| ● | Pharmaceutical therapy. • Behavioral modification. Behavioral modification, which includes diet and exercise, is an important component in the treatment of obesity; however, most obese patients find it difficult to achieve and maintain significant weight loss with a regimen of diet and exercise alone. • Pharmaceutical therapy. Pharmaceutical therapies often represent a first option in the treatment of obese patients but carry significant safety risks and may present troublesome side effects and compliance issues.
• Bariatric surgery. In more severe cases of obesity, patients may pursue more aggressive surgical treatment options such as gastric balloon, gastric banding, sleeve gastrectomy and gastric bypass. These procedures promote weight loss by surgically restricting the stomach’s capacity and outlet size. While largely effective, these procedures generally result in major lifestyle changes including dietary restrictions and food intolerances and they may present substantial side effects and carry short- and long-term safety and side effect risks that have limited their adoption.
Market Opportunity
Given the limitations of behavioral modification, pharmaceutical therapy and bariatric surgical approaches, we believe there is a substantial need for a patient-friendly, safer, effective and durable solution that:
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| | preserves normal anatomy;
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| | is “non-punitive” in that it supports continued ingestion and digestion of foods and micronutrients such as vitamins and minerals found in a typical, healthy diet while allowing the user to modify his or her eating behavior appropriately without inducing punitive physical restrictions that physically force a limitation of food intake;
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| | enables non-invasive adjustability while reducing the need for frequent clinic visits;
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| | minimizes undesirable side-effects;
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| | minimizes the risks of re-operations, malnutrition and mortality; and
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| | reduces the natural hunger drive of patients.
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Obesity is a disease that has been increasing at an alarming rate with significant medical repercussions and associated economic costs. Since 1980, the worldwide obesity rate has more than doubled, with about 13% of the world’s adult population now being obese. The World Health Organization (WHO) currently estimates that as many as 600 million people worldwide are estimated to be obese and more than 1.9 billion adults are estimated to be overweight. Being overweight or obese is also the fifth leading risk for global deaths, with approximately 3.4 million adults dying each year as a result.
We believe that this epidemic will continue to grow worldwide given dietary trends in developed nations that favor highly processed sugars, larger meals and fattier foods, as well as increasingly sedentary lifestyles. Despite the growing obesity rate, increasing public interest in the obesity epidemic and significant medical repercussions and economic costs associated with obesity, there continues to be a significant unmet need for effective treatments.
Our Technology
vBloc Therapy is designed to block the gastrointestinal effects of the vagus nerve using high-frequency, low-energy electrical impulses to intermittently interrupt naturally occurring neural impulses on the vagus nerve between the brain and the digestive system. Our therapy controls hunger sensations between meals, limits the expansion of the stomach and reduces the frequency and intensity of stomach contractions, leading to earlier fullness. The resulting physiologic effects of vBloc Therapy produce a feeling of early and prolonged fullness following smaller meal portions. By intermittently blocking the vagus nerve and allowing it to return to full function between therapeutic episodes, our therapy limits the body’s natural tendency to circumvent the therapy, which can result in long-term weight loss.
We have designed our vBloc System to address a significant market opportunity that we believe exists for a patient-friendly, safe, effective, less-invasive and durable therapy that is intended to address the underlying causes of hunger and obesity. Our vBloc System offers each of the following benefits, which we believe could lead to the adoption of vBloc Therapy as the surgical therapy of choice for obesity and its comorbidities:
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● | | Bariatric Surgery and Endoscopic Procedures. Preserves Normal Anatomy. The vBloc System is designed to deliver therapy that blocksIn more severe cases of obesity, patients may pursue more aggressive surgical treatment options such as sleeve gastrectomy and gastric bypass. These procedures promote weight loss by surgically restricting the neural signals that influence a patient’s hungerstomach’s capacity and sense of fullness without altering digestive system anatomy. Accordingly, patients should experience feweroutlet size. While largely effective, these procedures generally result in major lifestyle changes, including dietary restrictions and less severefood intolerances, and they may present substantial side effects compared to treatmentsand carry short- and long-term safety and side effect risks that incorporate anatomical alterations.have limited their adoption. |
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| | Allows Continued Ingestion and Digestion of Foods Found in a Typical, Healthy Diet. Because our therapy leaves the digestive anatomy unaltered, patients are able to maintain a more consistent nutritional balance compared to existing surgical approaches, thus allowing them to effect positive changes in their eating behavior in a non-forced and potentially more consistent way.
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| | May be Implanted on an Outpatient Basis and Adjusted Non-Invasively. The vBloc System is designed to be laparoscopically implanted within a 60-90 minute procedure, allowing patients to leave the hospital or clinic on the same day. The implantable system is designed to be turned off and left in place for patients who reach their target weight. When desired, the follow-up physician can simply and non-invasively turn the therapy back on. Alternatively, the implantable system can be removed in a laparoscopic procedure.
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| | Offers Favorable Safety Profile. We have designed our ReCharge and EMPOWER clinical trials to demonstrate the safety of the vBloc System. In our clinical trials to date, including the ReCharge and EMPOWER trials, we have not observed any mortality related to our device or any unanticipated adverse device effects. We have also not observed any long-term problematic clinical side effects in any patients, including in those patients who have been using vBloc Therapy for more than one year.
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| | Targets Multiple Factors that Contribute to Hunger and Obesity. We designed vBloc Therapy to target the digestive, metabolic and information transmission functions of the vagus nerve and to affect the perception of hunger and fullness, which together contribute to obesity and its metabolic consequences.
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vBloc Therapy, delivered via our vBloc System, is intended to offer patients an effective, safe, outpatient solution that minimizes complications. It enables patients to lose weight and maintain long-term weight loss while enjoying a normal, healthy diet. We also believe that the vBloc System will appeal to physicians based on the inherent physiological approach of vBloc Therapy and its favorable safety profile.
Our Commercialization Strategy
Our goal is to establish vBloc Therapy, delivered via our vBloc System, as the leading obesity management solution. The key business strategies by which we intend to achieve these objectives include:
Commercialize Our Products Using a Geography Focused Direct-to-Patient Marketing Effort Within the United States. Since we received FDA approval on January 14, 2015 for vBloc Therapy, delivered via the vBloc System, we have begun a controlled commercial launch at select bariatric centers of excellence in the United States. We had our first commercial sales in 2015 and sold 62 units in 2016. During 2015, we started the process of building a sales force and a controlled expansion of our operations and hired three new executives in January 2016 to oversee this expansion. The direct sales force is supported by field technical managers who provide training, technical and other support services to our customers. Throughout 2015 and 2016 our sales force called directly on key opinion leaders and bariatric surgeons at commercially-driven bariatric centers of excellence that met our certification criteria. Additionally, in 2016, through a distribution agreement with Academy Medical, VA medical facilities now offer the vBloc System as a treatment option to veteran healthcare benefits. We intend to continue to build on these efforts in 2017 through self-pay patient and veteran focused direct-to-patient marketing and key opinion leader and center specific partnering.
Account management and patient registration processes used during the clinical trial are being transitioned to a commercial registration structure. Centers responsible for implanting our product will be expanded and trained to perform patient selection, implant the vBloc System and manage appropriate follow-up procedures.
Our sales representatives are supported by field clinical experts who are responsible for training, technical support, and other support services at various implant centers. Our sales representatives implement consumer marketing programs and provide surgical centers and implanting surgeons with educational patient materials.
We market directly to patients but sell our product to select surgical centers throughout the United States that have patients that would like to use the vBloc System to treat obesity and its comorbidities. The surgical centers then sell our product to the patients and implant and administer vBloc Therapy. In 2015 and 2016, almost all the patients that purchased the vBloc System paid for the therapy themselves and did not receive reimbursement from an insurance provider, and we expect that most of our sales will come from self-pay patients and veterans in 2017. Additionally, through our distribution agreement with Academy Medical, VA medical facilities now offer the the vBloc System as a treatment option for veterans at little to no cost to veterans in accordance with their veteran healthcare benefits.
We are working to obtain coverage for our product from the U.S. Centers for Medicare and Medicaid Services (CMS), Medicare Administrative Contractors (MACs), major insurance carriers, local coverage entities and self-insured plans, including Integrated Delivery Networks (IDNs). We received coverage from one significant IDN in the northeast, Winthrop University Hospital, in 2016 and are in active discussions with other IDNs throughout the country.
Identify Appropriate Coding, Obtain Coverage and Payment for the vBloc System. While payers are not our direct customers, their coverage and reimbursement policies influence patient and physician selection of obesity treatment. We are employing a focused campaign to obtain payer support for vBloc Therapy. We are seeking specific and appropriate coding, coverage and payment for our vBloc System from private insurers and CMS. We plan to establish a market price for the vBloc System in the United States that is competitive with other available weight loss surgical procedures and comparable to other active implantable devices such as implantable cardioverter defibrillators, neurostimulation devices for chronic pain and depression, and cochlear implant systems.
CMS issued a national coverage determination for several specific types of bariatric surgery in 2006, which we view as positive potential precedent and guidance factors that CMS might use in deciding to cover our therapy. Although Medicare policies are often emulated or adopted by other third-party payers, other governmental and private insurance coverage currently varies by carrier and geographic location. We are actively working with major insurance carriers, local coverage entities and self-insured plans, as well as CMS, on obtaining coverage for procedures using our product. Initial coverage for vBloc will likely occur in self-contained healthcare systems that operate as IDNs, as these systems are able to evaluate risk-benefit ratios in a closed environment. For example, in the first quarter of 2016, we announced that the Winthrop Hospital System in New York, a significant IDN in the northeast, would cover our therapy for their employees. Other similar arrangements are in active discussion.
Drive the Adoption and Endorsement of vBloc Therapy Through Obesity Therapy Experts and Patient Ambassadors. Our Clinical Development strategy is to collaborate closely with regulatory bodies, obesity therapy experts and others involved in the obesity management process, patients and their advocates and scientific experts. We have established credible and open relationships with obesity therapy experts and have identified vBloc Therapy patient ambassadors and we believe these individuals will be important in promoting patient awareness and gaining widespread adoption of the vBloc System.
Expand and Protect Our Intellectual Property Position. We believe that our issued patents and our patent applications encompass a broad platform of neuromodulation therapies, including vagal blocking and combination therapy focused on obesity, diabetes, hypertension and other gastrointestinal disorders. We intend to continue to pursue further intellectual property protection through U.S. and foreign patent applications.
Leverage our vBloc Technology for Other Disease States. We intend to continue to conduct research and development for other potential applications for our vBloc Therapy and believe we have a broad technology platform that will support the development of additional clinical applications and therapies for other metabolic and gastrointestinal disorders in addition to obesity.
Concentrate Our Resources on the U.S. Market. We intend to devote our near-term efforts toward mounting a successful system launch in the United States. We intend to explore select international markets to commercialize the vBloc System as our resources permit, using direct, dealer and distributor sales models as the targeted market best dictates. Specifically, we are currently evaluating Canada as a market due to its relatively low barrier to entry and an established cash-pay bariatric patient market.
The vBloc System, Implantation Procedure and Usage
The vBloc System. Our vBloc System delivers vBloc Therapy via two small electrodes that are laparoscopically implanted and placed in contact with the trunks of the vagus nerve just above the junction between the esophagus and the stomach, near the diaphragm. The vBloc System (shown below) is powered by an internal rechargeable battery.
The major components of the vBloc System include:
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| | Neuroregulator. The neuroregulator, a pacemaker-like device, is an implanted device that controls the delivery of vBloc Therapy to the vagus nerve. It is surgically implanted just below, and parallel to, the skin, typically on the side of the body over the ribs.
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| | Lead System. Proprietary leads are powered by the neuroregulator and deliver electrical pulses to the vagus nerve via the electrodes. The leads and electrodes are similar to those used in traditional cardiac rhythm management products.
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| | Mobile Charger. The mobile charger is an electronic device worn by the patient externally while recharging the device. It connects to the transmit coil and provides information on the battery status of the neuroregulator and the mobile charger.
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| | Transmit Coil. The transmit coil is positioned for short periods of time on top of the skin over the implanted neuroregulator to deliver radiofrequency battery charging and therapy programming information across the skin into the device.
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| | Clinician Programmer. The clinician programmer connects to the mobile charger to enable clinicians to customize therapy settings as necessary and retrieve reports stored in system components. The reports include patient use and system performance information used to manage therapy. The clinician programmer incorporates our proprietary software and is operated with a commercially available laptop computer.
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Implantation Procedure. The vBloc System is implanted by a laproscopically trained surgeon using a procedure that is typically performed within 60-90 minutes. During the procedure, the surgeon laparoscopically implants the electrodes in contact with the vagal nerve trunks and then connects the lead wires to the neuroregulator, which is subcutaneously implanted. The implantation procedure and usage of the vBloc System carry some risks, such as the risks generally associated with laparoscopic procedures as well as the possibility of device malfunction. Adverse events related to the therapy, device or procedure may include, but are not limited to: transient pain at the implant site, heartburn, constipation, nausea, depression, diarrhea, infection, organ or nerve damage, surgical explant or revision, device movement, device malfunction and allergic reaction to the implant.
Usage of the vBloc System. The physician activates the vBloc System after implantation. vBloc Therapy is then delivered intermittently through the neuroregulator each day as scheduled (recommended during the patient’s waking hours when food is consumed) through the neuroregulator. The scheduled delivery of the intermittent pulses blocking the vagus nerve is customized for each patient’s weight loss and overall treatment objectives.
The physician is able to download reports to monitor patient use and system performance information. This information is particularly useful to physicians to ensure that patients are properly using the system. Although usage of our vBloc System generally proceeds without complications, as part of the therapy or intentional weight loss, patients in our clinical trials have observed side-effects such as transient pain at the implant site, heartburn, bloating, dysphagia, eructation, cramps, diarrhea, nausea, constipation, and excessive feelings of fullness, especially after meals. In addition, patient noncompliance with properly charging the vBloc System may render vBloc Therapy less effective in achieving long-term weight loss.
Our Clinical Experience
We have conducted a series of clinical trials to date, which have shown that vBloc Therapy offers physicians a programmable method to selectively and reversibly block the vagus nerve resulting in clinically and statistically significant EWL.
We have not observed any mortality related to our device or any unanticipated adverse device effects in any of our completed or ongoing studies. Reported events include those associated with laparoscopic surgery or any implantable electronic device. The effects of vBloc Therapy include changes in appetite, and, in some patients, effects that may be expected with decreased intra-abdominal vagus nerve activity, such as temporary abdominal discomfort and short episodes of belching, bloating, cramping or nausea.
Findings from our clinical trials have resulted in publication in numerous peer-reviewed journals including The Journal of the American Medical Association, Journal of Obesity, Obesity Surgery, Surgery for Obesity and Related Diseases, Journal of Diabetes and Obesity, Surgery and Journal of Neural Engineering, and data have been presented at several scientific sessions including the American Society for Metabolic and Bariatric Surgery, International Federation for Surgery of Obesity and Metabolic Disorders, the Obesity Surgery Society of Australia & New Zealand and The Obesity Society.
Below is a more detailed description of our ongoing clinical studies:
ReCharge Trial
In October 2010, we received an unconditional Investigational Device Exemption (IDE) Supplement approval from the FDA to conduct a randomized, double-blind, sham-controlled, multicenter pivotal clinical trial, called the ReCharge trial, testing the effectiveness and safety of vBloc Therapy utilizing our second generation vBloc System. Enrollment and implantation in the ReCharge trial was completed in December 2011 in 239 randomized patients (233
implanted) at 10 centers. All patients in the trial received an implanted device and were randomized in a 2:1 allocation to treatment or control groups. The control group received a non-functional device during the trial period. All patients were expected to participate in a standard weight management counseling program. The primary endpoints of efficacy and safety were evaluated at 12 months. The ReCharge trial met its primary safety endpoint with a 3.7% serious adverse event rate, significantly lower than the threshold of 15% (p<0.0001). The safety profile at 12 months was further supported by positive cardiovascular signals including a 5.5 mmHg drop in systolic blood pressure, a 2.8 mmHg drop in diastolic blood pressure and a 3.6 bpm drop in average heart rate.
Although the trial did not meet its predefined co-primary efficacy endpoints, it did demonstrate in the ITT population (n=239) a clinically meaningful and statistically significant EWL of 24.4% (approximately 10% TBL) for vBloc Therapy-treated patients, with 52.5% of patients achieving at least 20% EWL. In the per protocol population, the trial demonstrated an EWL of 26.3% for vBloc Therapy-treated patients, with 56.8% of patients achieving at least 20% EWL. As a result of the positive safety and efficacy profile of vBloc Therapy, we used the data from the ReCharge trial to support a PMA application for the vBloc System, which was submitted to the FDA in June 2013 and was accepted for review and filing in July 2013. An Advisory Panel meeting was held on June 17, 2014 to review our PMA application for approval of the vBloc System. The Advisory Panel voted 8 to 1 “in favor” that the vBloc System is safe when used as designed and voted 4 to 5 “against” on the issue of a reasonable assurance of efficacy. The final vote, on whether the relative benefits outweighed the relative risk, was 6 to 2 “in favor,” with 1 abstention. We received FDA approval on January 14, 2015 for vBloc Therapy, delivered via the vBloc System, for the treatment of adult patients with obesity who have a BMI of at least 40 to 45 kg/m2, or a BMI of at least 35 to 39.9 kg/m2 with a related health condition such as high blood pressure or high cholesterol levels, and who have tried to lose weight in a supervised weight management program and failed within the past five years.
Further analysis of the 12 month data show that in the primary analysis (ITT) population (n=239), vBloc Therapy-treated patients achieved a 24.4% average EWL (approximately 10% TBL) compared to 15.9% for sham control patients. This 8.5% difference demonstrated statistical superiority over sham control (p=0.002), but not super-superiority at the pre-specified 10% margin (p=0.705). In total, 52.5% of vBloc Therapy-treated patients had 20% or more EWL compared to 32.5% in the control group (p=0.004), and 38.3% of vBloc Therapy-treated patients had 25% or more EWL compared to 23.4% in the sham control group (p=0.02). While the respective co-primary endpoint targets of 55% and 45% were not met, the endpoint targets were within the 95% confidence intervals for the observed rates and therefore the observed rates were not significantly lower than these pre-specified rates. These efficacy data demonstrate vBloc Therapy’s positive effect on weight loss.
In the per protocol group, which included only those patients who received therapy per the trial design (n=211), the vBloc Therapy-treated patients had a 26.3% average EWL (approximately 10% TBL) compared to 17.3% for the sham control group (p=0.003). In total, 56.8% of vBloc Therapy-treated patients achieved at least 20% EWL, which was above the predefined threshold of 55% compared to 35.4% in the sham control group (p=0.004). 41.8% of vBloc Therapy-treated patients also achieved at least 25% EWL in this population, which is slightly less than the predefined threshold of 45%, compared to 26.2% in the sham control group (p=0.03).
Additionally, two-thirds of vBloc Therapy-treated patients achieved at least 5% TBL at 12 months. According to the CDC, 5% TBL can have significant health benefits on obesity related risk factors, or comorbidities, including reduction in blood pressure, improvements in Type 2 diabetes and reductions in triglycerides and cholesterol. Further analysis of our data at 12 months showed a meaningful impact on these comorbidities as noted in the below table showing the improvements seen at 10% TBL, the average weight loss in vBloc Therapy-treated patients.
| | | Risk Factor
| | 10% TBL
| Systolic BP (mmHg)
| | (9) | Diastolic BP (mmHg)
| | (6) | Heart Rate (bpm)
| | (6) | Total Cholesterol (mg/dL)
| | (15) | LDL (mg/dL)
| | (9) | Triglycerides (mg/dL)
| | (41) | HDL (mg/dL)
| | 3 | Waist Circumference (inches)
| | (7) | HbA1c (%)
| | (0.5) |
Approximately 93% of patients reached the 12 month assessment in the trial, consistent with a rigorously executed trial. vBloc Therapy-treated patients maintained their weight loss at 18 months and 24 months with an EWL of 23.5% and 21.1%, respectively. The trial’s positive safety profile also continued throughout this reported time period.
VBLOC-DM2 ENABLE Trial
Enrollment of the VBLOC-DM2 ENABLE trial began in 2008. The VBLOC-DM2 ENABLE trial is designed to evaluate the efficacy and safety of vBloc Therapy on obese subjects as well as its effect on glucose regulation in approximately 30 patients who are using the vBloc System. The trial is an international, open-label, prospective, multi-center study. At each designated trial endpoint the efficacy of vBloc Therapy is evaluated by measuring average percentage EWL, HbA1c (blood sugar), FPG (fasting plasma glucose), blood pressure, calorie intake, appetite and other endpoints at one week, one month, three, six, 12 and 18 months and longer. The following results were reported at 12 month intervals.
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| | Percent EWL (from implant, Company updated interim data):
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| | | | | Visit (post-device activation) | | % EWL | | N | 12 Months | | (24.5) | | 26 | 24 Months | | (22.7) | | 22 | 36 Months | | (24.3) | | 18 |
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| | HbA1c change in percentage points (Baseline HbA1c = 7.8 + 0.2%) (Company updated interim data):
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| | | | | | | % HbA1c | | | Visit (post-device activation) | | change | | N | 12 Months | | (1) | | 26 | 24 Months | | (0.5) | | 24 | 36 Months | | (0.6) | | 17 |
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| | Fasting Plasma Glucose change (Baseline 151.4 + 6.5 mg/dl average) (Company updated interim data):
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| | | | | | | Glucose | | | | | change | | | Visit (post-device activation) | | (mg/dl) | | N | 12 Months | | (27.6) | | 25 | 24 Months | | (20.3) | | 24 | 36 Months | | (24) | | 17 |
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| | Change in mean arterial pressure (MAP) in hypertensive patients (baseline 99.5 mmHg) (Company updated interim data):
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| | | | | | | MAP | | | | | change | | | Visit (post-device activation) | | (mmHg) | | N | 12 Months | | (7.8) | | 14 | 24 Months | | (7.5) | | 12 | 36 Months | | (7.3) | | 10 |
To date, no deaths related to our device or unanticipated adverse device effects have been reported during the VBLOC-DM2 ENABLE trial and the safety profile is similar to that seen in the other vBloc trials.
Caloric Intake Sub-study: A sub-study, conducted as part of the VBLOC-DM2 ENABLE trial, evaluated 12-month satiety and calorie intake in 10 patients with Type 2 diabetes mellitus enrolled in the trial. Follow-up measures among patients enrolled in the sub-study included EWL, 7-day diet records assessed by a nutritionist, calorie calculations and visual analogue scale (VAS) questions to assess satiety by 7-day or 24-hour recall at the following time
periods: baseline, 4 and 12 weeks and 6 and 12 months post device initiation. A validated program, Food Works™, was used to determine calorie and nutrition content. Results include:
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| | Mean EWL for the sub-study was 33+5% (p<0.001) at 12 months;
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| | Calorie intake decreased by 45% (p<0.001), 48% (p<0.001), 38% (p<0.001) and 30% (p=0.02), at 4 and 12 weeks, 6 months and 12 months, respectively, from a baseline of 2,062 kcal/day; and
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| | VAS recall data, using a repeated measures analysis, documented fullness at the beginning of meals (p=0.005), less food consumption (p=0.02) and less hunger at the beginning of meal (p=0.03) corroborating the reduction in caloric intake.
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EMPOWER Trial
The EMPOWER trial is a randomized, double-blind, controlled pivotal study that began in 2006 and was designed to evaluate the safety and efficacy of our first-generation vBloc RF System in the treatment of obesity in 294 patients. The purpose of the EMPOWER trial is to measure the safety and efficacy of our vBloc RF System in obese patients after 12 months of vBloc Therapy. After all patients completed 12 months of follow up, the trial was unblinded and all patients, including those in the control group, had the option to receive ongoing vBloc Therapy. Patients will continue to be followed out to 60 months as part of the trial and we will continue to monitor average percentage EWL and safety during this extended period. At 12 months from implant, patients in the treated group who used the system for greater than or equal to 12 hours a day saw an average EWL of nearly 30%. The trial produced the following safety results:
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| | No deaths, a one-year surgical revision rate of 4.8% and serious adverse event rate related to the device or implant/revision procedure of 3%;
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| | No therapy-related serious adverse events in the entire study population through 12 months; and
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| | No changes in intra-cardiac conduction, ventricular repolarization or ventricular arrhythmias were seen in either study group.
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At the 36 month endpoint, EMPOWER EWL was approximately 20% in 45 subjects receiving at least 9 hours of therapy per day. In addition, a subgroup analysis of EMPOWER trial patients was conducted to determine if vBloc Therapy would improve blood pressure prior to significant weight loss in obese subjects with hypertension, as defined by elevated blood pressure at baseline by JNC-7 guidelines (n=37, Group A) or history of hypertension (n=58, Group B) at baseline. The analysis was performed in a subset of subjects receiving at least 9 hours of therapy per day to 12 months.
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| | Change in systolic blood pressure (SBP) and diastolic blood pressure (DBP) from baseline:
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| | Week 4
| | 12 Months
| Group A (subjects with elevated blood pressure) (p<0.001)
| | | | | | | | | SBP (mmHg)
| | 145+/-2
| | -17+/-3
| | -17+/-3
| | (18+/(3)
| DBP (mmHg)
| | 89+/-2
| | -9+/-2
| | -8+/-2
| | (10+/(2)
| % EWL
| | N/A
| | 9+/-2
| | 12+/-1
| | 21+/-4
| Group B (subjects with history of hypertension) (p<0.001)
| | | | | | | | | SBP (mmHg)
| | 134+/-2
| | -10+/-2
| | -9+/-2
| | (13+/(2)
| DBP (mmHg)
| | 84+/-1
| | -6+/-1
| | -6+/-1
| | (7+/(1)
| % EWL
| | NA
| | 9+/-1
| | 13+/-1
| | 23+/-3
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Our Research and Development Current R&D Focus We have an experienced research and development team, including clinical, regulatory affairs and quality assurance, comprised of scientists electrical engineers, software engineers and mechanical engineers with significant clinical knowledge and expertise. Our research and development efforts are focused in the following major areas: | ·
● | | supporting the current vBloc System; Lap-Band system; |
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● | expanding and improving on the Lap-Band portfolio; |
| ● | gaining clinical evidence to the efficacy of the ReShape Vest; |
| ● | testing and developing the next-generation vBloc System;Diabetes Bloc-Stim Neuromodulation device; and |
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● | | identifying the effect of vagal blocking on nervesuction and organ function;calibration tubing line for gastric and
bariatric surgeries. |
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| | investigating the vBloc platform for the treatment of gastrointestinal disorders and comorbidities in addition to obesity.
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We have spent a significant portion of our capital resources on research and development. Our research and development expenses were $5.1$3.5 million in 2016, $8.12020 and $3.1 million in 2015 and $11.0 million in 2014. Having obtained FDA approval in January 2015, our main focus has been on commercialization efforts, resulting in decreases in spending on research and development in each of 2015 and 2016 compared to 2014, when we were still working through the FDA approval process.2019. Other Diseases and Disorders
We believe that our vBloc Therapy may have the potential, if validated through appropriate clinical studies, to treat a number of additional gastrointestinal disorders or comorbidities frequently associated with obesity, including the following:
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| | Type 2 Diabetes. Type 2 diabetes is an escalating global health epidemic often related to obesity that affects nearly 200 million people worldwide, 50 million in the United States alone. Those with diabetes are susceptible to cardiovascular morbidity and mortality, and up to two out of three people with diabetes have high blood pressure. We believe that vBloc Therapy has significant potential in treating metabolic syndrome (diabetes with high blood pressure). We have launched an international feasibility trial, VBLOC-DM2 ENABLE, to further explore the efficacy of vBloc Therapy in this patient population and have reported preliminary findings in the “Our Clinical Experience” section above.
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| | Hypertension. Blood pressure normally rises and falls throughout the day. When it consistently stays too high for too long, it is called hypertension. Globally, nearly one billion people have high blood pressure (hypertension); of these, two-thirds are in developing countries. About one in three American adults has high blood pressure or hypertension. Hypertension is one of the most important causes of premature death worldwide and the problem is growing; in 2025, an estimated 1.56 billion adults will be living with hypertension. Hypertension kills nearly 8 million people every year worldwide. We believe that vBloc Therapy may improve mean systolic and diastolic blood pressure in hypertensive patients. We completed a subgroup analysis of EMPOWER trial patients and have included an evaluation of the blood pressure effects of vBloc Therapy in our international feasibility trial, VBLOC-DM2 ENABLE, to further explore the efficacy of vBloc Therapy in this patient population and have reported preliminary findings in the “Our Clinical Experience” section above.
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| | Pancreatitis. Primary and recurrent cases of acute pancreatitis are estimated to number from 150,000 to 200,000 annually, resulting in approximately 80,000 hospital admissions each year in the United States. In animal studies, we have shown that vBloc Therapy suppresses pancreatic exocrine secretion, suggesting its potential efficacy in treating pancreatitis.
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| | Other Gastrointestinal Disorders. We believe that vBloc Therapy may have potential in a number of other gastrointestinal disorders, including irritable bowel syndrome and inflammatory bowel disease.
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None of the above conditions were included in our PMA application that was approved by the FDA on January 14, 2015, nor are they approved for sale internationally. Additional approvals will be required to market the vBloc System for these indications in the United States or internationally.
Medical Advisors
In addition to our collaboration with Mayo Clinic, we also have medical advisors who provide strategic guidance to our development programs, consult with us on clinical investigational plans and individual study protocols, and advise on clinical investigational site selection. Members of our medical advisory group also:
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| | serve on our Data Safety Monitoring Board and Clinical Events Committee;
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| | provide consultation on professional meeting presentations and journal manuscript submissions; and
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| | develop and participate in clinical site training programs, including study surgical technique training and study subject follow-up training.
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Our Competition The market for obesity treatments is competitive, subject to technological change and significantly affected by new product development. Our primary competition in the obesity treatment market is currently from bariatric surgical obesity procedures and from various devices used to implement neurostimulationendoscopic procedures. Our Lap-Band system competes, and gastric stimulation systems. We believe we are the first company having neuroblocking therapy for the treatment of obesity. There are currently no other FDA-approved neuromodulation or neuroblocking therapies for the treatment of obesity, but in the future we expect other new stimulation systems and neurotechnology devices to come on the market. We expectthat our vBloc SystemReShape Vest system will compete, with surgical obesity procedures, including gastric bypass, gastric balloon, gastric bandingballoons, sleeve gastrectomy and sleeve gastrectomy.the endoscopic sleeve. These current surgical procedures are performed in less than 1% of all eligible obese patients today. Current manufacturers of approved gastric balloon and bandingsuturing products that are approved in the United States include Apollo Endosurgery Inc. (Lap-Band and ORBERA(ORBERA Intragastric Balloon System and OverStitch Endoscopic Suturing System), ReShape Medical, Inc. (ReShape Integrated Dual Balloon System), and Obalon Therapeutics, Inc. (Obalon Balloon System) and Johnson & Johnson (Realize Adjustable Gastric Band).
In June of 2016, Aspire Bariatrics, Inc. received FDA approval onfor the Aspire Assist®Assist® System, an endoscopic alternative to weight loss surgery for people with moderate to severe obesity. We are also aware that GI Dynamics, Inc. has received approvals in various international countries to sell its EndoBarrier Gastrointestinal Liner. We also compete against the manufacturers of pharmaceuticals that are directed at treating obesity and the 99% of obese patients eligible for surgery that are not willing to pursue a surgical option .option. We are aware of a number of drugs that are approved for long-term treatment of obesity in the United States: Orlistat, marketed by Roche as Xenical and GlaxoSmithKline as Alli, Belviq marketed by Arena Pharmaceuticals, Inc., Qsymia, marketed by VIVUS, Inc. and Contrave, marketed by Orexigen Therapeutics, Inc. In addition, we are aware of a pivotal trial for GELESIS100 that is being conducted by Gelesis, Inc. In addition to competition from surgical obesity procedures, we compete with several private early-stage companies developing neurostimulation devices for application to the gastric region and related nerves for the treatment of obesity. Further, we know of two intragastric balloon companies either in clinical trials or working toward clinical trials in the U.S: Spatz3 Adjustable Balloon and Allurion Technology’s Elipse Balloon. These companies may prove to be significant competitors, particularly through collaborative arrangements with large and established companies. They
with large and established companies. They also compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and subject registration for clinical trials, as well as in acquiring technologies and technology licenses complementary to our programs or advantageous to our business.
In addition, there are many larger potential competitors experimenting in the field of neurostimulation to treat various diseases and disorders. For example, Medtronic, Inc., which develops deep brain stimulators and spinal cord stimulators, acquired TransNeuronix, which sought to treat obesity by stimulating the smooth muscle of the stomach wall and nearby tissue. St. Jude Medical, Inc., through its acquisition of Advanced Neuromodulation Systems, is developing spinal cord stimulators. LivaNova PLC is developing vagus nerve stimulators to modulate epileptic seizures and other neurological disorders. Boston Scientific Corporation, through its Advanced Bionics division, is developing neurostimulation devices such as spinal cord stimulators and cochlear implants. Ethicon-Endo Surgery acquired LivaNova PLC’s patents and patent applications pertaining to vagus nerve stimulation for the treatment of obesity and two related comorbidities, diabetes and hypertension, in overweight patients.
We believe that the principal competitive factors in our market include: | ·
● | | acceptance by healthcare professionals, patients and payers; |
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● | | published rates of safety and efficacy; |
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● | | reliability and high qualityhigh-quality performance; |
| ·
● | | effectiveness at controlling comorbidities such as diabetes and hypertension; |
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● | | invasiveness and the inherent reversibility of the procedure or device; |
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● | | cost and average selling price of products and relative rates of reimbursement; |
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● | | effective marketing, training, education, sales and distribution; |
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● | | regulatory and reimbursement expertise; |
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● | | technological leadership and superiority; and |
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● | | speed of product innovation and time to market. |
Many of our competitors are larger than we are and are either publicly-traded or are divisions of publicly-traded companies, and they enjoy several competitive advantages over us, including: | ·
● | | significantly greaterstronger name recognition;
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| ·
● | | establishedexisting relations with healthcare professionals, customers and third-party payers;
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| ·
● | | established distribution networks; |
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● | | greatersignificant experience in research and development, manufacturing, preclinical testing, clinical trials, obtaining regulatory approvals, obtaining reimbursement and marketing approved products; and
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● | | greater financial and human resources. |
As a result, we cannot assure you that we will be able to compete effectively against these companies or their products. Market Opportunity Given the limitations of behavioral modification, pharmaceutical therapy and traditional bariatric surgical approaches, we believe there is a substantial need for patient-friendly, safer, effective and durable solutions that: | ● | provide proven, long-term weight loss; |
| ● | preserve normal anatomy; |
| ● | are “non-punitive” in that they support continued ingestion and digestion of foods and micronutrients such as vitamins and minerals found in a typical, healthy diet while allowing the user to modify his or her eating |
| | behavior appropriately without inducing punitive physical restrictions that physically force a limitation of food intake; |
| ● | diminish undesirable side-effects; |
| ● | facilitate outpatient surgical procedures; |
| ● | minimize the risks of re-operations, malnutrition and mortality; and |
| ● | reduce the natural hunger drive of patients. |
Our Intellectual Property Our success will depend in part on our abilityIn order to obtainremain competitive, we must develop and defend patentmaintain protection for our products and processes, to preserve our trade secrets and to operate without infringing or violatingof the proprietary aspects of our technologies. We rely on a combination of patents, trademarks, trade secret laws and confidentiality and invention assignment agreements to protect our intellectual property rights. Our patent applications may not result in issued patents and our patents may not be sufficiently broad to protect our technology. Any patents issued to us may be challenged by third parties as being invalid or unenforceable, or third parties may independently develop similar or competing technology that does not infringe our patents. The laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of third parties. We own numerousthe United States.
Lap-Band As of December 31, 2020, we had 48 total U.S. and foreign patents and have numerous patent applications related to our Lap-Band system. The international patents and patent applications are in regions including Germany, France, Spain, the United Kingdom, Mexico, Canada, Italy, the Netherlands, Portugal, Ireland, Belgium, Poland, Australia, and South Korea. The issued patents expire between the years 2021 and 2031. We also have 48 total U.S. and international trademarks for the LAP-BAND brand name. ReShape Vest As of December 31, 2020, we had four granted U.S. patents and four granted foreign patents in China, Israel, Canada and Australia related to our ReShape Vest and 12 pending mostpatents in the U.S. and foreign countries. The patents expire between the years 2028 and 2038. We also have U.S. and international trademark applications for the RESHAPE VEST brand name. ReShapeCare As of which pertainDecember 31, 2020, we applied for two U.S. trademarks related to treating gastrointestinal disordersthe ReShapeCare™ logo and name. The trademarks cover electronic pedometers and electronic day planners for tracking food, body weight, pre-recorded nutritional and fitness; as well as nutritional and medical counseling and services. Diabetes Bloc-Stim Neuromodulation Device As of December 31, 2020, we believefiled a trademark application for Bloc-Stim Neuromodulation. The USPTO Examiner is reviewing the application and provided the Company with a disclaimer being required for “Neuromodulation”, as this a standard requirement for words that are in the standard vernacular. Sales and Distribution We market directly to patients but sell the Lap-Band system to select surgical centers throughout the U.S. and internationally having patients that would like to treat obesity and its comorbidities. The surgical centers then perform the LAP-BAND procedure and are most-commonly reimbursed by leading insurance providers. Alternatively, surgical
centers can offer the LAP-BAND as a cash-pay procedure. Our sales representatives are supported by field clinical experts who provide ustraining, technical support, and other support services at various implant centers. Our sales representatives help implement consumer marketing programs and provide surgical centers and implanting surgeons with broad intellectual property protection covering electrically-induced vagal blocking and methods for treating obesity. Assuming timely payment of maintenance fees as they become due, many of these patents will expire in 2023.educational patient materials. In order to support our Lap-Band sales efforts, we have seven dedicated team members to support the US Region. We have also received or applied for patentslaunched marketing campaigns in Europe, Australia, China, Indiaseveral top strategic accounts that allow us to partner with clinics in marketing efforts and Japan. These applications primarily pertainuse digital and traditional marketing to drive qualified leads to physicians. During 2020, our vagal blocking technologyinternational sales efforts were through a combination of direct and its application to obesity as well as other gastrointestinal disorders. We also register the trademarks and trade names through which we conduct our business. To date, in the United States we have registered trademarks for vBLOC®, ENTEROMEDICS® and MAESTRO®, each registereddistributor sales channels, with the United States Patent and Trademark Office, and trademark applications for vBLOC POWER TO CHOOSE and vBLOC POWER TO CHOOSE AND DESIGN. In addition, some or all of the marks vBLOC, ENTEROMEDICS, MAESTRO, MAESTRO SYSTEM ORCHESTRATING OBESITY SOLUTIONS, vBLOC POWER TO CHOOSE and vBLOC POWER TO CHOOSE AND DESIGN are the subject of either a trademark registration or application for registrationfocus on top Lap-Band customers in Australia, Brazil, China, the European Community, India, Kuwait, Mexico, Saudi Arabia, SwitzerlandThe Middle East and the United Arab Emirates.strategic countries in Europe.
In addition to our patents, we rely on confidentiality and proprietary information agreements to protect our trade secrets and proprietary knowledge. These confidentiality and proprietary information agreements generally provide that all confidential information developed or made known to individuals by us during the course of their relationship with us is to be kept confidential and not disclosed to third parties, except in specific circumstances. The agreements also provide for ownership of inventions conceived during the course of such agreements. If our proprietary information is shared or our confidentiality agreements are breached, we may not have adequate remedies, or our trade secrets may otherwise become known to or independently developed by competitors.
Our Manufacturers and Suppliers We have designed and developed all of the elements of our vBloc System, except for the clinician programmer hardware, which uses a commercially available laptop computer. To date, all of the materials and components of the systemfor our products, as well as any related outside services, are procured from qualified suppliers and contract manufacturers in accordance with our proprietary specifications. We use third parties to manufacture our vBloc System to minimize our capital investment, help control costs and take advantage of the expertise these third parties have in the large-scale production of medical devices. We do not currently plan to manufacture our vBloc System ourselves. All of our key manufacturers and suppliers have experience working with commercial implantable device systems, are ISO certified and are regularly audited by us.various regulatory agencies including the FDA. Our key manufacturers and suppliers have a demonstrated record of compliance with international regulatory requirements.
