to interest expense. The March 2019 Note principal of $3 million and accrued interest of $19 thousand were transferred to common stock subscribed but unissued. The conversion featuresplus 110% of the ~~May 2019~~remaining outstanding unconverted principal balance. The Company may not prepay the August 2020 Note ~~were approved on June 30, 2019~~without the consent of Crystal Amber.

The Company considers the change in control premium to represent a cash settleable feature, thereby requiring derivative liability classification. On applying a probability adjusted present value of the premiums, the fair value was considered immaterial upon issuance and onthrough the ~~same day, the May 2019 Note was converted to 237,687,411 CDIs (representing 4,753,747 common shares). The principal~~end of ~~$3 million converted to 236,220,472 CDIs (representing 4,724,409 common shares)~~this reporting period.

9. Commitments and ~~the accrued interest of $19 thousand converted to 1,466,939 CDIs (representing 29,338 common shares).~~Contingencies

~~11. Leases~~

On January 1, 2019, the Company adopted Topic 842 using the modified retrospective approach. There was no impact to retained earnings upon adoption of Topic 842 as there were no active long-term leases in place at the adoption date. Leases with an initial term of 12 months or less are not recorded on the balance sheet, unless the arrangement includes an option to purchase the underlying asset, or an option to renew the arrangement, that we are reasonably certain to exercise (short-term leases). Lease Commitments

In June 2016, the Company entered into a non-cancelable agreement to lease approximately 4,200 square feet of office space in Boston, Massachusetts. The lease commenced in June 2016 and expired in April 2018. Rent during the term was $12 thousand per month.

In December 2018, the Company entered into a 6-month membership agreement with WeWork for 985 square feet of office space located in Boston, Massachusetts. The committed lease term expired in May ~~2019 and contained a two-month cancellation provision.~~2019. The WeWork agreement contained no explicit or guaranteed extension provisions.

On April 22, 2019, the Company entered into a ~~Right-of-Use~~right-of-use lease for 3,520 square feet of office space in Boston, Massachusetts. The lease period contractually commenced June 1, 2019 and expires on May 31, 2022, but the space was available for occupancy on May 1, 2019 resulting in an effective period of May 2019 through May 2022, with no rent payment assessed in May 2019. The lease has defined escalating rent payments and contains no extension or expansion rights. On lease execution, the Company recorded the approximately ~~$509~~$463 thousand present value of the lease liability in short-term and long-term liabilities and recorded a related ~~Right of Use Asset.~~right-of-use asset. The ~~Right-of-Use~~right-of-use asset will be amortized to lease expense and the liability will be reduced by the rent payments over the term of the lease. As of June 30, 2019, the accumulated depreciation on the lease was approximately $11 thousand. Additional property tax allocations and separately metered utilities will all be expensed in the period incurred.

The ~~Company's~~Company’s leases generally do not provide an implicit interest rate and therefore the Company ~~used~~uses 10% as an estimate of its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease in a similar economic environment. The Company had no leases currently classified as finance leases or previously classified as capital leases in either reporting period.

~~Table of Contents~~

~~The following table presents supplemental balance sheet information related to our operating lease:~~

As of June 30, 2019

Operating Leases

(in thousands)

Right-of-Use Assets

$
497

Liabilities

Short-term operating lease liabilities

179

Long-term operating lease liabilities

318

Total Liabilities

$
497

The ~~total~~Company’s operating lease ~~cost for short-term leases not included as lease liabilities and right of use assets on~~is reflected in the balance ~~sheet was $55 thousand~~sheets. In the three and ~~$92 thousand for the three-month and six-month periods~~six months ended June 30, ~~2019, respectively. The total operating~~2020, $44 and $88 thousand of lease ~~cost~~expense was incurred and an additional $7 thousand of tax expense was accrued for ~~long-term leases included as lease liabilities and right of use assets on~~property taxes associated with the ~~balance sheet was $16 thousand for the three-month and six-month periods ended June 30, 2019.~~

leased facility. Other information related to leases was as ~~follows:~~follows (in 2019, other leases were all short term and excluded from the scope of ASC 842, Leases):

							Six Months Ended June 30,
	Three months ended June 30, 2019			Six months ended June 30, 2019			2020			2019
	(in thousands)						(in thousands)
Operating cash flows from operating leases in lease liability measurement	$	16		$	16		$	88		$	16
Operating cash flows from short term leases		92			92			88			92
Remaining long-term lease term in years		2.8			2.8			1.9			2.8
Discount rate		10	%		10	%		10	%		10	%

The maturity of the Company’s ~~finance and~~ operating lease ~~liabilities~~liability as of June 30, ~~2019 are~~2020 is as follows:

	Operating Leases		June 30, 2020
Year ending December 31,	(in thousands)
2019	$	95
			(in thousands)
2020		190	$	90
2021		195		182
2022		98		76
Total future minimum lease payments		578		348
Less: imputed interest		81		32
Total Liabilities	$	497
Total liabilities			$	316

~~12.~~Rent expense on non-cancelable operating leases was approximately $45 and $90 thousand for the three and six months ended June 30, 2020. Rent expense on non-cancelable operating leases was approximately $55 and $92 thousand for the three and six months ended June 30, 2019.

10. Stockholders’ ~~Equity (Deficit)~~Deficit

On ~~May 22, 2017, the~~December 19, 2019, GI Dynamics stockholders ~~of the Company~~ approved an increase of its authorized shares of ~~Common Stock~~common stock from ~~13,000,000~~50 million to ~~50,000,000 and to eliminate Class B shares of Common Stock of the Company.~~ 75 million.

As of June 30, ~~2019,~~2020, the authorized capital stock of the Company consists of ~~50,500,000~~75.5 million shares, of which ~~50,000,000~~75 million shares are designated as ~~Common Stock~~common stock and ~~500,000~~500 thousand shares are designated as ~~Preferred Stock.~~preferred stock.

~~In 2018,~~

On May 26, 2020, the Company ~~received commitments for two private placements to sophisticated~~filed a definitive proxy statement and ~~professional investors in Australia, the United States and the United Kingdom, consisting~~Notice of ~~U.S. and non-U.S. persons (as defined in Regulation S (“Regulation S”) of~~Stockholder Meeting with the Securities Act of 1933 (the “Securities Act”)) to raise up to approximately $6.61 million (the “2018 Placements”). The first placement (“First Quarter 2018 Placement”) consisted of a total of 406,002,869 fully paid CDIs of the Company (representing 8,120,057 shares of common stock) at an issue price of A$0.035 per CDI. The issue of CDIs under the First Quarter 2018 Placement occurred in two tranches. The first tranche closed on January 22, 2018 (US Eastern time), pursuant to which the Company issued 28,467,063 CDIs (representing 569,341 shares of common stock) resulting in gross proceeds of approximately $781 thousand and related issuance costs of $63 thousand. The closing of the second tranche of the First Quarter 2018 Placement resulted in gross proceeds of $824 thousand and related issuance costs of $39 thousand by the issue of 30,313,556 CDIs (606,271 shares) following stockholder approval granted on February 27, 2018. There were two participants in the First Quarter 2018 Placement second tranche; Crystal Amber Fund, a related party, purchased 27,391,756 CDIs. A Board member of the Company purchased 2,921,800 CDIs.

~~Table of Contents~~

The second placement (“Autumn 2018 Placement”) consisted of a total of 347,222,250 fully paid CDIs of the Company (representing 6,944,445 shares of common stock) at an issue price of A$0.020 per CDI. The investors in the Autumn 2018 Placement included certain existing investors. The issue of these CDIs occurred in two tranches. The first tranche closed on September 20, 2018 (US Eastern time), pursuant to which the Company issued 150,000,000 CDIs (representing 3,000,000 shares of common stock) resulting in gross proceeds of approximately $2.2 million and related issuance costs of $56 thousand. The closing of the second tranche resulted in gross proceeds of $2.8 million by the issue of 197,222,250 CDIs (representing 3,944,445 shares of common stock) following stockholder approval at the adjourned Special Meeting of stockholders on October 29, 2018. There were three participants in the second tranche; Crystal Amber Fund, a related party, purchased 168,194,450 CDIs. Existing investorsExchange Commission in the United States and ~~Australia also purchased 23,819,450~~with ASX in Australia. The proposal to be voted by shareholders was to formally apply for removal from the Official List of the ASX (the “Delisting”). On June 20, 2020, stockholders approved the Delisting and ~~5,208,350 CDIs, respectively.~~notice was given to the market that a formal Delisting application had been submitted to ASX. The Company was not offering any share purchase facilities under the Delisting plan. After a 30-day trading period ending 4:00 p.m. July 22, 2020 Australian Eastern Standard Time, the Company was Delisted. All ~~second tranche~~ CDIs were ~~allotted to investors in November 2018.~~

~~On June 30, 2019, Crystal Amber converted the 2018 Note to 134,852,549 CDIs (representing 2,697,050 common shares). The principal of $1.75 million~~ converted to ~~121,527,778~~shares of Common Stock before the CDN was dissolved. Registered holders converting CDIs ~~(representing 2,430,555~~such that a fractional common ~~shares) and~~share is generated will receive cash payment for such fractional share. The Company’s SEC reporting requirements shall still be in effect, even though the ~~accrued interest of $192 thousand converted to 13,324,772 CDIs (representing 266,495 common shares).~~ Company’s securities are not listed on any exchange.

On June 30, 2019, Crystal Amber converted the March 2019 Note to 81,070,003 CDIs (representing 1,621,400 common shares). The principal of $1 million converted to 78,740,157 CDIs (representing 1,574,803 common shares) and the accrued interest of approximately $30 thousand converted to 2,329,846 CDIs (representing 46,596 common shares).

