Nature of Business

12 Months Ended

Dec. 31, 2020

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 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. People with type 2 diabetes represent 90-95% of the worldwide diabetes population; only 5-10% of this population is diagnosed with type 1 diabetes (a form of diabetes mellitus wherein little to no insulin is produced).

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

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

EndoBarrier^® is intended for the treatment of type 2 diabetes and 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 efficacy gap.

The GI Dynamics vision is to make EndoBarrier the essential nonpharmacological and non-anatomy-altering treatment for patients with type 2 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 its products and systems, operating the 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.

COVID-19 Pandemic and Impacts to Business Operations

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. In January 2020, this coronavirus spread to other parts of the world, including the United States and Europe, and efforts to contain the spread of this coronavirus intensified. In March 2020, the World Health Organization declared the Coronavirus (“SARS-CoV-2”) outbreak a “pandemic.” The Company operations experienced significant restrictions and delays in 2020, including the following operational impacts:

	●	The pause of enrollment of the Step-1 trial due to categorization of the EndoBarrier implantation procedure as an elective procedure. In the face of the epidemic and as a measure to reduce the spread of SARS-CoV-2, many states and/or clinics ceased all elective procedures. All of the Step-1 clinical sites ceased enrollment for a period in 2020 and as of March 11, 2021, all sites were able to enroll, pending procedural backlog clearance in individual clinics.

	●	The private and public regulatory agencies required to approve the initiation of clinical trials, review and audit quality systems, and review applications for regulatory approvals all had to adapt to COVID-19 restricted work protocols that may have impacted productivity, priorities and schedules. As such, many regulatory applications the Company submitted were delayed in submission and follow-up response from the agencies were dramatically delayed. In one instance, the Company was able to incur substantial cost in enabling a timely in-person audit under COVID-19 safety precautions. In other instances, the Company cannot accelerate the timing of agency responses.

	●	The economic impact of the pandemic and resulting restrictions may have affected investor perception of available funds for investment and risk tolerance.

●

Business travel was largely restricted or eliminated in 2020, potentially limiting the effectiveness of fundraising and other important business meetings.

As of March 2021, various vaccines are being administered at differential rates in global communities and while the spread of SARS-CoV-2 is being impacted positively, a state of global economic and public health safety uncertainty remains as SARS-CoV-2 variants have emerged. Currently, the existing vaccines provide protection against the known variants, but the emergence of a variant for which the current vaccines are not effective may occur. If such a variant does emerge, the same effects experienced in 2020 may be repeated as restrictions are again required to minimize the impact of the re-emergent pandemic.

Going Concern Evaluation

As of December 31, 2020, the Company’s primary source of liquidity is its cash and restricted cash balances. GI Dynamics is currently focused on obtaining an EndoBarrier CE mark and enrolling the Company’s 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. 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.

The Company has incurred operating losses since inception and at December 31, 2020 had an accumulated deficit of approximately $296 million. The Company expects to incur significant operating losses for the next several years. At December 31, 2020, the Company had approximately $1.2 million in cash and restricted cash.

The Company will need to arrange additional financing before August 1, 2021 in order to continue to pursue its current business objectives as planned and to continue to fund its operations. The Company is looking to raise additional funds through any combination of additional equity and debt financings or from other sources, however, the Company has no guaranteed source of capital that will sustain operations past August 1, 2021. There can be no assurance that any such potential financing opportunities will be available on acceptable terms, if at all. If the Company is unable to raise sufficient capital on the Company’s required timelines and on acceptable terms to existing stockholders and the Board of Directors, it could be forced to cease operations, including activities essential to support regulatory applications to commercialize EndoBarrier. If access to capital is not achieved in the near term, it will materially harm the Company’s business, financial condition and results of operations to the extent that the Company may be required to cease operations altogether, file for bankruptcy, or undertake any combination of the 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.

In addition, if the Company does not meet its payment obligations to third parties as they become due, the Company may be subject to litigation claims and its credit worthiness would be adversely affected. Even if the Company is successful in defending these claims, litigation could result in substantial costs and would be a distraction to management and may have other unfavorable results that could further adversely impact the Company’s financial condition.

As a result of the factors described above, the Company’s Consolidated Financial Statements include a going-concern disclosure. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for further information regarding the Company’s funding requirements.

The accompanying Consolidated Financial Statements have been prepared assuming 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 Consolidated Financial Statements for the year ended December 31, 2020 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 these Consolidated Financial Statements are issued.

GI DYNAMICS, INC. 10-K