Since we received FDA approval on January 14, 2015, and commenced commercialization of the vBloc System in the United States, we have increased our production volume slowly in connection with the controlled commercial launch of the vBloc System in the United States. Given that we rely primarily on third-party manufacturers and suppliers for the production of our products, our ability to increase production going forward will depend upon the experience, certification levels and large scalelarge-scale production capabilities of our suppliers and manufacturers. Qualified suppliers and contract manufacturers have been and will continue to be selected to supply products on a commercial scale according to our proprietary specifications. We have modestly increased our inventory levels to support commercial forecasts as we expand our implanting centers and intend to continue to increase our inventory levels as we determine necessary. Our FDA approval process required us to name and obtain approval for the suppliers of key components of our vBloc System.
the Lap-Band system. Many of our parts are custom designed and require custom tooling and, as a result, we may not be able to quickly qualify and establish additional or replacement suppliers for the components of our vBloc System.products. Any new approvals of vendors required by the FDA or other regulatory agencies in other international markets for our vBloc Systemproducts as a result of the need to qualify or obtain alternate vendors for any of our components would delay our ability to sell and market the vBloc Systemour products and could have a material adverse effect on our business. We believe that our current manufacturing and supply arrangements will be adequate to continue our controlledongoing commercial launchsales and our ongoing and planned clinical trials. In order to produce the vBloc Systemour products in the quantities we anticipate to meet future market demand, we will need our manufacturers and suppliers to increase, or scale up, manufacturing production and supply arrangements by a significant factor over the current level of production. There are technical challenges to scaling up manufacturing capacity and developing commercial-scale manufacturing facilities that may require the investment of substantial additional funds by our manufacturers and suppliers and hiring and retaining additional management and technical personnel who have the necessary experience. If our manufacturers or suppliers are unable to do so, we may not be able to meet the requirements to expand the launch of the product in the United States or launch the product internationally or to meet future demand, if at all. We may also represent only a small portion of our suppliers’ or manufacturers’ business and if they become capacity constrained, they may choose to allocate their available resources to other customers that represent a larger portion of their business. We currently anticipate that we will continue to rely on third-party manufacturers and suppliers for the production of the vBloc System as we expand our commercial launch. If we are unable to obtain a sufficient supply of our product, our revenue, business and financial prospects would be adversely affected. Government Regulations Device Classification and Regulations United States Our vBloc System isproducts and products under development are regulated by the FDA as a medical devicedevices under the Federal Food, Drug, and Cosmetic Act (FFDCA)(“FFDCA”) and the regulations promulgated under the FFDCA. Pursuant to the FFDCA, the FDA regulates the research, design, testing, manufacture, safety, labeling, storage, record keeping, advertising, sales and distribution, post-market adverse event reporting, production and advertising and promotion of medical devices in the United States. Noncompliance with applicable requirements can result in warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket approval for devices and criminal prosecution. Medical devices in the United States are classified into one of three classes, Class I, II or III, on the basis of the amount of risk and the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I, low risk, devices are subject to general controls (e.g., labeling and adherence to good manufacturing practices). Class II, intermediate risk, devices are subject to general controls and to special controls (e.g., performance standards, and premarket notification). Generally, Class III devices are those which must receive premarket approval by the FDA to ensure their safety and effectiveness (e.g., life-sustaining, life-supporting and implantable devices, or new devices which have not been found substantially equivalent to legally marketed devices), and require clinical testing to ensurevalidate safety and effectiveness and FDA approval prior to marketing and distribution. The FDA also has the authority to require clinical testing of Class II devices. In both the United States and certain international markets, there have been a number of legislative and regulatory initiatives and changes, such as the Modernization Act and the EU-Medical Device Regulations, which could and have altered the healthcare system in ways that could impact our ability to sell our medical devices profitably. The FFDCA provides two basic review proceduresprocesses for medical devices. Certain products (Class II) may qualify for a submission authorized by Section 510(k) of the FFDCA, where the manufacturer submits to the FDA a premarket notification of the manufacturer’s intention to commence marketing the product. The manufacturer must, among other things, establish that the product to be marketed is substantially equivalent to another legally marketed product. Marketing may commence when the FDA issues a letter finding substantial equivalence.the subject device is subject device is substantially equivalent to a legally marketed predicate device. If a medical device does not qualify for the 510(k) procedure (Class III), the manufacturer must file a premarket approval (PMA) applicationPremarket Approval Application (“PMA”) with the FDA. This procedure requires more extensive pre-filing clinical and preclinical testing than the 510(k) procedureprocesses and involves a significantly longer FDA review process. A PMA is required to establish the safety and effectiveness of the device and a key component of a PMA submission is the pivotal clinical trial data, as discussed in more detail below. Premarket Approval OurThe ReShape vBloc System is an implanted device® and the Lap-Band system are medical devices that required a PMA submission from the FDA to market in the United States. The FDA approved ReShape vBloc in January of 2015 and the vBloc System on January 14, 2015Lap-Band system in 2001 with post-approval conditions intended to ensure the safety and effectiveness of the device.devices. Failure to comply with the conditions of approval can result in material adverse enforcement action, including the loss or withdrawal of the approval. Evenapprovals. Referenced in the FDA Guidance, after a device achieves initial PMA approval, of the PMA, new PMAs or supplemental PMAs will be required forany additional significant modifications to the manufacturing process, labeling, use and design of a device that isrequires a PMA supplement to be submitted and approved through the premarket approval process. Premarket approval supplements often require submission of the same type of information as a PMA except that the supplement is limited to information needed to support any
changes from the device covered by the original PMA. In addition, holders of an approved PMA are required to submit annual reports to the FDA that include relevant information on the continued use of the device. In September 2018, ReShape Lifesciences made a financial decision to stop the manufacturing and commercializing the vBloc product line in the US. This business decision was not related to the safety or efficacy of the device. On January 27, 2021, FDA accepted a PMA amendment to formally withdraw the vBloc PMA. On February 2, 2021, FDA accepted the PMA amendment for ReCharge Post Approval Study closure and the study status is marked “Completed” on the FDA Post-Approval Studies webpage. On March 4, 2021, FDA accepted the PMA amendment for ReNew Post Approval Study termination and the study status is marked “Terminated” on the FDA Post-Approval Studies webpage. The ReShape Vest with weight loss indication will be considered a Class III Long Term Implantable product by the FDA requiring the PMA path. A pivotal trial for the ReShape Vest will likely include approximately 250 implanted patients monitored up to three years. Other implantable devices for the treatment of obesity relied on twelve-month endpoints for the PMA submission with annual follow-up visits up to five years and we expect the pivotal trial for the ReShape Vest to be similar. A U.S. pivotal trial requires FDA Investigational Device Exemption (“IDE”) submission and approval. Clinical Trials A clinical trial is almost always required to support a PMA.PMA or certain 510(K) submissions. Clinical trials for a “significant risk” device such as ours require submission to the FDA of an application for an IDE for clinical studies to be conducted within the United States. The IDE application must be supported by appropriate data, such as animal and
laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. Clinical trialsIn the United States, a clinical trial for a significant risk device in the United States may begin once the IDE application is approved by the FDA and by the Institutional Review Boards (IRBs)(“IRBs”) overseeing the clinical trial at the various investigational sites. Clinical trials require extensive recordkeeping and detailed reporting requirements.reporting. Our clinical trials must be conducted under the oversight of an IRB for each participating clinical trial site and in accordance with applicable regulations and policies including, but not limited to, the FDA’s good clinical practice IDE requirements. We,ReShape Lifesciences, the trial Data Safety Monitoring Board, the FDA or the IRB for each site at which a clinical trial is being performed may suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Pervasive and Continuing U.S. Regulation Numerous regulatory requirements apply. These include: | ·
● | | Quality System Regulation, which requires manufacturers to follow design, testing, control, documentation, complaint handling and other quality assurance procedures during the design and manufacturing processes; |
| ·
● | | regulations which govern product labels and labeling, prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on labeling and promotional activities; |
| ·
● | | medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur; |
| ·
● | | notices of correction or removal and recall regulations; |
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● | | periodic reporting of progress related to clinical trials, post approval studies required as conditions of PMA approval and relevant changes to information contained within the PMA approval; and |
| ·
● | | reporting of transfers of value and payments to physicians and teaching hospitals. |
Advertising and promotion of medical devices are also regulated by the Federal Trade Commission and by state regulatory and enforcement authorities. Recently, some promotional activities for FDA-regulated products have resulted in enforcement actions brought under healthcare reimbursement laws and consumer protection statutes. In addition, under the federal Lanham Act, competitors and others can initiate litigation relating to advertising claims. Compliance with regulatory requirements is enforced through periodic facility inspections by the FDA, which may be unannounced. Because we rely on contract manufacturing sites and service providers, these additional sites are also subject to these FDA inspections. Failure to comply with applicable regulatory requirements can result in enforcement action, which may include any of the following sanctions: | ·
● | | warning letters or untitled letters; |
| ·
● | | fines, injunction and civil penalties; |
| ·
● | | recall or seizure of our products; |
| ·
● | | customer notification, or orders for repair, replacement or refund; |
| ·
● | | operating restrictions, partial suspension or total shutdown of production or clinical trials; |
| ·
● | | refusing our request for premarket approval of new products; |
| ·
● | | withdrawing premarket approvals that are already granted; and |
International Regulations International sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval,approval/clearance, and the requirements may differ. The primary regulatory environment in Europe is that of the European Economic Community (EEC)Union (“EU”), which consists of 28 European Union (EU)27 member states encompassing nearly all the major countries in Europe. Additional countries that are not part of the EU, but are part of the European Economic Area (EEA)(“EEA”), and other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the EECEU with respect to medical devices. The EECEU has adopted Directive 90/385/EEC as amended by 2007/47/EC for active implantable medical devices and numerous standards that govern and harmonize the national laws and standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices that are marketed in member states. Medical devices that comply with the requirements of the national law of the member state in which their Notified Body is located will be entitled to bear CE marking, indicating that the device conforms to applicable regulatory requirements, and, accordingly, can be commercially marketed within the EEAEU and other countries that recognize this mark for regulatory purposes. We obtained EuropeanThe Lap-Band system was CE Mark approval for our vBloc Systemmarked in 2011 for the treatment of obesity. The CE Mark approval for our vBloc System was expanded in 2014 to also include use for the management of Type 2 diabetes in obese patients.1997. The method of assessing conformity with applicable regulatory requirements varies depending on the class of the device, but for our vBloc System (which is considered an Active Implantable Medical Device (AIMD) in Australia and the EEA, and falls into Class III within the United States),Lap-Band system, the method involved a combination of self-assessment and issuance of declaration of conformity by the manufacturer of the safety and performance of the device, and a third-party assessment by a Notified Body of the design of the device and of our quality system. A Notified Body is a private commercial entity that is designated by the national government of a member state as being competent to make independent judgments about whether a product complies with applicable regulatory requirements. The assessment included, among other things, a clinical evaluation of the conformity of the device with applicable regulatory requirements. We use DEKRA Certification B.V. (formerly known as KEMA Quality) in the NetherlandsBSI as the Notified Body for our CE marking approval process.
Continued compliance with CE marking requirements is enforced through periodic facility inspections by the Notified Body, which may be unannounced. Because we rely on contract manufacturing sites and service providers, these additional sites may also be subject to these Notified Body inspections. Since the beginning of 2020, the COVID-19 pandemic slowed most of the economy in the European Union. This resulted in many different challenges ranging from notified bodies that were no longer able to perform audits, to manufacturers that were forced to increase their production beyond their existing capabilities or forced to stop their production all together. The original date of application of Regulation (EU) 2017/745 on medical device (MDR) was May 26, 2020. Due to COVID-19 pandemic the date of application for MDR was postponed to May 26, 2021. The Company will continue to implement changes across our quality systems to become compliant with the new MDR. Patient Privacy Laws United States and various international laws have been evolving to protect the confidentiality of certain patient health information, including patient medical records. These laws restrict the use and disclosure of certain patient health information. Enforcement actions, including financial penalties, related to patient privacy issues are globally increasing. The management of patient data may have an impact on certain clinical research activities and product design considerations. Employees As of December 31, 2016,2020, we had a total37 employees, all of 32 employees.which were full-time. All of these employees are located in the United States. U.S. From time to time we also employ independent contractors, consultants and temporary employees to support our operations. None of our employees are subject to collective bargaining agreements. We have never experienced a work stoppage and believe that our relations with our employees are good.
Information About our Executive Officers The following table sets forth information regarding our executive officers including their ages, as of February 28, 2017: March 1, 2021: Name |
| Age |
| Position | Barton P. Bandy | | Age
| | Position
| Dan W. Gladney
| | 6460
| | President and Chief Executive Officer | Scott P. YoungstromThomas Stankovich
| | 57
| | Chief Financial Officer and Chief Compliance Officer
| Naqeeb (Nick) A. Ansari
| | 5560
| | Senior Vice President of Sales | Peter M. DeLange
| | 48
| | Senior Vice President of Operations and Business Development
| Paul F. Hickey
| | 52
| | Senior Vice President of Marketing and ReimbursementChief Financial Officer
|
Dan W. GladneyBarton P. Bandy has served as our President and Chief Executive Officer since November 16, 2015April 1, 2019. Mr. Bandy has extensive leadership experience in health care and as Chairman of our board of directors since October 14, 2016.specifically in the obesity and bariatric space. Most recently, Mr. Gladney joined the Company on November 2, 2015 as President-Elect and a member of the board of directors. Prior to joining us, Mr. Gladney served as Chairman and Chief Executive Officer of Lanx, Inc., a medical device company focused on developing and commercializing innovative devices for spinal surgery. Prior to his time at Lanx, Inc., Mr. GladneyBandy was a Healthcare Operating Partner at Norwest Equity Partners (NEP) from 2008 until 2010, where he was responsible for strategic planning, business growth and corporate governance for NEP portfolio companies and executing new investment opportunities for the firm. Prior to joining NEP, Mr. Gladney served as President and Chief Executive Officer of severalBroadSpot Imaging Corporation, a developer of medical device companies including Heart Leaflet Technologies and ACIST Medical Systems, both of which were acquired by The Bracco Group. He also served as Chairman, Chief Executive Officer anddevices for eye care, since April 2017. From April 2013 to August 2016, Mr. Bandy was President of Complex Technologies, a publicly traded orthopedicWellness at Alphaeon Corporation, where he was responsible for business development, commercial activities, strategy and healthacquisition integration. He previously spent 10 years as the senior executive leading the Inamed and wellness electro therapy company, from 2002 until 2006. Mr. Gladney currently serves onAllergan Health Divisions through the boardlaunch, growth and transition of directors of ARIA CV, Inc. and has been a member of a number of other private and public company boards. After the sale of Lanx, he acted as a private investor and small business consultant.Lap-Band.
Scott P. YoungstromThomas Stankovich has served as our Chief Financial Officer since October 30, 2019. Mr. Stankovich has extensive leadership experiences as the CFO for multiple public and private healthcare companies. Mr. Stankovich has spent the past nine years as the Global Senior Vice President and Chief ComplianceFinancial Officer since October 3, 2016.of MP Biomedicals, a life science and molecular biology-diagnostics company. Prior to MP Biomedicals, Mr. Youngstrom has over 25 years of strategic financial and operational experience in a variety of medical device companies, most recently havingStankovich served as Chief Financial Officer and Vice President, Finance at Galil Medical, a leading developer of cryotherapy technology. Prior to Galil Medical, from 2009-2014,Response Genetics where he successfully led the company through their initial public offering. Additionally, Mr. Youngstrom served as Vice President, Chief Operating Officer, and Chief Financial Officer at DGIMED Ortho, Inc., a developer of orthopedic medical devices. Mr. Youngstrom has previouslyStankovich served as Chief Financial Officer and Vice President, Finance with Anulex Technologies, Enpath Medical, Compex Technologies, Acist Medical Systems, and Cardiotronics.
Naqeeb (Nick) A. Ansari has served as our Senior Vice President of Sales since January 6, 2016. Mr. Ansari has over 20 years of experiencefor Ribapham Inc., where he also led the company through their initial public offering, which at the time became the second largest ever initial public offering in the medical device industry, havingbiotechnology sector. Mr. Stankovich also held various senior sales positionsthe Chief Financial Officer position at Stryker Corporation, DePuy, Medtronic, Inc., Lanx, Inc. and Globus Medical Inc. PriorICN International which later changed its name to joining the Company he spent two years as the owner of an independent distributor solely selling Biomet products. Prior to this, he served as Senior Vice President of Sales at Lanx, Inc. from 2010 to 2013.Valeant Pharmaceuticals.
Peter M. DeLange has served as our Senior Vice President of Operations and Business Development since January 18, 2016. Mr. DeLange has spent the last 11 years as the owner and President of Devicix, LLC a medical device engineering development company that was sold in 2015. At Devicix, he contracted with large medical device companies and worked closely with individual surgeons to develop new technologies. Since 2011, Mr. DeLange has also served as a Co-Founder and Board Member of FocusStart LLC, an early stage technology development company utilizing a capital efficient business model to advance medical technology. Prior to Devicix, he held software engineer and product development positions at numerous companies including ACIST Medical Systems, Nellcor Puritan Bennett, Emerson EMC and Quester Technology.
Paul F. Hickey has served as our Senior Vice President of Marketing and Reimbursement since January 18, 2016. Mr. Hickey has over 15 years of experience as a medical device executive, most recently having served as Chief Executive Officer of Pantheon Spinal, a small spine implant start-up company based in Austin, Texas, since 2014. Prior to Pantheon, he spent three years as Senior Vice President, Global Commercialization at Lanx, Inc., which was acquired by Biomet Spine in 2013, where he oversaw marketing, clinical reimbursement and R&D. Mr. Hickey also spent 17
years at Zimmer-Spine where he held numerous marketing and developments positions, most recently as Vice President, Global R&D and Emerging Technology from 2004-2008.
Our Corporate Information We were originally incorporated in the state of Minnesota in December 2002 as two separate legal entities, Alpha Medical, Inc. and Beta Medical, Inc., bothreincorporated in the state of which were owned 100% by a common stockholder.Delaware in July 2004. In October 2003, the two entities were combined and2017, we changed our name tofrom EnteroMedics Inc. In 2004 we reincorporated in Delaware. to ReShape Lifesciences Inc. Our shares of common stock trade on the OTCQB Market under the symbol RSLS. We file reports and other information with the Securities and Exchange Commission (SEC)(“SEC”) including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy or information statements. Those reports and statements as well as all amendments to those documents filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (1) are available at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549, (2) may be obtained by sending an electronic message to the SEC at publicinfo@sec.gov or by sending a fax to the SEC at 1-202-777-1027, (3) are available at the SEC’s internet site (http://www.sec.gov), which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC and (4) are available free of charge through our website as soon as reasonably practicable after electronic filing with, or furnishing to, the SEC. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our principal executive offices are located at 2800 Patton Road, St. Paul, Minnesota 55113,1001 Calle Amanecer, San Clemente, California 92673, and our telephone number is (651) 634-3003.(949) 429-6680. Our website address is www.enteromedics.comwww.reshapelifesciences.com. The information on, or that may be accessed through, our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered a part of this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS Summary of risk Factors The following is a summary of the principal risks and uncertainties that could materially adversely affect our business, results of operations, financial condition, cash flows, prospects and/or the price of our outstanding securities, and make an investment in our securities speculative or risky. You should read this summary together with the more detailed description of each risk factor contained below. Risks Related to Our Proposed Merger with Obalon | ● | Fluctuations in the market price of Obalon Shares will affect the value of the Merger consideration. |
| ● | The Merger may not be consummated unless important conditions are satisfied or waived and there can be no assurance that the Merger will be consummated. |
| ● | There can be no assurance that the Obalon Shares to be issued in the Merger will be on the Nasdaq Stock Market or, if listed, that the combined company will be able to comply with the continued listing standards. |
| ● | The Merger Agreement contains provisions that could discourage a potential competing acquirer of either ReShape or Obalon. |
| ● | The pendency of the Merger could materially adversely affect the business, financial condition, results of operations or cash flows of ReShape or Obalon. |
| ● | ReShape directors and executive officers and Obalon directors and executive officers have interests in the Merger that may be different from, or in addition to, the interests of ReShape stockholders and Obalon stockholders. |
| ● | Failure to consummate the Merger could negatively impact respective future stock prices, operations and financial results of ReShape and Obalon. |
| ● | Financial projections regarding ReShape may not prove accurate. |
| ● | The Merger may disrupt attention of ReShape management and Obalon management from ongoing business operations. |
| ● | The market price for Obalon Shares following completion of the Merger will continue to fluctuate and may be affected by factors different from those that historically have affected Obalon Shares and ReShape Shares. |
Risks Related to Our Business and Industry | ● | We may be unable to attract and retain management and other personnel we need to succeed. |
| ● | Our ReShape Vest product is in the early stages of clinical evaluation. If the clinical trial is not successfully completed or any required regulatory approvals are not obtained, the ReShape Vest may not be commercialized and our business prospects may suffer. |
| ● | The shares of series C convertible preferred stock issued in connection with our acquisition of ReShape Medical have certain rights and preferences senior to our common stock, including a liquidation preference that is senior to our common stock. |
| ● | We are a medical device company with a limited history of operations and sales, and we cannot assure you that we will ever generate substantial revenue or be profitable. |
| ● | During the second quarter of 2019 we recorded a non-cash indefinite-lived intangible assets impairment loss, which significantly impacted our results of operations, and we may be exposed to additional impairment losses that could be material. |
| ● | We will need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or liquidate some or all of our assets. |
| ● | We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to compliance initiatives. |
| ● | General economic and political conditions could have a material adverse effect on our business. |
| ● | We face significant uncertainty in the industry due to government healthcare reform. |
| ● | We are subject, directly or indirectly, to United States federal and state healthcare fraud and abuse and false claims laws and regulations. Prosecutions under such laws have increased in recent years and we may become subject to such litigation. If we are unable to, or have not fully complied with such laws, we could face substantial penalties. |
| ● | Failure to protect our information technology information technology infrastructure against cyber-based attacks, network security breaches, service interruptions or data corruption could materially disrupt our operations and adversely affect our business. |
| ● | We operate in a highly competitive industry that is subject to rapid change. If our competitors are able to develop and market products that are safer or more effective than our products, our commercial opportunities will be reduced or eliminated. |
Risks Associated with Development and Commercialization of the Lap-Band System, ReShapeCare, ReShape Vest and Diabetes Bloc-Stim Neuromodulation | ● | Our efforts to increase revenue from our Lap-Band system and ReShapeCare, and commercialize the ReShape Vest, Diabetes Bloc-Stim Neuromodulation and expanded line of bariatric surgical accessories may not succeed or may encounter delays which could significantly harm our ability to generate revenue. |
| ● | We may not be able to obtain required regulatory approvals for our ReShape Vest and/or Diabetes Bloc-Stim Neuromodulation in a cost-effective manner or at all, which could adversely affect our business and operating results. |
| ● | We depend on clinical investigators and clinical sites to enroll patients in our clinical trials, and on other third parties to manage the trials and to perform related data collection and analysis, and, as a result, we may face costs and delays that are outside of our control. |
| ● | Modifications to the Lap-Band system may require additional approval from regulatory authorities, which may not be obtained or may delay our commercialization efforts. |
| ● | If we or our suppliers fail to comply with ongoing regulatory requirements, or if we experience unanticipated product problems, our Lap-Band system could be subject to restrictions or withdrawal from the market. |
| ● | We may be unable to manage our growth effectively. |
| ● | We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be able to obtain adequate product liability insurance. |
Risks Related to Intellectual Property | ● | If we are unable to obtain or maintain intellectual property rights relating to our technology and neuroblocking therapy, the commercial value of our technology and any future products will be adversely affected and our competitive position will be harmed. |
| ● | Many of our competitors have significant resources and incentives to apply for and obtain intellectual property rights that could limit or prevent our ability to commercialize our current or future products in the United States or abroad. |
| ● | If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected. |
| ● | Intellectual property litigation is a common tactic in the medical device industry to gain competitive advantage. If we become subject to a lawsuit, we may be required to expend significant financial and other resources and our management’s attention may be diverted from our business. |
Risks Relating to Ownership of Our Common Stock | ● | Our common stock trades on an over-the-counter market. |
| ● | Our common stock may be deemed to be a “penny stock” and broker-dealers who make a market in our stock may be subject to additional compliance requirements. |
| ● | The trading price of our common stock has been volatile and is likely to be volatile in the future. |
| ● | Sales of a substantial number of shares of our common stock in the public market by existing stockholders, or the perception that they may occur, could cause our stock price to decline. |
| ● | We have a significant number of outstanding warrants, which may cause significant dilution to our stockholders, have a material adverse impact on the market price of our common stock and make it more difficult for us to raise funds through future equity offerings. |
| ● | You may experience future dilution as a result of future equity offerings. |
| ● | Since our securities are quoted on the OTCQB market, our stockholders may face significant restrictions on the resale of our securities due to state “blue sky” laws. |
| ● | Our organizational documents and Delaware law make a takeover of our company more difficult, which may prevent certain changes in control and limit the market price of our common stock. |
| ● | We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our common stock. |
RISK FACTORS Risks Related to Our Proposed Merger with Obalon Fluctuations in the market price of Obalon Shares will affect the value of the Merger consideration. At the effective time, each share of ReShape common stock and series B preferred stock (the “ReShape Shares”) (other than shares held by Obalon, Merger Sub, any wholly-owned subsidiary of Obalon or ReShape, or by ReShape as treasury shares, which will be canceled and retired and cease to exist) will be converted into the right to receive a number of Obalon Shares, according to a ratio determined at least 10 days prior to the Obalon special meeting of stockholders to be held to approve such share issuance, that will result in the holders of such ReShape Shares owning 51% of the outstanding shares of common stock of the combined company immediately after the effective time of the Merger. Because the exact number of Obalon Shares that will be issued in exchange for each ReShape Share will not be determined until a later date, the market value of the Merger consideration that ReShape stockholders will receive will depend both on the number of Obalon Shares to be issued and the price per Obalon Share at the effective time of the Merger. The exact number of Obalon Shares to be issued and the market price per Obalon Share is not currently known and may be less or more than the current market price. Stock price changes may result from a variety of factors, including general market, industry and economic conditions, changes in the respective businesses, operations and prospects of ReShape and Obalon, regulatory considerations, results of the ReShape Special Meeting and the Obalon Special Meeting, announcements with respect to the Merger or any of the foregoing, and other factors beyond the control of ReShape or Obalon. You should obtain current market price quotations for ReShape Shares and for Obalon Shares, but as indicated above, the prices at the time the Merger is consummated may be greater than, the same as or less than such price quotations. The Merger may not be consummated unless important conditions are satisfied or waived and there can be no assurance that the Merger will be consummated. The Merger Agreement contains a number of conditions that must be satisfied or waived (to the extent permitted by applicable law) to consummate the Merger. Those conditions include, among others: | ● | the required approvals of the Obalon and ReShape stockholders; |
| ● | approval of the ReShape Merger Proposal by the ReShape stockholders; |
| ● | the absence of any adverse law or order promulgated, entered, enforced, enacted, or issued by any government entity that prohibits, restrains, or makes illegal the consummation of the Merger or the other transactions contemplated by the Merger Agreement; |
| ● | the effectiveness of a registration statement on Form S-4, which shall include this joint proxy statement/prospectus, under the Securities Act and the absence of any stop order issued by the SEC suspending the use of such registration statement; |
| ● | the Obalon Shares to be issued in the Merger being approved for listing on The Nasdaq Capital Market and approval of the combined company’s continued listing on The Nasdaq Capital Market (certain risks related to obtaining such approvals are described below); |
| ● | subject to certain materiality exceptions, the accuracy of certain representations and warranties of each of Obalon and ReShape contained in the Merger Agreement and the compliance by each party with the covenants contained in the Merger Agreement; and |
| ● | the absence of a material adverse effect with respect to each of Obalon and ReShape. |
These conditions to the consummation of the Merger may not be satisfied or waived (to the extent permitted by applicable law) and, as a result, the Merger may not be consummated at the time expected, or at all. In addition, ReShape or Obalon may elect to terminate the Merger Agreement in certain other circumstances.
There can be no assurance that the Obalon Shares to be issued in the Merger will be on the Nasdaq Stock Market or, if listed, that the combined company will be able to comply with the continued listing standards. Nasdaq has determined that the proposed transaction constitutes a business combination that results in a change of control pursuant to its listing rules. Accordingly, the combined company will be required to satisfy all of Nasdaq’s initial listing criteria and to complete Nasdaq’s initial listing process in order for the Obalon Shares to be listed on Nasdaq. An application to list the Obalon Shares on The Nasdaq Capital Market upon consummation of the Merger has been filed as required by The Nasdaq Capital Market. Since Obalon went public in 2016, it has twice fallen below Nasdaq’s minimum required level for stockholder equity and minimum bid price requirement. Obalon was downlisted in November 2020 from Nasdaq’s Global Market to its Capital Market though it is currently in compliance with the continued listing standards of the Nasdaq Capital Market. Nasdaq’s approval of the listing application is a condition to the closing of the Merger and while ReShape and Obalon can each terminate the Merger Agreement if the condition is not satisfied (in which case, a $1 million termination fee may be payable to Obalon by ReShape), the parties can also each choose to waive the condition and consummate the Merger without Nasdaq’s approval of the listing application. In the event ReShape and Obalon waive that condition and consummate the Merger without Nasdaq’s approval of the listing application, the combined company would not be listed on The Nasdaq Capital Market. In addition, if after listing, The Nasdaq Capital Market delists the Obalon Shares from trading on its exchange for failure to meet the continued listing standards, the combined company and its stockholders could face significant material adverse consequences including: | ● | a limited availability of market quotations for its securities; |
| ● | a determination that its common stock is a “penny stock” which will require brokers trading in its common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for its common stock; |
| ● | a limited amount of analyst coverage; and |
| ● | a decreased ability to issue additional securities or obtain additional financing in the future. |
The Merger Agreement contains provisions that could discourage a potential competing acquirer of either ReShape or Obalon. The Merger Agreement contains “no shop” provisions that restrict each of Obalon’s and ReShape’s ability to solicit, initiate or knowingly encourage and induce, or take any other action designed to facilitate competing third-party proposals relating to a merger, reorganization or consolidation of the company or an acquisition of the company’s stock or assets. In addition, the other party generally has an opportunity to offer to modify the terms of the Merger in response to any competing acquisition proposals before the board of directors of the company that has received a third-party proposal may withdraw or qualify its recommendation with respect to the Merger. The Merger Agreement does not permit either Obalon or ReShape to terminate the Merger Agreement in order to pursue a superior proposal. These provisions could discourage a potential third-party acquirer that might have an interest in acquiring all or a significant portion of Obalon or ReShape from considering or proposing an acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than the market value proposed to be received or realized in the Merger. The pendency of the Merger could materially adversely affect the business, financial condition, results of operations or cash flows of ReShape or Obalon. The announcement and pendency of the Merger could disrupt ReShape’s or Obalon’s businesses, in any of the following ways, among others: | ● | ReShape’s employees may experience uncertainty about their future roles with the combined company, which might adversely affect each company’s ability to retain and hire key managers and other employees; |
| ● | the attention of ReShape management or Obalon management may be directed toward completion of the Merger, integration planning and transaction-related considerations and may be diverted from the company’s day-to-day business operations and, following the completion of the Merger, the attention of the combined company’s management may also be diverted to such matters; |
| ● | vendors, suppliers, business partners or others may seek to modify or terminate their business relationship with ReShape or Obalon or the combined company following completion of the Merger; |
| ● | ReShape or Obalon, or the combined company following completion of the Merger, and their respective directors could become subject to lawsuits relating to the Merger; and |
| ● | ReShape or Obalon may experience negative reactions from their stockholders and the medical community, among others. |
These disruptions could be exacerbated by a delay in the completion of the Merger or termination of the Merger Agreement. Additionally, if the Merger is not consummated, each company will have incurred significant costs and diverted the time and attention of management. A failure to consummate the Merger may also result in negative publicity, reputational harm, litigation against ReShape or Obalon or their respective directors and officers, and a negative impression of the companies in the financial markets. The occurrence of any of these events individually or in combination could have a material adverse effect on either or both companies’ financial statements and stock price. In addition, the Merger Agreement restricts Obalon and ReShape from taking certain actions until the Effective Time without the consent of the other party, including, among others: the payment of dividends; the issuance of equity (including certain equity incentive awards); certain increases to employee compensation and benefits; capital expenditures; the incurrence of indebtedness; acquisitions and divestitures; and the entry into or amending certain material contracts. Obalon and ReShape are required to conduct business in the ordinary course consistent with past practice. The restrictive covenants, which are subject to various specific exceptions, may prevent Obalon or ReShape from pursuing attractive business opportunities that may arise prior to the consummation of the Merger. Although Obalon and ReShape may be able to pursue such activities with the other company’s consent, the other company may not be willing to provide its consent. ReShape directors and executive officers and Obalon directors and executive officers have interests in the Merger that may be different from, or in addition to, the interests of ReShape stockholders and Obalon stockholders. Certain of the directors and executive officers of ReShape and certain of the directors and executive officers of Obalon negotiated the terms of the Merger Agreement and these individuals have interests in the Merger that may be different from, or in addition to, those of ReShape stockholders and Obalon stockholders, respectively. These interests include, but are not limited to, the continued service of certain of these ReShape individuals as directors and executive officers of Obalon after the date of the consummation of the Merger, certain other compensation arrangements with the Obalon directors and executive officers, and provisions in the Merger Agreement regarding continued indemnification of and advancement of expenses of the directors and executive officers of ReShape and Obalon. Failure to consummate the Merger could negatively impact respective future stock prices, operations and financial results of ReShape and Obalon. If the Merger is not consummated for any reason, ReShape and Obalon may be subjected to a number of material risks, including the following: | ● | a decline in the market prices of the shares of ReShape Common Stock or Obalon Shares to the extent that their current market prices reflect a market assumption that the Merger will be consummated and will be beneficial to the value of the business of Obalon after the Closing Date; |
| ● | having to pay certain costs related to the proposed Merger, such as legal, accounting, financial advisory, printing and mailing fees, which must be paid regardless of whether the Merger is consummated; |
| ● | addressing the consequences of operational decisions made since the signing of the Merger Agreement, including because of restrictions on ReShape’s or Obalon’s operations imposed by the terms of the Merger Agreement and decisions to delay or defer capital expenditures; |
| ● | returning the focus of management and personnel to operating ReShape or Obalon, as applicable, on a standalone basis, without any of the benefits expected to have been provided by the consummation of the Merger; and |
| ● | negative reactions from their respective stockholders, suppliers, employees, patients enrolled in our studies and the medical community. |
In addition to the above risks, ReShape may be required, under certain circumstances, to pay to Obalon a termination fee of $1.0 million, which may materially adversely affect ReShape’s financial condition. The business of ReShape or Obalon may be adversely impacted by the failure to pursue other beneficial opportunities due to the focus of ReShape and Obalon management on the Merger. A failure to consummate the Merger may also result in negative publicity, reputational harm, litigation against ReShape or Obalon or their respective directors and officers, and a negative impression of the companies in the financial markets. If the Merger is not consummated, we cannot assure the Obalon stockholders or the ReShape stockholders that these risks will not materialize and will not materially adversely affect the business, financial results and stock price of the respective companies. Financial projections regarding ReShape may not prove accurate. In connection with the Merger, ReShape prepared and considered internal financial forecasts for ReShape. These financial projections are based on several assumptions, including regarding future operating cash flows, expenditures and income of ReShape, including benefits to be realized from the Merger. These financial projections were not prepared with a view to public disclosure, are subject to significant economic, competitive, industry and other uncertainties and may not be achieved in full, within projected timeframes or at all. The failure of ReShape to achieve projected results could have a material adverse effect on the price of the Obalon Shares, the combined company’s financial position after the Closing Date, and the combined company’s ability to pay dividends, and/or pay dividends at or above the rate currently paid by Obalon or ReShape, following the consummation of the Merger. The Merger may disrupt attention of ReShape management and Obalon management from ongoing business operations. Each of ReShape and Obalon has expended, and expects to continue to expend, significant management resources to consummate the Merger. The attention of each company’s management may be diverted away from the day-to-day operations of the businesses of ReShape and Obalon, respectively, including implementing initiatives to improve performance, execution of existing business plans and pursuing other beneficial opportunities, in an effort to consummate the Merger. This diversion of management resources could disrupt ReShape’s or Obalon’s operations and may have an adverse effect on the respective businesses, financial conditions, results of operations and cash flows of the two companies or the combined company after the effective time of the Merger. The market price for Obalon Shares following completion of the Merger will continue to fluctuate and may be affected by factors different from those that historically have affected Obalon Shares and ReShape Shares. Following the completion of the Merger, Obalon stockholders and ReShape stockholders will be stockholders in the combined company. ReShape’s business differs in important respects from that of Obalon and the combined company’s business will differ from that of Obalon and ReShape prior to the completion of the Merger. Accordingly, the results of operations of the combined company and the market price of Obalon Shares after the completion of the Merger may be affected by factors different from those currently affecting the independent results of operations of each of Obalon and ReShape. Risks Related to Our Business and Industry We may be unable to attract and retain management and other personnel we need to succeed. Our success depends on the services of our senior management and other key employees. The loss of the services of one or more of our officers or key employees could delay or prevent the successful completion of our clinical trials and the commercialization of our Lap-Band system and ReShapeCare, and the development of our ReShape Vest and Diabetes Bloc-Stim Neuromodulation. Our continued growth will require hiring a number of qualified clinical, scientific,
commercial and administrative personnel. Accordingly, recruiting and retaining such personnel in the future will be critical to our success. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we fail to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our development and commercialization activities. Our ReShape Vest product is in the early stages of clinical evaluation. If the clinical trial is not successfully completed or any required regulatory approvals are not obtained, the ReShape Vest may not be commercialized and our business prospects may suffer. Our ReShape Vest product is in the early stages of development and is currently in the early stages of clinical evaluation. Our ability to market the ReShape Vest in the United States and abroad depends upon our ability to demonstrate the safety and effectiveness of the product with clinical data to support our requests for regulatory approval. The ReShape Vest may not be found to be safe and, where required, effective in clinical trials and may not ultimately be approved for marketing by U.S. or foreign regulatory authorities, which would have a negative impact on our net sales. There is no assurance that we will be successful in achieving the desired results in our anticipated clinical trials for the ReShape Vest or, if we do, that the FDA or other regulatory agencies will approve the product for sale without the need for additional clinical trial data to demonstrate safety and efficacy. We continually evaluate the potential financial benefits and costs of clinical trials and the products being evaluated in them. If we determine that the costs associated with obtaining regulatory approval of a product exceed the potential financial benefits of that product or if the projected development timeline is inconsistent with our investment horizon, we may choose to stop a clinical trial and/or the development of a product. The shares of series C convertible preferred stock issued in connection with our acquisition of ReShape Medical have certain rights and preferences senior to our common stock, including a liquidation preference that is senior to our common stock. There are currently 95,388 shares of our series C convertible preferred stock outstanding, which are convertible into 38 shares of our common stock. We issued the shares of our series C convertible preferred stock in connection with our acquisition of ReShape Medical. The series C convertible preferred stock has a liquidation preference of $274.88 per share, or $692,691.05 per underlying share of common stock, or approximately $26.2 million in the aggregate. Holders of the series C convertible preferred stock have the right to convert their shares into shares of common stock instead of receiving the liquidation preference. In general, the series C convertible preferred stock is entitled to receive dividends (on an as-if-converted-to-common stock basis) actually paid on shares of common stock when, as and if such dividends are paid on shares of common stock. No other dividends will be paid on shares of series C convertible preferred stock. While the series C convertible preferred stock generally does not have voting rights, as long as any shares of series C convertible preferred stock remain outstanding, we cannot, without the affirmative vote of holders of a majority of the then-outstanding shares of series C convertible preferred stock, (a) alter or change adversely the powers, preferences or rights given to the series C convertible preferred stock (including by the designation, authorization, or issuance of any shares of preferred stock that purports to have equal rights with, or be senior in rights or preferences to, the series C convertible preferred stock), (b) alter or amend the series C convertible preferred stock certificate of designation, (c) amend our certificate of incorporation or other charter documents in any manner that adversely affects any rights of the holders of series C convertible preferred stock, (d) increase the number of authorized shares of series C convertible preferred stock or (e) enter into any agreement with respect to any of the foregoing. We are a medical device company with a limited history of operations no significant history ofand sales, in the United States and a limited history of sales in countries outside of the United States, and we cannot assure you that we will ever generate substantial revenue or be profitable. We are a medical device company with a limited operating history upon which you can evaluate our business. We received FDA approval to sell our product in the United States on January 14, 2015 and we have had commercial sales within the United States in 2015 and 2016. We have also completed the regulatory process required to sell our product in Australia, the European Economic Area and other countries that recognize the European CE Mark, and have not generated revenue from commercial sales outside of the United States since 2012 and then only on a limited basis in Australia and the Middle East. We have been engaged in research and development and clinical trials since our inception in 2002 and have invested substantially all of our time and resources in developing our vBloc Therapy, which we have begun to commercialize in the form of our vBloc System. The success of our business will depend on our ability to establish a sales force, makegenerate increased sales and control costs, as well as our ability to obtain additional regulatory approvals needed to market new versions of our vBloc SystemLap-Band system or regulatory approvals needed to market our ReShape Vest, Diabetes Bloc-Stim Neuromodulation and any other products we may develop in the future, all of which we may be unable to do. If we are unable to successfully market our vBloc SystemLap-Band system for its indicated use, ReShapeCare, or develop and commercialize the ReShape Vest or Diabetes Bloc-Stim Neuromodulation, we may never become profitable and may have to cease operations as a result. Our lack of a significant operating history also limits your ability to make a comparative evaluation of us, our products and our prospects. We have incurred losses since inception and we anticipate that we will continue to incur losses for the foreseeable future.
We have incurred losses in each year since our formation in 2002. Our net loss applicable to common stockholders for the fiscal years ended December 31, 2016, 2015 and 2014 was $23.4 million, $25.5 million and $26.1 million, respectively. We have funded our operations to date principally from the sale of securities and the issuance of indebtedness. Development of a new medical device, including conducting clinical trials and seeking regulatory approvals, is a long, expensive and uncertain process. Although we recently received the regulatory approval required to sell our vBloc System in the United States and have the approvals required for sales in the European Economic Area and
other countriesDuring the second quarter of 2019 we recorded a non-cash indefinite-lived intangible assets impairment loss, which significantly impacted our results of operations, and we may be exposed to additional impairment losses that recognizecould be material.