On June 30, 2019, Crystal Amber converted the May 2019 Note to 237,687,411 CDIs (representing 4,753,747 common shares). The principal of $3 million converted to 236,220,472 CDIs (representing 4,724,409 common shares) and the accrued interest of approximately $19 thousand converted to 1,466,939 CDIs (representing 29,338 common shares).

~~13.~~11. Share-Based Compensation

The Company has two stock-based compensation plans. ~~In May 2003, the~~The Board of Directors adopted the 2003 Omnibus Stock Plan (the “2003 Plan”), which provides for the grant of qualified incentive stock options and nonqualified stock options or other awards to the Company’s employees, officers, directors, advisors, and outside consultants to purchase up to an aggregate of 922,086 shares of the Company’s common stock.

In August 2011, the Board of Directors adopted the 2011 Employee, Director and Consultant Equity Incentive Plan (the “2011 Plan”, together with the 2003 Plan, the “Plans”) as the successor to the 2003 Plan. Under the 2011 Plan, the Company may grant incentive stock options, nonqualified stock options, restricted and unrestricted stock awards and other stock-based awards. ~~The Company had initially reserved 450,000~~As of June 30, 2020, an additional 554,866 shares ~~of its common stock for issue under the 2011 Plan. Awards that are returned to the Company’s 2003 Plan as a result of their forfeiture, expiration or cancellation without delivery~~ of common stock shares or that result in the forfeiture of shares back to the Company on or after August 1, 2011, the date the 2011 Plan became effective, are automatically made available for issuance under the 2011 Plan. At August 1, 2011, 80,235 shareswere available for grant under the ~~2003 Plan were transferred to the~~Company’s 2011 Plan. ~~At June 30, 2019, there were 1,748,812 shares available for future grant under the 2011 Plan.~~

In addition, the 2011 Plan 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 thousand shares;

~~500,000 shares;~~

●

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

●

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

~~Accordingly, in the first quarter of fiscal 2019, 500,000 options available for future grant~~ Accordingly, during each of the quarters ended March 31, 2020 and March 31, 2019, 500 thousand shares were added to the 2011 Plan.

Stock-Based Compensation

Stock-based compensation is reflected in the consolidated statements of operations as follows for the three and six months ended June 30, ~~2019~~2020 and ~~2018~~2019 (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
Research and development	$	16	$	—	$	32	$	5	$	15	$	16	$	28	$	32
Sales and marketing		—		4		—		10
General and administrative		41		31		84		49		169		41		368		84
	$	57	$	35	$	116	$	64	$	184	$	57	$	396	$	116

~~Table of Contents~~

The stock options granted under the Plans generally vest over a four-year period and expire ten years from the date of grant. From time to time, the Company grants stock options to purchase common stock subject to performance-based milestones. The vesting of these stock options will occur upon the achievement of certain milestones. When achievement of the milestone is deemed probable, the Company expenses the compensation of the respective stock option over the implicit service period.

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

Determining the fair value of stock-based awards using the Black-Scholes option-pricing model requires the use of highly subjective assumptions, including the expected term of the award and expected stock price volatility. The weighted-average assumptions used to estimate the fair value of employee stock options using the Black-Scholes option-pricing model were as follows for the three and six months ended June 30, ~~2019~~2020 and ~~2018:~~2019:

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Expected volatility		164.9	%		126.1	%		164.9	%		126.1	%
Expected term (in years)		5.84			6.05			5.84			6.05
Risk-free interest rate		0.9	%		1.8	%		0.9	%		1.8	%
Expected dividend yield		0	%		0	%		0	%		0	%

Three Months Ended June 30,

Six Months Ended June 30,

2019

2018

2019

2018

Expected volatility

126.1
%

119.4
%

126.1
%

117.1
%
Expected term (in years)

6.05

6.05

6.05

6.05

Risk-free interest rate

1.8
%

2.6
%

1.8
%

2.5
%
Expected dividend yield

0
%

0
%

0
%

0
%

Stock Options

The following table summarizes share-based activity under the Company’s stock option plans for the six months ended June 30, ~~2019:~~2020:

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, 2018

985,224

$
2.24

8.48

$
—

Granted

235,000

$
—

Exercised

—

$
—

Cancelled

—

—

—

$
—

Outstanding at June 30, 2019

1,220,224

$
2.24

8.24

$
1

Vested or expected to vest at June 30, 2019

1,220,224

$
2.24

8.24

$
1

Exercisable at June 30, 2019

486,916

$
4.87

6.87

$
—

	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, 2019		3,096,154		$	1.47		8.3	$	—
Granted		90,000		$	0.23		—	$	—
Cancelled		(161,933	)	$	0.83		—	$	—
Outstanding at June 30, 2020		3,024,221		$	1.47		8.4	$	—
Vested or expected to vest at June 30, 2020		3,024,221		$	—		—	$	—
Exercisable at June 30, 2020		775,930		$	2.74		6.6	$	—

AsThe majority of the Company’s option grants vest 25% on the first anniversary of the grant date, and in a quarterly straight-line rate thereafter until fully vested on the fourth anniversary of the grant date. The weighted average grant date fair value for options granted in the six-month period ended June 30, ~~2019, there~~2020, was ~~approximately $586 thousand of~~$0.18. The unrecognized ~~stock-based~~stock compensation ~~related to unvested stock option grants having service-based vesting under the Plans which is~~expense at June 30, 2020 was $1.8 million and was expected to be recognized over a ~~weighted-average~~weighted average period of ~~2.3 years.~~ 2.9 years from June 30, 2020.

The ~~intrinsic value~~Company has recorded non-employee stock-based compensation expense of approximately $1 thousand and $nil during the six-month period ended June 30, 2020 and 2019, respectively, which is included in total stock-based compensation expense. The unrecognized compensation expense associated with outstanding non-employee grants was $2 thousand and $nil at June 30, 2020 and 2019, respectively.

On February 28, 2020, the ~~table above represents~~Company’s Board of Directors approved, subject to stockholder approval per ASX Listing Rule 10.14, the ~~difference between~~grant of stock options (“NED Options”) conferring the ~~fair value~~right to purchase up to 30 thousand shares of the Company’s common stock onto Praveen Tyle, a non-executive director pursuant to the ~~measurement date~~Company’s 2011 Plan. The exercise price is $0.20 per share of common stock and the ~~exercise price~~NED Options will vest in full on February 28, 2021 if Dr. Tyle remains a director of the ~~stock option.~~

Company through that date. The ~~stock-based compensation plans provide that grantees may have the right~~NED Options will vest immediately on a change in control event. The NED Options are immediately exercisable, subject to ~~exercise an option~~repurchase rights if purchased prior to vesting. ~~Shares purchased upon the exercise of unvested options~~The NED Options will be ~~subject to~~cancelled immediately upon termination of service as a director, unless such termination is the ~~same vesting schedule as~~result of a defined change in control event, in which case the ~~underlying options and are subject to repurchase at~~NED Options will be cancelled 12 months after such termination. As of June 30, 2020, stockholders had not yet approved the ~~original exercise price by~~NED Options.

On February 15, 2020, the Company ~~should the grantee discontinue providing services~~granted a consultant an option to purchase up to 10 thousand shares of common stock at a price of $0.40 per share. The option vests in equal monthly amounts over a 24-month period and expires in 10 years.

At June 30, 2020, the Company ~~for any reason, prior~~had unvested outstanding options to ~~becoming fully vested in such shares.~~purchase 7,915 shares of common stock granted to non-employees.

~~Restricted Stock Units &~~

Performance Stock Units

Each ~~restricted stock unit and~~ performance stock unit (“~~RSU &~~ PSU”) ~~issued under the Company Plans~~ represents a contingent right to receive one share of the Company’s common stock. ~~The RSUs & PSUs outstanding at June 30, 2019 vest upon the achievement of certain product revenue, regulatory and reimbursement milestones.~~ There is no consideration payable on the vesting of ~~RSUs &~~ PSUs ~~issued.~~issued under the Plans. Upon vesting, ~~RSUs and~~the PSUs are exercised automatically and settled in shares of the Company’s common stock.

~~Table~~ During the six months ended June 30, 2020, the Company awarded no PSUs to employees and directors of ~~Contents~~the Company.

The following table summarizes information related to ~~RSU &~~ PSU activity for the six months ended June 30, ~~2019:~~2020:

	Number of Units		Weighted- Average Contractual Life		Aggregate Intrinsic Value		Number of Units		Weighted- Average Contractual Life		Aggregate Intrinsic Value
			(in years)		(in thousands)				(in years)		(in thousands)
Outstanding at December 31, 2018		250,000		7.23	$	141
Outstanding at December 31, 2019								250,000		6.23	$	149
Granted	—							—
Exercised	—							—
Cancelled	—		—		—			—		—		—
Outstanding at June 30, 2019		250,000		6.98	$	186
Outstanding at June 30, 2020								250,000		5.73	$	25

The aggregate intrinsic value at June 30, ~~2019 and December 31, 2018~~2020 noted in the table above represents the closing price of the Company’s common stock multiplied by the number of ~~RSUs and~~ PSUs outstanding. The fair value of each ~~RSU and~~ PSU award equals the closing price of the Company’s common stock on the date of grant.

At June 30, ~~2019, all RSUs and~~2020, 250 thousand of the PSUs outstanding ~~are subject to performance-based vesting criteria as described in the applicable award agreement. For these awards, vesting will occur upon~~vest on the achievement of certain ~~product revenue, regulatory and reimbursement~~ milestones. When achievement of the milestone is deemed probable, the Company ~~expenses~~will expense the compensation of the respective stock award over the implicit service period.

At June 30, ~~2019 and 2018, no RSUs and PSUs that have performance-based vesting criteria are considered probable of achievement. For the three and six months ended June 30, 2019 and 2018,~~2020, the Company ~~did not recognize any~~recognized no stock-based compensation ~~for RSUs and PSUs subject~~related to performance-based vesting ~~criteria.~~of PSUs.