We conduct our annual indefinite-lived intangible assets impairment analysis during the European CE Mark,fourth quarter of each year or when circumstances suggest that an indicator for impairment may be present. During the second quarter of 2019, we have only generated limited revenue from commercial salesperformed a qualitative impairment analysis of the in-process research and development (“IPR&D”). Due to delays in the United States and have not generated revenue from commercial sales outsideclinical trials experienced during the first six months of 2019, we revised its expectations of when revenues would commence for the ReShape Vest, thus reducing the projected near-term future net cash flows related to the ReShape Vest. As a result, we recorded an impairment charge of approximately $6.6 million of the United States since 2012excess of the carrying value over the estimated fair value. In the future, we may have additional indicators of potential impairment requiring us to record an impairment loss related to our remaining indefinite-lived and then only onfinite-lived intangible assets, which could also have a limited basis in Australia and the Middle East. We expect to incur significant sales and marketing expenses prior to recording sufficient revenue to offset these expenses. We expect our general and administrative expenses to increase as we continue to add the infrastructure necessary to support our initial commercial sales, operate as a public company and develop our intellectual property portfolio. For these reasons, we expect to continue to incur significant operating losses for the next several years. These losses, among other things, have had and will continue to have anmaterial adverse effect on our stockholders’ equity and working capital. Becauseresults of the numerous risks and uncertainties associated with developing new medical devices, we are unable to predict the extent of any future losses or when we will become profitable, if ever.operations. We will need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or liquidate some or all of our assets. Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts on the development and commercialization of our productproducts and on research and development, including conducting current and future clinical trials for our vBloc SystemLap-Band system, ReShapeCare, ReShape Vest (if approved for sale) and Diabetes Bloc-Stim Neuromodulation (if approved for sale) and subsequent versions of our product. Cash usedproducts. In addition, in operations was $20.6December 2021 we are obligated to pay Apollo the final $3.0 million $22.6 million and $19.4 million forinstallment of the fiscalpurchase price related to our acquisition of LAP-BAND system. For the years ended December 31, 2016, 20152020 and 2014,2019, net cash used in operating activities was $8.5 million and $14.2 million, respectively. We expect that our cash used in operations will continue to be significant in the upcoming years, and that we will need to raise additional capital to commercialize our vBloc System inLap-Band system and ReShapeCare, and to develop the United States, the European Economic Area, other countries that recognize the European CE MarkReShape Vest and other international markets, to explore other indications for our product,Diabetes Bloc-Stim Neuromodulation, and to continue our research and development programs, and to fund our ongoing operations. Our future funding requirements will depend on many factors, including: | ·
● | | the cost and timing of establishing sales, marketing and distribution capabilities; |
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● | | the cost of establishing clinical and commercial supplies of our vBloc SystemLap-Band system, ReShapeCare, ReShape Vest, Diabetes Bloc-Stim Neuromodulation and any products that we may develop; |
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● | | the rate of market acceptance of our vBloc System and vBloc TherapyLap-Band system, ReShapeCare, ReShape Vest, Diabetes Bloc-Stim Neuromodulation and any other product candidates; |
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● | | the cost of filing and prosecuting patent applications and defending and enforcing our patent and other intellectual property rights; |
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● | | the cost of defending, in litigation or otherwise, any claims that we infringe third-party patent or other intellectual property rights; |
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● | | the effect of competing products and market developments; |
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● | | the cost of explanting clinical devices; |
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● | | the terms and timing of any collaborative, licensing or other arrangements that we may establish; |
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● | | any revenue generated by sales of our vBloc SystemLap-Band system, ReShapeCare, ReShape Vest and Diabetes Bloc-Stim Neuromodulation or our future products; |
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● | | the scope, rate of progress, results and cost of any clinical trials and other research and development activities; |
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● | | the cost and timing of obtaining any further required regulatory approvals; and |
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● | | the extent to which we invest in products and technologies, although we currently have no commitments or agreements relating to these types of transactions. |
Until the time, if ever, when we can generate a sufficient amount of product revenue, we expect to finance our future cash needs through public or private equity offerings, debt financings or corporate collaboration, licensing arrangements and grants, as well as through interest income earned on cash balances. Additional capital may not be available on terms favorable to us, or at all. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may involve restrictive covenants or additional security interests in our assets. Any additional debt or equity financing that we complete may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or products, or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to delay, reduce the scope of, or eliminate some or all of, our development programs or liquidate some or all of our assets. We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to compliance initiatives. As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act)“Sarbanes-Oxley Act”), as well as rules subsequently implemented by the SEC and NASDAQ have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations result in increased legal and financial compliance costs and will make some activities more time-consuming and costly. The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure. In particular, we are required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. We have incurred and continue to expect to incur significant expense and devote substantial management effort toward ensuring compliance with Section 404. Moreover, if we do not comply with the requirements of Section 404, or if we identify deficiencies in our internal controls that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources. General economic and political conditions could have a material adverse effect on our business. External factors can affect our financial condition. Such external factors include general domestic and global economic conditions, such as interest rates, tax law including tax rate changes, and factors affecting global economic stability, and the political environment regarding healthcare in general. We cannot predict to what extent the global economic conditions may negatively impact our business. For example, negative conditions in the credit and capital markets could impair our ability to access the financial markets for working capital and could negatively impact our ability to borrow. In addition, the coronavirus outbreak has begun to have indeterminable adverse effects on general commercial activity and the world economy. If the impact of the coronavirus outbreak continues for an extended period, it could materially adversely impact our operating and clinical activities as a result of the impacts on our supply chain, our clinical trial sites, access to patients and additional regulatory guidance could be delayed or impacted. Our business and results of operations could be adversely affected to the extent that this coronavirus or any epidemic harms the global economy.
We face significant uncertainty in the industry due to government healthcare reform. reform. In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. The Patient Protection and Affordable Care Act, as amended, (the Affordable“Affordable Care Act)Act”) as well as any future healthcare reform legislation, may have a significant impact on our business. The impact of the Affordable Care Act on the health care industry is extensive and includes, among other things, the federal government assuming a larger role in the health care system, expanding healthcare coverage of United States citizens and mandating basic healthcare benefits. The Affordable Care Act contains many provisions designed to generate the revenues necessary to fund the coverage expansions and to reduce costs of Medicare and Medicaid, including imposing a 2.3% excise tax on domestic sales of many medical devices by manufacturers that began in 2013. Although aA moratorium was placed on the medical device excise tax in 2016 and 2017, if it is reinstated, it may adversely affect our sales andthrough 2019. During December of 2019, the cost of goods sold.medical device excise tax was permanently repealed. In January 2017, Congress voted in favor of a budget resolution that will produce legislation that would repeal certain aspects of the Affordable Care Act if enacted into law. Congress is also considering subsequent legislation to replace or repeal elements or all of the Affordable Care Act. In addition, there have been recent public announcements by members of Congress and the newcurrent presidential administration regarding their plans to repeal and replace the Affordable Care Act. Further, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the Affordable Care Act to waive, defer, grant exemptions from, or delay the implementation of any provision of the Affordable Care Act that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. At this time, it is not clear whether the Affordable Care Act will be repealed in whole or in part, and, if it is repealed, whether it will be replaced in whole or in part by another plan.plan and what impact those changes will have on coverage and reimbursement for healthcare items and services covered by plans that were authorized by the Affordable Care Act. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, and also indirectly affect the amounts that private payers are willing to pay. In addition, any healthcare reforms enacted in the future may, like the Affordable Care Act, be phased in over a number of years but, if enacted, could reduce our revenue, increase our costs, or require us to revise the ways in which we conduct business or put us at risk for loss of business. In addition, our results of operations, financial position and cash flows could be materially adversely affected by changes under the Affordable Care Act and changes under any federal or state legislation adopted in the future.
We are subject, directly or indirectly, to United States federal and state healthcare fraud and abuse and false claims laws and regulations. Prosecutions under such laws have increased in recent years and we may become subject to such litigation. If we are unable to, or have not fully complied with such laws, we could face substantial penalties. Our operations are directly, or indirectly through customers, subject to various state and federal fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute and federal False Claims Act. These laws may impact, among other things, our sales, marketing and education programs. The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. The Anti-Kickback Statute is broad and, despite a series of narrow safe harbors, prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs. The federal False Claims Act prohibits persons from knowingly filing, or causing to be filed, a false claim to, or the knowing use of false statements to obtain payment from the federal government. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. The frequency of filing qui tam actions has increased significantly in recent years, causing greater numbers of medical device, pharmaceutical and healthcare companies to have to defend a False Claim Act action. When an entity is determined to have violated the federal False Claims Act, it may be required to pay up to three times the actual
damages sustained by the government, plus civil penalties for each separate false claim. Various states have also enacted laws modeled after the federal False Claims Act. We are unable to predict whether we could be subject to actions under any of these laws, or the impact of such actions. If we are found to be in violation of any of the laws described above or other applicable state and federal fraud and abuse laws, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from government healthcare reimbursement programs and the curtailment or restructuring of our operations. Failure to protect our information technology information technology infrastructure against cyber-based attacks, network security breaches, service interruptions or data corruption could materially disrupt our operations and adversely affect our business. our business depends on our information technology systems. We rely on our information technology systems to, among other things, effectively manage sales and marketing data, accounting and financial functions, inventory management, product development tasks, clinical data, customer service and technical support functions. Our information technology systems are vulnerable to damage or interruption from earthquakes, fires, floods and other natural disasters, terrorist attacks, power losses, computer system or data network failures, security breaches, data corruption, and cyber-based attacks. Cyber-based attacks can include computer viruses, computer denial-of-service attacks, phishing attacks, worms, and other malicious software programs or other attacks, covert introduction of malware to computers and networks, impersonation of authorized users, and efforts to discover and exploit any design flaws, bugs, security vulnerabilities, or security weaknesses, as well as intentional or unintentional acts by employees or other insiders with access privileges, intentional acts of vandalism by third parties and sabotage. In addition, federal, state, and international laws and regulations, such as the General Data Protection Regulation adopted by the European Union and EEA countries can expose us to enforcement actions and investigations by regulatory authorities, and potentially result in regulatory penalties and significant legal liability, if our information technology security efforts fail. In addition, a variety of our software systems are cloud-based data management applications, hosted by third-party service providers whose security and information technology systems are subject to similar risks. We operate in a highly competitive industry that is subject to rapid change. If our competitors are able to develop and market products that are safer or more effective than our products, our commercial opportunities will be reduced or eliminated.eliminated. The health care industry is highly competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. The obesity treatment market in which we operate has grown significantly in recent years and is expected to continue to expand as technology continues to evolve and awareness of the need to treat the obesity epidemic grows. Although we are not aware of any competitors in the neuroblocking market, we face potential competition from pharmaceutical and surgical obesity treatments. Many of our competitors in the obesity treatment field have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, clinical trials, obtaining regulatory approvals and marketing approved products than we do. Smaller or early-stage companies may also prove to be significant competitors, particularly if they pursue competing solutions through collaborative arrangements with large and established companies, such as Allergan, Apollo Endosurgery, Boston Scientific, LivaNova PLC, Johnson & Johnson, Medtronic or St. Jude Medical. Our competitors may develop and patent processes or products earlier than us, obtain regulatory approvals for competing products more rapidly than we are able to and develop more effective, safer and less expensive products or technologies that would render our products non-competitive or obsolete. Failure to protect our information technology infrastructure against cyber-based attacks, network security breaches, service interruptions, or data corruption could significantly disrupt our operations and adversely affect our business and operating results.
We currently rely on information technology and telephone networks and systems, including the Internet, to process and transmit sensitive electronic information and will rely on such systems to manage or support a variety of business processes and activities, including sales, billing, customer service, procurement and supply chain, manufacturing, and distribution. We use enterprise information technology systems to record, process, and summarize financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal, and tax requirements.
Our information technology systems, some of which are managed by third-parties, may be susceptible to damage, disruptions or shutdowns due to computer viruses, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, telecommunication failures, user errors or catastrophic events. We are not aware of any breaches of our information technology infrastructure. Despite the precautionary measures we have taken to prevent breakdowns in our information technology and telephone systems, if our systems suffer severe damage, disruption or shutdown and we are unable to effectively resolve the issues in a timely manner, our business and operating results may suffer.
Risks Associated with Development and Commercialization of the vBlocLap-Band System, ReShapeCare, ReShape Vest and Diabetes Bloc-Stim Neuromodulation Our efforts to increase revenue from our Lap-Band system and ReShapeCare, and commercialize our vBloc Systemthe ReShape Vest, Diabetes Bloc-Stim Neuromodulation and expanded line of bariatric surgical accessories may not succeed or may encounter delays which could significantly harm our ability to generate revenue. Our ability to generate revenue will depend upon the sales of our Lap-Band system, expanded line of bariatric surgical accessories, and ReShapeCare and successful commercialization of our vBloc System.ReShape Vest (if approved for sale) and
Diabetes Bloc-Stim Neuromodulation (if approved for sale). Our efforts to commercialize this productthese products may not succeed for a number of reasons, including: | ·
● | we may not be able to obtain the regulatory approvals required for our ReShape Vest and/or Diabetes Bloc-Stim Neuromodulation; |
| ● | our vBloc Systemproducts may not be accepted in the marketplace by physicians, patients and third-party payers; |
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● | | the price of our vBloc System,products, associated costs of the surgical procedure and treatment and the availability of sufficient third-party reimbursement for the system implantation and follow-up procedures; |
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● | | appropriate reimbursement and/or coding options may not exist to enable billing for the system implantation and follow-up procedures; procedures for our ReShape Vest; |
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● | coverage policies for bariatric surgeries, including Lap-Band may be restricted in the future; |
| ● | we may not be able to sell our vBloc Systemproducts at a price that allows us to meet the revenue targets necessary to generate enough revenue for profitability; |
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● | | the frequency and severity of any side effects of our vBloc Therapy; products; |
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● | | physicians and potential patients may not be aware of the perceived effectiveness and sustainability of the results of vBloc Therapy provided by our vBloc System; products; |
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● | | we, or the investigators of our product,products, may not be able to have information on the outcome of the trials published in medical journals; |
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● | | the availability and perceived advantages and disadvantages of alternative treatments; |
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● | | any rapid technological change may make our productproducts obsolete; |
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● | | we may not be able to have our vBloc Systemproducts manufactured in commercial quantities or at an acceptable cost; |
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● | | we may not have adequate financial or other resources to complete the development and commercialization of our vBloc Systemproducts or to develop sales and marketing capabilities for our vBloc System;products; and |
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● | | we may be sued for infringement of intellectual property rights and could be enjoined from manufacturing or selling our products. |
Besides requiring physician adoption, market acceptance of our vBloc Systemproducts will depend on successfully communicating the benefits of our vBloc Therapyproducts to three additional constituencies involved in deciding whether to treat a particular patient using such therapy:our products: (1) the potential patients themselves; (2) institutions such as hospitals, where the procedure would be performed and opinion leaders in these institutions; and (3) third-party payers, such as private healthcare insurers and governmental payers, such as Medicare and Medicaid in the United States, which would ultimately bear most of the costs of the various providers and equipment involved in our vBloc Therapy.Lap-Band system, ReShape Care, ReShape Vest (if approved for sale) and Diabetes Bloc-Stim Neuromodulation (if approved for sale). Marketing to each of these constituencies requires a different marketing approach, and we must convince each of these groups of the efficacy and utility of our vBloc Therapyproducts to be successful. If our vBloc Therapy,products, or any other neuroblocking therapy or products for other gastrointestinal diseases and disorders that we may develop, doesdo not achieve an adequate level of acceptance by the relevant constituencies, we may not generate significant product revenue and may not become profitable. After we received FDA approval on January 14, 2015, we began the commercialization process for our vBloc System in the United States, and had our first commercial sales within the United States in 2015. Previously, in 2012, we commenced commercial sales of our vBloc System in Australia and the Middle East, but have not generated revenue from commercial sales outside of the United States since 2012 as we focused our resources on the U.S. regulatory approval process and commercialization of our product in the United States and we do not know when, or if, we will have the resources to commercialize our vBloc System internationally. If we are not successful in the commercialization of our vBloc System for the treatment of obesity we may not generate enough revenue to offset our expenses and may be forced to cease operations as a result.
We have not received, and may never receive, approval from the regulatory bodies of any foreign country other than the European Economic Area to market our vBloc System for the treatment of obesity.
We do not have the necessary regulatory approvals to market our vBloc System in any foreign market other than the European Economic Area for which we received CE Mark approval for our vBloc System in March 2011 for the treatment of obesity and other countries which accept these regulatory approvals. Additionally, the vBloc System was previously listed on the Australian Register of Therapeutic Goods (ARTG). The CE Mark approval for our vBloc System was expanded in 2014 to also include use for the management of Type 2 diabetes in obese patients. We commenced commercialization of our product in Australia and the Middle East in 2012, but have not generated revenue from commercial sales outside of the United States since 2012 as we focused our resources on the U.S. regulatory
approval processWe may not be able to obtain required regulatory approvals for our ReShape Vest and/or Diabetes Bloc-Stim Neuromodulation in a cost-effective manner or at all, which could adversely affect our business and commercializationoperating results.
The production and marketing of our productReShape Vest and Diabetes Bloc-Stim Neuromodulation, and our ongoing research and development, preclinical testing and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities both in the United States and abroad. U.S. and foreign regulations applicable to medical devices are wide-ranging and govern, among other things, the development, testing, marketing and premarket review of new medical devices, in addition to regulating manufacturing practices, reporting, advertising, exporting, labeling and record keeping procedures. We are required to obtain regulatory approval before we do not know when, or if, we will have the resources to commercialize our vBloc System internationally. In order tocan market our vBloc System outside ofReShape Vest and Diabetes Bloc-Stim Neuromodulation in the United States we will need to establish and comply with the numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries may differ from that required to obtain FDA approval.certain foreign countries. The regulatory approval process in other countries may also include all of the risks detailed below.
Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others. While the vBloc System was previously listed on the ARTGwill require significant time, effort and has received European CE Marking, we cannot assure you when, or if, we will be ableexpenditures to restart sales in Australia or the Middle East, commence sales in the European Economic Area or other countries that recognize the CE Mark or obtain approvalbring products to market, our vBloc System in other countries outside the United States.
Because vBloc Therapy represents a novel way to effect weight loss in the treatment of obesity, and because there is a large population of obese patients who might be eligible for treatment, it is possible that otherour ReShape Vest and/or Diabetes Bloc-Stim Neuromodulation will not be approved for sale. Even if regulatory bodies will review an application for approval of our vBloc System with greater scrutiny, which could cause that process to be lengthier and more involved than that for products without such characteristics. Such regulatory bodies can delay, limit ReShape Vest and/or deny approval of our vBloc System for many reasons, including our inability to demonstrate safety or effectiveness to their satisfaction, insufficient or inadequate data from our clinical trials, the facilities of our third-party manufacturers or suppliers may not meet applicable requirements; and changes in the regulatory bodies’ approval policies, expectations with regard to the type or amount of scientific data required or adoption of new regulations may require additional data or additional clinical studies.
We have limited data and experience regarding the safety and efficacy of the vBloc System. Any long-term data thatDiabetes Bloc-Stim Neuromodulation is generatedgranted, it may not be positive or consistent with our limited short-term data, which would affect market acceptance of these products.
Because our technology is relatively new ingranted within the treatment of obesity,timeframe that we have performed clinical trials only with limited patient populations. The long-term effects of using the vBloc System in a large number of patients have not been studied and the results of short-term clinical use of the vBloc System do not necessarily predict long-term clinical benefits or reveal long-term adverse effects.
Clinical trials conducted with the vBloc System have involved procedures performed by physicians who are very technically proficient. Consequently, both short and long-term results reported in these studies may be significantly more favorable than typical results achieved by physicians,expect, which could negatively impact market acceptance ofhave an adverse effect on our operating results and financial condition. Even after our ReShape Vest and/or Diabetes Bloc-Stim Neuromodulation is approved by the vBloc System and materially harm our business.
We may be unable to complete our current clinical trials or any additional clinical trials, orFDA, we may experience significant delays in completing those clinical trials,have ongoing responsibilities under FDA regulations, non-compliance of which could impact market acceptance of our vBloc System and impair our financial position.
We continue to evaluate the vBloc Therapy in human clinical trials, including the EMPOWER trial and ReCharge trial. Conducting a clinical trial, which involves screening, assessing, testing, treating and monitoring patients at several sites across the country and possibly internationally, and coordinating with patients and clinical institutions, is a complex and uncertain process.
The completion of our ongoing and future clinical trials, could be delayed, suspended or terminated for several reasons, including:
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| | ongoing discussions with regulatory authorities regarding the scope or design of our preclinical results or clinical trial or requests for supplemental information with respect to our preclinical results or clinical trial results;
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| | our failure or inability to conduct the clinical trials in accordance with regulatory requirements;
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| | sites currently participating in the trial may drop out of the trial, which may require us to engage new sites or petition the FDA for an expansion of the number of sites that are permitted to be involved in the trial;
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| | patients may not remain in or complete, clinical trials at the rates we expect;
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| | patients may experience serious adverse events or side effects during the trial, which, whether or not related to our product, could cause the FDA or other regulatory authorities to place the clinical trial on hold;
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| | clinical investigators may not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol and good clinical practices; and
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| | we may be unable to obtain a sufficient supply of our vBloc System necessary for the timely conduct of the clinical trials.
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Although we believe that we have adequate personnel and procedures in place to manage the clinical trial process, the complexity of managing this process while also commercializing our vBloc System and fulfilling our disclosure and other obligations to our stockholders, lenders, regulators and other constituents could result in the subsequent withdrawal of such approvals, or such approvals could be withdrawn due to the occurrence of unforeseen problems following initial approval. We also are subject to medical device reporting regulations that require us to report to the FDA if any of our inadvertently taking actions outsideproducts causes or contributes to a death or serious injury or if a malfunction were it to occur might cause or contribute to a death or serious injury. Any failure to obtain regulatory approvals on a timely basis or the clinical trial process,subsequent withdrawal of such approvals could prevent us from successfully marketing our products, which could adversely impact the trial. As is always the case, if the FDA ultimately determined that such actions materially violated the protocol for the trial, the FDA could suspend, terminate or reject the results of the clinical trialaffect our business and require us to repeat the process.
If our clinical trials are delayed, it will take us longer to ultimately commercialize a product and generate revenue or the delay could result in our being unable to do so. Moreover, our development costs will increase if we have material delays in our clinical trials or if we need to perform more or larger clinical trials than planned.operating results.
We depend on clinical investigators and clinical sites to enroll patients in our clinical trials, and on other third parties to manage the trials and to perform related data collection and analysis, and, as a result, we may face costs and delays that are outside of our control. We rely on clinical investigators and clinical sites to enroll patients in our clinical trials and other third parties to manage the trials and to perform related data collection and analysis. However, we may not be able to control the amount and timing of resources that clinical sites may devote to our clinical trials. If these clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials, ensure compliance by patients with clinical protocols or comply with regulatory requirements, we will be unable to complete these trials, which could prevent us from obtaining or maintaining regulatory approvals for our product. Our agreements with clinical investigators and clinical trial sites for clinical testing place substantial responsibilities on these parties and, if these parties fail to perform as expected, our trials could be delayed or terminated. If these clinical investigators, clinical sites or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated, or the clinical data may be rejected by the FDA, adversely affecting our ability to successfully commercialize our product. Modifications to the vBloc SystemLap-Band system may require additional approval from regulatory authorities, which may not be obtained or may delay our commercialization efforts. The FDA and our European Notified Body require medical device companies to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance; however, some of these regulatory authorities can review a company’s decision. Any modifications to an approved device that could significantly affect its safety or efficacy, or that would constitute a major change in its intended use could require additional clinical studies and separate regulatory applications. Product changes or revisions will require all the regulatory steps and associated risks discussed above possibly including testing, regulatory filings and clinical study. We may not be able to obtain approval of supplemental regulatory approvals for product modifications, new indications for our product or new products. Delays in obtaining future clearances would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our commercialization efforts and future growth. Our neuroblocking therapy for the treatment of obesity is a unique form of treatment. Physicians may not widely adopt our vBloc System and vBloc Therapy unless they determine, based on experience, long-term clinical data and published peer reviewed journal articles, that vBloc Therapy provides a safe and effective alternative to other existing treatments for obesity.
We believe we are the first and only company currently pursuing neuroblocking therapy for the treatment of obesity. Physicians tend to be slow to change their medical treatment practices because of the time and skill required to learn a new procedure, the perceived liability risks arising from the use of new products and procedures, and the uncertainty of third-party coverage and reimbursement. Physicians may not widely adopt our vBloc System and vBloc Therapy unless they determine, based on experience, long-term clinical data and published peer reviewed journal articles, that the use of our vBloc Therapy provides a safe and effective alternative to other existing treatments for obesity, including pharmaceutical solutions and bariatric surgical procedures.
We cannot provide any assurance that the data collected from our current and planned clinical trials will be sufficient to demonstrate that our vBloc Therapy is an attractive alternative to other obesity treatment procedures. We rely on experienced and highly trained surgeons to perform the procedures in our clinical trials and both short-and long-term results reported in our clinical trials may be significantly more favorable than typical results of practicing physicians, which could negatively impact rates of adoption of our vBloc System and vBloc Therapy. We believe that published peer-reviewed journal articles and recommendations and support by influential physicians regarding our vBloc System and vBloc Therapy will be important for market acceptance and adoption, and we cannot assure you that we will receive these recommendations and support, or that supportive articles will be published.
If we fail to obtain adequate coding, coverage or payment levels for our product by governmental healthcare programs and other third-party payers, there may be no commercially viable markets for our vBloc System or other products we may develop or our target markets may be much smaller than expected.
Healthcare providers generally rely on third-party payers, including governmental payers, such as Medicare and Medicaid in the United States, as well as private healthcare insurers, to adequately cover and reimburse the cost of medical devices. Importantly, third-party payers are increasingly challenging the price of medical products and services and instituting cost containment measures to control or significantly influence the purchase of medical products and services. We expect that third-party payers will continue to attempt to contain or reduce the costs of healthcare by challenging the prices charged for healthcare products and services. If reimbursement for our vBloc System and the related surgery and facility costs is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, market acceptance of our vBloc System will be impaired and our future revenue, if any, would be adversely affected. As such, even though we have obtained FDA approval for our vBloc System and began to market it in 2015, the availability and level of third-party coverage and reimbursement could substantially affect our ability to successfully commercialize our vBloc System and other products we may develop.
The efficacy, safety, ease of use and cost-effectiveness of our vBloc System and of any competing products will, in part, determine the availability and level of coverage and payment. In particular, we expect that securing coding, coverage and payment for our vBloc System will be more difficult if healthcare providers and obese individuals do not consider the percentage of EWL from a pre-implementation baseline that our clinical trials have demonstrated to be clinically meaningful, whether or not regulatory agencies consider the improvement of patients treated in clinical trials to have been clinically meaningful.
In some international markets, pricing of medical devices is subject to government control. In the United States and international markets, we expect that both government and third-party payers will continue to attempt to contain or reduce the costs of healthcare by challenging the prices charged for healthcare products and services. If payment for our vBloc System and the related surgery and facility costs is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, market acceptance of our vBloc System will be impaired and our future revenue, if any, would be adversely affected.
We cannot predict the likelihood or pace of any significant regulatory or legislative action in any of these areas, nor can we predict whether or in what form healthcare legislation being formulated by various governments will be passed. We also cannot predict with precision what effect such governmental measures would have if they were ultimately enacted into law. However, in general, we believe that such legislative activity will likely continue. If adopted, such measures can be expected to have an impact on our business.
If we or our suppliers fail to comply with ongoing regulatory requirements, or if we experience unanticipated product problems, our vBloc SystemLap-Band system could be subject to restrictions or withdrawal from the market. Completion of our clinical trials and commercialization of our vBloc System will require access to manufacturing facilities that meet applicable regulatory standards to manufacture a sufficient supply of our product. We rely solely on third parties to manufacture and assemble our vBloc System, and do not currently plan to manufacture or assemble our vBloc System ourselves in the future.
Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continual review and periodic inspections by our European Notified Body and the FDA and other regulatory bodies. In particular we and our manufacturers and suppliers are required to comply with ISO requirements, Good Manufacturing Practices, which for medical devices is called the Quality System Regulation (QSR)(“QSR”), and other regulations which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any product for which we obtain marketing approval. The FDA enforces the QSR through inspections, which may be unannounced, and the CE system enforces its certification through inspections and audits as well. Our quality system has received certification of compliance to the requirements of ISO 13485:20032016 and will have to continue to successfully complete such inspections to maintain regulatory approvals for sales outside of the United States. Failure by us or one of our manufacturers or suppliers to comply with statutes and regulations administered by the FDA, CE authorities and other regulatory bodies, or failure to adequately respond to any observations, could result in enforcement actions against us or our manufacturers or suppliers, including, restrictions on our product or manufacturing processes, withdrawal of the product from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties. If any of these actions were to occur it would harm our reputation and cause our product sales to suffer. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with applicable regulatory requirements. If the FDA or any other regulatory body finds their compliance status to be unsatisfactory, our commercialization efforts could be delayed, which would harm our business and our results of operations. Additionally, if the FDA determines that our promotional materials, training or other activities constitute promotion of an unapproved use, we could be subject to significant liability, the FDA could request that we cease, correct or modify our training or promotional materials or subject us to regulatory enforcement actions. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our training or other promotional materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. We are subject to medical device reporting regulations that require us to report to the FDA, Competent Authorities or other governmental authorities in other countries if our products cause or contribute to a death or serious injury or malfunction in a way that would be reasonably likely to contribute to death or serious injury if the malfunction were to recur. The FDA and similar governmental authorities in other countries have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacturing. A government mandated, or voluntary, recall by us could occur as a result of component failures, manufacturing errors or design defects, including defects in labeling. Any recall would divert managerial and financial resources and could harm our reputation with customers. There can be no assurance that there will not be product recalls in the future or that such recalls would not have a material adverse effect on our business. Once the product is approved and implanted in a large number of patients, infrequently occurring adverse events may appear that were not observed in the clinical trials. This could cause health authorities in countries where the product is available to take regulatory action, including marketing suspension and recall. We may not be successful in our efforts to utilize our vBloc Therapy to treat comorbidities associated with obesity and other gastrointestinal diseases and disorders.
As part of our long-term business strategy, we plan to research the application of our vBloc Therapy to treat comorbidities associated with obesity and other gastrointestinal diseases and disorders. Research to identify new target applications requires substantial technical, financial and human resources, whether or not any new applications for our vBloc Therapy are ultimately identified. We may be unable to identify or pursue other applications of our technology. Even if we identify potential new applications for our vBloc Therapy, investigating the safety and efficacy of our therapy requires extensive clinical testing, which is expensive and time-consuming. If we terminate a clinical trial in which we have invested significant resources, our prospects will suffer, as we will have expended resources on a program that will not provide a return on our investment and missed the opportunity to allocate those resources to potentially more productive uses. We will also need to obtain regulatory approval for these new applications, as well as achieve market acceptance and an acceptable level of reimbursement.
We depend on a limited number of manufacturers and suppliers of various critical components for our vBloc System. The loss of any of these manufacturer or supplier relationships could prevent or delay commercialization of our vBloc System.
We rely entirely on third parties to manufacture our vBloc System and to supply us with all of the critical components of our vBloc System, including our leads, implantable batteries, neuroregulators, transmit coils and controllers. If any of our existing suppliers were unable or unwilling to meet our demand for product components, or if the components or finished products that they supply do not meet quality and other specifications, completion of our clinical trials or commercialization of our product could be delayed. Alternatively, if we have to switch to a replacement manufacturer or replacement supplier for any of our product components, we may face additional regulatory delays, and the manufacture and delivery of our vBloc System could be interrupted for an extended period of time, which could delay completion of our clinical trials or commercialization of our vBloc System.
If our device manufacturers or our suppliers are unable to provide an adequate supply of our product, our growth could be limited and our business could be harmed.
In order to produce our vBloc System in the quantities that we anticipate will be required to meet anticipated market demand, we will need our manufacturers to increase, or scale-up, the production process by a significant factor over our current level of production. There are technical challenges to scaling-up manufacturing capacity and developing commercial-scale manufacturing facilities that may require the investment of substantial additional funds by our manufacturers and hiring and retaining additional management and technical personnel who have the necessary manufacturing experience. If our manufacturers are unable to do so, we may not be able to meet future demand, if any. We may also represent only a small portion of our supplier’s or manufacturer’s business and if they become capacity constrained they may choose to allocate their available resources to other customers that represent a larger portion of their business. We currently anticipate that we will continue to rely on third-party manufacturers and suppliers for the production of the vBloc System. If we are unable to obtain a sufficient supply of our product, our revenue, business and financial prospects would be adversely affected.
If we are unable to establish sales and marketing capabilities or enter into and maintain arrangements with third parties to market and sell our vBloc System, our business may be harmed.
We have limited experience as a company in sales, marketing and distribution of our product and began the process of developing a sales and marketing organization in 2015 and have continued its development in 2016 and 2017. We market our products in the United States through a direct sales force supported by field technical managers who provide training, technical and other support services to our customers. We have begun to develop the necessary sales and marketing infrastructure in order to commercialize our product, but developing a sales force is expensive and time consuming and we may be unable to develop an effective sales and marketing organization on a timely basis, if at all, or maintain our current sales and marketing capabilities, either of which would delay or prevent us from generating enough revenue to become profitable. Our sales force will be competing with the experienced and well-funded marketing and sales organizations of our more established competitors. If we are unable to establish and maintain our own sales and marketing capabilities, we will need to contract with third parties to market and sell our product. In this event, our profit margins would likely be lower than if we performed these functions ourselves. In addition, we would necessarily be
relying on the skills and efforts of others for the successful marketing of our product. If we are unable to establish and maintain effective sales and marketing capabilities, independently or with others, we may not be able to generate product revenue and may not become profitable.
When we have sufficient resources to commercialize our vBloc System internationally, we intend to use direct, dealer and distributor sales models as the targeted geography best dictates. We have entered into an agreement with Device Technologies, a third-party distributor in Australia, to sell our product in Australia and we have entered into an agreement with Bader Sultan & Brothers, a third-party distributor in Kuwait, to sell our product in the Middle East. To generate sales and launch the commercialization of our product in other geographic regions we may need to identify and enter into other third-party distributor agreements. There is no assurance that we can do so on economically acceptable terms or that if we do so, that a third-party distributor will be successful in selling our product.
The commercialization of our product in countries outside the United States will expose our business to certain risks associated with international operations.
When we have sufficient resources to do so, we intend to commercialize our product in the European Economic Area, Australia and the Middle East and other international markets in which we obtain necessary regulatory approvals. Conducting international operations will subject us to unique risks, including:
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| | fluctuations in currency exchange rates;
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| | potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings;
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| | increased financial accounting and reporting burdens and complexities; and
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| | reduced or varied protection for intellectual property rights in some countries.
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The occurrence of any one of these risks could negatively affect our business and results of operations generally. Additionally, operating in international markets requires significant management attention. We cannot be certain that investments required to establish operations in other countries will produce desired levels of revenues or profitability.
We may be unable to attract and retain management and other personnel we need to succeed.
Our success depends on the services of our senior management and other key employees. The loss of the services of one or more of our officers or key employees could delay or prevent the successful completion of our clinical trials and the commercialization of our vBloc System. We have begun a controlled expansion of our operations and hired three new executives in January 2016 to oversee this expansion. Our continued growth will require hiring a number of qualified clinical, scientific, commercial and administrative personnel. Accordingly, recruiting and retaining such personnel in the future will be critical to our success. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we fail to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our development and commercialization activities.
We may be unable to manage our growth effectively. Our business strategy entails significant future growth. For example, we will have to expand existing operations in order to increase revenue from our Lap-Band system and ReShapeCare, and develop our ReShape Vest and Diabetes Bloc-Stim Neuromodulation, conduct additional clinical trials, increase our contract manufacturing capabilities, hire and train new personnel to handle the marketing and sales of our product, assist patients and healthcare providers in obtaining reimbursement for the use of our product and create and develop new applications for our technology. This growth may place significant strain on our management and financial and operational resources. Successful growth is also dependent upon our ability to implement appropriate financial and management controls, systems and procedures. Our ability to effectively manage growth depends on our success in attracting and retaining highly qualified personnel, for which the competition may be intense. If we fail to manage these challenges effectively, our business could be harmed.
We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be able to obtain adequate product liability insurance. Our business exposes us to a risk of product liability claims that is inherent in the testing, manufacturing and marketing of medical devices. The medical device industry has historically been subject to extensive litigation over product liability claims. We may be subject to product liability claims if our vBloc System,products cause, or any other products we may sell, causes, or appearsappear to have caused, an injury. Claims may be made by consumers, healthcare providers, third-party strategic collaborators or others selling our products. We have product liability insurance, which covers the use of our vBloc System and vBloc Therapyproducts in our clinical trials and any commercial sales, in an amount we believe is appropriate. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, the coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost and on acceptable terms for an adequate coverage amount, or otherwise to protect against potential product liability claims, we could be exposed to significant liabilities, which may harm our business. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business, financial condition and results of operations. These liabilities could prevent or interfere with our product commercialization efforts. Defending a suit, regardless of merit, could be costly, could divert management attention and might result in adverse publicity, which could result in the withdrawal of, or inability to recruit, clinical trial volunteers or result in reduced acceptance of our vBloc System and vBloc Therapyproducts in the market. We may be subject to product liability claims even if it appears that the claimed injury is due to the actions of others. For example, we rely on the expertise of surgeons and other associated medical personnel to perform the medical procedure to implant and remove our vBloc Systemproducts and to perform the related vBloc Therapy.therapy. If these medical personnel are not properly trained or are negligent, the therapeutic effect of vBloc Therapyour products may be diminished or the patient may suffer critical injury, which may subject us to liability. In addition, an injury that is caused by the negligence of one of our suppliers in supplying us with a defective component that injures a patient could be the basis for a claim against us. A product liability claim, regardless of its merit or eventual outcome, could result in decreased demand for our products; injury to our reputation; diversion of management’s attention; withdrawal of clinical trial participants; significant costs of related litigation; substantial monetary awards to patients; product recalls or market withdrawals; loss of revenue; and the inability to commercialize our products under development. Risks Related to Intellectual Property If we are unable to obtain or maintain intellectual property rights relating to our technology and neuroblocking therapy, the commercial value of our technology and any future products will be adversely affected and our competitive position will be harmed. Our commercial success depends in part on our ability to obtain protection in the United States and other countries for our vBloc SystemLap-Band system, ReShapeCare, ReShape Vest and vBloc TherapyDiabetes Bloc-Stim Neuromodulation by establishing and maintaining intellectual property rights relating to or incorporated into our technology and products. We own numerous U.S. and foreign patents and have numerous patent applications pending, most of which pertain to treating gastrointestinal disorders.disorders and the treatment of obesity. We have also received or applied for additional patents in Europe, Australia, China, India and Japan. In addition, we areoutside the exclusive licensee of three U.S. patents owned by the Mayo Foundation for Medical Education and Research, which are unrelated to our vBloc Therapy.United States. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will provide us any competitive advantage. We expect to incur substantial costs in obtaining patents and, if necessary, defending our proprietary rights. The patent positions of medical device companies, including ours, can be highly uncertain and involve complex and evolving legal and factual questions. We do not know whether we will obtain the patent protection we seek, or that the protection we do obtain will be found valid and enforceable if challenged. If we fail to obtain adequate protection of our intellectual property, or if any protection we obtain is reduced or eliminated, others could use our intellectual property without compensating us, resulting in harm to our business. We may also determine that it is in our best interests to voluntarily challenge a third-party’s products or patents in litigation or administrative proceedings, including patent interferences, re-examinations or under more recently promulgated Inter Partes Review proceedings, depending on when the patent application was filed. In the event that we seek to enforce any of our owned or exclusively licensed patents against an infringing party, it is likely that the party defending the claim will seek to invalidate the patents we assert, which, if successful could result in the loss of the entire patent or the relevant portion of our patent, which would not be limited to any particular party. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and could divert the attention of our
management and key personnel from our business operations. Even if we were to prevail in any litigation, we cannot assure you that we can obtain an injunction that prevents our competitors from practicing our patented technology. Our competitors may independently develop similar or alternative technologies or products without infringing any of our patent or other intellectual property rights, or may design around our proprietary technologies. We cannot assure you that we will obtain any patent protection that we seek, that any protection we do obtain will be found valid and enforceable if challenged or that it will confer any significant commercial advantage. U.S. patents and patent applications may also be subject to interference proceedings and U.S. patents may be subject to re-examination proceedings in the U.S. Patent and Trademark Office (USPTO)(“USPTO”), or under more recently promulgated Inter Partes Review proceedings, depending on when the patent application was filed, and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent offices, which proceedings could result in either loss of the patent or denial of the patent application, or loss or reduction in the scope of one or more of the claims of, the patent or patent application. In addition, such interference, re-examination and opposition proceedings may be costly. Moreover, the U.S. patent laws have recently changed with the adoption of the America Invents Act (AIA)(“AIA”), possibly making it easier to challenge patents. Some of our technology was, and continues to be, developed in conjunction with third parties, and thus there is a risk that such third parties may claim rights in our intellectual property. Thus, any patents that we own or license from others may provide limited or no protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. If issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Non-payment or delay in payment of patent fees or annuities, whether intentional or unintentional, may result in loss of patents or patent rights important to our business. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States, particularly in the field of medical products and procedures. Many of our competitors have significant resources and incentives to apply for and obtain intellectual property rights that could limit or prevent our ability to commercialize our current or future products in the United States or abroad. Many of our competitors who have significant resources and have made substantial investments in competing technologies may seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make, use or sell our products either in the United StatesU.S. or in international markets. Our current or future U.S. or foreign patents may be challenged, circumvented by competitors or others or may be found to be invalid, unenforceable or insufficient. In most cases in the United States patent applications are published 18 months after filing the application, or corresponding applications are published in other countries, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first to make the inventions covered by each of our pending patent applications, or that we were the first to file patent applications for such inventions. If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected. In addition to patented technology, we rely on our unpatented proprietary technology, trade secrets, processes and know-how. We generally seek to protect this information by confidentiality agreements with our employees, consultants, scientific advisors and third parties. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Intellectual property litigation is a common tactic in the medical device industry to gain competitive advantage. If we become subject to a lawsuit, we may be required to expend significant financial and other resources and our management’s attention may be diverted from our business. There has been a history of frequent and extensive litigation regarding patent and other intellectual property rights in the medical device industry, and companies in the medical device industry have employed intellectual property
litigation to gain a competitive advantage. Accordingly, we may become subject to patent infringement claims or litigation in a court of law, or interference proceedings declared by the USPTO to determine the priority of inventions or an opposition to a patent grant in a foreign jurisdiction. We may also become subject to claims or litigation seeking payment of royalties based on sales of our product in connection with licensing or similar joint development arrangements with third parties or in connection with claims of patent infringement. The defense and prosecution of intellectual property suits, USPTO interference proceedings, reexamination proceedings, or under more recently promulgated Inter Partes Review proceedings, depending on when the patent application was filed, or opposition proceedings and related legal and administrative proceedings, are both costly and time consuming and could result in substantial uncertainty to us. Litigation or regulatory proceedings may also be necessary to enforce patent or other intellectual property rights of ours or to determine the scope and validity of other parties’ proprietary rights. Any litigation, opposition or interference proceedings, with or without merit, may result in substantial expense to us, cause significant strain on our financial resources, divert the attention of our technical and management personnel and harm our reputation. We may not have the financial resources to defend our patents from infringement or claims of invalidity. An adverse determination in any litigation could subject us to significant liabilities to third parties, require us to seek licenses from or pay royalties to third parties or prevent us from manufacturing, selling or using our proposed products, any of which could have a material adverse effect on our business and prospects. We are not currently a party to any patent or other litigation. Our vBloc TherapyLap-Band system, ReShapeCare, ReShape Vest or vBloc SystemDiabetes Bloc-Stim Neuromodulation may infringe or be claimed to infringe patents that we do not own or license, including patents that may issue in the future based on patent applications of which we are currently aware, as well as applications of which we are unaware. For example, we are aware of other companies that are investigating neurostimulation, including neuroblocking, and of patents and published patent applications held by companies in those fields. While we believe that none of such patents and patent applications are applicable to our products and technologies under development, third parties who own or control these patents and patent applications in the United States and abroad could bring claims against us that would cause us to incur substantial expenses and, if such claims are successfully asserted against us, they could cause us to pay substantial damages, could result in an injunction preventing us from selling, manufacturing or using our proposed products and would divert management’s attention. Because patent applications in many countries such as the United States are maintained under conditions of confidentiality and can take many years to issue, there may be applications now pending of which we are unaware, and which may later result in issued patents that our products infringe. If a patent infringement suit were brought against us, we could be forced to stop our ongoing or planned clinical trials, or delay or abandon commercialization of the product that is subject of the suit. As a result of patent infringement claims, or to avoid potential claims, we may choose or be required to seek a license from a third-party and be required to pay license fees or royalties, or both. A license may not be available at all or on commercially reasonable terms, and we may not be able to redesign our products to avoid infringement. Modification of our products or development of new products could require us to conduct additional clinical trials and to revise our filings with the FDA and other regulatory bodies, which would be time-consuming and expensive. Even if we were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. This could harm our business significantly. Risks Relating to Ownership of Our Common Stock Our common stock trades on an over-the-counter market. Our common stock trades on the OTCQB market and therefore may have less liquidity and may experience potentially more price volatility than experienced when our shares traded on Nasdaq. Stockholders may not be able to sell their shares of common stock on the OTCQB market in the quantities, at the times, or at the prices that could potentially be available on a more liquid trading market. The delisting of our common stock from Nasdaq in 2018 could also adversely affect our ability to obtain financing for our operations and/or result in a loss of confidence by investors or employees.
Our common stock may be deemed to be a “penny stock” and broker-dealers who make a market in our stock may be subject to additional compliance requirements. If our common stock is deemed to be a “penny stock” as defined in the Securities Exchange Act of 1934, broker-dealers who make a market in our stock will be subject to additional sales practice requirements for selling our common stock to persons other than established customers and accredited investors. For instance, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser's written agreement to the transaction prior to the sale. Consequently, the penny stock rules, if they were to become applicable, would affect the ability or willingness of broker-dealers to sell our securities, and accordingly would affect the ability of stockholders to sell their securities in the public market. These additional procedures could also limit our ability to raise additional capital in the future. The trading price of our common stock has been volatile and is likely to be volatile in the future. The trading price of our common stock has been highly volatile. Further, our common stock has a limited trading history. Since our public offering in November 2007 through February 28, 2017 our stock price has fluctuated from a low of $1.75 to a high of $67,851.00, as adjusted for the 1-for-70 reverse split of our common stock that was effected after trading on December 27, 2016 and the 1-for-15 reverse split of our common stock that was effected on January 6, 2016. The market price for our common stock will be affected by a number of factors, including:
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● | | the denial or delay of regulatory clearances or approvals of our product or receipt of regulatory approval of competing products; |
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● | | our ability to accomplish clinical, regulatory and other product development milestones and to do so in accordance with the timing estimates we have publicly announced; |
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● | | changes in policies affecting third-party coverage and reimbursement in the United States and other countries; |
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● | | changes in government regulations and standards affecting the medical device industry and our product; |
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● | | ability of our productproducts to achieve market success; |
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● | | our ability to develop sales and marketing capabilities; |
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● | | actual or anticipated variations in our results of operations or those of our competitors; |
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● | | announcements of new products, technological innovations or product advancements by us or our competitors; |
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● | | developments with respect to patents and other intellectual property rights; |
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● | | sales of common stock or other securities by us or our stockholders in the future; |
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● | | additions or departures of key scientific or management personnel; |
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● | | disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; |
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● | | the trading volume of our common stock; |
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● | | changes in earnings estimates or recommendations by securities analysts, failure to obtain or maintain analyst coverage of our common stock or our failure to achieve analyst earnings estimates; |
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● | | public statements by analysts or clinicians regarding their perceptions of our clinical results or the effectiveness of our products; |
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● | | general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors. |
The stock prices of many companies in the medical device industry have experienced wide fluctuations that have often been unrelated to the operating performance of these companies. Following periods of volatility in the market price of a company’s securities, securities class action litigation often has been initiated against a company. If class action litigation is initiated against us, we may incur substantial costs and our management’s attention may be diverted from our operations, which could significantly harm our business. Our inability to comply with the listing requirements of the NASDAQ Stock Market could result in our common stock being delisted, which could affect its market price and liquidity and reduce our ability to raise capital.
We are required to meet certain qualitative and financial tests (including a minimum closing bid price of $1.00 per share for our common stock) to maintain the listing of our common stock on the NASDAQ Stock Market. If we do not maintain compliance with the continued listing requirements for the NASDAQ Stock Market within specified periods and subject to permitted extensions, our common stock may be recommended for delisting (subject to any appeal we would file). If our common stock were delisted, it could be more difficult to buy or sell our common stock and to obtain accurate quotations, and the price of our stock could suffer a material decline. Delisting would also impair our ability to raise capital.
Sales of a substantial number of shares of our common stock in the public market by existing stockholders, or the perception that they may occur, could cause our stock price to decline. Sales of substantial amounts of our common stock by us or by our stockholders, announcements of the proposed sales of substantial amounts of our common stock or the perception that substantial sales may be made, could cause the market price of our common stock to decline. We may issue additional shares of our common stock in follow-on offerings to raise additional capital, upon the exercise of options or warrants, or in connection with acquisitions or corporate alliances. We also plan to issue additional shares to our employees, directors or consultants in connection with their services to us. All of the currently outstanding shares of our common stock are freely tradable under federal and state securities laws, except for shares held by our directors, officers and certain greater than five percent stockholders, which may be subject to holding period, volume limitations.and other limitations under Rule 144. Due to these factors, sales of a substantial number of shares of our common stock in the public market could occur at any time and could reduce the market price of our common stock. We have a significant number of outstanding warrants, which may cause significant dilution to our stockholders, have a material adverse impact on the market price of our common stock and make it more difficult for us to raise funds through future equity offerings. As of December 31, 2020, we had outstanding 6,166,554 shares of common stock. In addition, as of that date we had outstanding warrants to acquire 14,285,113 shares of common stock. The issuance of shares of common stock upon the exercise of warrants would dilute the percentage ownership interest of all stockholders, might dilute the book value per share of our common stock and would increase the number of our publicly traded shares, which could depress the market price of our common stock. In addition to the dilutive effects described above, the perceived risk of dilution as a result of the significant number of outstanding warrants may cause our common stockholders to be more inclined to sell their shares, which would contribute to a downward movement in the price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our common stock price could encourage investors to engage in short sales of our common stock, which could further contribute to price declines in our common stock. The fact that our stockholders and warrant holders can sell substantial amounts of our common stock in the public market, whether or not sales have occurred or are occurring, could make it more difficult for us to raise additional funds through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate, or at all. You may experience future dilution as a result of future equity offerings. In order to raise additional capital for general corporate purposes, in the future we may offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock at prices that may be lower than the current price per share of our common stock. In addition, investors purchasing shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower than the price per share paid by investors in prior offerings. Since our securities are quoted on the OTCQB market, our stockholders may face significant restrictions on the resale of our securities due to state “blue sky” laws. Each state has its own securities laws, often called “blue sky” laws, which (i) limit sales of securities to a state’s residents unless the securities are registered in that state or qualify for an exemption from registration, and (ii) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or the transaction must be exempt from registration. The applicable broker must be registered in that state. We do not know whether our common stock will be registered or exempt from registration under the laws of any state. Since our common stock is currently quoted on the OTCQB, a determination regarding registration will be made by those broker-dealers, if any, who agree to serve as the market-makers for our common stock. There may be significant state blue sky law restrictions on the ability of investors to sell,
and on purchasers to buy, our common stock. Investors should therefore consider the resale market for our common stock to be limited, as they may be unable to resell your common stock without the significant expense of state registration or qualification. Our organizational documents and Delaware law make a takeover of our company more difficult, which may prevent certain changes in control and limit the market price of our common stock. Our certificate of incorporation and bylaws and Section 203 of the Delaware General Corporation Law contain provisions that may have the effect of deterring or delaying attempts by our stockholders to remove or replace management, engage in proxy contests and effect changes in control. These provisions include: | ·
● | | the ability of our board of directors to create and issue preferred stock without stockholder approval, which could be used to implement anti-takeover devices; |
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● | | the authority for our board of directors to issue without stockholder approval up to the number of shares of common stock authorized in our certificate of incorporation, that, if issued, would dilute the ownership of our stockholders; |
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● | | the advance notice requirement for director nominations or for proposals that can be acted upon at stockholder meetings; |
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● | | a classified and staggered board of directors, which may make it more difficult for a person who acquires control of a majority of our outstanding voting stock to replace all or a majority of our directors; |
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● | | the prohibition on actions by written consent of our stockholders; |
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● | | the limitation on who may call a special meeting of stockholders; |
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● | | the prohibition on stockholders accumulating their votes for the election of directors; and |
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● | | the ability of stockholders to amend our bylaws only upon receiving a majority of the votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class. |
In addition, as a Delaware corporation, we are subject to Delaware law, including Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder unless certain specific requirements are met as set forth in Section 203. These provisions, alone or together, could have the effect of deterring or delaying changes in incumbent management, proxy contests or changes in control. These provisions also could discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. Some provisions in our certificate of incorporation and bylaws may deter third parties from acquiring us, which may limit the market price of our common stock. Our ability to use net operating losses (“NOL”) carryforwards may be limited. Our ability to use our federal and state NOL carryforwards to offset potential future taxable income is dependent upon our generation of future taxable income before the expiration dates of the NOL carryforwards, and we cannot predict with certainty when, or whether we will generate sufficient taxable income to use all of our NOL carryforwards. As of December 31, 2020, the Company had U.S. federal net operating loss carryforwards of $77.2 million. Of the total U.S. federal net operating loss carryforwards at December 31, 2020, $1.2 million is subject to a 20 year carryover period and will begin expiring in 2021. Losses generated beginning in 2018 will carryover indefinitely. The Company had state net operating loss carryforwards of $222.4 million at December 31, 2020, and had foreign net operating loss carryforwards of $0.3 million at December 31, 2020. Net operating loss carryforwards of the Company are subject to review and possible adjustment by the taxing authorities. With certain exceptions (e.g. the net operating loss carryforwards), the Company is no longer subject to U.S. federal, state or local examinations by tax authorities for years prior to 2016. There are no tax examinations currently in progress.
The Company’s ability to utilize its net operating loss carryforwards, tax credits, and built-in items of deduction, including capitalized start-up costs and research and development costs, has been, and may continue to be substantially limited due to ownership changes. These ownership changes limit the amount of net operating loss carryforwards, credits and built-in items of deduction that can be utilized annually to offset future taxable income. In general, an ownership change, as defined in IRC Section 382, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups. Due to the valuation allowance against deferred tax assets at December 31, 2020, the net effect of any further limitation will have no impact on results of operations. We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our common stock. We have never paid dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future. The payment of dividends on our common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates. ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable. ITEM 2. PROPERTIESPROPERTIES We lease approximately 28,38814,479 square feet of lab and officeoffice/warehouse space in St. Paul, Minnesota. The originalSan Clemente, California under an operating lease agreement began October 1, 2008 and was set to expire Septemberthat expires June 30, 2015. On August 25, 2015 we entered into an amendment extending the term of the lease for three years until September 30, 2018.2022. ITEM 3. LEGAL PROCEEDINGS On February 28, 2017, we received a class action and derivative complaint filed on February 24, 2017 in U. S. District Court for the District of Delaware by Vinh Du, one of our shareholders. The complaint names as defendants EnteroMedics, our board of directors and four members of our senior management, namely, Scott Youngstrom, Nick Ansari, Peter DeLange and Paul Hickey, and contains a purported class action claim for breach of fiduciary duty against our board of directors and derivative claims for breach of fiduciary duty against our board of directors and unjust enrichment against our senior management. The allegations in the complaint relate to the increase in the number of shares authorized for grant under our Second Amended and Restated 2003 Stock Incentive Plan (the “Plan”), which was approved by our shareholders at the Special Meeting of Shareholders held on December 12, 2016 (the “Special Meeting”), and to our subsequent grant of stock options on February 8, 2017, to our Directors and senior management to purchase an aggregate of 1,093,450 shares of our common stock (the “Option Grants”). In the complaint, the plaintiff contends that (i) the number of shares authorized for grant under the Plan, as adjusted by our board of directors after the Special Meeting for the subsequent recapitalization of the Company resulted from an alleged breach of fiduciary duties by the Board, and (ii) our senior management was allegedly unjustly enriched by the subsequent Option Grants. The plaintiff seeks relief in the form of an order rescinding the Plan as approved by the shareholders at the Special Meeting, an order cancelling the Option Grants, and an award to plaintiff for his costs, including fees and disbursements of
attorneys, experts and accountants. We believe the allegations in the complaint are without merit, and intend to defend the action vigorously.
Except as disclosed in the foregoing paragraph, we areis not currently a party to any material litigation and we arethe Company is not aware of any pending or threatened litigation against usit that could have a material adverse effect on ourthe Company’s business, operating results or financial condition. The medical device industry in which we operatethe Company operates is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. As a result, wethe Company may be involved in various legal proceedings from time to time.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable. PART II.PART II. ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY,EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market For Our Common Stock Information Our common stock has beenis traded on the NASDAQ StockOTCQB Market under the symbol “ETRM” since our initial public offering (IPO) on November 15, 2007. Prior to that date, there was no public market for our common stock. Our stock was tradedRSLS. Price quotations on the NASDAQ Global Market from its initial listing at the timeOTCQB reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions. Number of our IPO until January 21, 2010. Subsequently, in anticipation of not curing our deficiencies with the continued listing requirements of the NASDAQ Global Market, we requested and were approved to transfer to the NASDAQ Capital Market, effective January 22, 2010. Stockholders As of February 28, 2017,March 8, 2020, there were approximately 3719 holders of record of our common stock and 6,873,878 shares of common stock outstanding. No dividends have been paid on our common stock to date, and we do not anticipate paying any dividends in the foreseeable future.stock. The following table sets forth the high and low sales prices of our common stock as quoted on the NASDAQ Stock Market for the periods indicated. These prices have been adjusted to reflect the 1-for-70 reverse split of our common stock that was effected after trading on December 27, 2016 and the 1-for-15 reverse split of our common stock that was effected after trading on January 6, 2016.
Price Range of Common Stock
| | | | | | | | | Price Range | | | High | | Low | Fiscal 2015 | | | | | | | First Quarter | | $ | 2,152.50 | | $ | 955.50 | Second Quarter | | $ | 1,470.00 | | $ | 619.50 | Third Quarter | | $ | 693.00 | | $ | 210.00 | Fourth Quarter | | $ | 346.50 | | $ | 105.00 | Fiscal 2016 | | | | | | | First Quarter | | $ | 157.50 | | $ | 57.40 | Second Quarter | | $ | 86.80 | | $ | 18.90 | Third Quarter | | $ | 31.50 | | $ | 7.70 | Fourth Quarter | | $ | 9.80 | | $ | 1.95 |
The closing price for our common stock as reported by the NASDAQ Stock Market on February 28, 2017 was $6.36 per share.
Securities Authorized for Issuance Under Equity Compensation Plans The information required by this Item regarding equity compensation plans is incorporated by reference to the information set forth in Part III, Item 12 of this Annual Report on Form 10-K.
Unregistered Sales of Equity Securities None. Uses of Proceeds from Sale of Registered Securities None. Dividend Policy We have never paid cash dividends on our common stock. The board of directors presently intends to retain all earnings for use in our business and does not anticipate paying cash dividends in the foreseeable future. We do not have a dividend reinvestment plan or a direct stock purchase plan. Issuer Purchases of Equity Securities None. ITEM 6. SELECTED FINANCIAL DATA Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for the historical information contained herein, the matters discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-K are forward-looking statements that involve risks and uncertainties. The factors listed in Item 1A “Risk Factors,” as well as any cautionary language in this Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from those projected. Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this report. Overview We are the premier global weight-loss solutions company, offering an integrated portfolio of proven products and services that manage and treat obesity and associated metabolic disease. Our primary operations are in the following geographical areas: United States, Australia and certain European and Middle Eastern countries. Our current portfolio includes the LAP-BAND Adjustable Gastric Banding System, ReShapeCare virtual health coaching program, the ReShape Vest an investigational device to help treat more patients with obesity, and Diabetes Bloc-Stim Neuromodulation device, a medical device company with approvalstechnology under development as a new treatment for type 2 diabetes mellitus. There has been no revenue recorded for the ReShape Vest or the Diabetes Bloc-Stim Neuromodulation as these products are still in the development stage. Recent Developments On January 30, 2020, WHO announced a global health emergency because of a new strain of coronavirus and the risks to commercially launch our product, the vBloc Neuromodulation System (vBloc System),international community as the virus spreads globally beyond its points of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally and on March 13, 2020, the United States declared a national emergency with respect to the European Economic Area and other countries that recognizecoronavirus outbreak. In response to the European CE Mark. We are focusedCOVID-19 pandemic, on March 27, 2020, President Trump signed into law the design and developmentCARES Act, which provides for the PPP. The Company received a PPP Loan of devices that use neuroblocking technology to treat obesity, metabolic diseases and other gastrointestinal disorders. Our proprietary neuroblocking technology, which we refer to as vBloc Therapy, is designed to intermittently block$1.0 million dollars. On March 1, 2021, the vagus nerve using high frequency, low energy, electrical impulses. We have a limited operating history and only recentlyCompany received U.S. Food and Drug Administration (FDA) approval to sell our productnotice of forgiveness in the United States.full amount of the loan including all accrued interest. See Note 8 to the consolidated financial statements. On March 25, 2020, the Company executed a credit agreement with an institutional investor to borrow up to $3.5 million, of which $2.5 million was received up front and on June 23, 2020, the Company received the first draw down of $500 thousand. See Note 8 to the consolidated financial statements. On April 16, 2020, the Company implemented various short-term cost reductions and cash flow improvement actions, such as reducing the compensation for executives, management and key employees and decreasing operating expenses where possible. In addition, we have regulatory approvalthe Company also identified temporary headcount reductions and made the decision to sell our product infurlough a portion of its workforce. During the European Economic Areasecond quarter of 2020, certain government-mandated closures began to ease and other countries that recognizemany areas throughout the European CE Markworld and currently do not have any other source of revenue. We were incorporated in Minnesota on December 19, 2002 and later reincorporated in Delaware on July 22, 2004. We have devoted substantially all of our resources to the development and commercialization of the vBloc System, which was formerly known as the Maestro Rechargeable System. The vBloc System uses vBloc Therapy to limit the expansion of the stomach, help control hunger sensations between meals, reduce the frequency and intensity of stomach contractions and produce a feeling of early and prolonged fullness. We believe the vBloc System offers obese patients a minimally-invasive treatment that can result in significant, durable and sustained weight loss. We believe that our vBloc System allows bariatric surgeons to offer a new option to obese patients who are concerned about the risks and complications associated with currently available anatomy-altering, restrictive or malabsorptive surgical procedures.
We received FDA approval on January 14, 2015 for vBloc Therapy, delivered via the vBloc System, for the treatment of adult patients with obesity who have a Body Mass Index (BMI) of at least 40 to 45 kg/m2, or a BMI of at least 35 to 39.9 kg/m2 with a related health condition such as high blood pressure or high cholesterol levels, and who have tried to lose weight in a supervised weight management program and failed within the past five years. In 2015 we began a controlled commercial launch at select surgical centers in the United States and had our first commercial sales.began to allow elective surgeries. As a result of the easing, the Company did see sales volumes improve as we progressed through the third quarter. During 2015,the fourth quarter of 2020, there was another surge in COVID-19 cases resulting in a slowdown, or in some cases a shutdown, of elective surgeries. Even after the COVID-19 outbreak has subsided, we initiated a controlled expansion of our commercial operations and started the process of building a sales force. In January 2016, we hired new executives to oversee this expansion. Our direct sales force is supported by field clinical engineers who provide training, technical and other support services to our customers. Throughout 2016, our sales force called directly on key opinion leaders and bariatric surgeons at commercially-driven surgical centers that met our certification criteria. Additionally, in 2016, through a distribution agreement with Academy Medical, LLC, U.S. Department of Veterans Affairs (VA) medical facilities now offer the vBloc System as a treatment option to veterans using their veteran healthcare benefits. We plan to build on these efforts in 2017 with self-pay and veteran patient focused direct-to-patient marketing, key opinion leader and center specific partnering, and a multi-faceted reimbursement strategy. To date, we have relied on, and anticipate that we willmay continue to relyexperience materially adverse impact on third-party manufacturersour financial condition and suppliers forresults of operations. Additionally, on June 15, 2020, the productionCompany ended the temporary pay reductions and the furloughed employees returned to work.
On September 14, 2020, the Company entered into the second amendment to the credit agreement that increased the amount available under delayed draw term loans by $2.0 million, of which $1.0 million was received upfront. In addition, to the increase in the amount available under delayed draw term loans, the maturity date of the vBloc System.loans under the credit agreement, including those under the amendment, was extended from September 24, 2020 to March 31, 2021. Recharge Trial
Data from our ReCharge trial was used to supportOn December 16, 2020, the premarket approval (PMA) application forCompany entered into the vBloc System, submittedthird amendment to the FDA in June 2013. The ReCharge trial is a randomized, double-blind, sham-controlled, multicenter pivotal clinical trial testingcredit agreement that increased the effectiveness and safetyamount available under delayed draw term loans by $4.0 million, of vBloc Therapy utilizing our vBloc System. All patients inwhich all the trialfunds were received an implanted device and were randomized in a 2:1 allocationupfront. See Note 8 to treatment or sham control groups. The sham control group received a non-functional device during the trial period. All patients were expected to participate in a standard weight management counseling program. The primary endpoints of efficacy and safety wereconsolidated financial statements for further details.
evaluated at 12 months.During the third quarter of 2020, the Company launched ReShapeCare. ReShapeCare is an effective, convenient telehealth based coaching program and is typically covered by insurance providers. It works in partnership with patients and doctors, helping patients treat, manage, and improve the chronic, metabolic disease of obesity through a customizable program utilizing board certified clinical health coaches with the direction of their physician.
On January 19, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Obalon Therapeutics, Inc., a Delaware corporation (“Obalon”), and Optimus Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Obalon (“Merger Sub”), pursuant to which Merger Sub will merge with and into ReShape, with ReShape as the surviving corporation and a wholly-owned subsidiary of Obalon (the “Merger”). As announced,a result of the ReCharge trial met its primary safety endpointMerger, Obalon will be renamed “ReShape Lifesciences Inc.” See Note 16 to the consolidated financial statements for further details. On January 19, 2021, concurrently with the execution of the Merger Agreement, ReShape entered into a Credit Facility Agreement (“Credit Facility Agreement”) with Armistice, which is ReShape’s existing secured lender and majority stockholder, pursuant to which Armistice agreed to provide ReShape with a 3.7% serious adverse event rate. The safety profile$15.0 million line of credit that ReShape may access from time to time until December 31, 2022. ReShape has not drawn down any amounts under the Credit Facility Agreement, but any advances will bear interest at 12 monthsa rate per annum equal to the LIBOR rate plus 2.5%. Any advances under the Credit Facility Agreement would be subject to the Guarantee and Collateral Agreement between ReShape and Armistice dated March 25, 2020. See Note 16 to the consolidated financial statements for further details. On March 10, 2021, the Company and the Lender entered into the fifth amendment to the credit agreement. As part of this amendment the maturity date was further supported by positive cardiovascular signals includingamended from March 31, 2021 to March 31, 2022 or, if earlier, the date that is 15 days after the Company completes a 5.5 mmHg dropcapital raising transaction resulting in systolic blood pressure, a 2.8 mmHg drop in diastolic blood pressure and a 3.6 bpm drop in average heart rate. Additionally, the trial demonstrated in the intent to treat (ITT) population (n=239) a clinically meaningful and statistically significant excess weight loss (EWL)gross proceeds of 24.4% (approximately 10% total body weight loss (TBL)) for vBloc Therapy-treated patients, with 52.5% of patients achieving at least 20% EWL, although it did not meet its co-primary efficacy endpoints. In the per protocol population, the trial demonstrated an EWL$15 million. For further details see Note 16.
Financial Overview Results of 26.3% for vBloc Therapy-treated patients, with 56.8% of patients achieving at least 20% EWL. We subsequently announced that vBloc Therapy-treated patients were maintaining their weight loss at 18 months and 24 months with an EWL of 23.5% and 21.1%, respectively. Operations The trial’s positive safety profile also continued throughout this reported time period. For more information on our Recharge Trial and our other ongoing clinical trials, please see Item 1, Business, “Our Clinical Experience,” in this Annual Report on Form 10-K for the Year Ended December 31, 2016. We obtained European CE Mark approval for our vBloc System in 2011 for the treatment of obesity. The CE Mark approval for our vBloc System was expanded in 2014 to also include use for the management of Type 2 diabetes in obese patients. In January 2012, the final vBloc System components were listed on the Australian Register of Therapeutic Goods (ARTG) by the Therapeutic Goods Administration (TGA). The costs and resources required to successfully commercialize the vBloc System internationally are currently beyond our capability. Accordingly, we will continue to devote our near-term efforts toward mounting a successful system launch in the United States. We intend to explore select international markets to commercialize the vBloc System as our resources permit, using direct, dealer and distributor sales models as the targeted market best dictates.
To date, we have not observed any mortality related to our device or any unanticipated adverse device effects in our human clinical trials. We have also not observed any long-term problematic clinical side effects in any patients. In addition,following table sets forth certain data from our VBLOC-DM2 ENABLE trial outsideoperating results from the United States demonstrate that vBloc Therapy may hold promise in improving obesity-related comorbidities suchyears ended December 31, 2020 and 2019, expressed as diabetes and hypertension. We are conducting, or plan to conduct, further studies in eachpercentages of these comorbidities to assess vBloc Therapy’s potential in addressing multiple indications.
In 2016, we continued our commercialization efforts in the United States, deriving revenues from our primary business activity. We expect to incur significant sales and marketing expenses prior to recording sufficientnet revenue to offset these expenses. We expect our selling, general and administrative expenses to increase as we continue to add the infrastructure necessary to support our commercial sales, operate as a public company and develop our intellectual property portfolio. For these reasons, we expect to continue to incur operating losses for the next several years. We have financed our operations to date principally through the sale of equity securities, debt financing and interest earned on investments.(in thousands):
| | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | 2020 | | | 2019 | | Revenue | | | $ | 11,299 | | 100.0 | % | | $ | 15,089 | | 100.0 | % | Cost of goods sold | | | | 5,037 | | 44.6 | % | | | 5,784 | | 38.3 | % | Gross profit | | | | 6,262 | | 55.4 | % | | | 9,305 | | 61.7 | % | Operating expenses: | | | | | | | | | | | | | | Sales and marketing | | | | 4,694 | | 41.5 | % | | | 4,847 | | 32.1 | % | General and administrative | | | | 10,527 | | 93.2 | % | | | 17,224 | | 114.1 | % | Research and development | | | | 3,498 | | 31.0 | % | | | 3,121 | | 20.7 | % | Impairment of intangible assets | | | | — | | — | % | | | 6,588 | | 43.7 | % | Loss on litigation settlement | | | | — | | — | % | | | 1,500 | | 9.9 | % | Loss on disposal of assets | | | | — | | — | % | | | 486 | | 3.2 | % | Total operating expenses | | | | 18,719 | | 165.7 | % | | | 33,766 | | 223.8 | % | Operating loss | | | | (12,457) | | (110.2) | % | | | (24,461) | | (162.1) | % | Other expense (income), net: | | | | | | | | | | | | | | Interest expense, net | | | | 2,049 | | 18.1 | % | | | 451 | | 3.0 | % | Loss on extinguishment of debt | | | | 7,715 | | 68.3 | % | | | 71 | | 0.5 | % | Warrant expense | | | | — | | — | % | | | 49,027 | | 324.9 | % | (Gain) loss on foreign currency | | | | (410) | | (3.6) | % | | | (247) | | (2) | % | Other, net | | | | — | | — | % | | | 1,337 | | 8.9 | % | Loss from continuing operations before income taxes | | | | (21,811) | | (193.0) | % | | | (75,100) | | (497.7) | % | Income tax benefit | | | | (181) | | (1.6) | % | | | (893) | | (5.9) | % | Net loss | | | $ | (21,630) | | (191.4) | % | | $ | (74,207) | | (491.8) | % |
During 2016, our board of directors and stockholders approved two reverse stock splits (collectively, the Reverse Stock Splits). Neither reverse stock split changed the par value of our common stock or the number of preferred shares authorized by our certificate of incorporation. The first reverse stock split was a 1-for-15 reverse split (the First Reverse Stock Split) of our outstanding common stock that became effective after trading on January 6, 2016. The First Reverse Stock Split also decreased the number of shares of common stock authorized by our certificate of incorporation proportionately, and proportional adjustments were also made to our outstanding stock options and warrants and the number of shares authorized under our Amended and Restated 2003 Stock Incentive Plan . In connection with the First Reverse Stock Split, an amendment to our certificate of incorporation was also approved to increase the number of shares of our common stock authorized for issuance to 150 million shares, effective immediately after the First Reverse Stock Split on January 6, 2016.
The second reverse stock split was a 1-for-70 reverse split (the Second Reverse Stock Split) of our outstanding common stock that became effective after trading on December 27, 2016 pursuant to our Sixth Amended and Restated Certificate of Incorporation, which was filed in connection with the Second Reverse Stock Split. In connection with the Second Reverse Stock Split, proportional adjustments were also made to our outstanding stock options and warrants. Additionally, in connection with the Second Reverse Stock Split, a second amendment was approved to increase the
numberNon-GAAP Disclosures
In addition to the financial information prepared in conformity with GAAP, we provide certain historical non-GAAP financial information. Management believes that these non-GAAP financial measures assist investors in making comparisons of sharesperiod-to-period operating results and that, in some respects, these non-GAAP financial measures are more indicative of our common stock authorized for issuance to 300 million shares, effective after the Second Reverse Stock Split on December 27, 2016.Company’s ongoing core operating performance than their GAAP equivalents. Critical Accounting PoliciesManagement believes that the presentation of this non-GAAP financial information provides investors with greater transparency and Significant Judgmentsfacilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, and Estimates
Our management’s discussion and analysisamortization methods, which provides a more complete understanding of our financial conditionperformance, competitive position, and resultsprospects for the future. However, the non-GAAP financial measures presented in this Form 10-K have certain limitations in that they do not reflect all of the costs associated with the operations are based onof our consolidatedbusiness as determined in accordance with GAAP. Therefore, investors should consider non-GAAP financial statements, which have beenmeasures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with accounting principles generally acceptedGAAP. Further, the non-GAAP financial measures presented by the Company may be different from similarly named non-GAAP financial measures used by other companies.
Adjusted EBITDA Management uses Adjusted EBITDA in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dateits evaluation of the Company’s core results of operations and trends between fiscal periods and believes that these measures are important components of its internal performance measurement process. Adjusted EBITDA is defined as net loss before interest, taxes, depreciation and amortization, stock-based compensation, changes in fair value of liability warrants and other one-time costs. Management uses Adjusted EBITDA in its evaluation of the Company’s core results of operations and trends between fiscal periods and believes that these measures are important components of its internal performance measurement process. Therefore, investors should consider non-GAAP financial statementsmeasures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, the non-GAAP financial measures presented by the Company may be different from similarly named non-GAAP financial measures used by other companies. The following table contains a reconciliation of non-GAAP net loss to GAAP net loss attributable to common stockholders for the years ended December 31, 2020 and 2019 (in thousands). | | | | | | | Years Ended December 31, | | 2020 | | 2019 | GAAP net loss attributable to common stockholders | $ | (21,630) | | $ | (74,207) | Adjustments: | | | | | | Interest expense, net: | | 2,049 | | | 451 | Income tax benefit | | (181) | | | (893) | Depreciation and amortization | | 1,667 | | | 1,706 | Stock-based compensation expense | | 1,323 | | | 2,311 | Loss on extinguishment of debt | | 7,715 | | | 71 | Warrant expense | | — | | | 49,027 | Loss on litigation settlement | | — | | | 1,500 | Impairment of intangible assets and goodwill | | — | | | 6,588 | Loss on disposal of assets | | — | | | 486 | Other, net | | — | | | 1,337 | Non-GAAP loss | $ | (9,057) | | $ | (11,623) |
Comparison of Results of Operations Net Revenue. The following table summarizes our net revenue by geographic location based on the location of customers for the years ended December 31, 2020 and 2019, as well as the reported expenses duringpercentage by location of total revenue and the reporting periods. We evaluate our estimatesamount of change and judgments on an ongoing basis. Actual results may differ materially from these estimates under different assumptions or conditions.percentage of change (dollars in thousands): | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Amount | | Percentage | | | 2020 | | | 2019 | | | Change | | Change | | United States | $ | 8,275 | | 73.2 | % | | $ | 13,309 | | 88.2 | % | | $ | (5,034) | | (37.8) | % | Australia | | 1,086 | | 9.6 | % | | | 1,167 | | 7.7 | % | | | (81) | | (6.9) | % | Europe | | 1,824 | | 16.1 | % | | | 613 | | 4.1 | % | | | 1,211 | | 197.6 | % | Rest of World | | 114 | | 1.0 | % | | | — | | — | % | | | 114 | | 100.0 | % | Total net revenue | $ | 11,299 | | 100.0 | % | | $ | 15,089 | | 100.0 | % | | $ | (3,790) | | (25.1) | % |
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, title or risk of loss has passed, the selling price is fixed or determinable and collection is reasonably assured. Products are sold through direct sales or medical device distributors andNet revenue is recognized upon sale to a bariatric center of excellence or a medical device distributor when no right of return or price protection exists. Terms of sales to international distributors are generally EXW, reflecting that goods are shipped “ex works,” in which risk of loss is assumed by the distributor at the shipping point. A provision for returns is recorded only if product sales provide for a right of return. No provision for returns was recorded for the year ended December 31, 2016,2020 was $11.3 million, a decrease of $3.8 million, or 25%, as compared to net revenue of $15.1 million for the year ended December 31, 2019. The primary reason for the overall decrease in net revenue is due to a reduction in sales from the COVID-19 pandemic, which caused elective surgeries to be shut down throughout the world at the end of the first quarter of 2020. Late in the second quarter of 2020, sales volumes began to improve and continued to improve through the beginning of the fourth quarter as select geographical regions began to open back up. During the fourth quarter of 2020, there was another surge in COVID-19 cases resulting in a slowdown, or in some cases a shutdown, of elective surgeries. Despite this, there was a 198% increase in revenue in Europe for the year ended December 31, 2020 as compared to the year ended December 31, 2019, which saw significant growth particularly in the UK. Although, many centers were closed, there was a push for bariatric surgery as obesity was called out as a major contributor to COVID-19 complications.
Cost of Goods Sold and Gross Profit: The following table summarizes our cost of goods sold and gross profit for the years ended December 31, 2020 and 2019, as well as percentage of total revenue and the amount of change and percentage of change (dollars in thousands): | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Amount | | Percentage | | | 2020 | | | 2019 | | | Change | | Change | | Revenue | $ | 11,299 | | 100.0 | % | | $ | 15,089 | | 100.0 | % | | $ | (3,790) | | (25.1) | % | Cost of goods sold | | 5,037 | | 44.6 | % | | | 5,784 | | 38.3 | % | | | (747) | | (12.9) | % | Gross profit | $ | 6,262 | | 55.4 | % | | $ | 9,305 | | 61.7 | % | | $ | (3,043) | | (32.7) | % |
Gross profit. Gross profit for the year ended December 31, 2020 was $6.3 million, a decrease of $3.0 million, or 33%, as compared to gross profit of $9.3 million for the year ended December 31, 2019. Gross profit as a percentage of total revenue for the year ended December 31, 2020 was 55.4% compared to 61.7% for the same period in 2019. The decrease in gross profit margin is primarily due to reduced overall sales from the COVID-19 pandemic, coupled with an increase in international sales, which have a lower gross profit percentage than domestic sales.
Operating Expenses: The following table summarizes our operating expenses for the years ended December 31, 2020 and 2019, as well as the productpercentage of total revenue, and the amount of changes and percentage of change (dollars in thousands): | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Amount | | Percentage | | | 2020 | | | 2019 | | | Change | | Change | | Sales and marketing | $ | 4,694 | | 41.5 | % | | $ | 4,847 | | 32.1 | % | | $ | (153) | | (3.2) | % | General and administrative | | 10,527 | | 93.2 | % | | | 17,224 | | 114.1 | % | | | (6,697) | | (38.9) | % | Research and development | | 3,498 | | 31.0 | % | | | 3,121 | | 20.7 | % | | | 377 | | 12.1 | % | Impairment of intangible assets | | — | | — | % | | | 6,588 | | 43.7 | % | | | (6,588) | | (100.0) | % | Loss on litigation settlement | | — | | — | % | | | 1,500 | | 9.9 | % | | | (1,500) | | (100.0) | % | Loss on disposal of assets | | — | | — | % | | | 486 | | 3.2 | % | | | (486) | | (100.0) | % | Total operating expenses | $ | 18,719 | | 165.7 | % | | $ | 33,766 | | 223.8 | % | | $ | (15,047) | | (44.6) | % |
Sales and Marketing Expense. Sales and marketing expenses were $4.7 million for the year ended December 31, 2020, a decrease of $0.1 million, or 3%, from $4.8 million for the year ended December 31, 2019. The primary reason for the decrease is a reduction in travel and entertainment expenses of $0.3 million, as the Company decreased travel in 2020 due to the COVID-19 pandemic, and a reduction in stock-based compensation expense of $0.2 million. These decreases were offset by an increase in consulting fees of $0.2 million, due to the roll out of ReShapeCare during the third quarter of 2020, and an increase in commissions from greater International sales recordedand a larger Domestic sales force. General and Administrative Expense. General and administrative expenses were $10.5 million for the year ended December 31, 2020, a decrease of $6.7 million, or 39%, from $17.2 million. The decrease is primarily due to decreases in audit, consulting, and other professional service provider expenses of $3.4 million, as a result of the Company changing many of its services providers late in 2019 in an effort across the board to reduce unnecessary and overinflated expenses; legal fees of $2.3 million, primarily a result of settled litigation in 2019; stock-based compensation expense of $0.7 million, from normal employee attrition and lack of stock options being granted since 2018; and bad debt expense of $0.2 million. Research and Development Expense. Research and development expenses were $3.5 million for the year ended December 31, 2020, an increase of $0.4 million, or 12%, from $3.1 million for the year ended December 31, 2019. The primary reason is due to an increase in payroll related expenses of $0.2 million from greater headcount and consulting fees of $0.2 million, due to escalated efforts with the ReShape Vest and Diabetes Bloc-Stim Neuromodulation. The Company continues to focus on supreme innovation which includes developing the ReShape Vest and the investigational Diabetes Bloc-Stim Neuromodulation, and expanding and improving our current LAP-BAND portfolio. Impairment of Intangible Assets. During the year ended December 31, 2020, the Company did not providehave an impairment of intangible assets. The Company incurred an impairment charge of $6.6 million for rights of return. Inventory
From inception, inventory related purchases had been used for research and development related activities and had accordingly been expensed as incurred. Inthe year ended December 2011, we began receiving ARTG listings for components of the vBloc System from the Australian TGA, with the final components being listed on the ARTG in January 2012.31, 2019. As a result weof an impairment analysis performed during the second quarter of 2019, the Company determined certainthere was an impairment of the indefinite-lived intangible asset recorded in connection with our acquisition of BarioSurg, Inc. (“BarioSurg”). We also assessed the recoverability of finite-lived intangible assets were recoverableduring the second quarter of 2019 and did not identify any impairment as inventory beginning ina result of the performance of this analysis.
Legal Settlement. During the quarter ended September 30, 2019, the Company recognized a contingent loss of $1.5 million relating to the patent infringement claim with Fulfillium. Under the Settlement Agreement, Fulfillium agreed to dismiss with prejudice the previously disclosed lawsuits by Fulfillium. Loss on Disposal of Assets. The Company did not have any losses related to the disposal of long-term assets for the year ended December 2011 and have31, 2020. During the year ended December 31, 2019, the Company recorded a current inventory balance$0.5 million loss related to the disposal of $1,790,000 and $1,686,000 as oflong-term assets acquired in connection with the lap-band purchase. Interest Expense, Net. Net interest expense for the year ended December 31, 2016 and 2015, respectively. We account2020 was $2.0 million compared to $0.5 million for inventory at the lower of cost or market and record any long-term inventory as other assets in the consolidated balance sheets. There was $676,000 and $519,000 of long-term inventory as ofyear ended December 31, 2016 and 2015, respectively. Senior Amortizing Convertible Notes
2019. The senior amortizing convertible notes issued on November 9, 2015, January 11, 2016 and May 2, 2016 (the Notes) included a conversion feature which requires bifurcation and liability classification and measurement, at fair value, and requires evaluation at each reporting period. Under Accounting Standards Codification (ASC) 825, Financial Instruments, the Financial Accounting Standards Board (FASB) provides an alternative to bifurcation and companies may instead elect fair value measurementprimary reason for the entire instrument, includingincrease of $1.5 million is due to the amortization of deferred issuance costs and the debt and conversion feature. We have elected the fair value alternative in order to simplify our accounting and reporting of the senior amortizing convertible notes upon issuance. The fair value of these senior amortizing convertible notes is re-measured at each financial reporting period, with any changes in fair value being recognizeddiscount recorded as a component of other income (expense) in the consolidated statements of operations. We concluded that the fair value of the Notes at issuance is equalinterest expense, related to the gross proceeds received lesscredit
agreement with an institutional investor, slightly offset by the interest expense related to the subordinated debentures in 2019. Loss on Extinguishment of Debt. The Company recognized a loss on extinguishment of debt for the year ended December 31, 2020, of $7.7 million, related to the fair value of the warrants issued in conjunction with the Notes. Both at the date of issuance and during the years ended December 31, 2016 and 2015, a Binomial Lattice model was used to value the Notes. The fair value of the warrants was recorded as a discount to the Notes and amortized to interest expense following the effective interest rate method over the term of the Notes. During the year ended December 31, 2016, all remaining principal and interest amounts outstanding under the Notes were paid off, primarily via conversions to common shares. Common Stock Warrant Liability
Common stock warrants that were issued in connection with the July 8, 2015 public offering (the Series A Warrants)third and the Notes (the Note Warrants) are classified as a liability in the consolidated balance sheets, as the common stock warrants issued provide for certain anti-dilution protections in the event shares of common stock or securities convertible into shares of common stock are issued below the then-existing exercise price. The fair value of these common stock warrants is re-measured at each financial reporting period and immediately before exercise, with any changes in fair value being recognized as a component of other income (expense) in the consolidated statements of operations.