As of June 30, ~~2019,~~2020, there ~~remains~~was approximately ~~$283~~$200 thousand of unrecognized stock-based ~~compensation.~~compensation expense related to non-vested PSU awards that have performance-based vesting.

~~14.~~

12. 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

The Company has historically reported various geographic segments but ~~at June 30, 2019,~~does not do so currently as the ~~right-of-use-asset~~right-of-use asset of approximately ~~$487~~$463 thousand and all long-lived assets, comprised of property and equipment of approximately ~~$51~~$27 thousand are all held in the U.S. ~~and~~at June 30, 2020. Additionally, the Company did not have revenue in any geography for the three and six months ended June 30, 2020 and 2019, ~~and 2018,~~ respectively.

Major Customers

The Company did not recognize any revenue for the three and six months ended June 30, 2020 and 2019, ~~and 2018,~~ respectively.

~~Table of Contents~~

13. Subsequent Events

Material events occurring subsequent to June 30, 2020 detailed within the relevant sections above include the conversion of the 2017 Note and the issuance of the August 2020 Note (both described in Note 8 of the Notes to the Consolidated Financial Statements), and the Company Delisting from the ASX (described in Note 10 of the Notes to the Consolidated Financial Statements).

On July 13,2020, Crystal Amber and the Company entered into a non-binding term sheet that establishes agreement on key terms of the Proposed Financing. Components of the term sheet include, but are not limited to, shareholders authorizing the necessary shares included in the Proposed Financing transaction; Delisting from the Official List of ASX, which occurred on July22, 2020; Exchange or amendment of the August 2019 Convertible Note to new terms and a conversion price per share of Common Stock of 200% of the per share price of the Series A Preferred Stock sold in the Proposed Financing; cancellation of the Warrant issued to Crystal Amber on January 13, 2020 and the Company agreement to negotiate the cancellation of the Consultant Warrant. The non-binding term sheet also addresses certain rights and preferences of the Series A Preferred Stock, including, but not limited to, liquidation preference of 120% of the price paid in the Proposed Financing and subsequent participation on an as-converted basis; automatic 1:1 conversion to shares of Common Stock in the event of a qualified IPO; Board of Director appointment rights, and other terms customary for Preferred Stock in this type of transaction. The ASX announcement outlining the terms of the non-binding term sheet is available on the Company website using the link http://investor.gidynamics.com/investors/financial-information/default.aspx or on the ASX announcement website at https://www.asx.com.au/asxpdf/20200720/pdf/44knm99nrgt4md.pdf

On July 16, 2020, the four then-current members of the Board of Directors of the Company advised the Company of their intent, subsequent to Delisting, to appoint a new member to the Board of Directors, then resign. On July 23, 2020, each member of the Board of Directors submitted a resignation letter to be effective at 5:00 p.m. July 29, 2020. On July 29, prior to 5:00 p.m. each Board member retracted their resignation and withdrew the corresponding resignation letter given that the Board believed that each member should continue to serve for proper corporate governance practices until the definitive documentation for the proposed $10 million Series A Preferred Stock financing is executed.

The intentions to resign are not a result of any dispute or disagreement with the Company or the Board on any matter relating to the operations, policies or practices of the Company.

On July 23, 2020 the Company entered into a Retention Bonus Agreement and Amendment with Scott Schorer, the Company’s Chief Executive Officer, setting forth the terms of Mr. Schorer’s continued employment as CEO through at least December 31, 2020 (the “Retention Period”). In lieu of any severance benefits Mr. Schorer would otherwise be entitled to per the Amended and Restated Offer Letter of September 19, 2019 (the “Offer Letter”), the Company paid Mr. Schorer a one-time cash bonus of approximately $609 thousand, subject to tax withholding (“the Retention Bonus”). The Retention Bonus is subject to pro-rata forfeiture and repayment if Mr. Schorer leaves the Company prior to December 31, 2020, without Good Cause as defined in the Offer Letter or if terminated for Cause. The pro-rata forfeiture and repayment schedule is as follows: (i) termination between August 1, 2020 and August 31, 2020: 5/6 of Retention Bonus to be repaid (i.e., approximately $508 thousand); (ii) termination between September 1, 2020 and September 30, 2020: 4/6 of Retention Bonus to be repaid (i.e., approximately $406 thousand); (iii) termination between October 1, 2020 and October 31, 2020: 3/6 of Retention Bonus to be repaid (i.e., approximately $305 thousand); (iv) termination between November 1, 2020 and November 30, 2020: 2/6 of Retention Bonus to be repaid (i.e., approximately $203 thousand); (v) termination between December 1, 2020 and December 31, 2020: 1/6 of Retention Bonus to be repaid (i.e., approximately $102 thousand); and (vi) termination after December 31, 2020: 0/6 of Retention Bonus to be repaid (i.e., $0.00). Additionally, in lieu of any performance bonus Mr. Schorer may be entitled to per the Offer Letter, Mr. Schorer is eligible for a milestone bonus of up to $100 thousand, subject to tax withholding, for achieving the receipt of European CE mark approval and/or achieving approval of the I-Step clinical trial in India during the Retention Period. If Mr. Schorer’s employment is terminated without cause or if Mr. Schorer resigns for Good Reason as defined in the Offer Letter, and a milestone is subsequently attained, Mr. Schorer will be entitled to a pro-rata portion of the Milestone Bonus based on the percentage of the Retention Period that Mr. Schorer remained employed by the company. Mr. Schorer’s salary will remain at an annualized $450 thousand and should Mr. Schorer continue employment after the Retention Period, the performance bonus provision in the Offer Letter resumes January 1, 2021. In the event Mr. Schorer’s employment is terminated for any reason following the Effective Date of the Retention Bonus Agreement and Amendment, whether voluntarily or involuntarily, then Mr. Schorer will provide consulting services to the Company at a rate of $325 per hour on a part-time basis averaging ten hours per month, subject to adjustment by the parties (the “Consulting Services”), for a period of six months following such termination (the “Consulting Term”), subject to earlier termination by mutual agreement of the parties.

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

Forward-Looking Information

The following discussion and analysis of ~~our~~the Company’s financial condition and results of operations should be read in conjunction with ~~our~~the consolidated financial statements and related notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, ~~2018~~2019 included in ~~our~~the Company’s Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve significant risks, uncertainties and assumptions. As a result of many factors, such as those set forth under “Risk Factors” Item 1A. of ~~our~~the Company’s 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~~

GI Dynamics is a clinical stage medical device company located in Boston, Massachusetts. ~~We have~~The Company has developed EndoBarrier, a medical device intended ~~for treatment of~~to treat patients with type 2 diabetes and ~~obesity, and we are~~to reduce obesity. GI Dynamics is taking the steps necessary to obtain the regulatory approvals required to market this product. In order to market EndoBarrier in the U.S., weGI Dynamics must obtain approval from the FDA. In order to market EndoBarrier outside of the U.S., ~~we are~~GI Dynamics is required to comply with various regulations imposed by the countries in which ~~we seek~~it seeks to sell the product.

In 2010, EndoBarrier received CE Marking for sale in the European Union and in 2011, EndoBarrier was listed on the Australian Register of Therapeutic Goods. As a result, during 2013 and 2014, wethe Company received approximately $2.8 million and ~~$2.25~~$2.3 million, respectively, in revenue from the sale of EndoBarrier in Europe, South America and the Asia Pacific region. In the U.S. in 2013, wethe Company began enrollment of patients in the initial pivotal trial of EndoBarrier, which ~~we refer~~is referred to as the ENDO ~~Trial.~~trial.

In the third quarter of 2015, wethe Company announced ~~our~~its decision to discontinue the ENDO ~~Trial~~trial because patients were experiencing a higher than previously observed level of hepatic (liver) abscesses. In the fourth quarter of 2016, weGI Dynamics received formal notification from the ~~Therapeutic Goods Administration~~TGA of the Australian government of the cancellation of EndoBarrier’s inclusion on the ~~Australian Register of Therapeutic Goods.~~ARTG. In the fourth quarter of 2017 wethe Company received formal notification of CE mark withdrawal from ~~our~~its notified body in Europe, preventing the sale of EndoBarrier in Europe and select Middle Eastern countries. WeThe Company undertook comprehensive cost-cutting measures throughout 2015 and 2016, including significantly reducing the number of ~~our~~its employees.

Following ~~our~~the decision to discontinue the ENDO ~~Trial, we~~trial, GI Dynamics undertook significant investigational and scientific ~~analysis~~analyses with the goal of reducing the incidence rate and severity of hepatic abscess ~~that present concurrently~~concurrent with the EndoBarrier treatment. This investigational work focused on understanding the root cause of hepatic abscess and how to reduce the rate of occurrence. This included: DNA analysis of normal EndoBarrier removals as well as hepatic abscess EndoBarrier removals, numerous meta-analyses and responder cohort analyses, investigation into the contributing factors represented by proton pump inhibitors (PPIs), leaky gut syndrome and microbiome analyses, among other research. This allowed the ~~company~~Company to modify the medications utilized with EndoBarrier, most notably discontinuation of chronic double-dose PPI usage during EndoBarrier implant.

~~In July~~

As a result of the efforts described above, in August 2018, ~~we submitted to~~GI Dynamics received an IDE from the FDA ~~an application for investigational device exemption, or IDE,~~ to ~~commence~~begin enrollment in a ~~new~~ pivotal trial evaluating the safety and efficacy of EndoBarrier in the United States pending ~~Institutional Review Board, or IRB, approval. In August 2018, we received approval of an IDE from the FDA to begin enrollment in this pivotal trial, and~~ IRB approval, which was ~~granted in~~received on February 13, 2019. In this report, ~~we refer~~the Company refers to this pivotal trial as the ~~GID~~GI Dynamics STEP-1 clinical trial. On January 27, 2020, the first patient was randomized into the STEP-1 Trial Protocol.