The fair valuefourth amendments of the Company’s common stock warrant liability is calculated using a Black-Scholes valuation modelcredit agreement and is classified as Level 2 in the fair value hierarchy. The fair values are presented below along with valuation assumptions
| | | | | | | | | | | | | | Series A Warrants | | November 2015 Note Warrants | | | | December 31, 2016 | | | July 8, 2015 | | | December 31, 2016 | | | November 9, 2015 | | Risk-free interest rates | | 1.20 | % | | 0.91 | % | | 1.47 | % | | 1.75 | % | Expected life | | 24 | months | | 42 | months | | 46 | months | | 60 | months | Expected dividends | | — | % | | — | % | | — | | | — | % | Expected volatility | | 122.03 | % | | 89.89 | % | | 102.29 | % | | 84.85 | % | Fair value | $ | 36,000 | | $ | 6,004,000 | | $ | 449 | | $ | 169,000 | |
| | | | | | | | | | | | | | | | | January 2016 Note Warrants | | | May 2016 Note Warrants | | | | December 31, 2016 | | January 11, 2016 | | December 31, 2016 | | May 2, 2016 | | Risk-free interest rates | | | 1.93 | % | | 1.58 | % | | 1.93 | % | | 1.32 | % | Expected life | | | 48 | months | | 60 | months | | 52 | months | | 60 | months | Expected dividends | | | — | % | | — | % | | — | % | | — | % | Expected volatility | | | 108.57 | % | | 85.90 | % | | 106.37 | % | | 89.28 | % | Fair value | | $ | 1,633 | | $ | 515,157 | | $ | 1,037 | | $ | 150,195 | |
Stock-Based Compensation
We account for share-based payments using the fair value method, which requires compensation expense to be recognized using a fair-value-based method for costsdiscounts related to all share-based payments including stock options. Companies are required to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. Calculating stock-based compensationamendments.
Warrant Expense. The Company did not have a warrant expense requires the input of highly subjective assumptions, which represent our best estimates and involve inherent uncertainties and the application of management’s judgment. Estimates of stock-based compensation expenses are significant to our consolidated financial statements, but these expenses are based on the Black-Scholes pricing model and will never result in the payment of cash by us. All option grants are expensed on a straight-line basis over the vesting period. The application of share-based payment principles may be subject to further interpretation and refinement over time. There are significant differences among option valuation models, and this may result in a lack of comparability with other companies that use different models, methods and assumptions. If factors change and we employ different assumptions in the application of share-based payment accounting in future periods, or if we decide to use a different valuation model, the compensation expense that we record in the future may differ significantly from what we have recorded in the current period and could materially affect our operating loss, net loss and net loss per share.
The fair value method is applied to all share-based payment awards issued to employees and where appropriate, nonemployees, unless another source of literature applies. When determining the measurement date of a nonemployee’s share-based payment award, the Company measures the stock options at fair value and remeasures such stock options to the current fair value until the performance date has been reached. For stock options granted to nonemployees, the fair value of the stock options is estimated using the Black-Scholes valuation model. This model utilizes the estimated fair value of common stock and requires that, at the date of grant and each subsequent reporting period until the services are completed or a significant disincentive for nonperformance occurs, we make assumptions with respect to the expected term of the option, the volatility of the fair value of our common stock, risk free interest rates and expected dividend yields of our common stock. Different estimates of volatility and expected life of the option could materially change the value of an option and the resulting expense.
Net Operating Losses and Tax Credit Carryforwards
At December 31, 2016, we had federal net operating loss carryforwards of approximately $161.4 million. These net operating loss carryforwards will expire in varying amounts from 2022 through 2035, if not utilized. The Internal Revenue Code (IRC) imposes restrictions on the utilization of various carryforward tax attributes in the event of a change in ownership of the Company, as defined by IRC Section 382. In addition, IRC Section 382 may limit our built-in items of deduction, including capitalized start-up costs and research and development costs. During 2011, we completed an IRC Section 382 review and the results of this review indicate ownership changes have occurred which would cause a limitation on the utilization of carryforward attributes. Our gross net operating loss carryforwards, start-up costs and research and development credits are all subject to limitation. Under these tax provisions, the limitation is applied first to any built-in losses, then to any net operating losses and then to any general business credits. It is likely that ownership changes have occurred since we completed our IRC Section 382 review in 2011 and could result in further limitations on the utilization of carryforward attributes. A valuation allowance has been established to reserve for the potential benefits of the remaining carryforwards and tax credits in our consolidated financial statements to reflect the uncertainty of future taxable income required to utilize available tax loss carryforwards and other deferred tax assets.
Financial Overview
Revenue
We received FDA approval on January 14, 2015 for vBloc Therapy. In 2015 we began a controlled commercial launch at select surgical centers in the United States and had our first commercial sales. During 2015, we initiated a controlled expansion of our commercial operations and started the process of building a sales force. In January 2016, we hired new executives to oversee this expansion. Our direct sales force is supported by field clinical engineers who provide training, technical and other support services to our customers. Throughout 2016, our sales force called directly on key opinion leaders and bariatric surgeons at commercially-driven surgical centers that met our certification criteria. Additionally, in 2016, through a distribution agreement with Academy Medical, VA medical facilities now offer the vBloc System as a treatment option to veterans using their veteran healthcare benefits. We plan to build on these efforts in 2017 with self-pay and veteran patient focused direct-to-patient marketing, key opinion leader and center specific partnering, and a multi-faceted reimbursement strategy.
We had our first commercial sales within the United States in 2015 and for the year ended December 31, 2015 and we recognized $292,000 in revenue. During the year ended December 31, 2016, we continued our commercialization efforts and recognized $787,000 in revenue.
We obtained European CE Mark approval for our vBloc System in 2011 for the treatment of obesity, which enables commercialization in the European Economic Area and other countries that recognize the European CE Mark. The CE Mark approval for our vBloc System was expanded in 2014 to also include use for the management of Type 2 diabetes in obese patients. We have not generated revenue from commercial sales outside of the United States. We intend to explore select international markets to commercialize the vBloc System as our resources permit, using direct, dealer and distributor sales models as the targeted market best dictates. Specifically, Canada is a market with a relatively low barrier to entry and an established cash-pay bariatric patient market.
The vBloc System remains a relatively new product in the United States and internationally and it is difficult to predict the amount of revenue it will generate going forward. In any event, such revenue will only modestly reduce our continued losses resulting from our research and development and other activities.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of compensation for executive, finance, market development and administrative personnel, including stock-based compensation. Other significant expenses include costs associated with attending medical conferences, professional fees for legal services, including legal services associated with our efforts to obtain and maintain broad protection for the intellectual property related to our products, reimbursement development and accounting services, cash management fees, consulting fees and travel expenses.
Research and Development Expenses
Our research and development expenses primarily consist of engineering, product development, quality assurance and clinical and regulatory expenses, incurred in the development of our VBloc System. Research and development expenses also include employee compensation, including stock-based compensation, consulting services, outside services, materials, clinical trial expenses, including supplies, devices, explants and revisions, depreciation and travel. We2020. Warrant expense research and development costs as they are incurred.
Results of Operations
Comparison of the Years Ended December 31, 2016 and 2015
Sales. Sales were $787,000 for the year ended December 31, 2016 compared2019 includes noncash expense of approximately $49.0 million for the value of the liability warrants issued in connection with $292,000our equity financing completed in June 2019 and September 2019 in excess of the proceeds received and changes in fair value of the warrant liability. As a result of the reverse stock split on November 12, 2019, the Company reclassified the warrant liability to equity.
Other, Net. There were no other, net expenses for the year ended December 31, 2016. The increase of $495,000 is the result of the continued controlled commercial launch of the vBloc System at select surgical centers in the United States which resulted in sales of 62 units during 2016 versus 24 units during 2015. We received FDA approval to sell the vBloc System on January 14, 2015. Cost of Goods Sold. Cost of goods sold were $431,0002020. Other, net expenses for the year ended December 31, 2016 compared2019 includes $1.3 million of transaction costs required to $125,000be expensed as a result of the liability treatment for the year ended December 31, 2015. The increasewarrants issued in connection with our June and September equity financings.
Income Tax Benefit. There was driven primarily by the 158% increase in the numberan income tax benefit of units sold in 2016 over 2015. Gross margin percentage for 2016 was 45.2% versus 57.2% for the prior year. The decline in gross margin percentage was primarily due to higher supply chain costs in 2016 than in 2015. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $18.0$0.2 million for the year ended December 31, 2016, compared to $19.92020, while there was an income tax benefit of $0.9 million for the year ended December 31, 2015.2019 for the reduction in the deferred tax liability associated with an indefinite-lived intangible asset, for which we recorded an impairment charge of $6.6 million during the three months ended June 30, 2019. The decreaseincome tax benefit is the result of $1.9the indefinite lived deferred tax liability that had been netted with certain indefinite lived deferred tax assets. It is also net of an increase to the deferred tax valuation allowance of $3.5 million or 9.6%,that was primarily due to a $3.4 million decrease in payroll-related expenses, partially offset by a $1.1 million increase in professional services expenses and a $366,000 increase in severance expenses. The increase in professional services expenses are the result of increasing commercialization efforts as we continue the controlled commercial launch of the vBloc System at select surgical centers in the United States.
Research and Development Expenses. Research and development expenses were $5.2 million for the year ended December 31, 2016, compared to $8.1 million for the year ended December 31, 2015. The decrease of $3.0 million or 36.5%, was primarily due to decreases of $2.0 million, $436,000 and $119,000 in payroll-related expenses, supply expenses and professional services expenses, respectively. The decreases are the result of a continued shift away from a research and development focus toward commercialization. The Company plans to increase it research and development expenses in 2017 to support a next generation product and to support our post-clinical trial requirements.
Interest Expense. Interest expense was $4.1 million for the year ended December 31, 2016, compared to $939,000 for the year ended December 31, 2015. The increase of $3.2 million was driven by interest costs from the three Note closings that occurred on November 9, 2015, January 11, 2016 and May 2, 2016, and increased interest costs due to conversions of remaining amounts due under the Notes into common shares by holders of the Notes during the year ended December 31, 2016, and, as a result, accelerations of “make whole” interest amounts due under the Notes. Additionally, $277,000 in debt issuance costs were expensed during the quarter ended June 30, 2016.
Change in Value of Warrant Liability. The value of the common stock warrant liability increased $217,000 for the year ended December 31, 2016, compared to the year ended December 31, 2015. Common stock warrant liabilities were recorded during the year ended December 31, 2015 for the Series A Warrants on July 8, 2015 and for the Note Warrants issued on November 9, 2015. In addition, Note Warrants were issued on January 11, 2016 and May 2, 2016. The decline in the value of the warrants was driven by the decrease in the Company’s stock price, which declined throughout 2016, from $136.50 per share on December 31, 2015 to $2.00 on December 31, 2016.
Comparison of the Years Ended December 31, 2015 and 2014
Sales. Sales were $292,000 for the year ended December 31, 2015, compared to no sales for the year ended December 31, 2014. The increase of $292,000 is the result of receiving FDA approval on January 14, 2015 and commencing a controlled commercial launch of the vBloc System at select bariatric centers of excellence in the United States.
Cost of Goods Sold. Cost of goods sold were $125,000 for the year ended December 31, 2015, compared to no cost of goods sold for the year ended December 31, 2014. Gross margin was 57.2% for the year ended December 31, 2015.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $19.9 million for the year ended December 31, 2015, compared to $14.6 million for the year ended December 31, 2014. The increase of $5.3 million, or 36.6%, was primarily due to increases of $2.1 million, $1.7 million, $1.0 million and $505,000 in payroll-related expenses, professional services, employee stock-based compensation and travel, respectively. The increases in payroll-related expenses, professional services and travel are primarily the result of receiving FDA approval on January 14, 2015 and beginning a controlled commercial launch at select bariatric centers of excellence in the United States. The increase in payroll-related expenses is also the result of a special one-time bonus and an increase in the 2014 management incentive plan accrual in recognition of achieving FDA approval on January 14, 2015. The increase in employee stock-based compensation is also a result of stock option grants made in recognition of the receipt of FDA approval and in connection with new hires in 2015.net operating loss carryforward deferred tax asset.
Research and Development Expenses. Research and development expenses were $8.1 million for the year ended December 31, 2015, compared to $11.0 million for the year ended December 31, 2014. The decrease of $2.9 million, or 26.2%, was primarily due to decreases of $2.3 million, $254,000, $171,000 and $160,000 in professional services, payroll-related expenses, devices and travel. Professional services in 2014 were primarily related to preparation for the advisory panel meeting with the FDA, which was held June 17, 2014. Decreases in payroll-related expenses, devices and travel were primarily the result of decreased emphasis in research and development as efforts were focused on the commercial launch as a result of receiving FDA approval on January 14, 2015.
Interest Expense. Interest expense was $939,000 for the year ended December 31, 2015, compared to $530,000 for the year ended December 31, 2014. The increase of $409,000, or 77.1%, is primarily due to $532,000 and $33,000 of financing costs that were assigned to the common stock warrants issued with the July 8, 2015 financing and the Notes, respectively, both being recognized immediately as interest expense as the warrants are exercisable upon issuance, together with a $187,000 success fee paid to Silicon Valley Bank as a result of achieving FDA approval on January 14, 2015. These increases were offset by a reduction of interest expense due to the declining principal balance through monthly principal and interest loan payments that began on April 1, 2013.
Change in Value of Warrant Liability. The value of the common stock warrant liability decreased $3.3 million for the year ended December 31, 2015, compared to no change for the year ended December 31, 2014. Common stock warrant liabilities were recorded on July 8, 2015 and November 9, 2015 as the common stock warrants issued with the July 8, 2015 public offering and with the Notes provide for certain anti-dilution protections in the event shares of common stock or securities convertible into shares of common stock are issued below the then-existing exercise price. The fair market value was calculated using the Black-Scholes valuation model, which resulted in $3.2 million and $51,000 decreases for the year ended December 31, 2015 for the common stock warrants issued with the July 8, 2015 public offering and the Notes, respectively as our stock price decreased from $388.50 on July 8, 2015 and $178.50 on November 9, 2015 to $136.50 on December 31, 2015.
Liquidity and Capital Resources As of December 31, 2016, we had $3.3 million in cash bank deposits. While we had no short-term money market funds or other investments at December 31, 2016, we periodically invest in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Company or other government agency. These money market funds seek to preserve the value of the investment at $1.00 per share; however, it is possible to lose money investing in these funds. Periodically, we invest cash in excess of immediate requirements in accordance with our investment policy, primarily with a view to liquidity and capital preservation. At times, such deposits may be in excess of insured limits. We have not experienced any losses on our deposits of cash and cash equivalents.
We have financed our operations to date principally through the sale of equity securities and debt financingfinancing. During the years ended December 31, 2020 and interest earned on investments.2019, we received aggregate net proceeds of $10.5 million and $15.0 million, respectively, from debt and equity offerings, and $0.7 million and $0.3 million, respectively, from the exercise of warrants to purchase common stock. As of December 31, 2016,2020, we had $3.3$3.0 million of cash and cash equivalents, including $50 thousand of restricted cash. Subsequent to fund its operations into early 2017. Onyear end management has successfully obtained a $15.0 million line of credit and has agreed to merge with Obalon as filed on January 23, 2017, we received $19.0 million19, 2021, which the Company anticipates will result in gross proceeds, priorthe combined company’s common stock being traded on the NASDAQ Stock Market Exchange. The Company is also pursuing further funding options, including seeking additional equity or debt financing to deducting offering expensessupport the expansion of approximately $2.5 million, at the closingLap-Band product line, the introduction of an underwritten public offeringReShapeCare to the market place; and the continued development and, successful commercialization of unitsthe ReShape Vest and the ReShape Diabetes Bloc-Stim Neuromodulation. The following table summarizes our change in order tocash and cash equivalents (in thousands): | | | | | | | | | Year Ended | | | December 31, | | | 2020 | | 2019 | Net cash used in operating activities | | $ | (8,550) | | $ | (14,200) | Net cash used in investing activates | | | (2,390) | | | (2,014) | Net cash provided in financing activities | | | 11,075 | | | 13,659 | Effect of exchange rate changes | | | (113) | | | (8) | Net change in cash and cash equivalents | | $ | 22 | | $ | (2,563) |
fundNet Cash Used in Operating Activities
Net cash used in operating activities was $8.6 million and $14.2 million for the years ended December 31, 2020 and 2019, respectively. Net cash used in operating activities for the year ended December 31, 2020, was primarily the result of our futurenet loss of $21.6 million, partially offset by non-cash adjustments for amortization of intangible assets of $1.7 million, stock-based compensation of $1.3 million, loss on extinguishment of debt of $7.7 million, amortization of debt discount and deferred debt issuance costs of $1.7 million, noncash interest expense of $0.2 million, bad debt expense of $0.3 million, and provision for inventory in excess and obsolescence of $0.2 million. In addition, the Company has focused efforts on collection of accounts receivable, which resulted in an increase to cash of $1.2 million, offset by an increase in change of inventory of $1.2 million, primarily due to expected inventory buildup related to our impending manufacturing transfer and a decrease in accounts payable and accrued liabilities of $1.0 million. Net cash used in operating activities from continuing operations (see Note 18, “Subsequent Events,”for the year ended December 31, 2019, was primarily the result of our net loss of $74.2 million, partially offset by non-cash adjustments for amortization of intangible assets of $1.7 million, impairment of intangible assets of $6.6 million, stock-based compensation of $2.3 million, warrant expenses of $49.0 million and warrant issuance costs of $1.4 million. Increases to accounts receivable of $3.6 million, inventory of $0.3 million and prepaid expenses and other of $0.4 million were partially offset by cash savings due to an increase in accounts payable, accrued liabilities and warranty liability of $3.0 million. Net Cash Used in Investing Activities Net cash used in investing activities was $2.4 million for the year ended December 31, 2020, as compared with $2.0 million for the year ended December 31, 2019. The investing activities in 2020 reflects the second annual payment of $2.0 million paid in connection with our acquisition of the lap-band product line, as well as $0.4 million of capital expenditures related to the Consolidated Financial Statements on Form 10-Kprocess of moving manufacturing transfer Costa Rica to the United States. Net cash used in investing activities for the Year Endedyear ended December 31, 2016).2019 reflected the first annual payment of $2.0 million paid in connection with our acquisition of the LAP-BAND product line. Net Cash Provided by Financing The followingNet cash provided by financing transactions occurred in 2015, 2016 and early 2017 to fund the Company’s operations:
Early 2017 (see Note 18, “Subsequent Events,” to the Consolidated Financial Statements on Form 10-Kof $11.1 million for the Year Endedyear ended December 31, 2016)2020, consisted of proceeds from the credit agreement with an institutional investor of $9.5 million, $1.0 million received under the CARES Act in the form of a PPP Loan and $0.7 million in cash received from the exercise of warrants, offset by approximately $0.1 million of debt issuance costs.
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| | On January 23, 2017, the Company closed an underwritten public offering consisting of units of common stock, convertible preferred stock and warrants to purchase common stock. Gross proceeds of the offering were $19.0 million, prior to deducting underwriting discounts and commissions and offering expenses of approximately $2.5 million.
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| | Between January 1, 2017 and March 6, 2017, common stock warrants for 559,256 shares of common stock were exercised by warrant holders with proceeds to the Company of $3.1 million
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Net cash provided by financing activities of $13.7 million for the year ended December 31, 2019, consisted of proceeds of $13.7 million from equity offerings and $0.1 million from the exercise of warrants to purchase common stock. In connection with these equity transactions, we paid an immaterial amount of related transaction costs. A portion of the net proceeds from the June 2019 equity financing was used to repay the $2.2 million face amount of convertible subordinated debentures that were issued at an original issue discount of 10 percent in March 2019. 2015Operating Capital and 2016Capital Expenditure Requirements
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| | On July 8, 2015, we closed a public offering of units consisting of common stock and the Series A Warrants. Gross proceeds of the offering were $16.0 million, prior to deducting offering expenses of approximately $2.5 million.
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| | On November 4, 2015, we entered into a securities purchase agreement (the Purchase Agreement) with institutional investors to issue up to $25.0 million of senior amortizing convertible notes (the Notes) and Note Warrants, in three separate closings, $18.75 million of which were issued. $1.5 million of the Notes was funded at the first closing on November 9, 2015 (the First Closing). $11.0 million of the Notes was funded at the second closing on January 11, 2016 (the Second Closing) and after entering into an amendment to the Purchase Agreement on May 2, 2016 (the First Amendment) that divided the scheduled third closing into two separate closings, $6.25 million was funded at the third closing on May 2, 2016 (the Third Closing). Pursuant to a second amendment to the Purchase Agreement entered into on July 14, 2016 (the Second Amendment), a deadline of December 30, 2016 was set for the final closing. As the final closing did not occur prior to December 30, 2016, the remaining $6.25 million of Notes was not funded.
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The Company’sOur anticipated operations include plans to (i) integrate the sales and operations of the Company with the Lap-Band product line in order to expand sales domestically and internationally as well as to obtain cost savings synergies, (ii) introduce to the controlled commercial launchmarket place ReShapeCare, (iii) continue clinical test of vBloc Therapy, delivered via the vBloc System.ReShape Vest, (iv) continue development of the Diabetes Bloc-Stim Neuromodulation, (v) seek opportunities to leverage our intellectual property portfolio and custom development services to provide third-party sales and licensing opportunities, and (vi) explore and capitalize on synergistic opportunities to expand our portfolio and offer future minimally invasive treatments and therapies in the obesity continuum of care. The Company believes that it has the flexibility to manage the growth of its expenditures and operations depending on the amount of available cash flows.flows, which could include reducing expenditures for marketing, clinical and product development activities. However, the Company will ultimately need to achieve sufficient revenues from product sales and/orand obtain additional debt or equity financing to support its operations.
Sales Agreement—June 2014
On June 13, 2014, we entered into a sales agreement with Cowen and Company, LLC (Cowen) to sell shares of our common stock having aggregate gross sales proceeds of up to $25.0 million, from time to time, through an at-the market facility (ATM) under which Cowen will act as our sales agent (the Cowen ATM). We will determine, at our sole discretion, the timing and number of shares to be sold under the Cowen ATM. We will pay Cowen a commission for its services in acting as agent in the sale of common stock equal to 3.0% of the gross sales price per share of all shares sold through it as agent under the sales agreement. As of December 31, 2015, we have sold 5,256 shares under the Cowen ATM at a weighted-average selling price of $1,442.00 per share for gross proceeds of $7.6 million before deducting offering expenses. There have been no shares sold under the Cowen ATM subsequent to December 31, 2015 through March 6, 2017. We can direct Cowen to sell up to $17.4 million in common stock, provided we remain in compliance with all of the conditions under the Cowen ATM.
Sales Agreement—July 2015
On July 8, 2015, we closed a public offering, where we sold 30,476 units at an aggregate price of $525.00 per unit, for gross proceeds of $16.0 million, before deducting estimated offering expenses of approximately $1.4 million, of which $532,000 was assigned to the warrants issued with each unit sold. Each unit consisted of: (A)(i) one share of common stock or (ii) one pre-funded Series C warrant to purchase one share of common stock at an exercise price equal
to $525.00 per share (Series C Warrant); and (B) one Series A warrant to purchase one share of common stock at an exercise price equal initially to $630.00 per share (Series A Warrant). Each purchaser of a unit could elect to receive a Series C Warrant in lieu of a share of common stock. No Series C Warrants were issued.
The Series A Warrants are exercisable for a period of 42 months from the closing date of the public offering. The exercise price and number of shares of common stock issuable on the exercise of the Series A Warrants are subject to adjustment upon the issuance of any shares of common stock or securities convertible into shares of common stock below the then-existing exercise price, with certain exceptions, and in the event of any stock split, reverse stock split, recapitalization, reorganization or similar transaction. The holder of the Series A Warrant does not have the right to exercise any portion of the Series A Warrant if the holder, together with its affiliates, would, subject to certain limited exceptions, beneficially own in excess of 9.99% of our common stock outstanding immediately after the exercise or 4.99% as may be elected by the purchaser.
The exercise price of the Series A Warrants was reduced to $168.00 per share on November 9, 2015 as a result of the issuance of the Notes and was further reduced to $67.90 per share on January 29, 2016, the 16th trading day following the First Reverse Stock Split, per the terms of the Series A Warrants and was further reduced at various times during the year ended December 31, 2016 as a result of installment and acceleration payments made on the Notes. As of December 31, 2016, the exercise price of the Series A Warrants was $2.80 per share and on January 20, 2017, the 16th trading day following the Second Reverse Stock Split, the exercise price of the Series A Warrants was adjusted to $2.18 per share, per the terms of the Series A Warrants.
Senior Amortizing Convertible Notes
On November 4, 2015, we entered into the Purchase Agreement to issue and sell to four institutional investors 7% senior amortizing convertible notes due 2017 in three separate closings. The Notes were initially convertible into shares of our common stock at a price equal to $304.50 per share with an aggregate principal amount of $25.0 million. Each Note was sold with a Note Warrant with an exercise price of $325.50 per share. We issued and sold Notes and Note Warrants for aggregate total proceeds of $12.5 million in the First Closing and Second Closing. Subsequent to the Second Closing, we entered into the First Amendment, which provided that the scheduled third closing would be divided into two separate closings, issued and sold Notes and Note Warrants for aggregate total proceeds of $6.25 million in the Third Closing. After the Third Closing, we entered into the Second Amendment, which set a deadline of December 30, 2016 for the final closing and provided the consent of the holders of the Notes to we reduce the conversion price of the Notes from time to time in order to incentivize the holders of the Notes to convert their Notes into shares of our common stock. As the final closing did not occur prior to the December 30, 2016 deadline, the remaining $6.25 million of Notes was not funded. Additionally, after entering into the Second Amendment, we reduced the conversion price of the Notes frequently in order to incentivize the holders of the Notes to convert all of the outstanding amounts outstanding under the Notes. As of December 31, 2016, all of the Notes were fully repaid.
During the year ended December 31, 2016, $18.7 million of aggregate principal amount of Notes were converted by holders of the Notes into approximately 2,632,000 shares of the Company’s common stock.
Description of the Notes
The Notes were payable in monthly installments, accrued interest at a rate of 7.0% per annum from the date of issuance and had a maturity date 24 months after the First Closing. The Notes were repayable, at the Company’s election, in either cash or shares of our common stock at a discount to the then-current market price. The Notes were also convertible from time to time, at the election of the holders, into shares of our common stock at an initial conversion price of $304.50 per share. The conversion price was adjusted to $76.30 per share on January 29, 2016, the 16th trading day following the First Reverse Stock Split, per the terms of the Notes. The Notes also allowed us to reduce the conversion price from time-to-time, upon the holders’ consent, which was provided in the Second Amendment.
The holder of each Note has the right to convert any portion of such Note unless the holder, together with its affiliates, beneficially owned in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to the conversion, as such percentage ownership was determined in accordance with the terms of the Notes. The holders were also able to increase or decrease such percentage to any other percentage, but in no event above 9.99%, provided that any increase of such percentage would not be effective until 61 days after providing us notice.
The First Closing occurred on November 9, 2015. At the First Closing, we issued and sold Notes with an aggregate principal amount of $1.5 million, along with Note Warrants exercisable for 1,679 shares. During the quarter ended September 30, 2016, all remaining principal and interest amounts outstanding under the Notes issued at the First Closing were paid off via conversions to common shares.
The Second Closing occurred on January 11, 2016 after we received approval of the offering by the Company’s stockholders and the satisfaction of certain customary closing conditions. At the Second Closing, we issued and sold Notes with an aggregate principal amount of $11.0 million, along with Note Warrants exercisable for 12,312 shares. The fair value of Note Warrants issued on January 11, 2016 was determined to be $515,000 using a Black-Scholes valuation model and the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 85.90%; (3) weighted average risk –free interest rate of 1.58%; and (4) expected life of 5.0 years. During the year and quarter ended December 31, 2016, all remaining principal and interest amounts outstanding under Notes issued at the Second Closing were paid off via conversions to common shares.
The Third Closing occurred on May 2, 2016 after we entered into the First Amendment and satisfied certain closing conditions. At the Third Closing, we issued and sold Notes with an aggregate principal amount of $6.25 million, along with Note Warrants exercisable for 6,995 shares. The fair value of the Note Warrants issued on May 2, 2016 was determined to be $150,195 using a Black-Scholes valuation model and the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 89.28%; (3) weighted average risk –free interest rate of 1.32%; and (4) expected life of 5.0 years. During the quarter and year ended December 31, 2016, all remaining principal and interest amounts outstanding under Notes issued at the Third Closing were paid off via conversions to common shares.
The following table summarizes the installment amounts and additional conversions by the holders of the Notes through December 31, 2016:
First Closing:
| | | | | | | | | | | | | | | | | | | | | | | | Common | | | | Principal | | Interest | | Total | | Shares | | Installment amount at December 31, 2015 | | $ | 65,217 | | $ | 23,651 | | $ | 88,868 | | 814 | | Holder conversions during the quarter ended December 31, 2015 | | | 18,261 | | | 2,375 | | | 20,636 | | 189 | | Total installments and conversions, December 31, 2015 | | | 83,478 | | | 26,026 | | | 109,504 | | 1,003 | | Installment amount at February 29, 2016 | | | 65,217 | | | 23,681 | | | 88,898 | | 1,314 | | Installment amount at March 31, 2016 | | | 65,217 | | | 14,827 | | | 80,044 | | 1,271 | | Holder conversions during the quarter ended March 31, 2016 | | | 104,784 | | | 12,762 | | | 117,546 | | 1,524 | | Total installments and conversions, March 31, 2016 | | | 318,696 | | | 77,296 | | | 395,992 | | 5,112 | | Installment amount at April 30, 2016 | | | 65,217 | | | 13,853 | | | 79,070 | | 1,454 | | Installment amount at May 31, 2016 | | | 65,217 | | | 13,082 | | | 78,299 | | 2,121 | | Installment amount at June 30, 2016 | | | 54,217 | | | 11,275 | | | 65,492 | | 3,590 | | Holder conversions during the quarter ended June 30, 2016 | | | 1,627 | | | 174 | | | 1,801 | | 29 | | Total installments and conversions, June 30, 2016 | | | 504,974 | | | 115,680 | | | 620,654 | | 12,306 | | Installment amount at July 31, 2016 | | | 65,217 | | | 10,148 | | | 75,365 | | 5,521 | | Installment amount at August 31, 2016 | | | 46,957 | | | 5,830 | | | 52,787 | | 4,593 | | Holder conversions during the quarter ended September 30, 2016 | | | 882,852 | | | 78,634 | | | 961,486 | | 72,528 | | Total installments and conversions, September 30, 2016 and December 31, 2016 | | $ | 1,500,000 | | $ | 210,292 | | $ | 1,710,292 | | 94,948 | |
Second Closing:
| | | | | | | | | | | | | | | | | | | | | | | | Common | | | | Principal | | | Interest | | | Total | | Shares | | | | | | | | | | | | | | | Installment amount at March 2, 2016 | | $ | 404,762 | | $ | 149,300 | | $ | 554,062 | | * | | Holder conversions during the quarter ended March 31, 2016 | | | 987,000 | | | 124,050 | | | 1,111,050 | | 14,974 | | Total installments and conversions, March 31, 2016 | | | 1,391,762 | | | 273,350 | | | 1,665,112 | | 14,974 | | Installment amount at April 29, 2016 | | | 404,762 | | | 149,497 | | | 554,259 | | 10,190 | | Installment amount at May 31, 2016 | | | 291,428 | | | 86,518 | | | 377,946 | | 10,238 | | Installment amount at June 30, 2016 | | | 404,762 | | | 82,913 | | | 487,675 | | 22,842 | | Holder conversions during the quarter ended June 30, 2016 | | | 25,373 | | | 2,995 | | | 28,368 | | 414 | | Total installments and conversions, June 30, 2016 | | | 2,518,087 | | | 595,273 | | | 3,113,360 | | 58,658 | | Installment amount at July 31, 2016 | | | 213,429 | | | 47,457 | | | 260,886 | | 19,113 | | Installment amount at August 31, 2016 | | | 631,429 | | | 116,511 | | | 747,940 | | 64,810 | | Installment amount at September 30, 2016 | | | 404,762 | | | 45,846 | | | 450,608 | | 51,698 | | Holder conversions during the quarter ended September 30, 2016 | | | 4,868,679 | | | 418,847 | | | 5,287,526 | | 418,253 | | Total installments and conversions, September 30, 2016 | | | 8,636,386 | | | 1,223,934 | | | 9,860,320 | | 612,532 | | Installment amount at Oct 31, 2016 | | | 340,000 | | | 24,738 | | | 364,738 | | 70,665 | | Installment amount at Nov 30, 2016 | | | 291,429 | | | 27,528 | | | 318,957 | | 81,952 | | Installment amount at December 31, 2016 | | | 156,867 | | | 11,425 | | | 168,292 | | 57,453 | | Holder conversions during the quarter ended December 31, 2016 | | | 1,575,318 | | | 122,624 | | | 1,697,942 | | 450,385 | | Total installments and conversions, December 31, 2016 | | $ | 11,000,000 | | $ | 1,410,249 | | $ | 12,410,249 | | 1,272,987 | |
Third Closing:
| | | | | | | | | | | | | | | | | | | | | | | | Common | | | | | Principal | | | Interest | | | Total | | Shares | | | | | | | | | | | | | | | Installment amount at June 30, 2016 | | $ | 212,158 | | $ | 90,659 | | $ | 302,817 | | 16,600 | | Holder conversions during the quarter ended June 30, 2016 | | | — | | | — | | | — | | — | | Total installments and conversions, June 30, 2016 | | | 212,158 | | | 90,659 | | | 302,817 | | 16,600 | | Installment amount at July 31, 2016 | | | 147,368 | | | 32,374 | | | 179,742 | | 13,168 | | Cash Payment – July 31, 2016 installment | | | 42,105 | | | 6,107 | | | 48,212 | | * | | Installment amount at August 31, 2016 | | | 336,842 | | | 62,059 | | | 398,901 | | 34,684 | | Installment amount at September, 2016 | | | 263,158 | | | 41,822 | | | 304,980 | | 34,523 | | Holder conversions during the quarter ended September 30, 2016 | | | 1,915,698 | | | 175,092 | | | 2,090,790 | | 155,272 | | Total installments and conversions, September 30, 2016 | | | 2,917,329 | | | 408,113 | | | 3,325,442 | | 254,247 | | Installment amount at Oct 31, 2016 | | | 221,053 | | | 35,004 | | | 256,057 | | 48,192 | | Installment amount at Nov 30, 2016 | | | 221,053 | | | 31,259 | | | 252,312 | | 64,828 | | Installment amount at December 31, 2016 | | | 221,053 | | | 14,526 | | | 235,579 | | 81,872 | | Holder conversions during the quarter ended December 31, 2016 | | | 2,669,512 | | | 170,359 | | | 2,839,871 | | 816,707 | | Total installments and conversions, December 31, 2016 | | $ | 6,250,000 | | $ | 659,261 | | $ | 6,909,261 | | 1,265,846 | |
* Cash payments
Description of the Note Warrants
Each Note Warrant is exercisable immediately and for a period of 60 months from the date of the issuance of the Warrant. The Note Warrants entitle the holders of the Note Warrants to purchase, in aggregate, 27,982 shares of our common stock upon the completion of the Third Closing, subject to certain adjustments. The Note Warrants are initially exercisable at an exercise price equal to $325.50, subject to adjustment on the eighteen month anniversary of issuance, and certain other adjustments. The exercise price and number of shares of common stock issuable on the exercise of the Note Warrants is subject to adjustment upon the issuance of any shares of common stock or securities convertible into shares of common stock below the then-existing exercise price, with certain exceptions, and in the event of any stock
split, reverse stock split, recapitalization, reorganization or similar transaction. The holder of each Note Warrant does not have the right to exercise any portion of such Note Warrant if the holder, together with its affiliates, beneficially owns in excess of 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Note Warrants. However, any holder may increase or decrease such percentage to any other percentage, but in no event above 9.99%, provided that any increase of such percentage will not be effective until 61 days after providing us notice.
The exercise price of the Note Warrants issued November 9, 2015 was reduced to $76.30 per share on January 29, 2016, the 16th trading day following the First Reverse Stock Split, per the terms of the Note Warrants. Per the terms of the Note Warrants, the exercise price of each of the Note Warrants issued January 11, 2016 and May 2, 2016 remained $325.50 until January 20, 2017, the 16th trading day following the Second Reverse Stock Split, at which point the exercise price of all of the Note Warrants was adjusted to $2.18 per share. All of the Note Warrants remain subject to adjustment on the eighteen month anniversary of issuance.
Net Cash Used in Operating Activities
Net cash used in operating activities was $20.6 million, $22.6 million and $19.4 million for the years ended December 31, 2016, 2015 and 2014, respectively. Net cash used in operating activities primarily reflects the net loss for those periods, less noncash expenses for stock-based compensation, depreciation and amortization, provision for doubtful accounts, change in value of warrant liability, and partially offset by changes in operating assets and liabilities.
Net Cash Used in Investing Activities
Net cash used in investing activities was $14,000, $39,000 and $89,000 for the years ended December 31, 2016, 2015 and 2014, respectively. Net cash used in investing activities is primarily related to the purchase of property and equipment.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $16.0 million, $19.0 million and $7.8 million for the years ended December 31, 2016, 2015 and 2014, respectively. For the year ended December 31, 2016, net cash provided by financing activities was primarily the result of gross proceeds from the Second Closing and Third Closing of the Notes, which totaled $17.3 million, less cash principal payments on Notes of $447,000 and debt issuance costs of $750,000.
For the year ended December 31, 2015, net cash provided by financing activities was primarily the result of gross proceeds of $16.0 million from the July 8, 2015 public offering, ATM draws of $6.7 million and $1.5 million in gross proceeds from the issuance of the Notes on November 9, 2015. These increases were offset by $1.7 million in financing costs, $477,000 of debt issuance costs and principal repayments of $3.0 million on our long-term debt.
For the year ended December 31, 2014, net cash provided by financing activities was primarily the result of gross proceeds from ATM draws of $9.8 million and proceeds of $2.2 million from the exercise of common stock warrants. These increases were offset by $285,000 in financing costs and $4.0 million in principal repayments on our long-term debt.
Operating Capital and Capital Expenditure Requirements
We received FDA approval on January 14, 2015 for vBloc Therapy, delivered via the vBloc System, and began a controlled commercial launch at select bariatric centers of excellence in the United States. We had our first commercial sales within the United States in 2015 and for the years ended December 31, 2015 and 2016, we recognized $292,000 and $787,000 in revenue, respectively. We anticipate that we will continue to incur net losses for the next several years as we develop our products, commercialize our vBloc System, develop the corporate infrastructure required to sell our products, operate as a publicly-traded company and pursue additional applications for our technology platform.
We have financed our operations to date principallyObtaining funds through the sale of additional equity and debt securities debt financing and interest earned on investments. As of December 31, 2016, we had $3.3 million of cash and cash equivalents to fund our anticipated operations into early 2017. On January 23, 2017, we received $19.0 million in gross proceeds, prior to deducting offering expenses of approximately $2.5 million, at the closing of an underwritten public offering of units
consisting of common stock, convertible preferred stock and common stock warrants in order to fund our operations. Additionally, between January 1, 2017 and March 6, 2017, common stock warrants for 559,256 shares of common stock were exercised by warrant holders with proceeds to the Company of $3.1 million (see also Note 18, “Subsequent Events,” to the Consolidated Financial Statements on Form 10-K for the Year Ended December 31, 2016).
Our anticipated operations include plans that consider the controlled commercial launch of vBloc Therapy, delivered via the vBloc System. We believe that we have the flexibility to manage the growth of our expenditures and operations depending on the amount of our cash flows However, we will ultimately need to achieve sufficient revenues from product sales and/or obtain additional debt or equity financing in order to support our operations. Obtaining funds through the warrant holders’ exercise of outstanding common stock warrants or the sale of additional equity and debt securities may result in dilution to our stockholders. If we raise additional funds through the
issuance of debt securities, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. The sale of additional equity may require us to obtain approval from our stockholders to increase the number of shares of common stock we have authorized under our certificate of incorporation. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay, or eliminate some or all of, our planned research, development and commercialization activities, which could materially harm our business. In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to products or proprietary technologies, or grant licenses on terms that are not favorable. Our forecast of the period of time through which our financial resources will be adequate to support our operations, the costs to complete development of products and the cost to commercialize our products 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 Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K.Factors. 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. Because of the numerous risks and uncertainties associated with the development of medical devices, such as our vBloc System,ReShape Vest and Diabetes Bloc-Stim Neuromodulation, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to complete the development of the ReShape Vest and Diabetes Bloc-Stim Neuromodulation or other additional products and successfully deliver a commercial product to the market. Our future capital requirements will depend on many factors, including, but not limited to, the following: | ·
● | | the cost and timing of establishing sales, marketing and distribution capabilities; |
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● | | the cost of establishing clinical and commercial supplies of our vBloc SystemReShape Vest and Diabetes Bloc-Stim Neuromodulation, and any products that we may develop; |
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● | | the rate of market acceptance of our vBloc SystemReShape Vest and vBloc TherapyDiabetes Bloc-Stim Neuromodulation, and any other product candidates; |
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● | | the cost of filing and prosecuting patent applications and defending and enforcing our patent and other intellectual property rights; |
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● | | the cost of defending, in litigation or otherwise, any claims that we infringe third-party patent or other intellectual property rights; |
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● | | the effect of competing products and market developments; |
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● | | the cost of explanting clinical devices; |
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● | | the terms and timing of any collaborative, licensing or other arrangements that we may establish; |
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● | | any revenue generated by sales of our vBloc SystemLap-Band, ReShapeCare, ReShape Vest, Diabetes Bloc-Stim Neuromodulation or our future products; |
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● | | the scope, rate of progress, results and cost of our clinical trials and other research and development activities; |
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● | | the cost and timing of obtaining any further required regulatory approvals; and |
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● | | the extent to which we invest in products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions. |
| | | | | | | | | | | | | | | | | | Payments Due By Period | | | | | Less Than 1 | | | | | | More than | Contractual Obligations | | Total | | Year | | 1-3 Years | | 3-5 Years | | 5 Years | Operating lease | | $ | 420,852 | | $ | 237,749 | | $ | 183,103 | | $ | — | | $ | — | Total contractual cash obligations | | $ | 420,852 | | $ | 237,749 | | $ | 183,103 | | $ | — | | $ | — |
The table above reflects only payment obligations that are fixed and determinable based on our current agreements. Our operating lease commitment relates to our corporate headquarters in St. Paul, Minnesota. The above table does not include the Notes due to the variability in timing and the option to settle the Notes through the issuance of shares.
Off-balance-sheet Arrangements Since our inception, we have not engaged in any off-balance-sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities as defined by rules enacted by the SEC and FASB, and accordingly, no such arrangements are likely to have a current or future effect on our financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Critical Accounting Policies and Significant Judgments and Estimates Recent Accounting Pronouncements
In April 2015, FASB issued Simplifying the PresentationOur management’s discussion and analysis of Debt Issuance Costs, (Accounting Standards Update No. 2015-03 (ASU 2015-03)), which changes the presentation of debt issuance costs in the financial statements. Under ASU 2015-03, an entity presents such costs in the balance sheet as a direct deduction from the recognized debt liability rather than as an asset. Amortization of the costs is reported as interest expense. This guidance will be effective for interim and annual reporting periods beginning after December 15, 2015. We have evaluated the impact of adopting ASU 2015-03 and do not believe the new guidance will have a material effect on our financial position,condition and results of operations or cash flows.