For financial reporting purposes, ~~we have~~the Company has one reportable segment, which designs, manufactures and plans to market EndoBarrier.

To date, ~~we have~~GI Dynamics has devoted substantially all ~~our~~of its efforts to research and development, business planning, clinical research, clinical study management, reimbursement development, product commercialization, acquiring operating assets and raising capital. ~~We have~~GI Dynamics has incurred significant operating losses since ~~our~~its inception in 2003. As of June 30, ~~2019, we~~2020, the Company had an accumulated deficit of approximately ~~$279~~$290 million. ~~We expect~~The Company expects to incur net losses for the next several years while ~~we continue~~it continues to evaluate which markets are appropriate to continue pursuing ~~regulatory approval,~~ reimbursement, market awareness and general market development efforts, and ~~continue~~continues to restructure ~~our~~its business and costs, establish new priorities, continue limited research, and evaluate strategic options.

~~To date, the Company~~

GI Dynamics has raised net proceeds of approximately ~~$273~~$279.3 million through sales of the Company’s equity and placement of debt, of which $9.3 million was raised through the Company’s 2019 financings and approximately $1.3 million has been raised in 2020 financings, inclusive of the August 2020 Note.

On August 21, 2019, the Company and Crystal Amber entered into a securities purchase agreement for a total funding of up to approximately $10 million (the “August 2019 SPA”). The initial $5.4 million was comprised of existing warrant exercises scheduled between August 25, 2019 and November 15, 2019. The remaining amount of the August 2019 funding was represented by a Convertible Term Promissory Note (“August 2019 Note”) of up to approximately $4.6 million and a related Warrant (“August 2019 Warrant”). Under the terms of the August 2019 SPA and August 2019 Note, the Company, at its sole discretion, could elect to request any of the $4.6 million to be funded at any date on or before December 6, 2019. The conversion feature allows the conversion of the August 2019 Note’s unpaid principal and interest at $0.02 per CDI and the August 2019 Warrant, upon its issue, allowed the purchase for $0.02 per CDI a number of CDIs represented by the August 2019 Note principal divided by $0.02 per CDI.

On August 21, 2019, the maturity date of the 2017 Note was extended to March 31, 2020.

On December 2, 2019, GI Dynamics provided notice to Crystal Amber that the Company elected to place the August 2019 Note at the full amount, on or before December 6, 2019. In December, the Company and Crystal Amber agreed to confer the right to tranche the funding of the August 2019 Note in amounts and per timing chosen solely by Crystal Amber, provided the August 2019 Note total was funded on or before January 15, 2020.

On December 16, 2019, GI Dynamics’ stockholders approved the August 2019 Note conversion feature and the issuance of ~~convertible debt and sales of our equity. See Note 1~~the August 2019 Warrant, pending funding of the ~~Consolidated Financial Statements (Nature~~August 2019 Note by Crystal Amber.

On January 13, 2020, GI Dynamics received approximately $4.6 million in cash representing the full funding of ~~Business —~~the August 2019 Note. As stockholder approval had been obtained in December 2019, the August 2019 Note became convertible at Crystal Amber’s sole discretion until maturity in January 2025. Additionally, the August 2019 Warrant was issued to Crystal Amber, providing for the purchase of up to 229,844,650 CDIs (representing 4,596,893 shares of common stock) at $0.02 per CDI.

On March 31, 2020, the maturity date of the 2017 Note was extended to May 1, 2020. On April 30 , 2020, the maturity date of the 2017 Note was extended to May 15, 2020. On May 15, 2020, the maturity date of the 2017 Note was extended to June 15, 2020. On June 15, 2020, the maturity date of the 2017 Note was extended to June 29, 2020. On June 29, 2020, the maturity date of the 2017 Note was extended to July 31, 2020.

On May 11, 2020, the Company received approximately $200 thousand from a lender under the Paycheck Protection Program (“PPP”) Loan program of the 2020 CARES Act. The PPP loan accrues interest at 1% with payments deferred for six months and a maturity date two years from loan approval. The Company may apply for loan forgiveness subject to completion of an application and appropriate use of the loan proceeds as defined in the PPP loan structure. The Company must use a defined portion of the proceeds for payroll and the remainder for qualified facilities expenses during a defined measurement period. The Company has completed the measurement period and believes all conditions for forgiveness were met. The Company will apply for loan forgiveness when the lender accepts applications for forgiveness.

On June 18, 2020, the Company entered into a Note Purchase Agreement (“June 2020 NPA”) with Crystal Amber, pursuant to which, the Company issued and sold to Crystal Amber, a Convertible Promissory Note in an aggregate original principal amount of $750 thousand (the “June 2020 Note”). The note and accrued interest will mandatorily convert at the Initial Close of the Proposed Offering into shares of Series A Preferred Stock at a conversion price equal to 80% of the price per share of Series A Preferred Stock sold in the Proposed Offering, otherwise, the note and accrued interest become immediately due and payable at the sole discretion of Crystal Amber any time after December 18, 2020.

On July 13, 2020, Crystal Amber provided the Company with a notice of optional conversion of the 2017 Note, thereby converting the principal of $5 million and the accrued and unpaid interest of $390 thousand into 2,574,873,400 CDIs, which is equal to 51,497,468 shares of Common Stock. On receipt of the notice of conversion, the Company did not have sufficient authorized shares to allow full conversion. The available 38,401,704 shares were issued to CDN, allowing the allotment of 1,920,085,200 CDIs to Crystal Amber and a Right to Shares and Waiver Agreement in which the Company agreed to issue the remaining 13,095,764 shares of Common Stock owed under the conversion when the Company has filed an amended and restated certification of incorporation with the Delaware Secretary of State in connection with the consummation of the Proposed Financing ~~History)~~and the Company has been delisted from the ASX.

On July 22, 2020, GI Dynamics was removed from the Official List of the ASX and all CDIs were converted to shares of Common Stock. Although the Company’s securities are not traded on any exchange, the Company remains subject to SEC reporting requirements.

On August 4, 2020, the Company entered into a Note Purchase Agreement (“August 2020 NPA”) with Crystal Amber, pursuant to which, the Company issued and sold to Crystal Amber, a Convertible Promissory Note in an aggregate original principal amount of $500 thousand (the “August 2020 Note”). The note and accrued interest will mandatorily convert at the Initial Close of the Proposed Offering into shares of Series A Preferred Stock at a conversion price equal to 80% of the price per share of Series A Preferred Stock sold in the Proposed Offering, otherwise, the note and accrued interest become immediately due and payable at the sole discretion of Crystal Amber any time after February 4, 2021.

The Company’s costs include employee salaries and benefits, compensation paid to consultants, materials and supplies for research, costs associated with development activities including materials, sub-contractors, travel and administration, legal expenses, sales and marketing costs, general and administrative expenses, and other costs associated with an early stage, medical technology company. As of June 30, 2020, GI Dynamics has 15 full-time employees. The number of employees required to support the Company’s activities as it moves the EndoBarrier through the GI Dynamics STEP-1 clinical trial, as well as in the areas of research and development, sales and marketing, and general and administrative functions, may increase. GI Dynamics expects to continue to incur consulting expenses related to technology development that will increase as it enters into the recruitment phase of the STEP-1 and India clinical trials, and the Company expects to continue to incur expenses to protect its intellectual property.

On March 11, 2020, the World Health Organization declared the outbreak of a ~~detailed description~~coronavirus (“COVID-19”) pandemic. As a result, economic uncertainties have arisen which, as of June 30, 2020, have negatively impacted GI Dynamics short term-operations, for example in delays in timing of regulatory audits and other key operational activities due to widespread sequestration and in facing enrollment pauses in our clinical trials due to the clinic-level restriction of elective procedures, for which EndoBarrier implantation qualifies. When operational activities are delayed, expenditures on certain items may decrease, such as travel. There is no certainty which reduced expenditures will result in higher than usual expenditures as activities resume and which will return to the expected rate. If the restrictions are limited in duration, the Company anticipates an ability to overcome delays and return to original timing estimates, but there can be no guarantee the duration and operational impact will be limited to the degree required. Additionally, market-level impacts may affect the timing or the negotiation of terms in the Company’s financing ~~history.~~efforts. These and other financial impacts that could occur may appear as positive or negative impacts to the Company’s future financial statements.

~~Our~~

The amount that GI Dynamics spends for any specific purpose may vary significantly from quarter to quarter or year to year, and could depend on a number of factors including, but not limited to, the pace of progress of the GI Dynamics STEP-1 and India clinical trials, commercialization and development efforts and actual needs with respect to development and research.

Research, development, and commercial acceptance of new medical technologies are, by their nature, unpredictable. Although the Company will undertake development and commercialization efforts with reasonable diligence, there can be no assurance that the net proceeds from the Company’s securities offerings will be sufficient to enable the Company to develop the Company’s technology to the extent needed to create future sales to sustain operations. If the net proceeds from these offerings are insufficient for this purpose, GI Dynamics will consider other options to continue its path to commercialization, including, but not limited to, additional financing through additional equity offerings, debt financing, co-development agreements, sale or licensing of developed intellectual or other property, or other alternatives.

GI Dynamics cannot assure that its technology will be accepted, that it will ever earn revenues sufficient to support its operations, or that it will ever be profitable. Furthermore, the Company has no ongoing committed source of financing and cannot assure that it will be able to raise money as and when it needs it to continue operations. If the Company cannot raise funds as and when it needs them, it may be required to scale back development plans by reducing expenditures for employees, consultants, business development and marketing efforts or to otherwise severely curtail, or even to cease, business operations.

The Company’s corporate headquarters are located in Boston, Massachusetts. The Company ~~executed a three-year lease commencing May 1, 2019, allowing us to terminate the Company’s former short-term lease and exit our former~~leases 3,520 square feet of office space ~~as of~~with a lease expiration in May ~~31, 2019.~~2022. This space is adequate for current operations.

Critical Accounting Policies and Estimates

~~Our~~

The Company’s discussion and analysis of ~~our~~its financial condition and results of operations is based upon ~~our~~the Company’s consolidated financial statements prepared in accordance with generally accepted accounting principles in the ~~U.S. The preparation~~United States. GI Dynamics believes that its application of ~~these financial statements requires us to make certain estimates~~the following accounting policies, each of which require significant judgments 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 income taxes including the valuation allowance for deferred tax assets, research and development expenses, contingencies, stock-based compensation, going concern considerations, lease liabilities and derivative valuations are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on ~~our historical experience~~the part of management, are the most critical to aid in fully understanding and ~~various other assumptions that~~evaluating the Company’s reported financial results. The Company’s significant accounting policies are ~~believed to be reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions. See~~more fully described in Note 2, ~~of the Consolidated Financial Statements (Summary~~“Summary of Significant Accounting Policies and Basis of ~~Presentation — New Accounting Pronouncements) for a detailed discussion of new accounting pronouncements, their adoption by the Company, and their impact (if any) on~~Presentation”, to the Company’s consolidated financial ~~statements.~~

~~Table of Contents~~statements appearing elsewhere in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes to these policies since December 31, 2019.

Results of Operations

The following is a description of significant components of ~~our~~Company operations, including significant trends and uncertainties that ~~we believe~~ are believed to be important to an understanding of ~~our~~the Company’s business and results of ~~operations (in thousands).~~operations:

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
	(in thousands)												(in thousands)						(in thousands)
Operating expenses:
Research and development	$	810		$	254		$	1,620		$	627		$	858		$	810		$	2,031		$	1,620
Sales and marketing		6			312			22			516			—			6			—			22
General and administrative		1,393			855			2,737			2,040			1,628			1,393			3,171			2,737
Total operating expenses		2,209			1,421			4,379			3,183			2,486			2,209			5,202			4,379
Loss from operations		(2,209	)		(1,421	)		(4,379	)		(3,183	)		(2,486	)		(2,209	)		(5,202	)		(4,379	)
Other income (expense):
Interest income		—			9			3			16			—			—			—			3
Interest expense		(5,912	)		(207	)		(6,089	)		(288	)		(352	)		(5,912	)		(636	)		(6,089	)
Foreign exchange gain (loss)		15			(2	)		6			8			(2	)		15			(12	)		6
Gain on write-off of accounts payable		61			—			90			—			—			61			—			90
Re-measurement of derivative liabilities		(1,687	)		2			(1,688	)		3			—			(1,687	)		—			(1,688	)
Other income														13			—			187			—
Other income (expense), net		(7,523	)		(198	)		(7,678	)		(261	)		(341	)		(7,523	)		(461	)		(7,678	)
Loss before income tax expense		(9,732	)		(1,619	)		(12,057	)		(3,444	)		(2,827	)		(9,732	)		(5,663	)		(12,057	)
(Benefit from) Provision for income taxes		26			15			32			(3	)
Provision for income taxes														5			26			10			32
Net loss	$	(9,758	)	$	(1,634	)	$	(12,089	)	$	(3,441	)	$	(2,832	)	$	(9,758	)	$	(5,673	)	$	(12,089	)

Basic and diluted net loss per common share		(0.51	)	$	(0.13	)		(0.63	)	$	(0.29	)		(0.08	)	$	(0.51	)		(0.16	)	$	(0.63	)
Weighted-average number of common shares used in basic and diluted net loss per common share		19,277,545			12,333,101			19,277,545			12,069,624			36,598,291			19,277,545			36,598,291			19,277,545

Three and six months ended June 30, ~~2019~~2020 compared to three and six months ended June 30, ~~2018~~2019

Revenue. The Company did not record any revenues or associated cost of revenue during the three and six months ended June 30, 2020 and 2019, ~~and 2018,~~ respectively.

Operating expenses

	Three Months Ended										Six Months Ended										Three Months Ended										Six Months Ended
	June 30,				Change						June 30,				Change						June 30,				Change						June 30,				Change
	2019		2018		$			%			2019		2018		$			%			2020		2019		$			%			2020		2019		$			%
	(dollars in thousands)										(dollars in thousands)										(in thousands)										(in thousands)
Research and development	$	810	$	254	$	556			218.9	%	$	1,620	$	627	$	993			158.4	%	$	858	$	810	$	48			5.9	%	$	2,031	$	1,620	$	411			25.4	%
Sales and marketing		6		312		(306	)		(98.1	)%		22		516		(494	)		(95.7	)%		—		6		(6	)		(100.0	)%		—		22		(22	)		(100.0	)%
General and administrative		1,393		855		538			62.9	%		2,737		2,040		697			34.2	%		1,628		1,393		235			16.9	%		3,171		2,737		434			15.9	%
Total operating expenses	$	2,209	$	1,421	$	788			55.5	%	$	4,379	$	3,183	$	1,196			37.6	%	$	2,486	$	2,209	$	277			12.5	%	$	5,202	$	4,379	$	823			18.8	%

Research and Development Expense. The increase in research and development expense for the three ~~and six~~months ended June 30, 2020 compared to the three months ended June 30, 2019 ~~compared to the three and six months ended June 30, 2018~~ was primarily due to an increase in ~~salary~~spending on internal and external resources as the Company initiated the STEP-1 trial in the United States, submitted the protocol for the I-Step trial (under joint venture with Apollo Sugar) in India to the regulatory agency and preparing to file for CE Mark designation under the Medical Device Directive standard revision.

The increase in research and development expense for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily due to an increase in headcount and employee-related ~~costs caused by increased headcount~~expenses and ~~increased consulting fees. The~~clinical trial-related expenses as the Company ~~has been accelerating its efforts to prepare for~~initiated the STEP-1 ~~clinical~~ trial ~~which is expected to begin~~ in ~~Q3 2019.~~the United States.

Sales and Marketing Expense. The decrease in sales and marketing expense for the three and six months ended June 30, ~~2019~~2020 compared to the three and six months ended June 30, ~~2018~~2019 was primarily due to ~~a decrease in overall sales and marketing activities and~~ a reclassification of existing overseas employee efforts from sales and marketing support to research and development.

General and Administrative Expense. The increase in general and administrative expense for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily due to increased headcount and employee-related expenses as well as corporate insurance expenses due to a higher directors’ and officers’ premium.

The increase in general and administrative expense for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 ~~compared to the three and six months ended June 30, 2018~~ was primarily ~~a result of market research costs including a health economics analysis~~due to an increase in headcount and ~~a research summary provided to potential investors,~~employee-related expenses, increased ~~professional fees including corporate~~insurance premiums, increased legal ~~and costs~~expenses related to ~~being a public company~~patents, financings and ~~increased facilities costs.~~general corporate matters.

~~We continue~~

The Company continues to look for ways to realize a more efficient cost structure in order to extend ~~our~~the Company’s cash runway. WeCost reductions may not be ~~able to achieve cost reductions~~achievable in all instances as ~~we look to prepare to initiate~~the Company executes clinical development in support of ~~eventual~~ commercial regulatory ~~approval. We expect~~

~~Table~~approvals. Additionally, on March 11, 2020, the World Health Organization declared the outbreak of ~~Contents~~

~~operating expenses~~a COVID-19 pandemic. As a result, economic uncertainties have arisen which, as of June 30, 2020, have negatively impacted GI Dynamics short term-operations, for example in delays in timing of regulatory audits and other key operational activities due to widespread sequestration and in facing enrollment pauses in our clinical trials due to the ~~third quarter~~clinic-level restriction of ~~2019~~elective procedures, for which EndoBarrier implantation qualifies. When operational activities are delayed, expenditures on certain items may decrease, such as travel. There is no certainty which reduced expenditures will result in higher than usual expenditures as activities resume and which will return to ~~approximate those~~the expected rate. If the restrictions are limited in duration, the Company anticipates an ability to overcome delays and return to original timing estimates, but there can be no guarantee the duration and operational impact will be limited to the degree required. Additionally, market-level impacts may affect the timing or the negotiation of terms in the ~~second quarter of 2019~~Company’s financing efforts. These and other financial impacts that could occur may appear as ~~we continue~~positive or negative impacts to ~~prepare for commencement of~~ the ~~STEP-1 clinical trial.~~Company’s future financial statements.