In May 2014, FASB issued Revenue from Contracts with Customers, Topic 606 (Accounting Standards Update No. 2014-09 (ASU 2014-09)), which provides a framework for the recognition of revenue, with the objective that recognized revenues properly reflect amounts an entity is entitled to receive in exchange for goods and services. This guidance will be effective for interim and annual reporting periods beginning after December 15, 2017. We do not believe that the adoption of the new standard will have a material effectare based on our consolidated financial statements, in that the accounting related to our current revenue-based business practices will not change under the new standard.
In August 2014, FASB issued Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, (Accounting Standards Update No. 2014-15 (ASU 2014-15)), which provides a framework for entities to evaluate going concern issues as well as potential related disclosures. This guidance became effective and the Company adopted it for the year ended December 31, 2016. See Note 3, Liquidity and Management’s Plans.
In March 2016, FASB issued Improvements to Employee Share-Based Payment Accounting, (Accounting Standards Update No. 2016-09 (ASU 2016-09)), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, the estimation of forfeitures, shares withheld for taxes and classification of shares withheld for taxes on the statement of cash flows. As part of the adoption of this guidance we have elected to account for forfeitures of share-
based awards as they occur. The Company will adopt ASU 2016-09 as required on January 1, 2017 and the adoption will not have a material effect on its consolidated financial statements.
Various other accounting standards and interpretations have been issued with 2016 effective dates and effective dates subsequent to December 31, 2016. We have evaluated the recently issued accounting pronouncements that are currently effective or will be effectiveprepared in 2016 and believe that none of them have had or will have a material effect on our financial position, results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk is confined to our cash and cash equivalents. As of December 31, 2016 we had $3.3 million in cash and cash equivalents. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. To achieve our goals, we may maintain a portfolio of cash equivalents and investments in a variety of securities of high credit quality. The securities in our investment portfolio, if any, are not leveraged, are classified as either available for sale or held-to-maturity and are, due to their very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our cash equivalents, we do not believe that an increase in market rates would have any material negative impact on interest income recognized in our statement of operations. We have no investments denominated in foreign currencies and therefore our investments are not subject to foreign currency exchange risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
EnteroMedics Inc.
St. Paul, Minnesota
We have audited the accompanying consolidated balance sheets of EnteroMedics Inc. and subsidiary (the "Company") as of December 31, 2016 and 2015, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
March 8, 2017
ENTEROMEDICS INC.
Consolidated Balance Sheets
| | | | | | | | | December 31, | | December 31, | | | 2016 | | 2015 | ASSETS | | | | | | | Current assets: | | | | | | | Cash and cash equivalents | | $ | 3,310,787 | | $ | 7,927,240 | Accounts receivable (net of allowance for bad debts of $20,000 at December 31, 2016) | | | 143,692 | | | 57,928 | Inventory | | | 1,789,578 | | | 1,686,324 | Prepaid expenses and other current assets | | | 476,624 | | | 831,495 | Total current assets | | | 5,720,681 | | | 10,502,987 | Property and equipment, net | | | 200,720 | | | 326,296 | Other assets | | | 1,119,405 | | | 757,802 | Total assets | | $ | 7,040,806 | | $ | 11,587,085 | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | Current liabilities: | | | | | | | Current portion of convertible notes payable | | $ | — | | $ | 717,391 | Accounts payable | | | 1,311,706 | | | 172,050 | Accrued expenses | | | 2,751,415 | | | 3,595,415 | Accrued interest payable | | | — | | | 1,172 | Total current liabilities | | | 4,063,121 | | | 4,486,028 | Convertible notes payable, less current portion (net of discounts of $149,340 at December 31, 2015) | | | — | | | 549,791 | Common stock warrant liability | | | 39,119 | | | 2,877,817 | Total liabilities | | | 4,102,240 | | | 7,913,636 | Commitments and contingencies (Note 16) | | | | | | | Stockholders’ equity: | | | | | | | Common stock, $0.01 par value; 300,000,000 and 13,333,333 shares authorized; 2,736,621 and 102,415 shares issued and outstanding at December 31, 2016 and 2015 respectively | | | 27,366 | | | 1,024 | Additional paid-in capital | | | 303,852,582 | | | 281,252,963 | Accumulated deficit | | | (300,941,382) | | | (277,580,538) | Total stockholders’ equity | | | 2,938,566 | | | 3,673,449 | Total liabilities and stockholders’ equity | | $ | 7,040,806 | | $ | 11,587,085 |
See accompanying notes to consolidated financial statements.
ENTEROMEDICS INC.
Consolidated Statements of Operations
| | | | | | | | | | | | | Year Ended December 31, | | | | 2016 | | 2015 | | 2014 | | Sales | | $ | 786,660 | | $ | 292,000 | | $ | — | | Cost of goods sold | | | 431,476 | | | 125,047 | | | — | | Gross profit | | | 355,184 | | | 166,953 | | | — | | Operating expenses: | | | | | | | | | | | Selling, general and administrative | | | 17,981,525 | | | 19,892,424 | | | 14,561,656 | | Research and development | | | 5,169,286 | | | 8,141,323 | | | 11,031,619 | | Total operating expenses | | | 23,150,811 | | | 28,033,747 | | | 25,593,275 | | Operating loss | | | (22,795,627) | | | (27,866,794) | | | (25,593,275) | | Other income (expense): | | | | | | | | | | | Interest income | | | 5,837 | | | 1,819 | | | 3,331 | | Interest expense | | | (4,104,003) | | | (939,182) | | | (530,222) | | Change in value of warrant liability | | | 3,512,816 | | | 3,295,536 | | | — | | Other, net | | | 20,133 | | | 9,874 | | | (8,554) | | Net loss | | $ | (23,360,844) | | $ | (25,498,747) | | $ | (26,128,720) | | Net loss per share—basic and diluted | | $ | (37.53) | | $ | (298.97) | | $ | (404.25) | | Shares used to compute basic and diluted net loss per share | | | 622,431 | | | 85,290 | | | 64,635 | |
See accompanying notes to consolidated financial statements.
ENTEROMEDICS INC.
Consolidated Statements of Stockholders’ Equity
| | | | | | | | | | | | | | | | | | | Additional | | | | | Total | | | Common Stock | | Paid-in | | Accumulated | | Stockholders’ | | | Shares | | Amount | | Capital | | Deficit | | Equity | Balance December 31, 2013 | | 60,599 | | $ | 606 | | $ | 240,631,842 | | $ | (225,953,071) | | $ | 14,679,377 | Net loss | | — | | | — | | | — | | | (26,128,720) | | | (26,128,720) | Employee stock-based compensation expense | | — | | | — | | | 6,138,384 | | | — | | | 6,138,384 | Nonemployee stock-based compensation expense | | — | | | — | | | 181,323 | | | — | | | 181,323 | Issuance of common stock through “at-the-market” equity offerings in 2014 for cash from $1,157.80 to $2,664.20 per share, net of financing costs of $284,698 | | 4,468 | | | 44 | | | 9,551,722 | | | — | | | 9,551,766 | Exercise of 1,265 warrants in 2014 for cash from $1,197.00 to $2,299.50 per share | | 1,265 | | | 13 | | | 2,242,252 | | | — | | | 2,242,265 | Balance December 31, 2014 | | 66,332 | | $ | 663 | | $ | 258,745,523 | | $ | (252,081,791) | | $ | 6,664,395 | Net loss | | — | | | — | | | — | | | (25,498,747) | | | (25,498,747) | Employee stock-based compensation expense | | — | | | — | | | 6,974,489 | | | — | | | 6,974,489 | Nonemployee stock-based compensation expense | | — | | | — | | | (34,712) | | | — | | | (34,712) | Issuance of common stock through “at-the-market” equity offerings in 2015 for cash from $1,162.00 to $1,589.00 per share, net of financing costs of $259,560 | | 4,604 | | | 46 | | | 6,392,326 | | | — | | | 6,392,372 | Issuance of common stock, net of warrants to purchase approximately 301,905 shares of common stock valued at $6,003,932, in registered public offering in July 2015 for cash at an aggregate price of $525.00 per unit, net of financing costs of $929,920 | | 30,476 | | | 305 | | | 9,065,843 | | | — | | | 9,066,148 | Issuance of common stock for payments made in shares on convertible notes payable | | 1,003 | | | 10 | | | 109,494 | | | — | | | 109,504 | Balance December 31, 2015 | | 102,415 | | | 1,024 | | | 281,252,963 | | | (277,580,538) | | | 3,673,449 | Net loss | | — | | | — | | | — | | | (23,360,844) | | | (23,360,844) | Employee stock-based compensation expense | | — | | | — | | | 2,327,402 | | | — | | | 2,327,402 | Nonemployee stock-based compensation expense | | — | | | — | | | 3,535 | | | — | | | 3,535 | Common stock financing costs | | — | | | — | | | (28,000) | | | — | | | (28,000) | Exercise of 1,428 warrants in 2016 for cash at $3.50 per share | | 1,428 | | | 14 | | | 4,986 | | | — | | | 5,000 | Issuance of common stock for payments made in shares on convertible notes payable | | 2,632,778 | | | 26,328 | | | 20,291,696 | | | — | | | 20,318,024 | Balance December 31, 2016 | | 2,736,621 | | $ | 27,366 | | $ | 303,852,582 | | $ | (300,941,382) | | $ | 2,938,566 |
See accompanying notes to consolidated financial statements.
ENTEROMEDICS INC.
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | Year Ended December 31, | | | | 2016 | | 2015 | | 2014 | | Cash flows from operating activities: | | | | | | | | | | | Net loss | | $ | (23,360,844) | | $ | (25,498,747) | | $ | (26,128,720) | | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | Depreciation and amortization | | | 139,576 | | | 188,606 | | | 188,904 | | Provision for doubtful accounts | | | 20,000 | | | | | | | | Loss on sale of equipment | | | — | | | 885 | | | — | | Stock-based compensation | | | 2,330,937 | | | 6,939,777 | | | 6,319,707 | | Amortization of commitment fees, debt issuance costs and original issue discount | | | 1,836,340 | | | 825,735 | | | 123,068 | | Change in value of warrant liability | | | (3,512,816) | | | (3,295,536) | | | — | | Change in operating assets and liabilities: | | | | | | | | | | | Accounts receivable | | | (105,625) | | | (55,116) | | | 14,930 | | Inventory | | | (103,254) | | | (705,805) | | | 147,422 | | Prepaid expenses and other current assets | | | 354,732 | | | (409,822) | | | 125,071 | | Other assets | | | (600,634) | | | 349,709 | | | (74,372) | | Accounts payable | | | 1,139,656 | | | (222,636) | | | 267,356 | | Accrued expenses | | | (891,060) | | | (235,351) | | | (355,294) | | Accrued interest payable | | | 2,097,199 | | | (487,739) | | | (11,735) | | Net cash used in operating activities | | | (20,655,793) | | | (22,606,040) | | | (19,383,663) | | Cash flows from investing activities: | | | | | | | | | | | Purchases of property and equipment | | | (14,000) | | | (38,915) | | | (88,680) | | Net cash used in investing activities | | | (14,000) | | | (38,915) | | | (88,680) | | Cash flows from financing activities: | | | | | | | | | | | Proceeds from warrants exercised | | | 5,000 | | | — | | | 2,242,265 | | Proceeds from sale of common stock and warrants for purchase of common stock | | | — | | | 22,651,932 | | | 9,836,464 | | Common stock financing costs | | | (28,000) | | | (1,721,794) | | | (284,698) | | Proceeds from convertible notes payable | | | 17,250,000 | | | 1,500,000 | | | — | | Repayments on convertible notes payable | | | (446,867) | | | — | | | — | | Repayments on notes payable | | | — | | | (3,000,000) | | | (4,000,000) | | Debt issuance costs | | | (726,793) | | | (477,110) | | | — | | Net cash provided by financing activities | | | 16,053,340 | | | 18,953,028 | | | 7,794,031 | | Net (decrease) increase in cash and cash equivalents | | | (4,616,453) | | | (3,691,927) | | | (11,678,312) | | Cash and cash equivalents: | | | | | | | | | | | Beginning of period | | | 7,927,240 | | | 11,619,167 | | | 23,297,479 | | End of period | | $ | 3,310,787 | | $ | 7,927,240 | | $ | 11,619,167 | | Supplemental disclosure: | | | | | | | | | | | Cash paid for interest | | $ | 155,407 | | $ | 601,185 | | $ | 418,889 | | Noncash investing and financing activities: | | | | | | | | | | | Conversion of convertible notes and interest payable | | $ | 20,318,024 | | $ | 109,504 | | | — | |
See accompanying notes to consolidated financial statements.
EnteroMedics Inc.
Notes to Consolidated Financial Statements
(1)Description of the Business; Risks and Uncertainties of the Business
Description of Business
EnteroMedics Inc. (the Company) develops and sells implantable systems to treat obesity, metabolic diseases and other gastrointestinal disorders. The Company was incorporated in the state of Minnesota on December 19, 2002, originally as two separate legal entities, Alpha Medical, Inc. and Beta Medical, Inc., both of which were owned 100% by a common stockholder. Effective October 1, 2003, the two entities were combined and the combined entity changed its name to EnteroMedics Inc. The Company reincorporated in Delaware on July 22, 2004. The Company has devoted substantially all of its resources to recruiting personnel, developing its product technology, obtaining patents to protect its intellectual property, commercialization activities and raising capital and has recently commenced commercial operations in the United States deriving revenues from its primary business activity in 2015. The Company is headquartered in St. Paul, Minnesota.
EnteroMedics Europe Sárl (EnteroMedics Europe), a wholly owned subsidiary of the Company, was formed in January 2006. EnteroMedics Europe is a Swiss entity established as a means to conduct clinical trials in Switzerland. Upon establishment there were 20 shares of EnteroMedics Europe issued and outstanding with a par value of 1,000 Swiss Francs. EnteroMedics purchased 100% of the shares and then issued one share to a fiduciary agent. The one share is the property of EnteroMedics and is held by the fiduciary in a fiduciary capacity under terms of the Fiduciary Agreement. The functional currency of EnteroMedics Europe has been determined to be the U.S. Dollar.
During 2016, the Company’s board of directors and stockholders approved two reverse stock splits (collectively, the Reverse Stock Splits). Neither reverse stock split changed the par value of the Company’s common stock or the number of preferred shares authorized by the Company’s certificate of incorporation. The first reverse stock split was a 1-for-15 reverse split (the First Reverse Stock Split) of the Company’s outstanding common stock that became effective after trading on January 6, 2016. The First Reverse Stock Split also decreased the number of shares of common stock authorized by the Company’s certificate of incorporation proportionately, and proportional adjustments were also made to the Company’s outstanding stock options and warrants and the number of shares authorized under the Company’s Amended and Restated 2003 Stock Incentive Plan . In connection with the First Reverse Stock Split, an amendment to the Company’s certificate of incorporation was also approved to increase the number of shares of the Company’s common stock authorized for issuance to 150 million shares, effective immediately after the First Reverse Stock Split on January 6, 2016.
The second reverse stock split was a 1-for-70 reverse split (the Second Reverse Stock Split) of the Company’s outstanding common stock that became effective after trading on December 27, 2016pursuant to the Company’s Sixth Amended and Restated Certificate of Incorporation. In connection with the Second Reverse Stock Split, proportional adjustments were also made to the Company’s outstanding stock options and warrants. Additionally, in connection with the Second Reverse Stock Split, a second amendment was approved to increase the number of shares of the Company’s common stock authorized for issuance to 300 million shares, effective after the Second Reverse Stock Split on December 27, 2016.
All share and per-share amounts have been retroactively adjusted to reflect the Reverse Stock Splits for all periods presented.
Risks and Uncertainties
The Company is focused on the design and development of medical devices that use neuroblocking technology to treat obesity, metabolic diseases and other gastrointestinal disorders and currently has approvals to commercially launch the vBloc System in the United States, the European Economic Area and other countries that recognize the European CE Mark. The Company has devoted substantially all of its resources to recruiting personnel, developing its product technology, obtaining patents to protect its intellectual property and raising capital, and has recently commenced commercial operations in the United States deriving revenues from its primary business activity in 2015 and 2016.
The Company’s products require approval from the U.S. Food and Drug Administration (FDA) or corresponding foreign regulatory agencies prior to commercial sales. The Company received FDA approval on January 14, 2015 for vBloc Therapy, delivered via the vBloc System, and has begun a controlled commercial launch at select surgical centers in the United States. The vBloc System has also received CE Mark and was previously listed on the Australian Register of Therapeutic Goods (ARTG).
The medical device industry is characterized by frequent and extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often difficult to predict, and the outcome may be uncertain until the court has entered final judgment and all appeals are exhausted. The Company’s competitors may assert that its products or the use of the Company’s products are covered by U.S. or foreign patents held by them.
The Company’s activities are subject to significant risks and uncertainties, including the ability to obtain additional financing, and there can be no assurance that the Company will be successful in obtaining additional financing on favorable terms, or at all. If adequate funds are not available, the Company may have to further reduce its cost structure until financing is obtained and/or delay development or commercialization of products or license to third parties the rights to commercialize products or technologies that the Company would otherwise seek to commercialize.
(2)Summary of Significant Accounting Policies
Basis of Presentation
The Company has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The Company’s fiscal year ends on December 31.
Use of Estimates
The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires managementus to make estimates and assumptions that affect the reported amounts reported inof assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported expenses during the reporting periods. We evaluate our estimates and accompanying notes.judgments on an ongoing basis. Actual results couldmay differ materially from those estimates.these estimates under different assumptions or conditions. Principles of Consolidation
TheWhile our significant accounting policies are more fully described in Note 2 to our consolidated financial statements includeincluded in Item 8 of this Annual Report on Form 10-K, we believe that the accountsfollowing accounting policies and estimates are most critical to a full understanding and evaluation of the Company and its wholly owned subsidiary. All intercompany transactions and accounts have been eliminated in consolidation.our reported financial results.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. Cash and cash equivalents are primarily deposited in demand and money market accounts. At times, such deposits may be in excess of insured limits. Investments in money market funds are not considered to be bank deposits and are not insured or guaranteed by the federal deposit insurance company or other government agency. These money market funds seek to preserve the value of the investment at $1.00 per share; however, it is possible to lose money investing in these funds. The Company has not experienced any losses on its deposits of cash and cash equivalents.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities approximate fair value due to their short maturities. The Company’s common stock warrants are required to be reported at fair value and the Company elected to report its senior amortizing convertible notes at fair value. The fair values of common stock warrants and investments in debt and equity securities, if any, are disclosed in Note 4. The fair value of the Company’s senior amortizing convertible notes is disclosed in Notes 4 and 8.
Common Stock Warrant Liability
The common stock warrants that were issued in connection with the July 8, 2015 public offering (the Series A Warrants) and the common stock warrants issued in connection with the November 9, 2015, January 11, 2016 and May 2, 2016 senior amortizing convertible notes (the Note Warrants) are classified as a liability in the consolidated balance sheets, as the common stock warrants issued provide for certain anti-dilution protections in the event shares of common stock or securities convertible into shares of common stock are issued below the then-existing exercise price. The fair value of these common stock warrants is re-measured at each financial reporting period and immediately before exercise, with any changes in fair value being recognized as a component of other income (expense) in the consolidated statements of operations.
Cash and Cash Equivalents
Revenue Recognition The Company considers highly liquid investments generally with maturitiesrecognizes revenue when it satisfies a performance obligation by transferring control of 90 daysthe promised goods or less when purchasedservices to its customers, in an amount that reflects the consideration the Company expects to be cash equivalents. Cash equivalents are statedentitled to in exchange for those goods or services. Product sales consist of a single performance obligation that the Company satisfies at cost, which approximates market value. The Company’s cash equivalents are primarilya point in money market funds and certificates of deposit.time. The Company deposits its cashrecognizes product revenue when the following events have occurred: (a) the Company has transferred physical possession of the products, (b) the Company has a present right to payment, (c) the customer has legal title to the products, and cash equivalents in high-quality credit institutions.(d) the customer bears significant risks and rewards of ownership of the products. Short-Term Investments
The Company considersFor the Company’s Lap-Band product, these criteria are met under the agreements with most customers upon product shipment. This includes sales to distributors, who sell the products to their customers, take title to the products and assume all investments with maturities greater than three months and less than one yearrisks of ownership at the time of purchase as short-term investmentsshipment. Distributors are obligated to pay within specified terms regardless of when, if ever, they sell the products. Refer to Note 12 for additional information about the Company’s products and classifies them as either availablecontractual arrangements.
Taxes collected from customers and remitted to governmental authorities are accounted for sale or heldon a net basis. Accordingly, such amounts are excluded from revenues. Amounts billed to maturity.customers related to shipping and handling are included in revenues. Shipping and handling costs related to revenue producing activities are included in cost of sales. Intangible Assets and Long-Lived Assets We acquire intangible assets in connection with business combinations and asset purchases. The Company also considers certain investments with maturities greater than one year but whichacquired intangible assets are also held for liquidity purposes and are available for sale as short-term investments. Available-for-sale securities are carriedrecorded at fair value, which is determined based on quoted market prices, witha discounted cash flow analysis. The determination of fair value requires significant estimates, including, but not limited to, the unrealized gainsamount and losses included in other comprehensive income within stockholders’ equity intiming of projected future cash flows, the consolidated balance sheets. Realized gains and losses and declines in value judgeddiscount rate used to be other than temporary on available-for-sale securities are included in interest and other income. Interest and dividends on securities classified as available for sale are included in interest income. The cost of securities sold is based ondiscount those cash flows, the specific identification method.
Short-term investments in debt securities which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income, using the interest method, over the period to maturity. Unrealized losses on held-to-maturity securities reflecting a decline in value determined to be other than temporary are charged to income.
Inventory
The Company accounts for inventory at the lower of cost or market and records any long-term inventory as other assets in the consolidated balance sheets.
Property and Equipment, Net
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over their estimated useful lives of five to seven years for furniture and equipment and three to five years for computer hardware and software. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful life or the termassessment of the lease. Upon retirement or sale,asset's life cycle, including the costtiming and related accumulated depreciation or amortization are removed from the consolidated balance sheetsexpected costs to complete in-process projects, and the resulting gain or lossconsideration of legal, technical, regulatory, economic, and competitive risks.
IPR&D acquired in business combinations is reflected in the consolidated statements of operations. Repairs and maintenance are expensed as incurred. Impairment of Long-Lived Assets
The Company evaluates its long-lived assetsreviewed for impairment by comparison ofannually, or whenever an event occurs or circumstances change that would indicate the carrying amount may be impaired. Additionally, management reviews the carrying amounts to future net undiscounted cash flows expected to be generated by suchof other intangible and long-lived assets whenwhenever events or changes in circumstances indicate that the carrying amountamounts of an asset may not be recoverable. Should anThe impairment exist, the impairment loss would bereviews require significant estimates about fair value,
measuredincluding estimation of future cash flows, selection of an appropriate discount rate, and estimates of long-term growth rates.
Research and Development Expenses We record the estimated costs of research and development activities performed by third-party service providers based upon the estimated services provided but not yet invoiced and include these costs in accrued expenses and other payables in the Consolidated Balance Sheets and within research and development expense in the consolidated statements of operations. We accrue for these costs based on the excess carrying valuefactors such as estimates of the assetwork completed and in accordance with agreements established with its third-party service providers. As actual costs become known, the Company adjusts its accrued liabilities. The Company’s CRO arrangement generally requires payments in advance of services. Upon making a payment, the Company makes a determination as to the amount to record as a deferred charge and the amount of research and development expense. The amount of CRO related costs included in research and development expense each period is based upon the Company’s estimate of the time period over which services will be performed, enrollment of patients, number of sites activated and level of effort to be expended. Any amount of advances paid in excess of expense recognized is included in prepaid expenses and other current assets on the asset’s fair valueConsolidated Balance Sheets. If the actual timing of the CRO’s performance of services or the level of effort varies from the Company’s estimate, the amount of prepaid CRO expense is adjusted accordingly. We make significant judgments and estimates in determining the accrued balance and any deferred charges in each reporting period. Our understanding of future discounted cash flows. The Company has not identifiedfactors such as the status and timing of services performed, the number of patients enrolled and the rate of patient enrollment may vary from our estimates and could result in us reporting amounts that are too high or too low in any such impairment losses to date. particular period. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance for deferred income tax assets is recorded when it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The Company has providedCompany’s policy is to classify interest and penalties related to income taxes as income tax expense in the consolidated statements of operations. Recent Accounting Pronouncements See Note 2 to the Consolidated Financial Statements, for a full valuation allowance againstdiscussion of new accounting standards that have been adopted and those not yet adopted.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements
Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors ReShape Lifesciences, Inc. San Clemente, California Opinion on the gross deferred tax assetsConsolidated Financial Statements We have audited the accompanying consolidated balance sheets of ReShape Lifesciences, Inc. (the “Company”) as of December 31, 20162020 and 2015 (see2019, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Classification of Series G Warrants As described in Note 12)8 and 11 to the Company’s consolidated financial statement, between March and December 2020, the Company issued 6,400,000 Series G warrants. The warrants were issued to the Lender in conjunction with amendments made to the credit agreement and are classified within stockholders’ equity. We identified the assessment of the classification of the warrants as equity or liability as a critical audit matter due to the complexity in assessing warrant features, and the impact of those features on the accounting of the Series G warrants as equity or liability. Auditing the classification of these warrants required challenging and complex auditor judgment to
analyze the warrant features and increased audit effort involving the use of professionals with specialized skill and knowledge to assist in evaluating warrant features. The primary procedures we performed to address this critical audit matter included: | ● | Utilizing personnel with specialized skill and knowledge to assist in assessing management’s analysis over the classification of the warrants issued by i) evaluating the underlying terms of the agreements that affect the recognition in the consolidated financial statements and ii) assessing the appropriateness of conclusions reached by management. |
/s/ BDO USA, LLP We have served as the Company's auditor since 2019 Costa Mesa, California March 10, 2021
RESHAPE LIFESCIENCES INC. Consolidated Balance Sheets (in thousands, except share and per share amounts) | | | | | | | | | December 31, | | December 31, | | | 2020 | | 2019 | ASSETS | | | | | | | Current assets: | | | | | | | Cash and cash equivalents | | $ | 2,957 | | $ | 2,935 | Restricted cash | | | 50 | | | 50 | Accounts and other receivables (net of allowance for doubtful accounts of $968 and $709 respectively) | | | 2,620 | | | 4,096 | Inventory | | | 2,244 | | | 1,317 | Prepaid expenses and other current assets | | | 1,073 | | | 1,711 | Total current assets | | | 8,944 | | | 10,109 | Property and equipment, net | | | 584 | | | 16 | Operating lease right-of-use assets | | | 465 | | | 758 | Other intangible assets, net | | | 27,022 | | | 28,674 | Other assets | | | 46 | | | 99 | Total assets | | $ | 37,061 | | $ | 39,656 | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | Current liabilities: | | | | | | | Accounts payable | | $ | 3,655 | | $ | 4,263 | Accrued and other liabilities | | | 3,630 | | | 3,821 | Warranty liability, current | | | 397 | | | 105 | Debt, current portion, net of deferred financing costs | | | 3,609 | | | 1,909 | Operating lease liabilities, current | | | 314 | | | 291 | Total current liabilities | | | 11,605 | | | 10,389 | Debt, noncurrent portion | | | 9,168 | | | 2,728 | Operating lease liabilities, noncurrent | | | 163 | | | 477 | Warranty liability, noncurrent | | | 1,022 | | | 1,253 | Deferred income taxes | | | 615 | | | 702 | Total liabilities | | | 22,573 | | | 15,549 | Commitments, contingencies and subsequent events | | | | | | | Stockholders’ equity: | | | | | | | Preferred stock, 5,000,000 shares authorized: | | | | | | | Series B convertible preferred stock, $0.001 par value; 3 issued and outstanding at December 31, 2020 and December 31, 2019, respectively | | | — | | | — | Series C convertible preferred stock, $0.001 par value; 95,388 shares issued and outstanding at December 31, 2020 and December 31, 2019 | | | 1 | | | 1 | Common stock, $0.001 par value; 275,000,000 shares authorized at December 31, 2020 and December 31, 2019; 6,166,554 and 391,739 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively | | | 6 | | | — | Additional paid-in capital | | | 529,429 | | | 517,311 | Accumulated deficit | | | (514,827) | | | (493,197) | Accumulated other comprehensive loss | | | (121) | | | (8) | Total stockholders’ equity | | | 14,488 | | | 24,107 | Total liabilities and stockholders’ equity | | $ | 37,061 | | $ | 39,656 |
See accompanying notes to consolidated financial statements.
RESHAPE LIFESCIENCES INC. Consolidated Statements of Operations (in thousands, except share and per share amounts) | | | | | | | | | Year Ended December 31, | | | 2020 | | 2019 | Revenue | | $ | 11,299 | | $ | 15,089 | Cost of revenue | | | 5,037 | | | 5,784 | Gross profit | | | 6,262 | | | 9,305 | Operating expenses: | | | | | | | Sales and marketing | | | 4,694 | | | 4,847 | General and administrative | | | 10,527 | | | 17,224 | Research and development | | | 3,498 | | | 3,121 | Impairment of intangible assets | | | — | | | 6,588 | Loss on litigation settlement | | | — | | | 1,500 | Loss on disposal of assets | | | — | | | 486 | Total operating expenses | | | 18,719 | | | 33,766 | Operating loss | | | (12,457) | | | (24,461) | Other expense (income), net: | | | | | | | Interest expense, net | | | 2,049 | | | 451 | Loss on extinguishment of debt | | | 7,715 | | | 71 | Warrant expense | | | — | | | 49,027 | Gain on foreign currency exchange | | | (410) | | | (247) | Other, net | | | — | | | 1,337 | Loss before income tax provision | | | (21,811) | | | (75,100) | Income tax benefit | | | (181) | | | (893) | Net loss attributable to common shareholders | | $ | (21,630) | | $ | (74,207) | Net loss per share - basic and diluted: | | | | | | | Net loss per share - basic and diluted | | $ | (3.12) | | $ | (42.93) | Shares used to compute basic and diluted net loss per share | | | 6,927,021 | | | 1,728,722 |
See accompanying notes to consolidated financial statements.
RESHAPE LIFESCIENCES INC. Consolidated Statements of Comprehensive Loss (in thousands) | | | | | | | | | Year Ended December 31, | | | 2020 | | 2019 | Net loss | | $ | (21,630) | | $ | (74,207) | Foreign currency translation adjustments | | | (113) | | | (8) | Other comprehensive loss, net of tax | | | (113) | | | (8) | Comprehensive loss | | $ | (21,743) | | $ | (74,215) |
See accompanying notes to consolidated financial statements.
RESHAPE LIFESCIENCES INC. Consolidated Statements of Stockholders’ Equity (in thousands, except share amounts) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Series B Convertible | | Series C Convertible | | Series E Convertible | | | | Additional | | | | | Accumulated Other | | Total | | | Preferred Stock | | Preferred Stock | | Preferred Stock | | Common Stock | | Paid-in | | Accumulated | | Comprehensive | | Stockholders’ | | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | | Income (Loss) | | Equity | Balance December 31, 2018 | | 159 | | $ | — | | 95,388 | | $ | 1 | | — | | $ | — | | 73,092 | | $ | — | | $ | 450,652 | | $ | (418,990) | | $ | — | | $ | 31,663 | Net loss | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | (74,207) | | | — | | | (74,207) | Other comprehensive income (loss), net of tax | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (8) | | | (8) | Stock-based compensation expense, net | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 2,311 | | | — | | | — | | | 2,311 | Warrant expense | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | 130 | | | — | | | — | | | 130 | Sales of common stock and warrants, net of issuance and other costs | | — | | | — | | — | | | — | | — | | | — | | 199,167 | | | — | | | 434 | | | — | | | — | | | 434 | Warrant adjustment | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | (312) | | | — | | | — | | | (312) | Conversion of common stock into convertible preferred stock | | — | | | — | | — | | | — | | 1,192,000 | | | 12 | | (9,933) | | | — | | | (12) | | | — | | | — | | | — | Conversion of convertible preferred stock into common stock | | (156) | | | — | | — | | | — | | (1,192,000) | | | (12) | | 10,973 | | | — | | | 12 | | | — | | | — | | | — | Warrant liability reclassified to equity | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 63,954 | | | — | | | — | | | 63,954 | Issuance of common stock upon exercise of warrants, net of transaction costs | | — | | | — | | — | | | — | | — | | | — | | 118,440 | | | — | | | 142 | | | — | | | — | | | 142 | Balance December 31, 2019 | | 3 | | $ | — | | 95,388 | | $ | 1 | | — | | $ | — | | 391,739 | | $ | — | | $ | 517,311 | | $ | (493,197) | | $ | (8) | | $ | 24,107 | Net loss | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | (21,630) | | | — | | | (21,630) | Other comprehensive income (loss), net of tax | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (113) | | | (113) | Stock-based compensation expense, net | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | | 1,323 | | | — | | | — | | | 1,323 | Issuance of warrants | | — | | | — | | — | | | — | | — | | | — | | — | | | — | | — | 9,917 | | | — | | | — | | | 9,917 | Institutional exercise of warrants | | — | | | — | | — | | | — | | — | | | — | | 5,665,834 | | | 6 | | | 673 | | | — | | | — | | | 679 | Cashless exercise of warrants | | — | | | — | | — | | | — | | — | | | — | | 58,981 | | | — | | | — | | | — | | | — | | | — | Common stock issued for professional services | | — | | | — | | — | | | — | | — | | | — | | 50,000 | | | — | | | 205 | | | — | | | — | | | 205 | Balance December 31, 2020 | | 3 | | $ | — | | 95,388 | | $ | 1 | | — | | $ | — | | 6,166,554 | | $ | 6 | | $ | 529,429 | | $ | (514,827) | | $ | (121) | | $ | 14,488 |
See accompanying notes to consolidated financial statements.
RESHAPE LIFESCIENCES INC. Consolidated Statements of Cash Flows (in thousands) | | | | | | | | | Year Ended December 31, | | | 2020 | | 2019 | Cash flows from operating activities: | | | | | | | Net loss | | $ | (21,630) | | $ | (74,207) | Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | Depreciation expense | | | 15 | | | 40 | Amortization of intangible assets | | | 1,652 | | | 1,666 | Impairment of intangible assets | | | — | | | 6,588 | Noncash interest expense | | | 230 | | | 451 | Loss on extinguishment of debt | | | 7,715 | | | 71 | Stock-based compensation | | | 1,323 | | | 2,311 | Bad debt expense | | | 259 | | | 439 | Provision for inventory excess and obsolescence | | | 248 | | | — | Warrant expense | | | — | | | 49,027 | Amortization of debt discount and deferred debt issuance costs | | | 1,697 | | | — | Deferred income tax benefit | | | (86) | | | (1,143) | Loss on disposal of asset | | | — | | | 486 | Common stock warrant liability issuance costs | | | — | | | 1,442 | Other noncash items | | | 21 | | | 57 | Change in operating assets and liabilities: | | | | | | | Accounts and other receivables | | | 1,217 | | | (3,619) | Inventory | | | (1,175) | | | (332) | Prepaid expenses and other current assets | | | 843 | | | (442) | Accounts payable and accrued liabilities | | | (992) | | | 1,629 | Warranty liability | | | 61 | | | 1,358 | Other | | | 52 | | | (22) | Net cash used in operating activities | | | (8,550) | | | (14,200) | Cash flows from investing activities: | | | | | | | Capital expenditures | | | (390) | | | (14) | Acquisition of LAP-BAND product line assets | | | (2,000) | | | (2,000) | Cash used in investing activities: | | | (2,390) | | | (2,014) | Cash flows from financing activities: | | | | | | | Proceeds from issuance of subordinated convertible debentures | | | — | | | 2,000 | Payments of financing costs | | | (59) | | | (21) | Repayment of subordinated convertible debentures | | | — | | | (2,200) | Proceeds from sale and issuance of equity securities | | | — | | | 478 | Proceeds from issuance of common stock warrant liabilities, net of issuance costs of $1,442 | | | — | | | 13,304 | Payments of equity issuance costs | | | — | | | (44) | Proceeds from institutional exercise of warrants | | | 679 | | | 142 | Proceeds from credit agreement | | | 9,500 | | | — | Proceeds from PPP loan | | | 955 | | | — | Net cash provided by financing activities | | | 11,075 | | | 13,659 | Effect of currency exchange rate changes on cash and cash equivalents | | | (113) | | | (8) | Net increase (decrease) in cash, cash equivalents and restricted cash | | | 22 | | | (2,563) | Cash, cash equivalents and restricted cash at beginning of period | | | 2,985 | | | 5,548 | Cash, cash equivalents and restricted cash at end of period | | $ | 3,007 | | $ | 2,985 | Supplemental disclosure: | | | | | | | Cash paid for income taxes | | $ | 40 | | $ | — | Noncash investing and financing activities: | | | | | | | Relative fair value of warrants classified as debt issuance costs | | $ | 1,393 | | $ | — | Fair value of warrants included as a component of loss on extinguishment of debt | | | 8,523 | | | — | Capital expenditures accruals | | | 193 | | | — | Common stock warrant liabilities reclassified to equity | | | — | | | 63,954 | Conversion of common stock to convertible preferred stock | | | — | | | (1) |
See accompanying notes to consolidated financial statements.
ReShape Lifesciences Inc. Notes to Consolidated Financial Statements (1) | Description of the Business and Risks and Uncertainties |
Description of Business ReShape Lifesciences Inc. (the “Company”) was originally incorporated in the state of Minnesota in December 2002 and reincorporated in the state of Delaware in July 2004. In 2017, the Company changed its name from EnteroMedics Inc. to ReShape Lifesciences Inc. The Company is headquartered in San Clemente, California. The Company is a developer of minimally invasive medical devices that advance bariatric surgery to treat obesity and metabolic diseases. The Company’s current portfolio consist of the LAP-BAND® Adjustable Gastric Banding System, ReShapeCareTM virtual health coaching program, the ReShape VestTM, an investigational device to help treat more patients with obesity and the Diabetes Bloc-Stim Neuromodulation, a technology under development as a new treatment for type 2 diabetes mellitus. The Company sells the LAP-BAND worldwide and is managed in the following geographical regions: United States, Australia, Europe and the rest of world. Refer to Note 12 for additional information about operating segments. Risks and Uncertainties The Company continues to devote significant resources to developing its product technology, commercialization activities and raising capital. These activities are subject to significant risks and uncertainties, including the ability to obtain additional financing, and there can be no assurance that the Company will be successful in obtaining additional financing on favorable terms, or at all. If adequate funds are not available, the Company may have to further reduce its cost structure until financing is obtained and/or delay development, or commercialization of products, or license to third parties the rights to commercialize products, or technologies that the Company would otherwise seek to commercialize. The medical device industry is characterized by frequent and extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often difficult to predict, and the outcome may be uncertain until the court has entered final judgment and all appeals are exhausted. The Company’s competitors may assert that its products or the use of the Company’s products are covered by U.S. or foreign patents held by them. Refer to Note 15 for additional information about contingencies and litigation matters. On April 16, 2020, the Company implemented various short-term cost reductions and cash flow improvement actions, such as reducing the compensation for executives, management and key employees and decreasing operating expenses where possible. In addition, the Company also identified temporary headcount reductions and made the decision to furlough a portion of its workforce. During the second quarter of 2020, certain government-mandated closures began to ease and many areas throughout the world and within the United States began to allow elective surgeries. As a result of the easing, the Company did see sales volumes improve as we progressed through the third quarter. During the fourth quarter of 2020, there was another surge in COVID-19 cases resulting in a slowdown, or in some cases a shutdown of elective surgeries. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impact on our financial condition and results of operations. Additionally, on June 15, 2020, the Company ended the temporary pay reductions and the furloughed employees returned to work. (2) | Summary of Significant Accounting Policies |
Basis of Presentation The Company has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Reverse Stock Splits On November 11, 2019, the Company’s board of directors and stockholders approved a 1-for-120 reverse stock split of the Company’s outstanding common stock that became effective after the close of market on November 11, 2019. In addition, the Company’s certificate of incorporation was amended to change the common stock par value from $0.01 per share to $0.001 per share. The reverse stock split in 2019 did not change the number of common or preferred shares authorized by the Company’s certificate of incorporation. All par value, share and per share amounts have been retroactively adjusted to reflect the reverse stock split for all periods presented. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers highly liquid investments generally with maturities of 90 days or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. The Company’s cash equivalents are primarily in money market funds and certificates of deposit. The Company deposits its cash and cash equivalents in high-quality credit institutions. Restricted Cash Restricted cash represents $50 thousand related to a collateral money market account maintained by the Company as collateral in connection with corporate credit cards with Silicon Valley Bank at December 31, 2020 and 2019. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the consolidated balance sheets to the same total reported in the consolidated statements of cash flows (in thousands): | | | | | | | | | December 31, | | December 31, | | | 2020 | | 2019 | Cash and cash equivalents | | $ | 2,957 | | $ | 2,935 | Restricted cash | | | 50 | | | 50 | Total cash, cash equivalents, and restricted cash in the consolidated statement of cash flows | | $ | 3,007 | | $ | 2,985 |
Inventory The Company accounts for inventory at the lower of cost or net realizable value, where net realizable value is based on market prices less costs to sell. The Company establishes inventory reserves for obsolescence based upon specific identification of expired or unusable units with a corresponding provision included in cost of revenue. The allowance for excess and slow-moving inventory was $0.1 million and $0.2 million at December 31, 2020 and 2019, respectively. Property and Equipment, Net Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over their estimated useful lives of five to seven years for furniture and equipment and three to five years for computer hardware and software. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful life or the term of the lease. Upon retirement or sale,
the cost and related accumulated depreciation or amortization are removed from the Consolidated Balance Sheets and the resulting gain or loss is reflected in the Consolidated Statements of Operations. Repairs and maintenance are expensed as incurred. Other Intangible Assets Intangible assets are recorded based on their fair values at the date of acquisition. Indefinite-lived intangible assets consist of in-process research and development (“IPR&D”) for the ReShape Vest recorded in connection with the Company’s acquisition of BarioSurg, Inc. (“BarioSurg”) in May 2017. Finite-lived intangible assets primarily consist of developed technology and trademarks/tradenames and are being amortized on a straight-line basis over their estimated useful lives. See Note 6 for additional information. Impairment of Indefinite-Lived and Long-Lived Assets Acquired IPR&D is subject to impairment testing until completion or abandonment of the project. Indefinite-lived intangible assets are reviewed for impairment annually, or whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. An impairment loss is recognized when the asset's carrying value exceeds its fair value. See Note 7 for additional information. The Company evaluates long-lived assets under the provisions of ASC 350 “Intangibles–Goodwill and Other” and ASC 360 “Property, Plant, and Equipment” which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. For purposes of assessing the recoverability of long-lived assets, the Company has one asset group which includes all assets of the Company. For assets to be held and used, the Company compares the carrying amounts to future net undiscounted cash flows expected to be generated by such assets when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the assets over the assets’ fair value or estimates of future discounted cash flows. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance for deferred income tax assets is recorded when it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The Company’s policy is to classify interest and penalties related to income taxes as income tax expense in the consolidated statements of operations. Equity Medical Device Excise TaxCertain issuances of the Company’s convertible preferred stock and warrants classified within equity contain non-standard down round features that result in the strike price being reduced on the basis of the pricing of future equity offerings. The value of the effect of the down round feature when it is triggered is recorded similar to a dividend and as a numerator adjustment in the basic earnings per share calculation.