Three Months Ended

Six Months Ended

June 30,

Change

June 30,

Change

2019

2018

$

%

2019

2018

$

%

(dollars in thousands)

(dollars in thousands)

Other income (expense):

Interest income

$
—

$
9

$
(9
)

(100.0
)%

$
3

$
16

$
(13
)

(81.3
)%
Interest expense

(5,912
)

(207
)

(5,705
)

2,756.0
%

(6,089
)

(288
)

(5,801
)

2,014.2
%
Foreign exchange gain (loss)

15

(2
)

17

(850.0
)%

6

8

(2
)

(25.0
)%
Gain on write-off of accounts payable

61

—

61

(—
)%

90

—

90

(—
)%
Re-measurement of derivative liabilities

(1,687
)

2

(1,689
)

(84,450.0
)%

(1,688
)

3

(1,691
)

(56,366.7
)%
Total other income (expense), net

$
(7,523
)

$
(198
)

$
(7,325
)

3,699.5
%

$
(7,678
)

$
(261
)

$
(7,417
)

2,841.8
%

Other income (expense)

	Three Months Ended												Six Months Ended
	June 30,						Change						June 30,						Change
	2020			2019			$			%			2020			2019			$			%
	(in thousands)												(in thousands)
Other income (expense):
Interest income	$	—		$	—		$	—			(—	)%	$	—		$	3		$	(3	)		(100.0	)%
Interest expense		(352	)		(5,912	)		5,560			(94.0	)%		(636	)		(6,089	)		5,453			(89.6	)%
Foreign exchange gain (loss)		(2	)		15			(17	)		(113.3	)%		(12	)		6			(18	)		(300.0	)%
Gain on write-off of accounts payable		—			61			(61	)		100.0	%		—			90			(90	)		100.0	%
Re-measurement of derivative liabilities		—			(1,687	)		1,687			(100.0	)%		—			(1,688	)		1,688			(100.0	)%
Other income		13			—			—			100.0	%		187			—			187			100.0	%
Total other income (expense), net	$	(341	)	$	(7,523	)	$	7,169			(95.3	)%	$	(461	)	$	(7,678	)	$	7,217			(94.0	)%

Other income (expense). The change to other ~~income (expense),~~expense, net, for the three and six months ended June 30, ~~2019~~2020 compared to the three and six months ended June 30, ~~2018~~2019 is primarily due to the ~~change~~changes in ~~fair value~~gain on write off of accounts payable, increases in non-cash interest, re-measurement of derivative liabilities, reclass of derivative liabilities to equity and the ~~conversion~~elimination of the ~~2018, March 2019 and May 2019 Notes Payable to Crystal Amber Fund Limited, a related party, offset by a gain on the write-off~~right of ~~prior period accounts payable.~~product return reserves of $164 thousand, which is included in other income.

Liquidity and Capital Resources

~~The Company has incurred losses since our inception in March 2003 and as~~

As of June 30, ~~2019, we~~2020, the Company’s primary source of liquidity is its cash and restricted cash balances. GI Dynamics is currently focused primarily on its clinical trials, which will support future regulatory submissions and potential commercialization activities. Until the Company is successful in gaining regulatory approvals, it is unable to sell the Company’s product in any market at this time. Without revenues, GI Dynamics is reliant on funding obtained from investment in the Company to maintain business operations until the Company can generate positive cash flows from operations. The Company cannot predict the extent of future operating losses and accumulated deficit, and it may never generate sufficient revenues to achieve or sustain profitability.

GI Dynamics has incurred operating losses since inception and at June 30, 2020, had an accumulated deficit of approximately ~~$279~~$290 million and a working capital deficit of approximately $3.8 million. ~~We have financed our operations from a combination of sales of equity securities and issuances of convertible term notes. As of~~The Company expects to incur significant operating losses for the next several years. At June 30, ~~2019, we~~2020, the Company had approximately ~~$2.5 million of~~$760 thousand in cash and ~~cash equivalents.~~restricted cash.

~~In June 2017,~~

Currently, the Company ~~completed a Convertible Term Promissory Note (the “2017 Note”) secured financing with its largest stockholder,~~and Crystal Amber Fund Limited ~~(“Crystal Amber”),~~have executed a non-binding term sheet for ~~a gross amount~~the sale of ~~$5.0 million. The 2017 Note accrues interest at 5% per annum compounded annually.~~up to $10 million of shares of Series A Preferred Stock (the Proposed Offering) which is expected to close in August or September 2020. Additionally, Crystal Amber ~~is deemed a Related Party~~has purchased the June 2020 Convertible Note and the August 2020 Convertible Note (together the “2020 Notes”, individually described in detail in Note 8 of the ~~Company for ASX purposes due~~consolidated financial statements) which is expected to fund operations until the ~~size of its ownership position. The 2017 Note contains provisions for conversion during its term and is also subject to security arrangements in favor~~anticipated Series A Preferred Stock offering initial close date (the “Initial Close”). On Initial Close, Crystal Amber ~~(See Note 10 of~~will provide $5 million, less the ~~Consolidated Financial Statements for a more complete description of the terms and conditions of the financing).~~

The 2017 Note accrues interest at a rate equal to 5% per annum, compounded annually, other than during the continuance of an event of default, when the 2017 Note accrues interest at a rate of 8% per annum. The entire outstanding2020 Notes principal balance and ~~all unpaid accrued interest thereon was initially due on December~~any legal fees incurred by Crystal Amber to be paid by the Company in connection with the Proposed Offering. Crystal Amber may sell a portion of the remaining $5 million in the Proposed Offering to additional investors and will purchase any shares of the Proposed Offering that remain unsubscribed by additional investors at October 31, ~~2018 but was extended~~2020. The Company expects that the cash received in the Proposed Offering will be sufficient to fund the Company’s operations through the later of obtaining of CE mark approval or March 31, ~~2019 in December 2018 (in exchange for payment of $394 thousand,~~2021, after which additional financing will be required to continue the ~~total accrued interest~~Company’s operations. Further additional financing will be required to fund operations until the Company achieves sustainably positive cash flow. There can be no assurance that any potential financing opportunities will be available on acceptable terms, if at all. If the Company is unable to raise sufficient capital on the ~~2017 Note at December 31, 2018)~~Company’s required timelines and ~~further extended~~on acceptable terms to ~~May 1, 2019 in March 2019, July 1, 2019 in April 2019~~stockholders and ~~October 1, 2019 in June 2019.~~

~~The 2017 Note is secured by~~the Board of Directors, it could be forced to reduce or cease operations that may include activities essential to support regulatory applications to commercialize EndoBarrier, file for bankruptcy, or undertake a ~~first priority security interest in substantially all tangible and intangible assets~~combination of the Company, including intellectual property (the “Collateral”). In the event of an uncured default, Crystal Amber is authorized to sell, transfer, assign or otherwise deal in or with the Collateral or the proceeds thereof or any related goods securing the Collateral, as fully and effectually as if Crystal Amber were the absolute owner thereof.

In May 2018, the Company completed a Convertible Term Promissory Note (the “2018 Note”) and Warrant (the “2018 Warrant”) financing with its largest stockholder, Crystal Amber, for a gross amount of $1.75 million. The 2018 Note accrued interest at 10% per annum compounded annually and was converted into 134,852,549 CDIs (representing 2,697,050 common shares) on June 30, 2019. 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 of the financing).

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

~~Table of Contents~~foregoing.

~~The second placement (“Autumn 2018 Placement”) consisted of~~These factors raise substantial doubt about the Company’s ability to continue as a ~~total of 347,222,250 fully paid CDIs of~~going concern within one year after the ~~Company (representing 6,944,445 shares of common stock) at an issue price of A$0.020 per CDI. The investors in the Autumn 2018 Placement included certain existing investors. The issue of~~date that these CDIs occurred in two tranches. The first tranche closed on September 20, 2018 (US Eastern time), pursuant to which the Company issued 150,000,000 CDIs (representing 3,000,000 shares of common stock) resulting in gross proceeds of approximately $2.2 million and related issuance costs of $56 thousand. The closing of the second tranche resulted in gross proceeds of $2.8 million by the issue of 197,222,250 CDIs (representing 3,944,445 shares of common stock) following stockholder approval at the adjourned Special Meeting of Stockholders on October 29, 2018. There were three participants in the second tranche; Crystal Amber, a related party, purchased 168,194,450 CDIs. Existing investors in the United States and Australia also purchased 23,819,450 and 5,208,350 CDIs, respectively. All second tranche CDIs were allotted to investors in November 2018.consolidated financial statements are issued.

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 stockholder, Crystal Amber, for a gross amount of $1.0 million. The March 2019 Note accrued interest at 10% per annum compounded annually and was converted on June 30, 2019 into 81,070,003 CDIs (representing 1,621,400 common shares). The March 2019 Warrant will expire on June 30, 2024. 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 May 2019, the Company completed a Convertible Term Promissory Note (the “May 2019 Note”) and Warrant (the “May 2019 Warrant”) financing with its largest stockholder, Crystal Amber, for a gross amount of up to $3.0 million. The May 2019 Note accrued interest at 10% per annum, computed on the daily funded balance until completion of funding on June 28, 2019, when interest began to compound annually at 10% per annum. The May 2019 Note converted on June 30, 2019 into 237,687,411 CDIs (representing 4,753,747 common shares). The May 2019 Warrant will expire on June 30, 2024. 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).

During the six months ended June 30, ~~2019, our~~2020 the Company’s cash and restricted cash ~~equivalents~~ balance decreased by approximately $1.8 million primarily due to receipt of the relevant funding amount under the convertible notes issued to Crystal Amber and funded on January 13, 2020 and June 18, 2020 less cash payments related to, among other things, research and development and general and administrative expenses as ~~a result of funds utilized~~GI Dynamics continued to ~~support our operations offset by proceeds from financing activities.~~focus on clinical and regulatory strategies that exceeded its various financings.

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

	Six Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2020			2019
	(in thousands)						(in thousands)
Net cash (used in) provided by:
Operating activities	$	(5,287	)	$	(3,542	)	$	(7,308	)	$	(5,287	)
Investing activities		(5	)		—			—			(5	)
Financing activities		3,913			3,168			5,542			3,913
Net increase (decrease) in cash and cash equivalents	$	(1,379	)	$	(374	)
Net increase (decrease) in cash, cash equivalents and restricted cash							$	(1,766	)	$	(1,379	)

Cash Flows ~~From~~Used in Operating Activities

The primary uses of cash ~~used~~for operating activities for the six months ended June 30, 2020 were:

●

to fund the Company’s net loss of approximately $5.7 million;

●

a net negative adjustment to cash flow from changes in working capital of approximately $2.7 million resulting primarily from increases in prepaid expenses and accounts payable offset by decreases in accrued expenses and;

●

a net positive adjustment to cash flow from non-cash items of approximately $1 million, primarily from non-cash interest expense and stock-based compensation.

The primary uses of cash for operating activities for the six months ended June 30, 2019 were:

~~to fund our net loss of approximately $12.1 million and;~~

●

to fund the Company’s net loss of approximately $12.1 million and;

●

a net positive adjustment to cash flow of approximately $7.8 million due to non-cash interest expense and revaluation of derivative liabilities and;

●

a net negative adjustment to cash flow from changes in working capital of approximately $1.1 million resulting primarily from decreases in accounts payable and accrued expenses.

Cash Flows Used in Investing Activities

No cash ~~flow from changes in working capital of approximately $1.1 million resulting primarily from decreases in accounts payable and accrued expenses.~~

~~The primary uses of cash~~was used in ~~operating~~investing activities for the six months ended June 30, ~~2018 were:~~

~~to fund our net loss of approximately $3.4 million and;~~

~~a net negative adjustment to cash flow from changes in working capital of approximately $322 thousand resulting primarily from decreases in accounts payable and accrued expenses.~~

~~Cash Flows From Investing Activities~~

2020. Cash used in investing activities for the six months ended June 30, 2019 was approximately $5 ~~thousand. No cash was used in investing~~thousand related to capital expenditures.

Cash Flows Provided by Financing Activities

Cash provided by financing activities for the six months ended June 30, ~~2018.~~2020 totaled approximately $6 million and resulted from proceeds received from the August 2019 Note, the June 2020 Note and the Paycheck Protection Program loan.

~~Cash Flows From Financing Activities~~

Cash provided by financing activities for the six months ended June 30, 2019 totaled approximately $3.9 million and primarily resulted from proceeds received in March 2019 from the March 2019 Note and May and June 2019 from the May 2019 Note payable to a related party.

Cash provided by financing activities for the six months ended June 30, 2018 totaled approximately $3.2 million and primarily resulted from net proceeds received in May 2018 from the 2018 Note payable to a related party and net proceeds from our private placement of CDIs offset by related issuance costs.

~~Table of Contents~~

Funding Requirements

As of June 30, ~~2019,~~2020, the Company’s primary source of liquidity is its cash and restricted cash ~~equivalents~~ balances. GI Dynamics is currently focused primarily on gaining CE mark and executing its clinical trials, which will support future regulatory submissions and potential commercialization activities. Until the Company is successful in gaining CE mark and various regulatory approvals, it is unable to sell the Company’s product in any market at this time. Without revenues, GI Dynamics is reliant on funding obtained from investment in the Company to maintain business operations until the Company can generate positive cash flows from operations. The Company ~~continues~~cannot predict the extent of future operating losses and accumulated deficit, and it may never generate sufficient revenues to ~~evaluate which markets are appropriate to pursue regulatory approvals, continue pursuing reimbursement, market awareness~~achieve or sustain profitability.

GI Dynamics has incurred operating losses since inception and ~~general market development~~at June 30, 2020, had an accumulated deficit of approximately $290 million and ~~selling efforts.~~working capital of approximately $3.8 million. The Company ~~continues to restructure its business and costs, establish new priorities, and evaluate strategic options. As a result, if the Company remains in business, it~~ expects to incur significant operating losses for the next several years.

~~The Company has incurred operating losses since inception and at~~ At June 30, ~~2019~~2020, the Company had ~~an accumulated deficit of~~ approximately ~~$279 million, a working capital deficit of approximately $3.8 million, cash used~~$760 thousand in ~~operating activities of approximately $5.3 million and~~ cash and cash equivalents of approximately $2.5 million. Cash provided by these activities will be used predominantly to prepare for and conduct 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 September 2019. 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. Furthermore, if the Company raises insufficient funds and is required to make payment to Crystal Amber under the 2017 Note on its maturity date of October 1, 2019 the Company will be required either to renegotiate the maturity date of the loan or to potentially cease operations. The Company expects to discuss further extension of the maturity date of the 2017 Note with Crystal Amber, but there can be no assurance that any extension will occur.restricted cash.

Our forecast of the period of time through which our financial resources will be adequate to support our operations are forward-looking statements and involve risks and uncertainties, and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in the “Risk Factors” in Item 1A. of our Annual Report on Form 10-K, which is incorporated by reference herein. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

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

●

the timing and conditions related to COVID-19 restrictions on clinical development and corporate activities;

●

the timing, cost, and resulting success of research and development efforts;

●

the rate of progress and cost of commercialization activities after regulatory approval;

●

the expenses the Company may incur in marketing and selling EndoBarrier subject to future regulatory approvals;

●

the timing and decisions of payer organizations related to reimbursement;

●

the revenue generated by sales of EndoBarrier;

~~the rate of enrollment of patients in our clinical trial and the completion of our trial in a timely fashion;~~

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

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

The disclosure of ~~our~~ contractual obligations and commitments is set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations and Commitments” in ~~our~~the Company Annual Report on Form ~~10-K.~~10-K for the year ended December 31, 2019.

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

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

The Company conducts business in foreign countries and ~~our~~ cash flows are thereby exposed to market risk from changes in currency exchange and interest rates.

The Company’s unrestricted cash ~~and cash equivalents~~ of approximately ~~$2.5 million~~$730 thousand at June 30, ~~2019, consisted of cash and money market funds, all of~~2020, which will be used for working capital purposes. ~~We do~~The Company does not enter into investments for trading or speculative purposes. The goals of ~~our~~the Company’s investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. WeThe Company also ~~seek~~seeks to maximize income from ~~our~~ investments without assuming significant risk. ~~Our~~The Company’s 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~~the Company’s cash and restricted cash, ~~equivalents, we do~~GI Dynamics does not believe that ~~we have~~it has 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.~~

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

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

All proceeds from our 2011, 2013, 2014, and 2016 offerings, along with a portion of our 2017 and 2018 offerings, were denominated in Australian dollars and as of June 30, 2019, we held the equivalent of approximately US $5 thousand denominated in Australian dollars and approximately US $1 thousand denominated in euros. Accordingly, we have had and will continue to have exposure to foreign currency exchange rate fluctuations. A change of 10% or more in foreign currency exchange rates of the Australian dollar or the euro would not have a material impact on our financial position and results of operations.

The Company does not believe that inflation and ~~changing prices~~price fluctuations over the three and six months ended June 30, ~~2019~~2020 and ~~2018~~2019 had a significant impact on ~~our~~the results of operations.

In accordance with Exchange Act Rules 13a-15 and 15d-15(f), GI Dynamics carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”), of the ~~Securities Exchange Act~~effectiveness of ~~1934, or~~ the ~~Exchange Act, our management, including our principal executive officer~~Company’s disclosure controls and ~~our principal financial and accounting officer, conducted an evaluation~~procedures as of the end of the period covered by this ~~Quarterly Report~~report. Based on ~~Form 10-Q of~~that evaluation, the effectiveness of the design and operation of our disclosure controls and procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and such information required to be disclosed by us in the reports we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate to allow timely decisions regarding required disclosure. Our principal executive officer and principal financial and accounting officer haveCompany’s Certifying Officers concluded that ~~based on and as of~~ the ~~time of such evaluation, our~~Company’s disclosure controls and procedures were effective atas of June 30, 2020 in enabling GI Dynamics to record, process, summarize and report information required to be included in its periodic SEC filings within the ~~reasonable assurance level.~~

As required by Rule 13a-15(d) of the Exchange Act, ~~our management, including our principal executive officer and our principal financial and accounting officer,~~the Certifying Officers conducted an evaluation of the internal control over financial reporting ~~and concluded that there have not been~~to determine whether any changes occurred during the second fiscal quarter ~~ended June 30, 2019~~of 2020 that have materially affected, or are reasonably likely to materially affect, ~~our~~the Company’s internal control over financial reporting. The evaluation performed by the Certifying Officers resulted in a conclusion that no such changes occurred.

Company management, including ~~our~~the principal executive officer and principal financial and accounting officer, does not expect that ~~our~~the Company’s disclosure controls and procedures or ~~our~~ internal control over financial reporting will prevent all error and all fraud. AInternal 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 canover financial reporting cannot 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 occurachieving financial reporting objectives because of ~~simple error~~its inherent limitations. It is a process that involves human diligence and compliance and is subject to lapses in judgment or ~~mistake. Additionally, controls~~breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. While process safeguards can reduce risks, because of inherent limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the ~~individual acts~~risk that controls may become inadequate because of ~~some persons, by collusion~~changes in conditions, or that the degree of ~~two~~compliance with the policies or ~~more people, or by management override of controls.~~

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

In addition to the other information contained elsewhere in this Quarterly Report on Form 10-Q and as set forth below, you should carefully consider the factors discussed in “Item 1A. Risk Factors” in ~~our~~the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 27, 2020, which could materially affect ~~our~~the Company business, financial condition or future results. The risks described in ~~our~~the Company’s Annual Report on Form 10-K are not the only risks ~~we face.~~faced by the Company. Additional risks that we do not presently know or that we currently believe are immaterial could also materially and adversely affect any of ~~our~~the Company business, financial condition or future results.

The Company has delisted its CHESS Depositary Interests (“CDIs”) from the Australian Securities Exchange (the “ASX”), which may reduce the liquidity and value of the Company’s securities.

In view of the significant costs associated with maintaining an ASX listing, the lack of liquidity in the CDIs, amplified CDI volatility, no current nexus with Australia and the fact that potential financing opportunities were limited by such listing, the Company delisted, with the consent of ASX and its stockholders, CDIs from the ASX on July 23, 2020 (U.S. Eastern Time). The absence of a listing on the ASX may reduce the ability of Australian residents to own shares of the Company’s common stock. In addition, there is no established public trading ~~price~~market for the Company’s common stock and the Company does not currently expect a market to develop. At this time, the Company does not intend to apply for listing of ~~our CDIs~~the shares of common stock on any securities exchange. Without an active market, stockholders may ~~decline due~~be unable to ~~these risks.~~readily sell the shares of common stock.