Foreign Currency On January 14, 2015,When the local currency of the Company's foreign subsidiaries is the functional currency, all assets and liabilities are translated into United States dollars at the rate of exchange in effect at the balance sheet date. Income and expense items are translated at the weighted-average exchange rate prevailing during the period. The effects of foreign currency translation adjustments for these subsidiaries are deferred and reported in stockholders’ equity as a component of Accumulated Other Comprehensive Loss. The effects of foreign currency transactions denominated in a currency other than an entity's functional currency are included in Gain on foreign currency exchange in the Consolidated Statements of Operations. The Company does not hedge foreign currency translation risk in the net assets and income it reports from these sources.
Revenue Recognition The Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods or services to its customers, in an amount that reflects the consideration the Company received FDA approvalexpects to be entitled to in exchange for vBloc Therapy, delivered via the vBloc Rechargeable System, and starting in the second quarterthose goods or services. Product sales consist of 2015 revenues were generated from sales in the United States. As a result,single performance obligation that the Company is now requiredsatisfies at a point in time. The Company recognizes product revenue when the following events have occurred: (a) the Company has transferred physical possession of the products, (b) the Company has a present right to payment, (c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products. For the Company’s Lap-Band product, these criteria are met under the agreements with most customers upon product shipment. This includes sales to distributors, who sell the products to their customers, take title to the products and assume all risks of ownership at the time of shipment. Distributors are obligated to pay within specified terms regardless of when, if ever, they sell the products. Refer to Note 12 for additional information about the Company’s products and contractual arrangements. Taxes collected from customers and remitted to governmental authorities are accounted for on a quarterly medical device tax under the Affordable Care Act, which imposes a 2.3% excise tax on the salenet basis. Accordingly, such amounts are excluded from revenues. Amounts billed to customers related to shipping and handling are included in revenues. Shipping and handling costs related to revenue producing activities are included in cost of certain medical devices by device manufactures, producers or importers (the Medical Device Tax). The Medical Device Tax was effective on sales of devices made after December 31, 2012. The Company records the Medical Device Tax as an operating expense in the consolidated statements of operations, which totaled $1,363 for 2015. A moratorium was placed on the Medical Device Tax for 2016 and 2017 and, consequently, the Company was not required to pay the Medical Device Tax in 2016.sales. Comprehensive Loss
Comprehensive loss is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from distributions to owners. There was no difference from reported net loss for the years ended December 31, 2016, 2015 and 2014.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, title or risk of loss has passed, the selling price is fixed or determinable and collection is reasonably assured. Products are sold through direct sales or medical device distributors and revenue is recognized upon sale to a bariatric center of excellence or a medical device distributor when no right of return or price protection exists. Terms of sales to international distributors are generally EXW, reflecting that goods are shipped “ex works,” in which risk of loss is assumed by the distributor at the shipping point. A provision for returns is recorded only if product sales provide for a right of return. No provision for returns was recorded for the years ended December 31, 2015 and December 31, 2016, as the product sales recorded did not provide for rights of return.
Research and Development Expenses Research and development expenses are chargedconsist of costs incurred to expense as incurred. Researchfurther the Company’s research and development expenses include, but are not limited to,activities, including product development, clinical trial expenses, including supplies, devices, explants and revisions, quality assurance, regulatory expenses, payroll and other personnel expenses, materials and consulting costs. Patent Costs
Costs associated with Certain of these activities, such as pre-clinical studies and clinical trials, may be conducted by third-party service providers at the submission of a patent application are expensed as incurred given the uncertaintydirection of the patents resultingCompany. In addition, during 2018, the Company entered into an arrangement with a Contract Research Organization (“CRO”) under which the CRO performs and manages research and development activities on the Company’s behalf.
The Company records the estimated costs of research and development activities performed by third-party service providers based upon the estimated services provided but not yet invoiced and includes these costs in probable future economic benefitsaccrued expenses and other payables in the Consolidated Balance Sheets and within research and development expense in the Consolidated Statements of Operations. The Company accrues for these costs based on factors such as estimates of the work completed and in accordance with agreements established with its third-party service providers. As actual costs become known, the Company adjusts its accrued liabilities. The Company’s CRO arrangement generally requires payments in advance of services. Upon making a payment, the Company makes a determination as to the Company. Patent-related legal expensesamount to record as a deferred charge and the amount of research and development expense. The amount of CRO related costs included in generalresearch and administrative costs were $269,000, $200,000,development expense each period is expensed based on the Company’s estimate of the time period over which services will be performed, enrollment of patients, number of sites activated and $338,000 forlevel of effort to be expended. Any amount of advances paid in excess of expense recognized is included in prepaid expenses and other current assets on the years ended December 31, 2016, 2015 and 2014, respectively.Consolidated Balance Sheets. If the actual timing of the CRO’s performance of services or the level of effort varies from the Company’s estimate, the amount of prepaid CRO expense is adjusted accordingly. Stock-Based Compensation The fair value method is applied to all share-based payment awards issued to employeesCompany applies ASC 718 Compensation — Stock Compensation and where appropriate, nonemployees, unless another source of literature applies. When determining the measurement date of a nonemployee’s share-based payment award, the Company measures theaccordingly records compensation expense for stock options at fair value and remeasures such stock options to the current fair value until the performance date has been reached. All option grants are expensed on a straight-line basis over the vesting period.or service period using the fair value on the date of grant, as calculated by the Company using the Black-Scholes model. The Company’s stock-based compensation plans are more fully described in Note 13. Net Loss Per Share Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period.period, including the prefunded warrants that were reclassified from warrant liability to equity as
a result of the reverse stock split. Diluted net loss per share is based on the weighted-average common shares outstanding during the period plus dilutive potential common shares calculated using the treasury stock method. Such potentially dilutive shares are excluded when the effect would be to reduce a net loss per share. The Company’s potential dilutive shares, which include outstanding common stock options and warrants, have not been included in the computation of diluted net loss per share for all periods as the result would be anti-dilutive. The following table sets forth the computationFor purposes of basic and diluted per share computations, loss from continuing operations and net loss per shareare reduced by the down round adjustments for the years ended December 31, 2016, 2015convertible preferred stock and 2014:
| | | | | | | | | | | | | Year Ended | | | | December 31, | | | | 2016 | | 2015 | | 2014 | | Numerator: | | | | | | | | | | | Net loss | | $ | (23,360,844) | | $ | (25,498,747) | | $ | (26,128,720) | | Denominator for basic and diluted net loss per share: | | | | | | | | | | | Weighted-average common shares outstanding | | | 622,431 | | | 85,290 | | | 64,635 | | Net loss per share—basic and diluted | | $ | (37.53) | | $ | (298.97) | | $ | (404.25) | |
warrants. The following table sets forth the potential shares of common stock that are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive as of the end of each period presented: | | | | | | | | December 31, | | | | 2016 | | 2015 | | Stock options outstanding | | 19,840 | | 21,935 | | Warrants to purchase common stock | | 55,044 | | 54,875 | |
| | | | | | | | December 31, | | | | 2020 | | 2019 | | Stock options | | 40 | | 155 | | Convertible preferred stock | | 1,288 | | 1,288 | | Warrants | | 13,483,446 | | 13,647,740 | |
Recently IssuedConcentration of Credit Risk, Interest Rate Risk and Foreign Currency Exchange Rate
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash and trade accounts receivable. Cash and cash equivalents are primarily deposited in demand and money market accounts. At times, such deposits may be in excess of insured limits. Investments in money market funds are not considered to be bank deposits and are not insured or guaranteed by the federal deposit insurance company or other government agency. These money market funds seek to preserve the value of the investment at $1.00 per share; however, it is possible to lose money investing in these funds. The Company has not experienced any losses on its deposits of cash and cash equivalents. To minimize the risk associated with trade accounts receivable, management maintains relationships with the Company’s customers that allow management to monitor current changes in business operations so the Company can respond as needed. Substantially all of the Company’s revenue is denominated in U.S. dollars. Only a small portion of revenue and expenses are denominated in foreign currencies, principally the Australian dollar and Euro for 2020 and 2019. The Company has not entered into any hedging contracts. Future fluctuations in the value of the U.S. dollar may affect the price competitiveness of the Company’s products outside the U.S. Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (referred to as an “exit price”). Fair value of an asset or liability considers assumptions that market participants would use in pricing the asset or liability, including consideration of non-performance risk. Assets and liabilities are categorized into a three-level fair value hierarchy based on valuation inputs used to determine fair value. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable, either directly or indirectly. Level 3 inputs are unobservable due to little or no corroborating market data. The carrying amounts of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and certain accrued and other liabilities approximate fair value due to their short-term maturities. Refer to Note 8 regarding the fair value of debt instruments and Note 12 regarding fair value measurements and inputs of warrants. Recent Accounting StandardsPronouncements New accounting standards adopted by the Company in 2020 are discussed below or in the related notes, where appropriate.
In April 2015,August 2018, the Financial Accounting Standards Board (FASB)FASB issued SimplifyingASU No. 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Presentation of Debt Issuance Costs, (Accounting Standards Update No. 2015-03 (ASU 2015-03))Disclosure Requirements for Fair Value Measurement, which changesmodifies the presentationdisclosure requirements on fair value measurements and is intended to improve the effectiveness of debt issuancedisclosures, including the consideration of costs in the financial statements. Under ASU 2015-03, an entity presents such costs in the balance sheet as a direct deduction from the recognized debt liability rather than as an asset. Amortizationand benefits. The guidance is effective on January 1, 2020. The adoption of the costs is reported as interest expense. This guidance was effective for interim and annual reporting periods beginning after December 15, 2015. The newthis guidance did not have a material effectimpact on the Company’s consolidated financial position, resultsstatements. In August 2018, the FASB issued ASU 2018-15 Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The ASU is effective for the Company on January 1, 2020. The adoption of operations or cash flows.this guidance did not have a material impact on its consolidated financial statements. New accounting standards not yet adopted are discussed below. In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes: ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. This guidance is effective for annual periods after December 15, 2020, including interim periods within those annual periods. The Company is currently evaluating the potential impact of this guidance on its consolidated financial statements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is intended to provide financial statement users with more useful information about expected credit losses on financial assets held by a reporting entity at each reporting date. In May 2014,2019, the FASB issued Revenue from ContractsASU No. 2019-05, which amended the new standard by providing targeted transition relief. The new guidance replaces the existing incurred loss impairment methodology with Customers, Topic 606 (Accounting Standards Update No. 2014-09 (ASU 2014-09)),a methodology that requires consideration of a broader range of reasonable and supportable forward-looking information to estimate all expected credit losses. In November 2019, the FASB issued 2019-11, which provides a frameworkamended the new standard by providing additional clarification. This guidance is effective for the recognition of revenue, with the objective that recognized revenues properly reflect amounts an entity is entitled to receive in exchange for goodsfiscal years and services. This guidance will be effective for interim and annual reporting periods within those years beginning after December 15, 2017.2022. The Company does not believe thatis currently evaluating the adoption ofimpact the new standardguidance will have a material effect on its consolidated financial statements in that the accounting related to its current revenue-based business practices will not change under the new standard. In August 2014, FASB issued Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, (Accounting Standards Update No. 2014-15 (ASU 2014-15)), which provides a framework for entities to evaluate going concern issues as well as potential related disclosures. This guidance became effective and the Company adopted it for the year ended December 31, 2016. See Note 3, Liquidity and Management’s Plans.
In March 2016, FASB issued Improvements to Employee Share-Based Payment Accounting, (Accounting Standards Update No. 2016-09 (ASU 2016-09)), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, the estimation of forfeitures, shares withheld for taxes and classification of shares withheld for taxes on the statement of cash flows. As part of the adoption of this guidance the Company has elected to account for forfeitures of share-based awards as they occur. The Company will adopt ASU 2016-09 as required on January 1, 2017 and the adoption will not have a material effect on its consolidated financial statements.
Various other accounting standards and interpretations have been issued with 20162021 effective dates and effective dates subsequent to December 31, 2016.2020. The Company has evaluated the recently issued accounting pronouncements that are currently effective or will be effective in 20162021 and believe that none of them have had or will have a material effect on the Company’s financial position, results of operations or cash flows. (3)Liquidity and Management’s Plans
(3) | Liquidity and Management’s Plans |
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has financedcurrently is not generating revenue from operations that is significant relative to its operations to date principally through the salelevel of equity securities, debt financing and interest earned on investments. operating expenses. As of December 31, 2016,2020, the Company had $3.3net negative working capital of $2.7 million. The Company’s principal source of liquidity as of December 31, 2020 consisted of approximately $3.0 million of cash and cash equivalents, to fund its operations into early 2017. On January 23, 2017, the Company received $19.0and $2.6 million in gross proceeds, prior to deducting offering expenses of approximately $2.5 million, at the closing of an underwritten public offering of units in order to fund its operations (see Note 18, Subsequent Events).:accounts receivable. The following financing transactions occurred in 2015, 2016 and early 2017 to fund the Company’s operations:
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| | On July 8, 2015, the Company closed a public offering of units consisting of common stock and the Series A Warrants. Gross proceeds of the offering were $16.0 million, prior to deducting offering expenses of approximately $1.4 million
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| | On November 4, 2015 the Company entered into a securities purchase agreement (the Purchase Agreement) with institutional investors to issue up to $25.0 million of senior amortizing convertible notes (the Notes) and Note Warrants, in three separate closings. $1.5 million of the Notes was funded at the first closing on November 9, 2015 (the First Closing).
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| | An additional $11.0 million of the Notes was funded at the second closing on January 11, 2016 (the Second Closing).
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| | An additional $6.25 million of the Notes was funded at the third closing on May 2, 2016 (the Third Closing).
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| | On January 23, 2017, the Company closed an underwritten public offering consisting of units of common stock, convertible preferred stock and warrants to purchase common stock. Gross proceeds of the offering were $19.0 million, prior to deducting underwriting discounts and commissions and offering expenses of approximately $2.5 million (see Note18, Subsequent Events).
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| | Between January 1, 2017 and March 6, 2017, common stock warrants for 559,256 shares of common stock were exercised by warrant holders with proceeds to the Company of $3.1 million (see Note 18, Subsequent Events).
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The Company’sOur anticipated operations include plans to (i) integrate the sales and operations of the Lap-Band product line in order to expand sales domestically and internationally as well as to obtain cost savings synergies, (ii) introduce to the controlled commercial launchmarket place ReShapeCare, (iii) continue clinical test of vBloc Therapy, delivered via the vBloc System.ReShape Vest, (iv) continue development of the Diabetes Bloc-Stim Neuromodulation, (v) seek opportunities to leverage our intellectual property portfolio and custom development services to provide third-party sales and licensing opportunities, and (vi) explore and capitalize on synergistic opportunities to expand our portfolio and offer future minimally invasive treatments and therapies in the
obesity continuum of care. The Company believes that it has the flexibility to manage the growth of its expenditures and operations depending on the amount of available cash flows. Additionally, the Company has evaluated its projected cash flows, through March 2018 using the guidance of ASU 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern (ASC 205-40),which could include reducing expenditures for marketing, clinical and believes that its current available cash should enable it to sustain operations into March 2018.product development activities. However, the Company will ultimately need to achieve sufficient revenues from product sales and/orand obtain additional debt or equity financing to support its operations.operations
Subsequent to year end management has successfully obtained a $15.0 million line of credit and has agreed to merge with Obalon, see Note 16 for further details, which the Company anticipates will result in the combined company’s common stock being traded on the NASDAQ Stock Market Exchange. The Company is also pursuing further funding options, including seeking additional equity or debt financing to support the expansion of the Lap-Band product line, the introduction of ReShapeCare to the market place; and the continued development and, successful commercialization of the ReShape Vest and the ReShape Diabetes Bloc-Stim Neuromodulation. (4)Fair Value MeasurementsCOVID-19 Risk and Uncertainties and CARES Act
Fair valueAdditionally, on January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of financial assetsa new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and liabilities is definedthe risks to the international community as the pricevirus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally and on March 13, 2020, the United States declared a national emergency with respect to the coronavirus outbreak. This outbreak has severely impacted global economic activity, and many countries and many states in the United States have reacted to the outbreak by instituting quarantines, mandating business and school closures and restricting travel. These mandated business closures have at times included the cessation of non-elective surgeries in Australia, Europe and the United States for all but emergency procedures. As a result of these mandates, on April 16, 2020, the Company implemented various short-term cost reductions and cash flow improvement actions, such as reducing the compensation for executives, management and key employees and decreasing operating expenses where possible. In addition, the Company also identified temporary headcount reductions and made the decision to furlough a portion of its workforce. During the second quarter of 2020, the mandated closures began to ease in many areas throughout the world and within the United States. As a result of this, elective surgeries started back up again through various parts of the world, which led to improved sales progressing through the third quarter. Even after the COVID-19 outbreak has subsided, the Company may continue to experience materially adverse impact on its financial condition and results of operation. Additionally, on June 15, 2020, the Company ended the temporary pay reductions and the furloughed employees returned to work. The full impact of the COVID-19 outbreak continues to evolve and it is uncertain as to the full magnitude that would bethe pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce and has taken actions to mitigate the impact including among other things, temporary reductions in pay, and furloughs of certain positions along with deferrals in payment for cash preservation. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2021.
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act established the Paycheck Protection Program (“PPP”) under which the Company received a PPP loan described in more detail in Note 8 below. On February 3, 2021, the Company submitted the application for PPP loan forgiveness according to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchyterms and conditions of the SBA’s Loan Forgiveness Application (Revised June 24, 2002). On March 1, 2021, the Company received confirmation from the SBA, the PPP Loan has been established that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted pricesforgiven in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:full including all interest incurred. | ·
| | Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
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| | Level 2—Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or model-derived valuations for which all significant inputs are observable, either directly or indirectly.
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| | Level 3—Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
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The Company did not hold any short-term investments classified as available for sale or held to maturity as of December 31, 2016 and 2015.
The fair value of the Company’s common stock warrant liability is calculated using a Black-Scholes valuation model and is classified as Level 2 in the fair value hierarchy. The fair values are presented below along with valuation assumptions:
| | | | | | | | | | | | | | | | | Series A Warrants | | | November 2015 Note Warrants | | | | December 31, 2016 | | December 31, 2015 | | December 31, 2016 | | December 31, 2015 | | Risk-free interest rates | | | 1.20 | % | | 0.91 | % | | 1.47 | % | | 1.75 | % | Expected life | | | 24 | months | | 42 | months | | 46 | months | | 60 | months | Expected dividends | | | — | % | | — | % | | — | % | | — | % | Expected volatility | | | 122.03 | % | | 89.89 | % | | 102.29 | % | | 84.85 | % | Fair value | | $ | 36,000 | | $ | 2,759,583 | | $ | 449 | | $ | 118,234 | |
| | | | | | | | | | | | | | | | | January 2016 Note Warrants | | | May 2016 Note Warrants | | | | December 31, 2016 | | January 11, 2016 | | December 31, 2016 | | May 2, 2016 | | Risk-free interest rates | | | 1.93 | % | | 1.58 | % | | 1.93 | % | | 1.32 | % | Expected life | | | 48 | months | | 60 | months | | 52 | months | | 60 | months | Expected dividends | | | — | % | | — | % | | — | % | | — | % | Expected volatility | | | 108.57 | % | | 85.90 | % | | 106.37 | % | | 89.28 | % | Fair value | | $ | 1,633 | | $ | 515,157 | | $ | 1,037 | | $ | 150,195 | |
(4) | Supplemental Balance Sheet Information |
Inventory | | | | | | | | | December 31, | | | 2020 | | 2019 | Raw materials | | $ | 174 | | $ | — | Sub-assemblies | | | 733 | | | — | Finished goods | | | 1,337 | | | 1,317 | Total inventory | | $ | 2,244 | | $ | 1,317 |
Prepaid expenses and other current assets: | | | | | | | | | December 31, | | | 2020 | | 2019 | Prepaid insurance | | $ | 619 | | $ | 190 | Prepaid contract research organization expenses | | | 295 | | | 1,356 | Other | | | 159 | | | 165 | Total prepaid expenses and other current assets | | $ | 1,073 | | $ | 1,711 |
The followingAccrued and other liabilities:
| | | | | | | | | December 31, | | | 2020 | | 2019 | Payroll and benefits | | $ | 1,735 | | $ | 1,021 | Accrued professional services | | | 446 | | | 1,432 | Customer deposits | | | 398 | | | 202 | Accrued insurance premium | | | 272 | | | 87 | Taxes | | | 265 | | | 373 | Equity transaction related liability | | | — | | | 211 | Other | | | 514 | | | 495 | Total accrued and other liabilities | | $ | 3,630 | | $ | 3,821 |
In addition, to the accrued taxes included in the table summarizes fair value measurementsabove, the Company has $61 thousand of taxes payable to the Note Warrants issuedAustralian Taxation Office included within accounts payable in 2016 by levelthe consolidated balance sheet at December 31, 2016: | | | | | | | | | | | | | | | Level 1 | | Level 2 | | Level 3 | | Total | December 31, 2015 | | | | | | | | | | | | | Senior amortizing convertible notes (net of discounts of $149,340) | | $ | — | | $ | — | | $ | 1,267,182 | | $ | 1,267,182 | Common stock warrants | | | — | | | 2,877,817 | | | — | | | 2,877,817 | Total December 31, 2015 | | $ | — | | $ | 2,877,817 | | $ | 1,267,182 | | $ | 4,144,999 | December 31, 2016 | | | | | | | | | | | | | Common stock warrants | | $ | — | | $ | 39,119 | | $ | — | | $ | 39,119 |
During the year ended2020. There was no taxes payable included in accounts payable at December 31, 2016 all the amounts outstanding under the Notes were paid off via conversions into shares of common stock. 2019.
As of December 31, 2015, the fair value
(5) | Property and Equipment |
Property and equipment consist of the outstanding Notes from the First Closing was determined to be $1.3 million. The fair value of the Notes issued with the Second Closing was determined to be $2.4 million on the January 11, 2016 issue date. The fair value of the Notes issued with the Third Closing was determined to be $6.0 million on the May 2, 2016 issue date. The fair values were calculated using a Binomial Lattice model and the following assumptions:following: | | | | | | | | | | | | | | | | | | November 2015 Notes | | | January 2016 Notes | | | | December 31, 2016 | | | December 31, 2015 | | | | December 31, 2016 | | | January 11, 2016 | | Risk-free interest rates | | | N/A | | | 1.11 | % | | | N/A | | | 1.01 | % | Expected life | | | N/A | | | 1.86 | years | | | N/A | | | 1.83 | years | Expected dividends | | | N/A | | | — | % | | | N/A | | | — | % | Expected volatility | | | N/A | | | 57.5 | % | | | N/A | | | 60.0 | % | Fair value per share of common stock | | | N/A | | $ | 1.95 | | | | N/A | | $ | 1.33 | |
| | | | | | | | | December 31, | | | 2020 | | 2019 | Machinery and equipment | | $ | 179 | | $ | — | Furniture and equipment | | | 83 | | | 83 | Computer hardware and software | | | 78 | | | 78 | Leasehold improvements | | | 19 | | | 19 | Construction in progress | | | 404 | | | — | | | | 763 | | | 180 | Less accumulated depreciation and amortization | | | (179) | | | (164) | Property and equipment, net | | $ | 584 | | $ | 16 |
| | | | | | | | | | | May 2016 Notes
| | | | | December 31, 2016
| | | May 2, 2016
| | Risk-free interest rates
| | | N/A
| | | 0.69 | %
| Expected life
| | | N/A
| | | 1.52 | years
| Expected dividends
| | | N/A
| | | —
| %
| Expected volatility
| | | N/A
| | | 65.0 | %
| Fair value per share of common stock
| | | N/A
| | $
| 0.80 | |
For the years ended December 31, 2016 and December 31, 2015, respectively, the Company converted $20.3 million and $0.1 million of principal and interest of the Notes into shares of common stock. There were no gains or losses resulting from the Notes recognized in the consolidated statements of operationsDepreciation expense for the years ended December 31, 2016 or December 31, 2015.
(5)Inventory
From inception, inventory related purchases had been used for research2020 and development related activities2019 were approximately $15 thousand and had accordingly been expensed as incurred. In December 2011, the Company began receiving Australian Register of Therapeutic Goods (ARTG) listings for components of the vBloc System from the Australian Therapeutic Goods Administration, with the final components being listed on the ARTG in January 2012. As a result, the Company determined certain assets were recoverable as inventory beginning in December 2011. The Company accounts for inventory at the lower of cost or market and records any long-term inventory as other assets in the consolidated balance sheets. There was approximately $676,000 and $519,000 of long-term inventory, primarily consisting of raw materials, as of December 31, 2016 and 2015,$40 thousand, respectively.
Current inventory consists of the following as of:
| | | | | | | | | December 31, | | December 31, | | | 2016 | | 2015 | Raw materials | | $ | 335,606 | | $ | 576,898 | Work-in-process | | | 1,437,957 | | | 1,066,345 | Finished goods | | | 16,015 | | | 43,081 | Inventory | | $ | 1,789,578 | | $ | 1,686,324 |
(6) | Other Intangible Assets |
(6)Property and Equipment
Property and equipment consists of the following as of:
| | | | | | | | | December 31, | | | 2016 | | 2015 | Furniture and equipment | | $ | 2,302,878 | | $ | 2,299,290 | Computer hardware and software | | | 596,292 | | | 585,880 | Leasehold improvements | | | 62,651 | | | 62,651 | | | | 2,961,821 | | | 2,947,821 | Less accumulated depreciation and amortization | | | (2,761,101) | | | (2,621,525) | Property and equipment, net | | $ | 200,720 | | $ | 326,296 |
(7)Accrued Expenses
Accrued expensesOther intangible assets consist of the followingfollowing:
| | | | | | | | | | | | | | December 31, 2020 | | | Weighted Average Useful Life (years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | Finite-lived intangible assets: | | | | | | | | | | | | Developed technology | | 10.0 | | $ | 14,362 | | $ | (2,933) | | $ | 11,429 | Trademarks/Tradenames | | 10.0 | | | 2,045 | | | (585) | | | 1,460 | Covenant not to compete | | 3.0 | | | 76 | | | (76) | | | 0 | | | | | | 16,483 | | | (3,594) | | | 12,889 | Indefinite-lived intangible assets: | | | | | | | | | | | | In-process research and development | | indefinite | | | 14,133 | | | — | | | 14,133 | Total | | | | $ | 30,616 | | $ | (3,594) | | $ | 27,022 |
| | | | | | | | | | | | | | December 31, 2019 | | | Weighted Average Useful Life (years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | Finite-lived intangible assets: | | | | | | | | | | | | Developed technology | | 10.0 | | $ | 14,362 | | $ | (1,496) | | $ | 12,866 | Trademarks/Tradenames | | 10.0 | | | 2,045 | | | (381) | | | 1,664 | Covenant not to compete | | 3.0 | | | 76 | | | (65) | | | 11 | | | | | | 16,483 | | | (1,942) | | | 14,541 | Indefinite-lived intangible assets: | | | | | | | | | | | | In-process research and development | | indefinite | | | 14,133 | | | — | | | 14,133 | Total | | | | $ | 30,616 | | $ | (1,942) | | $ | 28,674 |
The gross amount and accumulated impairment loss of indefinite-lived intangible assets are as of:follows (in thousands): | | | | | | | | | December 31, | | | 2020 | | 2019 | Gross amount | | $ | 20,721 | | $ | 20,721 | Accumulated impairment loss | | | (6,588) | | | (6,588) | Indefinite-lived intangible assets, net | | $ | 14,133 | | $ | 14,133 |
| | | | | | | | | December 31, | | | 2016 | | 2015 | Professional service related expenses | | $ | 1,858,912 | | $ | 1,912,775 | Payroll related expenses | | | 507,327 | | | 1,270,208 | Other expenses | | | 385,176 | | | 412,432 | Accrued expenses | | $ | 2,751,415 | | $ | 3,595,415 |
(8)Senior Amortizing Convertible Notes
On November 4, 2015,Amortization expense for both the Company entered into the Purchase Agreement to issue and sell to four institutional investors 7% senior amortizing convertible notes due 2017 in three separate closings. The Notes were initially convertible into shares of the Company’s common stock at a price equal to $304.50 per share with an aggregate principal amount of $25.0 million. Each Note was sold with Note Warrant with an exercise price of $325.50 per share. The Company issued and sold Notes and Note Warrants for aggregate total proceeds of $12.5 million in the First Closing and Second Closing and after entering into the First Amendment, which provided that the scheduled third closing would be split into two separate closings, issued and sold Notes and Note Warrants for aggregate total proceeds of $6.25 million in the Third Closing. After the Third Closing, the Company entered into the Second Amendment, which set a deadline of December 30, 2016 for the final closing and provided the consent of the holders of the Notes to the Company reducing the conversion price of the Notes from time to time in order to incentivize the holders of the Notes to convert their Notes into shares of the Company’s common stock. As the final closing did not occur prior to the December 30, 2016 deadline, the remaining $6.25 million of Notes was not funded. Additionally, after entering into the Second Amendment, the Company reduced the conversion price of the Notes frequently in order to incentivize the holders of the Notes to convert all of the outstanding amounts outstanding under the Notes. As of December 31, 2016, all of the Notes were fully repaid.
During the yearyears ended December 31, 2016, $18.7 million of aggregate principal amount of Notes2020 and 2019 were converted by holdersapproximately $1.7 million.
Estimated amortization expense for each of the Notes into approximately 2,632,000 shares of the Company’s common stock.years ending December 31 is as follows: | | | | Year ending December 31, | | | | 2021 | | $ | 1,641 | 2022 | | | 1,641 | 2023 | | | 1,641 | 2024 | | | 1,641 | 2025 | | | 1,641 | Thereafter | | | 4,684 | | | $ | 12,889 |
(7) | Impairment of Intangible Assets |
DescriptionDuring the second quarter of 2020, the Company determined a triggering event occurred due to the COVID-19 pandemic, and as such, the Company performed a quantitative analysis and determined the fair value of the NotesIPR&D exceeded the carrying value and concluded there was no impairment of intangible assets. The Company has continued to monitor the delays and determined there is no impairment needed for the year ended December 31, 2020.
Second Quarter 2019 The Notes were payableCompany has completed the feasibility study for the ReShape Vest and began clinical trials in monthly installments, accrued interest atEurope in 2018. During the second quarter of 2019, the Company performed a qualitative impairment analysis of the IPR&D. Due to delays in the clinical trials experienced during the first six months of 2019, the Company revised its expectations of when revenues would commence for the ReShape Vest, thus reducing the projected near-term future net cash flows related to the ReShape Vest. As a result, the Company performed a quantitative impairment analysis of the IPR&D and recorded a one-time nonrecurring impairment charge of $6.6 million, for the excess of the carrying value over the estimated fair value. The fair value of the IPR&D was estimated using an income approach using Level 3 assumptions which included discounting the revised projected future net cash flows to their present value, with a discount rate of 7.0%22.4%. The Company also assessed the recoverability of finite-lived intangible assets and did not identify any impairment as a result the performance of this analysis. | | | | | | | | | December 31, | | December 31, | | | 2020 | | 2019 | Asset purchase consideration | | $ | 2,867 | | $ | 4,637 | Credit agreement | | | 9,500 | | | — | PPP Loan | | | 955 | | | — | Total debt | | | 13,322 | | | 4,637 | Less: unamortized debt discount | | | 545 | | | — | Less: current portion of debt | | | 3,609 | | | 1,909 | Debt, noncurrent portion | | $ | 9,168 | | $ | 2,728 |
CARES Act On April 24, 2020, the Company entered into a PPP Loan agreement with Silicon Valley Bank (“SVB”) under the PPP, which is part of the CARES Act administered by the United States Small Business Administration (“SBA”). As part of the application for these funds, the Company in good faith, has certified that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. Under this program, the Company received proceeds of $1.0 million from the PPP Loan. In accordance with the requirements of the PPP, the Company intends to use proceeds from the PPP Loan primarily for payroll costs, rent and utilities. The PPP Loan has a 1.00% interest rate per annum, from the date of issuancematures on April 24, 2022 and had a maturity date 24 months after the First Closing. The Notes were repayable, at the Company’s election, in either cash or shares of the Company’s common stock at a discountis subject to the then-current market price. The Notes were also convertible from timeterms and conditions applicable to time, atloans administered by the election ofSBA under the holders, into shares of the Company’s common stock at an initial conversion price of $304.50 per share. The conversion price was adjusted to $76.30 per share on January 29, 2016, the 16th trading day following the First Reverse Stock Split, perPPP. Under the terms of PPP, all or certain amounts of the Notes. The Notes also allowedPPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. On February 23, 2021, the Company to reducesubmitted the conversion price from time-to-time, upon the holders’ consent, which was providedapplication for in the Second Amendment. The holder of each Note had the right to convert any portion of such Note unless the holder, together with its affiliates, beneficially owned in excess of 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the conversion, as such percentage ownership was determinedPPP loan forgiveness, in accordance with the terms and conditions of the Notes. The holders were also able to increase or decrease such percentage to any other percentage, but in no event above 9.99%, provided that any increase of such percentage would not be effective until 61 days after providing notice to the Company.
The Company determined that the conversion feature in the Notes requires bifurcation and liability classification and measurement, at fair value, and requires evaluation at each reporting period. Under Accounting Standards Codification (ASC) 825, Financial Instruments, the FASB provides an alternative to bifurcation and companies may instead elect fair value measurement for the entire instrument, including the debt and conversion feature. The Company elected the fair value alternative in order to simplify its accounting and reporting of the Notes upon issuance. The fair value of the Note Warrants was recorded as a discount to the Notes and amortized to interest expense following the effective interest rate method over the term of the Notes.
The First Closing occurred on November 9, 2015. At the First Closing, the Company issued and sold Notes with an aggregate principal amount of $1.5 million, along with Note Warrants exercisable for 1,679 shares. During the quarter ended September 30, 2016, all remaining principal and interest amounts outstanding under the Notes issued at the First Closing were paid off via conversions to common shares.
The Second Closing occurred on January 11, 2016 afterSBA’s Loan Forgiveness Application (revised June 24, 2020). On March 1, 2021, the Company received approval ofconfirmation from the offering bySBA, the Company’s stockholders and the satisfaction of certain customary closing conditions. At the Second Closing, the Company issued and sold Notes with an aggregate principal amount of $11.0 million, along with Note Warrants exercisable for 12,312 shares. The fair value of Note Warrants issued on January 11, 2016 was determined to be $515,000 using a Black-Scholes valuation model. During the quarter ended December 31, 2016,PPP Loan has been forgiven in full including all remaining principal and interest amounts outstanding under Notes issued at the Second Closing were paid off via conversions to common shares.incurred.
The Third Closing occurred on May 2, 2016 after the Company entered into the First Amendment and satisfied certain closing conditions. At the Third Closing, the Company issued and sold Notes with an aggregate principal amount of $6.25 million, along with Note Warrants exercisable for 6,995 shares. The fair value of the Note Warrants issued on May 2, 2016 was determined to be $150,195 using a Black-Scholes valuation model. During the quarter ended December 31, 2016, all remaining principal and interest amounts outstanding under Notes issued at the Third Closing were paid off via conversions to common shares.
On December 31, 2015, the fair value of the outstanding Notes was determined to be $1.3 million using a Binomial Lattice model.
Credit Agreement
On March 25, 2020, the Company executed a credit agreement up to $3.5 million, with an institutional investor (the “Lender”), who holds warrants in connection with the June 2019 and September 2019 transactions. On the day of closing, the Company received $2.5 million and the additional $1.0 million may be drawn from time to time 30 days after the closing date but prior to five months after the closing date, in $500 thousand increments per draw. On June 23, 2020, the Company made the first additional draw of $500 thousand and on July 29, 2020 the second $500 thousand draw was made. On September 14, 2020, the Company and the Lender entered into the second amendment to the credit agreement that increased the amount available under delayed draw term loans by $2.0 million. The Company borrowed $1.0 million of the available amount immediately and the remaining $1.0 million was available in increments of least $500 thousand with at least 30 days between borrowings and issued an additional 1,200,000 Series G Warrants. On November 13, 2020, the Company made the first additional draw of $500 thousand and on December 16, 2020, at the time of the next amendment, the Company made the final draw of $500 thousand available within the terms of this amendment. The Company evaluated the accounting related to the amendment and in conjunction with the warrants issued. Based on this analysis the Company determined the agreements are substantially different and extinguished the original credit agreement and recorded the amended credit agreement as a new debt at a fair value of $3.9 million. As a result, the Company recorded a debt discount of approximately $0.6 million and a $2.4 million loss on extinguishment of debt which is comprised of the fair value of the warrants and unamortized debt issuance cost with the original credit agreement, offset by the debt discount. At September 30, 2020 there was approximately $0.5 million of unamortized debt discount. Pursuant to the amendment of the credit agreement, the maturity date of the loans are March 31, 2021 and the loans bear interest at LIBOR plus 2.5%. On December 16, 2020, the Company and the Lender entered into the third amendment to the credit agreement that increased the amount available under delayed draw term loans by an additional $4.0 million. The Company borrowed the entire $4.0 million of the available amount immediately and issued an additional 4,000,000 Series G Warrants. The Company evaluated the accounting related to the amendment and in conjunction with the warrants issued. Based on this analysis the Company determined the agreements are substantially different and extinguished the original credit agreement and recorded the amended credit agreement as a new debt at a fair value of $8.9 million. As a result, the Company recorded a debt discount of approximately $0.6 million and a $5.3 million loss on extinguishment of debt which is comprised of the fair value of the warrants and unamortized debt discount cost with the original credit agreement, offset by the debt discount related to the new debt. At December 31, 2020 there was approximately $0.5 million of unamortized debt discount. Pursuant to the amendment of the credit agreement, the maturity date of the loan is March 31, 2021 and the loans bear interest at LIBOR plus 2.5%. On March 10, 2021, the Company and the Lender entered into the fifth amendment to the credit agreement. As part of this amendment the maturity date was amended from March 31, 2021 to March 31, 2022 or, if earlier, the date that is 15 days after the Company completes a capital raising transaction resulting in gross proceeds of at least $15 million. For further details see Note 16. Asset Purchase Consideration Payable The following table summarizesCompany granted Apollo a first security interest in substantially all of the installment amountsCompany’s assets as security for the payment and additional conversionsperformance when due of all of all of its obligations under the Asset Purchase Agreement, including the remaining asset purchase consideration. On October 28, 2019, the Company received the acknowledgement from Apollo of the termination of the security interest granted by the holdersCompany. The security interest was automatically terminated as a result of the Notes throughCompany completing a Qualified Financing, as defined in the Security Agreement, in connection with the Company’s previously disclosed Securities Purchase Agreement, dated June 13, 2019, and Warrant Exercise Agreement, dated September 23, 2019. The net present value of the secured asset purchase consideration payable was determined using a discount rate of 5.1%. At December 31, 2016:2020 and 2019, the aggregate carrying value of the current and noncurrent asset purchase consideration payable of approximately $2.9 million and $4.6 million respectively, as adjusted for accretion of interest of approximately $0.6 million and $0.3 million, respectively. First Closing:
| | | | | | | | | | | | | | | | | | | | | | | | Common | | | | Principal | | Interest | | Total | | Shares | | Installment amount at December 31, 2015 | | $ | 65,217 | | $ | 23,651 | | $ | 88,868 | | 814 | | Holder conversions during the quarter ended December 31, 2015 | | | 18,261 | | | 2,375 | | | 20,636 | | 189 | | Total installments and conversions, December 31, 2015 | | | 83,478 | | | 26,026 | | | 109,504 | | 1,003 | | Installment amount at February 29, 2016 | | | 65,217 | | | 23,681 | | | 88,898 | | 1,314 | | Installment amount at March 31, 2016 | | | 65,217 | | | 14,827 | | | 80,044 | | 1,271 | | Holder conversions during the quarter ended March 31, 2016 | | | 104,784 | | | 12,762 | | | 117,546 | | 1,524 | | Total installments and conversions, March 31, 2016 | | | 318,696 | | | 77,296 | | | 395,992 | | 5,112 | | Installment amount at April 30, 2016 | | | 65,217 | | | 13,853 | | | 79,070 | | 1,454 | | Installment amount at May 31, 2016 | | | 65,217 | | | 13,082 | | | 78,299 | | 2,121 | | Installment amount at June 30, 2016 | | | 54,217 | | | 11,275 | | | 65,492 | | 3,590 | | Holder conversions during the quarter ended June 30, 2016 | | | 1,627 | | | 174 | | | 1,801 | | 29 | | Total installments and conversions, June 30, 2016 | | | 504,974 | | | 115,680 | | | 620,654 | | 12,306 | | Installment amount at July 31, 2016 | | | 65,217 | | | 10,148 | | | 75,365 | | 5,521 | | Installment amount at August 31, 2016 | | | 46,957 | | | 5,830 | | | 52,787 | | 4,593 | | Holder conversions during the quarter ended September 30, 2016 | | | 882,852 | | | 78,634 | | | 961,486 | | 72,528 | | Total installments and conversions, September 30, 2016 and December 31, 2016 | | $ | 1,500,000 | | $ | 210,292 | | $ | 1,710,292 | | 94,948 | |
Second Closing:
| | | | | | | | | | | | | | | | | | | | | | | | Common | | | | Principal | | | Interest | | | Total | | Shares | | | | | | | | | | | | | | | Installment amount at March 2, 2016 | | $ | 404,762 | | $ | 149,300 | | $ | 554,062 | | * | | Holder conversions during the quarter ended March 31, 2016 | | | 987,000 | | | 124,050 | | | 1,111,050 | | 14,974 | | Total installments and conversions, March 31, 2016 | | | 1,391,762 | | | 273,350 | | | 1,665,112 | | 14,974 | | Installment amount at April 29, 2016 | | | 404,762 | | | 149,497 | | | 554,259 | | 10,190 | | Installment amount at May 31, 2016 | | | 291,428 | | | 86,518 | | | 377,946 | | 10,238 | | Installment amount at June 30, 2016 | | | 404,762 | | | 82,913 | | | 487,675 | | 22,842 | | Holder conversions during the quarter ended June 30, 2016 | | | 25,373 | | | 2,995 | | | 28,368 | | 414 | | Total installments and conversions, June 30, 2016 | | | 2,518,087 | | | 595,273 | | | 3,113,360 | | 58,658 | | Installment amount at July 31, 2016 | | | 213,429 | | | 47,457 | | | 260,886 | | 19,113 | | Installment amount at August 31, 2016 | | | 631,429 | | | 116,511 | | | 747,940 | | 64,810 | | Installment amount at September 30, 2016 | | | 404,762 | | | 45,846 | | | 450,608 | | 51,698 | | Holder conversions during the quarter ended September 30, 2016 | | | 4,868,679 | | | 418,847 | | | 5,287,526 | | 418,253 | | Total installments and conversions, September 30, 2016 | | | 8,636,386 | | | 1,223,934 | | | 9,860,320 | | 612,532 | | Installment amount at Oct 31, 2016 | | | 340,000 | | | 24,738 | | | 364,738 | | 70,665 | | Installment amount at Nov 30, 2016 | | | 291,429 | | | 27,528 | | | 318,957 | | 81,952 | | Installment amount at December 31, 2016 | | | 156,867 | | | 11,425 | | | 168,292 | | 57,453 | | Holder conversions during the quarter ended December 31, 2016 | | | 1,575,318 | | | 122,624 | | | 1,697,942 | | 450,385 | | Total installments and conversions, December 31, 2016 | | $ | 11,000,000 | | $ | 1,410,249 | | $ | 12,410,249 | | 1,272,987 | |
Convertible Subordinated Debentures Third Closing
| | | | | | | | | | | | | | | | | | | | | | | | Common | | | | | Principal | | | Interest | | | Total | | Shares | | | | | | | | | | | | | | | Installment amount at June 30, 2016 | | $ | 212,158 | | $ | 90,659 | | $ | 302,817 | | 16,600 | | Holder conversions during the quarter ended June 30, 2016 | | | — | | | — | | | — | | — | | Total installments and conversions, June 30, 2016 | | | 212,158 | | | 90,659 | | | 302,817 | | 16,600 | | Installment amount at July 31, 2016 | | | 147,368 | | | 32,374 | | | 179,742 | | 13,168 | | Cash Payment – July 31, 2016 installment | | | 42,105 | | | 6,107 | | | 48,212 | | * | | Installment amount at August 31, 2016 | | | 336,842 | | | 62,059 | | | 398,901 | | 34,684 | | Installment amount at September, 2016 | | | 263,158 | | | 41,822 | | | 304,980 | | 34,523 | | Holder conversions during the quarter ended September 30, 2016 | | | 1,915,698 | | | 175,092 | | | 2,090,790 | | 155,272 | | Total installments and conversions, September 30, 2016 | | | 2,917,329 | | | 408,113 | | | 3,325,442 | | 254,247 | | Installment amount at Oct 31, 2016 | | | 221,053 | | | 35,004 | | | 256,057 | | 48,192 | | Installment amount at Nov 30, 2016 | | | 221,053 | | | 31,259 | | | 252,312 | | 64,828 | | Installment amount at December 31, 2016 | | | 221,053 | | | 14,526 | | | 235,579 | | 81,872 | | Holder conversions during the quarter ended December 31, 2016 | | | 2,669,512 | | | 170,359 | | | 2,839,871 | | 816,707 | | Total installments and conversions, December 31, 2016 | | $ | 6,250,000 | | $ | 659,261 | | $ | 6,909,261 | | 1,265,846 | |
* Cash payments
DescriptionOn March 29, 2019, the Company completed a private placement with certain healthcare focused institutional investors for the sale of secured subordinated original issue discount convertible debentures (“debentures”) for a purchase price of $2.0 million. The debentures had a maturity of June 28, 2019 and a face amount of $2.2 million, reflecting a 10% original issue discount. The Company recorded an additional debt discount and a derivative liability for the fair value of the Note Warrants
Each Note Warrant is exercisable immediately and for a period of 60 months from the datebifurcated embedded conversion features discussed below. The initial carrying amount of the issuancedebentures, net of discounts and deferred financing costs, was $1.5 million. The Company repaid the debentures on June 20, 2019 at their face amount of $2.2 million with proceeds from an equity financing which closed on June 18, 2019. In connection with the early repayment of the Note Warrant. After completiondebentures, the Company recorded a loss on extinguishment of debt of $0.1 million, which consisted of the Third Closing,unamortized debt discount and deferred financing costs.