Item 2. Unregistered Sales of Equity ~~Securities:~~Securities and Use of Proceeds.

Other than as previously disclosed on ~~our~~the Company’s Current Reports on Form 8-K filed with the SEC, wethe Company did not issue any unregistered equity securities during the three months ended June 30, ~~2019.~~2020.

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

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.

Delaware		84-1621425

~~Delaware~~		~~84-1621425~~
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

~~PO Box 51915~~ 320 Congress Street, 3^rd Floor
Boston, Massachusetts		~~02205~~ 02210
(Address of Principal Executive Offices)		(Zip Code)

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

Exhibit No:		Description

10.1*		~~Third~~Seventh Amendment to Note Purchase Agreement, dated June 15, 2017, between GI Dynamics, Inc. and Crystal Amber Fund Limited, as purchaser, dated ~~April 30, 2019.~~May 1, 2020.

10.2*		~~Third~~Seventh Amendment to Senior Secured Convertible Promissory Note, dated June 15, 2017, by and between GI Dynamics, Inc. and Crystal Amber Fund Limited, dated May 1, 2020.

10.3*		Eighth Amendment to Note Purchase Agreement, dated June 15, 2017, between GI Dynamics, Inc. and Crystal Amber Fund Limited, as purchaser, dated ~~April 30, 2019.~~May 15, 2020.

10.3* 10.4*		Eighth Amendment to Senior Secured Convertible Promissory Note, ~~and Warrant Purchase Agreement,~~ dated ~~May 8, 2019,~~June 15, 2017, by and between GI Dynamics, Inc. and Crystal Amber Fund Limited, ~~as purchaser.~~dated May 15, 2020.

10.4* 10.5*		~~Senior Unsecured Convertible Promissory Note, dated May 8, 2019, between GI Dynamics, Inc. and Crystal Amber Fund Limited.~~

10.5*		~~Warrant to Purchase 78,984,823 CHESS Depositary Interests of GI Dynamics, Inc., dated June 30, 2019, between GI Dynamics, Inc. and Crystal Amber Fund Limited.~~

10.6*		~~Warrant to Purchase up to 236,220,472 CHESS Depositary Interests of GI Dynamics, Inc., dated June 30, 2019, between GI Dynamics, Inc. and Crystal Amber Fund Limited.~~

10.7*		~~Fourth~~Ninth Amendment to Note Purchase Agreement, dated June 15, 2017, between GI Dynamics, Inc. and Crystal Amber Fund Limited, as purchaser, dated June ~~30, 2019.~~15, 2020.

10.8* 10.6*		~~Fourth~~Ninth Amendment to Senior Secured Convertible Promissory Note, dated June 15, 2017, by and between GI Dynamics, Inc. and Crystal Amber Fund Limited, dated June ~~30, 2019.~~15, 2020.

31.1* 10.7		Convertible Note Purchase Agreement, dated June 18, 2020, between the Company and Crystal Amber Fund Limited, incorporated by reference to Exhibit 10.1 of GI Dynamics, Inc.’s Current Report on Form 8-K filed with the SEC on June 19, 2020.

10.8		Unsecured Convertible Promissory Note, dated June 18, 2020, between GI Dynamics, Inc. and Crystal Amber Fund Limited, incorporated by reference to Exhibit 10.2 of GI Dynamics, Inc.’s Current Report on Form 8-K filed with the SEC on June 19, 2020.

10.9*		Tenth Amendment to Note Purchase Agreement, dated June 15, 2017, between GI Dynamics, Inc. and Crystal Amber Fund Limited, as purchaser, dated June 29, 2020.

10.10*		Tenth Amendment to Senior Secured Convertible Promissory Note, dated June 15, 2017, by and between GI Dynamics, Inc. and Crystal Amber Fund Limited, dated June 29, 2020.

31.1*		Certification of principal executive officer pursuant to Rules 13a-14 or 15d-14 of the Exchange Act.

31.2*		Certification of principal financial officer pursuant to Rules 13a-14 or 15d-14 of the Exchange Act.

32.1‡		Certification of principal executive officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.

32.2‡		Certification of principal financial officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Exchange Act and 18 U.S.C. Section 1350.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Database

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document


			GI Dynamics, Inc.

Date: August ~~14, 2019~~ 7, 2020	By:		~~By:~~	/s/ SCOTT W. SCHORER
				Scott W. Schorer
				President and Chief Executive Officer
				(principal executive officer)

Date: August ~~14, 2019~~ 7, 2020	By:		~~By:~~	/s/ CHARLES R. CARTER
				Charles R. Carter
		Chief Financial Officer, Secretary
				(principal financial and accounting officer)

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

	●	the severity, magnitude and duration of the COVID-19 pandemic, including impacts of the pandemic and of businesses’ and governments’ responses to the pandemic on our clinical trials and personnel;

	●	our inability to predict the extent to which the COVID-19 pandemic and related impacts will continue to adversely impact our business operations, financial performance, results of operations, financial position and the achievement of our strategic objectives;

	●	ability to commercialize products;

	Common Stock				Common Stock subscribed but unissued
THREE MONTHS ENDED JUNE 2019	Shares		Par Value		Shares		Carrying Value		Additional Paid-in Capital		Accumulated Deficit			Total Stockholders' Deficit
Balance at April 1, 2019		19,277,545	$	193		—	$	—	$	263,580	$	(269,490	)	$	(5,717	)
Reclassification of derivative liabilities to additional paid-in capital upon stockholder approval		—		—		—		—		5,784		—			5,784
Conversion of notes payable to related party		—		—		9,072,197		5,991		—		—			5,991
2017 Note modification		—		—		—		—		55		—			55
Stock-based compensation expense		—		—		—		—		57		—			57
Net loss		—		—		—		—		—		(9,758	)		(9,758	)
Balance at June 30, 2019		19,277,545	$	193		9,072,197	$	5,991	$	269,476	$	(279,248	)	$	(3,588	)

	Common Stock				Common Stock subscribed but unissued
THREE MONTHS ENDED JUNE 2018	Shares		Par Value		Shares		Carrying Value		Additional Paid-in Capital		Accumulated Deficit			Total Stockholders' Deficit
Balance at April 1, 2018		12,333,101	$	124		—	$	—	$	256,814	$	(260,929	)	$	(3,991	)
Beneficial conversion feature discount associated with 2018 Note		—		—		—		—		1,007		—			1,007
Relative fair value of warrant issued with 2018 Note		—		—		—		—		743		—			743
Stock-based compensation expense		—		—		—		—		35		—			35
Net loss		—		—		—		—		—		(1,634	)		(1,634	)
Balance at June 30, 2018		12,333,101	$	124		—	$	—	$	258,599	$	(262,562	)	$	(3,839	)

	Common Stock				Common Stock subscribed but unissued
SIX MONTHS ENDED JUNE 2019	Shares		Par Value		Shares		Carrying Value		Additional Paid-in Capital		Accumulated Deficit			Total Stockholders' Deficit
Balance at January 1, 2019		19,277,545	$	193		—	$	—	$	263,521	$	(267,159	)	$	(3,445	)
Reclassification of derivative liabilities to additional paid-in capital upon stockholder approval		—		—		—		—		5,784		—			5,784
Conversion of notes payable to related party		—		—		9,072,197		5,991		—		—			5,991
2017 Note modification		—		—		—		—		55		—			55
Stock-based compensation expense		—		—		—		—		116		—			116
Net loss		—		—		—		—		—		(12,089	)		(12,089	)
Balance at June 30, 2019		19,277,545	$	193		9,072,197	$	5,991	$	269,476	$	(279,248	)	$	(3,588	)

	Common Stock				Common Stock subscribed but unissued
SIX MONTHS ENDED JUNE 2018	Shares		Par Value		Shares		Carrying Value		Additional Paid-in Capital		Accumulated Deficit			Total Stockholders' Deficit
Balance at January 1, 2018		11,157,489	$	112		—	$	—	$	255,294	$	(259,121	)	$	(3,715	)
Issuance of shares upon private placement, net of issuance costs		1,175,612		12		—		—		1,491		—			1,503
Beneficial conversion feature discount associated with 2018 Note		—		—		—		—		1,007		—			1,007
Relative fair value of warrant issued with 2018 Note		—		—		—		—		743		—			743
Stock-based compensation expense		—		—		—		—		64		—			64
Net loss		—		—		—		—		—		(3,441	)		(3,441	)
Balance at June 30, 2018		12,333,101	$	124		—	$	—	$	258,599	$	(262,562	)	$	(3,839	)

			Fair Value Measurements at
			Reporting Date Using
			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	June 30, 2019		(Level 1)		(Level 2)		(Level 3)
Assets
Money market funds (included in cash and cash equivalents)	$	4	$	4	$	—	$	—
Total assets	$	4	$	4	$	—	$	—
Liabilities
Derivative liability	$	14	$	—	$	—	$	14
Total liabilities	$	14	$	—	$	—	$	14

Balance at December 31, 2018	$	51
Increase in fair value of warrants upon re-measurement		1,715
Amortization of conversion rights		(40	)
Fair value of warrants issued with Notes to Related Party		4,072
Reclassification of warrants to additional paid-in caputal		(5,784	)
Balance at June 30, 2019	$	14

	As of June 30, 2019
	Operating Leases
	(in thousands)
Right-of-Use Assets	$	497
Liabilities
Short-term operating lease liabilities		179
Long-term operating lease liabilities		318
Total Liabilities	$	497