The debentures contained a conversion feature that provided that, at any time after June 28, 2019, if the Note Warrants entitle their holdersdebentures had not been repaid, but subject to purchase, in aggregate, 27,982certain investor ownership limitations, the debentures were convertible into shares of common stock at a conversion price equal to the lesser of $0.33 and 80% of the average of the lowest two volume weighted average prices of the Company’s common stock.stock during the 20 trading days prior to conversion. The Note Warrants were initially exercisable at anCompany analyzed the conversion features embedded in the debentures and determined that bifurcation and liability classification was required under ASC 815 due to the variable number of shares issuable upon conversion. The fair value of the bifurcated embedded conversion features was determined to be $0.5 million as of the issuance date using a Monte Carlo model and primarily Level 3 inputs. Upon the closing of the Company’s equity financing and the Company’s planned use of a portion of the proceeds to repay the debentures, the fair value of the embedded derivative liability was reduced to zero as the conversion feature was no longer available. The fair value adjustment to the embedded derivative liability of $0.5 million was recorded as a reduction to Interest Expense. In connection with the financing, the Company amended the exercise price equalof warrants to $325.50, subjectpurchase up to adjustment on the eighteen month anniversary of issuance, and certain other adjustments. The exercise price and number of66,667 shares of common stock issuableheld by the investors that were issued on November 28, 2018 from $180.00 per share to $1.20 per share. The value attributable to the exercise price reduction of $0.1 million was recorded in Warrant Expense and was estimated using the Black Scholes option pricing model using a risk-free interest rate of 2.2%, an expected term of 4.7 years, expected dividends of zero and expected volatility of 204.4%. On the date of adoption of Topic 842, the Company had noncancelable operating leases for office and warehouse space in San Clemente, California and noncancelable operating leases for certain office equipment that expire at various dates through 2022. Financing lease arrangements and the effects of any lease modifications have not been material. Certain of the Company’s equipment leases include variable lease payments that are adjusted periodically based on actual usage. Lease and non-lease components are accounted for separately. The Company determines the lease term as the noncancelable period of the lease, and may include options to extend or terminated the lease when reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less are not recognized on the balance sheet. The Company uses its incremental borrowing rate based on the information available at lease commencement in determining the present value of unpaid lease payments. Right-of-use assets also include any lease payments made at or before lease commencement and any initial direct costs incurred, and exclude any lease incentives received. Operating lease costs for the year ended December 31, 2020 were $0.3 million. Variable lease costs were not material.
Supplemental information related to operating leases is as follows: | | | | | Balance Sheet Information at December 31, 2020 | | | | | Operating lease ROU assets | | $ | 465 | | | | | | | Operating lease liabilities, current portion | | $ | 314 | | Operating lease liabilities, long-term portion | | | 163 | | Total operating lease liabilities | | $ | 477 | | | | | | | Cash Flow Information for the Year Ended December 31, 2020 | | | | | Cash paid for amounts included in the measurement of operating leases liabilities | | $ | 323 | |
Maturities of operating lease liabilities at December 31, 2019 were as follows: | | | | | Twelve months ending December 31, | | | | | 2021 | | $ | 331 | | 2022 | | | 166 | | 2023 | | | — | | Total lease payments | | | 497 | | Less: imputed interest | | | 20 | | Total lease liabilities | | $ | 477 | | | | | | | Weighted-average remaining lease term at end of period (in years) | | | 1.7 | | Weighted-average discount rate at end of period | | | 5.1 | % |
The Company may issue preferred stock, common stock, or both, in connection with underwritten public offerings, registered direct offerings, or business acquisitions. Such issuances of equity typically include the issuance or sale of warrants to purchase common stock. Certain issuances of convertible preferred stock and warrants may contain anti-dilutive features apart from customary adjustments for splits and reverse splits of common stock (collectively, “down round features”). When a series of convertible preferred stock contains this non-standard down round feature, the Company is required to adjust the conversion price in the event of future stock sales at a lower unit price. When warrants issued in connection with an equity transaction contain, or are amended to contain, this non-standard down round feature, the Company is required to adjust the exercise of the Note Warrants is subject to adjustmentprice upon the issuance of any shares of common stock or securities convertible into shares of common stock below the then-existing exercise price with certain exceptions. Additionally,and evaluate and account for the value attributable to the reduced warrant exercise price. In the event down round adjustments are triggered, the values attributable to the adjustment to the convertible preferred stock conversion price and warrant exercise price are recorded as an increase to additional paid-in capital and numberincrease to accumulated deficit. All series of the Company’s convertible preferred stock are classified in stockholders’ equity, including those with the down round feature, when applicable to the equity transaction. Warrants to purchase common stock are classified in stockholders’ equity, including those issued with the down round feature, as they are both indexed to the Company’s own stock and meet the scope exception in ASC 815 “Derivatives and Hedging.” The Company had the following equity transactions during the years ended December 31, 2020 and 2019:
December 2020 Exercise of Warrants for Common Stock On December 3, 2020, the Company issued 290,000 shares of common stock issuable upon theto two healthcare focused institutional investors, totaling 580,000 shares of common stock, as an exercise of pre-funded warrants issued in connection with the June 2019 and September 2019 private placement transactions. The Company received approximately $0.1 million in connection with these exercises. June 2020 Cashless Exercise of Warrants for Common Stock On June 23, 2020, the Company issued 58,981 shares of common stock as a cashless exercise of warrants issued to the placement agents in connection with the June 2019 private placement with healthcare focused institutional investors. May 2020 Common Stock Issued for Professional Services On May 28, 2020, the Company issued 50,000 shares of common stock, having an aggregate fair value of $0.2 million for ongoing professional services. The $0.2 million was recorded as a prepaid asset and will be amortized of the minimum life of the agreement. April 2020 Exercise of Warrants for Common Stock As discussed in Note Warrants are subject8 above, in connection with the credit agreement, the lender exercised its Series C and Series F warrants to adjustmentpurchase an aggregate of 5,085,834 shares of common stock with a current exercise price of $0.12 per warrant on April 15, 2020, in which the Company received net proceeds of $0.6 million. September 2019 Issuance of Common Stock and Warrants On September 23, 2019, the Company entered into a warrant exercise agreement with the holders of Series B warrants issued in the eventJune 2019 private placement. The holders agreed to early exercise 3,333,334 Series B warrants in the private placement in exchange for 69,167 shares of anycommon stock split, reverseand 3,264,167 common stock split, recapitalization, reorganization or similar transaction.equivalents in the form of Series F prefunded warrants. The holdernet proceeds from the early exercise of each Note Warrant does not haveSeries B warrants were approximately $6.9 million, after deducting placement agent fees and other transaction costs. As an incentive for the rightwarrant holders to exercise any portion of such Note Warrant iftheir Series B warrant in full, the holder, together with its affiliates, beneficially owns in excess of 4.99% of the number ofwarrant holders were issued new five-year series E warrants to purchase up to 3,333,334 unregistered shares of the Company’s common stock, outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Note Warrants. However, any holder may increase or decrease such percentage to any other percentage, but in no event above 9.99%, provided that any increase of such percentage will not be effective until 61 days after providing notice to the Company. Theaggregate, at an exercise price of the Note Warrants issued November 9, 2015 was reduced to $76.30$6.00 per share, on January 29, 2016, the 16th trading day following the First Reverse Stock Split, per the terms of the Note Warrants. Per the terms of the Note Warrants, the exercise price of each of the Note Warrants issued January 11, 2016 and May 2, 2016 remained $325.50 until January 20, 2017, the 16th trading day following the Second Reverse Stock Split, at which point the price of all of the Note Warrants was adjusted to $2.18 per share. All of the Note Warrants remain subject to adjustment on the eighteen month anniversary of issuance.
(9)Preferred Stock
The Company’s Sixth Amended and Restated Certificate of Incorporation currently authorizes 5,000,000 shares of $0.01 par value preferred stock. As of December 31, 2016 and 2015, there were no shares of preferred stock issued or outstanding.
On January 23, 2017, the Company closed an underwritten public offering that included 12,531 shares of convertible preferred stock. On January 23 and January 24, 2017 all shares of preferred stock issued in conjunctionthrough a private placement. In connection with the registered direct offering, were converted by their holders into 2,359,894 shares of common stock. See Note 18, Subsequent Events.
(10)Stock Sales
Sales Agreement—July 2015
On July 8, 2015, the Company closed a public offering, where it sold 30,476 units at an aggregate price of $525.00 per unit, for gross proceeds of $16.0 million before deducting estimated offering expenses of approximately $1.4 million, of which $532,000 was assigned to theplacement agent received warrants issued with each unit sold and was recognized immediately as interest expense in the consolidated statements of operations as the warrants are exercisable upon issuance. Each unit consisted of: (A)(i) one share of common stock or (ii) one pre-funded Series C warrant to purchase one share233,334 shares of common stock at an exercise price equal to $525.00of $6.00 per share.
June 2019 Issuance of Common Stock and Warrants On June 18, 2019, the Company completed a private placement with certain healthcare focused institutional investors for the sale of 130,000 shares of common stock at a purchase price of $2.40 per share (Seriesand series C Warrant); and (B) one Seriespre-funded warrants to purchase 3,203,334 shares of common stock at a purchase price of $2.28 per share. The exercise price of each pre-funded warrant is $0.12 per share. The Company also issued series A Warrant withwarrants to purchase 3,333,334 shares of common stock at an exercise price initially equal to $630.00of $2.64 per share (Series A Warrant).and series B warrants to purchase 3,333,334 shares of common stock at an exercise price of $2.40 per share. Net proceeds from the private placement were $6.9 million after deducting placement agent fees and other transaction costs. In connection with the registered direct offering, the placement agent received warrants to purchase 233,334 shares of common stock at an exercise price of $3.00 per share. Conversions of Stock On February 1, 2019, pursuant to an exchange agreement with Sabby Volatility Warrant Master Fund, Ltd. (“Sabby”) 9,993 shares of the Company’s common stock were exchanged for an aggregate of 1,192,000 shares of series E convertible preferred stock, par value $0.01 per share (“Series E Preferred Stock”) in a noncash transaction. Each purchasershare of Series E Preferred Stock was convertible into one share of common stock at Sabby’s election pre-effect of the reverse stock split that occurred during November 2019. In April 2019, all shares of Series E Preferred Stock were
converted into an equal number of shares of common stock. The November 2019 reverse stock split had no effect on this transaction. During the year ended December 31, 2019, 156 shares of Series B Preferred Stock were converted into 1,040 shares of common stock. At December 31, 2020, the remaining 3 shares of Series B Preferred stock are convertible into 1,250 shares of common stock. At December 31, 2020, the remaining 95,388 shares of Series C Convertible Preferred Stock, par value $0.001 per share, are convertible into 38 shares of common stock. The Series C Preferred Stock has no voting rights. In the event of any voluntary or involuntary liquidation of the Company, the Series C Preferred Stock holders shall be paid after other series of preferred stock, but take preferential treatment over common shareholders. The series C convertible preferred stock has a unit could electliquidation preference of $274.88 per share, or $692,691.05 per underlying share of common stock, or approximately $26.2 million in the aggregate. Holders of the series C convertible preferred stock have the right to convert their shares into shares of common stock instead of receiving the liquidation preference. In general, the series C convertible preferred stock is entitled to receive a Series C Warrant in lieudividends (on an as-if-converted-to-common stock basis) actually paid on shares of a sharecommon stock when, as and if such dividends are paid on shares of common stock. No Seriesother dividends will be paid on shares of series C Warrants were issued.convertible preferred stock. The Company’s grants of warrants to purchase common stock are primarily in connection with equity financings. See Note 10 for additional information about equity financings and the related issuance of warrants. Warrant activity was as follows: | | | | | | |
| |
| | | | | | | | | | | | | | Shares | | | Balance December 31, 2018 | | 127,540 | | | | Issued | | 16,934,170 | | | (1) | Exercised | | (3,451,642) | | | (2) | Cancelled | | (139) | | | | Balance December 31, 2019 | | 13,609,929 | | | | Issued | | 6,400,000 | | | (3) | Exercised | | (5,724,815) | | | (4) | Cancelled | | (1) | | | | Balance December 31, 2020 | | 14,285,113 | | | |
| (1) | Warrants issued in 2019 include 6,467,501 of pre-funded warrants sold in connection with private placements completed on June 18, 2019 and September 23, 2019 (“June 2019 Pre-funded Warrants” and “September 2019 Pre-funded Warrants”). The pre-funded warrants do not expire. In addition, in June 2019 institutional investors purchased 3,333,333 Series A warrants, 3,333,334 Series B warrants, and in September 2019 the institutional investors purchased 3,333,334 Series E warrants. As part of both the June 2019 and September 2019 purchases there were 466,668 of placement agent warrants issued. For further details of the June and September 2019 transactions, see Note 10 equity above. |
| (2) | Warrants exercised in 2019 51,667of the November 2018 Pre-funded Warrants at their exercise price of $1.20per share. Warrants exercised in 2019 also include 66,666of the Series A warrants issued in November 2018 (“November 2018 Series A Warrants”) at their exercise price of $1.20 per share, as adjusted. Warrants exercised in 2019 also include 3,333,334 of Series B warrants issued in June 2019. |
| (3) | Warrants issued in 2020 include 6,400,000 of three issuances of Series G warrants. |
| (4) | Warrants exercised in 2020 include 3,089,413 of Series C pre-funded warrants at an exercise price of $0.12 per shares, 2,576,421 Series F pre-funded warrants at an exercise price of $0.12 per share and 58,981 of placement agent warrants. |
Warrant Liability The Company had liability warrants related to the June 2019 and September 2019 transactions, due to the variable price feature that was in effect until the reverse stock split occurred on November 12, 2019. The Company analyzed the variable price features and established a warrant liability of $16.0 million and $24.6 million related to the June 2019 transaction and September 2019 transaction, respectively. As the initial fair value of both offering exceeded the cash received the company recorded $8.3 million and $17.2 million as warrant expense for the June 2019 transaction and September 2019 transaction, respectively. The initial fair value and changes to fair value through September 30, 2019 were determined using a Monte Carlo simulation model. The Company re-evaluated the warrants subsequent to reverse stock split and determined that the price becoming fixed, the warrants should be reclassified from liability to equity. In addition, as the price was fixed the Company determined the Monte Carlo simulation model was no longer the appropriate model; therefore the Company used a Black Scholes calculation to determine the fair value of these warrants at November 12, 2019. This resulted in the Company reclassifying $64.0 million of warrant liability to equity. The Company also recognized an additional $23.4 million of warrant expense for the changes in fair value of the liability warrants through November 12, 2019. Warrant Assumptions – 2020 Warrants Issued The following table provides the assumptions used to calculate the fair value of the Series AG warrants issued during 2020, using a Black-Scholes model: | | | | | | | | | | | | | | | | Warrants Outstanding | | | Strike Price | | Volatility | | | Remaining Life | | Risk Free Rate | | First Issuance | | 1,200,000 | | | 3.70 | | 97.0 | % | | 5.0 | | 0.56 | % | Second Issuance | | 1,200,000 | | | 3.25 | | 101.1 | % | | 5.0 | | 0.27 | % | Third Issuance | | 4,000,000 | | | 3.50 | | 100.8 | % | | 5.0 | | 0.37 | % |
Warrant Assumptions – 2019 Warrants are exercisableIssued The following table provides the assumptions used to calculate initial fair value using a Monte Carlo simulation model: | | | | | | | | | | | | | | | | Strike Price | | Volatility | | | Remaining Life | Series A | | | | $ | 2.64 | | 164.1 | % | | 5.22 | Series B | | | | $ | 2.40 | | 164.1 | % | | 1.22 | Series E | | | | $ | 6.00 | | 93.2 | % | | 5.11 | Series F | | | | $ | 0.12 | | 93.2 | % | | 5.11 |
The following table provides the assumptions used at November 12, 2019, using a Black-Scholes model: | | | | | | | | | | | | | | | | Warrants Outstanding | | | Strike Price | | Volatility | | | Remaining Life | | Risk Free Rate | | Series A | | 3,333,333 | | $ | 2.64 | | 93.5 | % | | 5.1 | | 1.73 | % | Placement Agent - June | | 233,334 | | $ | 3.00 | | 93.5 | % | | 4.7 | | 1.73 | % | Series E | | 3,333,334 | | $ | 6.00 | | 93.5 | % | | 5.1 | | 1.73 | % | Series F | | 3,264,167 | | $ | 0.12 | | 93.5 | % | | 5.1 | | 1.73 | % | Placement Agent - September | | 233,334 | | $ | 6.00 | | 93.5 | % | | 4.9 | | 1.73 | % |
(12) | Revenue Disaggregation and Operating Segments |
The following table presents the Company’s revenue disaggregated by product and geography: | | | | | | | | | Year Ended | | | December 31, | | | 2020 | | 2019 | United States | | $ | 8,275 | | $ | 13,309 | Australia | | | 1,086 | | | 1,167 | Europe | | | 1,824 | | | 613 | Rest of world | | | 114 | | | — | Total net revenue | | $ | 11,299 | | $ | 15,089 |
| ● | The next largest individual country outside the U.S. for the years ended December 31, 2020 and 2019 was Australia, which was 9.6% and 7.7% of total revenues, respectively. |
Variable Consideration The Company records revenue from customers in an amount that reflects the transaction price it expects to be entitled to after transferring control of the goods. Customers and distributors of the Lap-Band product generally have the right to return or exchange products purchased for a period of 42 monthsup to thirty days from the closing date of product shipment contingent upon a 10% restocking fee. Any such return or exchange of Lap-Band products will be recorded as a reduction of revenue in the public offering. The exerciseperiod incurred until sufficient historical information is available to enable management to estimate a returns reserve. Certain Lap-Band customers may receive volume rebates or discounts. Discounts are treated as a reduction in sales price and therefore corresponding revenue at the point of sale. Any volume rebates offered would be estimated and reserved as a reduction in revenue. Warranty The Company generally provides warranties against defects in materials and workmanship, and provides replacements at no charge to the customer, as long as the customer has notified the Company within 30 days of delivery and returns such products in accordance with the Company’s instructions. As they are considered assurance-type warranties, the Company does not account for them as separate performance obligations. Warranty reserve requirements are based on a specific assessment of the products sold with warranties where a customer asserts a claim for warranty or a product defect. For the vBloc product line, the Company has a 5-year warranty on all implantable parts. vBloc sales began in 2015 and ended in 2018, so this warranty will go through 2023. Contract Balances The Company records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied. Practical Expedients The Company has elected the practical expedient not to determine whether contracts with customers contain significant financing components for contracts with a duration of one year or less. Operating Segments The Company conducts operations worldwide and is managed in the following geographical regions: United States, Australia, Europe and rest of world (primarily in The Middle East). All regions sell the LAP-BAND product line, which consisted of nearly all our revenue and gross profit for the years ended December 31, 2020 and 2019. During the second half of 2020 there were minimal revenue and gross profit related to ReShapeCare as this product was just
launched and there were no revenue or gross profit recorded for the ReShape Vest or Diabetes Bloc-Stim Neuromodulation in 2020 or 2019 because these two products are still in the development stage. The Company’s geographic segments are reported based on the financial information provided to the Chief Operating Decision Maker (the Chief Executive Officer, or “CODM”). The Company’s CODM evaluates segment performance based on revenue and gross profit. The Company’s CODM does not use operating segment assets information to allocate resources or to assess performance of the operating segments and thus total segment assets have not been disclosed. (13) | Stock-based Compensation |
The ReShape Lifesciences Inc. Second Amended and Restated 2003 Stock Incentive Plan (the “Plan”) provides for the grant of stock options or other stock-based awards to employees, officers, non-employee directors and outside consultants of the Company. In 2018, the Company’s stockholders approved an amendment to the Plan that increased the number of shares authorized for issuance by 26 shares. The Plan amendment in 2018 also added an automatic share increase provision that provides for an annual increase on January 1 of each year beginning in 2019 such that the number of shares of common stock issuable onauthorized for issuance under the exercisePlan is equal to 15% of the Series A Warrants are subject to adjustment upon the issuance of anytotal shares of common stock or securities convertible intooutstanding, on an as converted basis, as of the last day of the immediately preceding fiscal year. The increased number of shares available for issuance under the Plan is subject to adjustment in accordance with certain provisions of the Plan. As of January 1, 2021, the number of shares authorized for issuance increased from 2,100,443 to 3,067,949 and there were 3,067,909 shares of common stock belowavailable for issuance under the then-existingPlan. The Plan is administered by the board of directors, which determines the types of awards to be granted, including the number of shares subject to the awards, the exercise price with certain exceptions, and in the eventvesting schedule. Options granted under the Plan expire no later than ten years from the date of any stock split, reverse stock split, recapitalization, reorganization or similar transaction.grant. The holderexercise price of each option may not be less than 100% of the Series A Warrant does not have the right to exercise any portionfair market value of the Series A Warrantcommon stock at the date of grant, except if the holder, together with its affiliates, would, subjectan incentive stock option is granted to certain limited exceptions, beneficially own in excess of 9.99%a Plan participant possessing more than 10% of the Company’s common stock, outstanding immediately afteras defined by the Plan, the exercise or 4.99% asprice may not be elected by the purchaser. The exercise priceless than 110% of the Series A Warrants issued July 8, 2015 was reduced to $168.00 per share on November 9, 2015 as a resultfair value of the issuancecommon stock at the date of grant. Employee stock options generally vest over four years.
In addition to the stock options granted pursuant to the Plan, the Company from time to time grants options to individuals as an inducement to accepting positions as employees (Inducement Grants). These Inducement Grants are made at the discretion of the Notesboard of directors and was further reduced to $67.90 per share on January 29, 2016, the 16th trading day following the First Reverse Stock Split, per the termsare issued outside of the Series A Warrants and was further reduced at various times duringPlan. Each of the year ended December 31, 2016Inducement Grants vests over a period of up to four years from the date of the officer’s employment agreement. Stock option activity for the Plan is as a result of installment and acceleration payments made on the Notes. follows: | | | | | | | | | | | | | | | Weighted | | | | | Weighted | | Average | | | | | Average | | Remaining | | | | | Exercise Price | | Contractual | | | Shares | | Per Share | | Life (years) | Outstanding at December 31, 2018 | | 28 | | $ | 2,957,210.16 | | | Shares reserved | | — | | | — | | | Options granted | | — | | | — | | | Options exercised | | — | | | — | | | Options cancelled | | — | | | — | | | Outstanding at December 31, 2019 | | 28 | | | 2,957,210.16 | | | Options granted | | — | | | — | | | Options exercised | | — | | | — | | | Options cancelled | | (3) | | | 500,506.83 | | | Outstanding at December 31, 2020 | | 25 | | | 3,264,298.08 | | 6.8 | Exercisable at December 31, 2020 | | 21 | | | 3,884,244.46 | | 6.8 | Vested and expected to vest at December 31, 2020 | | 25 | | | 3,884,244.46 | | 6.9 |
As of December 31, 2016, the exercise price of the warrants was $2.80 per share and on January 20, 2017, the 16th trading day following the Second Reverse Stock Split, the exercise price of the Series A Warrants was adjusted to $2.18 per share, per the terms of the Series A Warrants. Sales Agreement—June 2014
On June 13, 2014, the Company entered into a sales agreement with Cowen and Company, LLC (Cowen) to sell shares of the Company’s common2020, stock having aggregate gross sales proceeds of up to $25.0 million, from time to time, through an at-the-market (ATM) facility under which Cowen will act as the Company’s sales agent (the Cowen ATM). The Company will determine, at its sole discretion, the timing and number of shares to be soldoptions under the Cowen ATM. The Company will pay Cowen a commission for its services in acting as agent in the sale of common stock equalPlan that were outstanding, exercisable and vested and expected to 3.0% of the gross sales price per share of all shares sold through it as agentvest under the sales agreement. As of December 31, 2015, the Company had sold 5,256 shares under the Cowen ATM at a weighted-average selling price of $1,442.00 per share for gross proceeds of $7.6 million before deducting offering expenses. There have been no shares sold under the Cowen ATM subsequent to December 31, 2015 through March 6, 2017. The Company can direct Cowen to sell up to $17.4 million in common stock, provided we remain in compliance with all of the conditions under the Cowen ATM.
intrinsic value.
Stock option activity for Inducement Grants is summarized below: (11)Income Taxes
| | | | | | | | | | | | Weighted | | | | | Weighted | | Average | | | | | Average | | Remaining | | | | | Exercise Price | | Contractual | | | Shares | | Per Share | | Life (years) | Outstanding at December 31, 2018 | | 18 | | $ | 352,876.06 | | | Options granted | | — | | | — | | | Options exercised | | — | | | — | | | Options cancelled | | — | | | — | | | Outstanding at December 31, 2019 | | 18 | | | 352,876.06 | | | Options granted | | — | | | — | | | Options exercised | | — | | | — | | | Options cancelled | | (3) | | | 532,766.92 | | | Outstanding at December 31, 2020 | | 15 | | | 316,897.88 | | 7.1 | Exercisable at December 31, 2020 | | 15 | | | 316,897.88 | | 7.1 | Vested and expected to vest at December 31, 2020 | | 15 | | | 316,897.88 | | 7.1 |
As of December 31, 2020, Inducement Grants outstanding, exercisable and vested and expected to vest had no intrinsic value. The Company has incurred net operating losses (NOLs) since inception. The Company has not reflected any benefitThere were no stock options granted during the years ended December 31, 2020 and 2019. Compensation cost for stock options granted to employees is based on the estimated grant-date fair value and is recognized over the vesting period of such net operating loss carryforwards in the accompanying consolidated financial statements.applicable award on a straight-line basis.
Compensation expense related to stock options was recognized as follows: | | | | | | | | | | Year Ended | | | | December 31, | | | | 2020 | | 2019 | | Sales and marketing | | $ | — | | $ | 151 | | General and administrative | | | 1,323 | | | 2,115 | | Research and development | | | — | | | 45 | | Total stock-based compensation expense | | $ | 1,323 | | $ | 2,311 | |
The incomeAs of December 31, 2020, there was approximately $0.3 million of total unrecognized compensation related to unvested stock option awards, which is expected to be recognized over a weighted-average period of 1.2 years.
Income tax expense benefit differed from(benefit) consists of the amount computed by applyingfollowing: | | | | | | | | | Year ended December 31, | | | 2020 | | 2019 | Deferred: | | | | | | | Federal | | $ | (84) | | $ | (276) | State | | | (2) | | | (867) | Deferred income tax provision (benefit) | | | (86) | | | (1,143) | Current: | | | | | | | Federal | | | — | | | — | State | | | 1 | | | 18 | Foreign | | | (96) | | | 232 | Total income tax provision (benefit), net | | $ | (181) | | $ | (893) |
A reconciliation of the U.S. federal statutory income tax rate of 34% to the Company's effective income before income taxestax rate is as a resultfollows: | | | | | | | | | | Year ended December 31, | | | | 2020 | | 2019 | | Income tax benefit at U.S. federal statutory rate | | | 21.0 | % | | 21.0 | % | State income tax benefit, net of federal benefit | | | 4.2 | % | | 3.9 | % | Stock warrant valuation | | | (10.2) | % | | (14.2) | % | Other permanent differences | | | (0.6) | % | | (0.7) | % | Research and development credit | | | — | % | | (0.2) | % | Change in state tax rate | | | (0.3) | % | | — | % | Foreign rate differential | | | 0.5 | % | | (0.1) | % | Other adjustments | | | 1.4 | % | | 0.3 | % | Change in valuation allowance | | | (15.2) | % | | (8.8) | % | Effective income tax rate | | | 0.8 | % | | 1.2 | % |
The components of the following: | | | | | | | | | | 2016 | | 2015 | | 2014 | | Computed ‘expected’ tax benefit | | 34 | % | 34 | % | 34 | % | Other permanent adjustments | | 3.1 | % | 1.6 | % | (2.3) | % | Research and development credit | | 0.6 | % | 0.9 | % | 0.3 | % | Federal valuation allowance | | (37.7) | % | (36.5) | % | (32) | % | | | — | % | — | % | — | % |
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as of December 31 is presented below:
follows: | | | | | | | | | | 2016 | | 2015 | | Deferred tax assets (liabilities): | | | | | | | | | | | | | | | | | | | December 31, | | | | 2020 | | 2019 | Deferred tax assets: | | | | | | | | Start-up costs | | $ | 6,662,000 | | $ | 8,886,000 | | $ | 1,192 | | $ | 1,208 | Capitalized research and development costs | | | 23,012,000 | | | 29,781,000 | | | 503 | | | 612 | Reserves and accruals | | | 8,933,000 | | | 8,121,000 | | | 9,235 | | | 8,180 | Property and equipment | | | 83,000 | | | 107,000 | | | 133 | | | 55 | Research and development credit | | | 2,198,000 | | | 1,972,000 | | | 1,194 | | | 1,194 | Lease liability | | | | 41 | | | 118 | State and local taxes | | | | 2 | | | 4 | Net operating loss carryforwards | | | 41,657,000 | | | 25,695,000 | | | 30,156 | | | 27,860 | Total gross deferred tax assets | | | 82,545,000 | | | 74,562,000 | | | 42,456 | | | 39,231 | Valuation allowance | | | (82,545,000) | | | (74,562,000) | | | (39,803) | | | (36,349) | Net deferred tax assets | | $ | — | | $ | — | | Deferred tax assets, net of valuation allowance | | | | 2,653 | | | 2,882 | Intangible assets | | | | (3,151) | | | (3,396) | Operating lease right-of-use assets | | | | (117) | | | (188) | Total gross deferred tax liabilities | | | | (3,268) | | | (3,584) | Net deferred tax liability | | | $ | (615) | | $ | (702) |
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. In addition, certain limitations imposed under the Internal Revenue Code (IRC) could further limit the Company’s realization of these deferred tax assets in the event of changes in ownership of the Company, as defined by IRC Section 382. Based on the level of historical taxable losses, and projections of losses in future taxable income (losses) over the periods and potential limitations pursuant to changes in which the deferred tax assets can be realized, management currently believes that it is more likely than not thatownership under Internal Revenue Code (“IRC”) Section 382, the Company will not realize the benefits of these deductible differences. Accordingly, the Company has provided a valuation allowance against the grossat both December 31, 2020 and 2019. The remaining net deferred tax assets asliability at both December 31, 2020 and 2019 is the result of the deferred tax liability associated with the indefinite-lived intangible asset less the deferred tax asset associated with U.S. federal net operating loss and 163j interest limitation carryforward that do not expire. The Company has a policy that NOL’s are shown gross with valuation allowances with respect to IRC 382 limitations. As of December 31, 20162020 and 2015.2019, the Company had U.S. federal net operating loss carryforwards of $77.2 million and $68.0 million, respectively. Of the total U.S. federal net operating loss carryforwards at December 31, 2020, $1.2 million is subject to a 20 year carryover period and will begin expiring in 2021. Losses generated beginning in 2018 will carryover indefinitely. The Company had state net operating loss carryforwards of $222.4 million and $212.7 million at December 31, 2020 and 2019, respectively and had foreign net operating loss carryforwards of $0.3 million and $0.4 million at December 31, 2020 and 2019, respectively. Net operating loss carryforwards of the Company are subject to review and possible adjustment by the taxing authorities. With certain exceptions (e.g. the net operating loss carryforwards), the Company is no longer subject to U.S. federal, state or local examinations by tax authorities for years prior to 2016. There are no tax examinations currently in progress.
The Company’s ability to utilize its net operating loss carryforwards, tax credits, and built-in items of deduction, including capitalized start-up costs and research and development costs, has been, and may continue to be substantially limited due to ownership changes that may have occurred or that could occur in the future.changes. These ownership changes may limit the amount of net operating loss carryforwards, credits and built-in items of deduction that can be utilized annually to offset future taxable income. In general, an ownership change, as defined in IRC Section 382, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups. During 2011,Due to the valuation allowance against deferred tax assets at December 31, 2020, the net effect of any further limitation will have no impact on results of operations. On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, a $2.0 trillion relief package comprising a combination of tax provisions and other stimulus measures. The CARES Act broadly provides entities tax payment relief and significant business incentives and makes certain technical corrections to the 2017 Tax Cuts and Jobs Act, or the Tax Act. The tax relief measures for entities include a five-year net operating loss carry back, increases interest expense deduction limits, acceleration of alternative minimum tax credit refunds, payroll tax relief, and a technical correction to allow accelerated deductions for qualified improvement property. The Act also provides other non-income tax benefits, including federal funding for a range of stabilization measures and emergency funding to assist those impacted by the COVID-19 pandemic. Similar legislation is being enacted in other jurisdictions in which the Company completed an IRC Section 382 reviewoperates. ASC Topic 740, Income Taxes, requires the effect of changes in tax rates and laws on deferred tax balances to be recognized in the resultsperiod in which new legislation is enacted. The enactment of the review indicatedCARES Act and similar legislation in other jurisdictions in which the Company operates was not material to the Company's income tax benefit for the year ended December 31, 2020 The Company has adopted accounting standards which prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company's income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company had no amounts of unrecognized tax benefits that, ownership changesif recognized, would affect its effective income tax rate for the years ended December 31, 2020 and 2019. The Company’s policy is to classify interest and penalties related to income tax expense as tax expense. As of December 31, 2020, the Company had occurred. Whileno amount accrued for the payment of interest and penalties related to unrecognized tax benefits. (15) | Commitments and Contingencies |
Employee Arrangements and Other Compensation Certain members of management are entitled to severance benefits payable upon termination following a change in control, which would approximate $1.8 million at December 31, 2020. The Company also has agreements with certain employees to pay bonuses based on targeted performance criteria. As of December 31, 2020 and 2019, approximately $1.3 million and $0.6 million was accrued for performance bonuses, which is included in accrued liabilities in the consolidated balance sheets. Purchase Commitments The Company generally purchases its products and accessories from a limited group of third-party suppliers through purchase orders. The Company had $1.7 million of purchase commitments as of December 31, 2020, for which the Company has not completed an IRC Section 382 review since 2011, it believes that it is likely that additional ownership changes have occurred since then. Sincereceived the goods or services and which are expected to be purchased primarily within one year. These purchase commitments were made to secure better pricing and to ensure the Company has experienced an ownership change, utilization of carryforward attributeswill have the necessary inventory to meet anticipated near term demand. Although open purchase orders are subjectconsidered enforceable and legally binding, the Company may be able to an annual limitation, which is determined by first multiplying the value of the Company’s common stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any such limitation may result in the expiration of a significant portion of the carryforward attributes before utilization and the permanent loss of built-in items of deduction. Any carryforward attributes that expirecancel, reschedule, or adjust requirements prior to utilization or permanent loss of built-in items of deduction as a result of such limitations will be removed from deferred tax assets with a corresponding adjustment to the valuation allowance.supplier fulfillment. Litigation
As of December 31, 2016, the Company has generated U.S. federal net operating loss carryforwards of approximately $161.4 million. Of the total federal net operating loss, $48.0 million will expire unused as a result of the 2011 Section 382 limitation and $221,000 are generated from excess tax benefits not yet recorded to the income tax payable, such that they are not reflected in the deferred tax asset balance. The federal net operating loss carryforwards expire in the years 2022 through 2036. The Company’s research and development credit carryforwards, if not used, begin to expire in 2024.
Net operating loss carryforwards of the Company are subject to review and possible adjustment by the taxing authorities. With certain exceptions (e.g. the net operating loss carryforwards), the Company is no longer subject to U.S. federal, state or local examinations by tax authorities for years prior to 2013. There are no tax examinations currently in progress.
(12)Stock Options
The Company has adopted the Second Amended and Restated 2003 Stock Incentive Plan (the Plan) that includes both incentive stock options and nonqualified stock options to be granted to employees, officers, consultants, independent contractors, directors and affiliates of the Company. At December 31, 2016 and 2015, according to the Plan 40,000,000 and 18,857 shares, respectively, were authorized and reserved. Pursuant to the terms of the Plan, the shares authorized under the Plan were not adjusted automatically as part of the Second Reverse Stock Split. Instead, pursuant to the terms of the Plan, the board of directors exercised its power to adjust the number of shares authorized under the Plan as it determines is necessary after a stock split or other similar event to prevent dilution or enlargement of the benefits intended to be made available under the Plan. On February 8, 2017, pursuant to the terms of the Plan, the board of directors adjusted the number of shares authorized under the Plan to 3,000,000 shares as a result of the recapitalization of the Company consisting of the Second Reverse Stock Split and the public offering of the Company’s stock which closed on January 23, 2017. Pursuant to the terms of the Plan, the board of directors is required to adjust the number of shares authorized under the Plan as it determines necessary after a recapitalization or other similar corporate transaction to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan.
The board of directors establishes the terms and conditions of all stock option grants, subject to the Plan and applicable provisions of the IRC. Incentive stock options must be granted at an exercise price not less than the fair market value of the common stock on the grant date. The options granted to participants owning more than 10% of the Company’s outstanding voting stock must be granted at an exercise price not less than 110% of fair market value of the common stock on the grant date. The options expire on the date determined by the board of directors, but may not extend more than 10 years from the grant date, while incentive stock options granted to participants owning more than 10% of the Company’s outstanding voting stock expire five years from the grant date. The vesting period for employees is generally over four years. The vesting period for nonemployees is determined based on the services being provided.
Stock option activity for the Plan is as follows:
| | | | | | | | | | | | | | | Outstanding Options | | | | | | | | | | | | | | | | | Shares | | | | | | | Aggregate | | | Available For | | Number of | | Weighted-Average | | Intrinsic | | | Grant | | Shares | | Exercise Price | | Value | Balance, December 31, 2013 | | 519 | | 11,129 | | $ | 2,660.00 | | | | Shares reserved | | 7,143 | | — | | | — | | | | Options granted | | (1,197) | | 1,197 | | | 1,712.00 | | | | Options exercised | | — | | — | | | — | | | | Options cancelled | | 275 | | (275) | | | 2,528.00 | | | | | | | | | | | | | | | Balance, December 31, 2014 | | 6,740 | | 12,051 | | | 2,597.00 | | $ | 519,546 | Shares reserved | | — | | — | | | | | | | Options granted | | (3,238) | | 3,238 | | | 1,104.00 | | | | Options exercised | | — | | — | | | | | | | Options cancelled | | 735 | | (735) | | | 1,942.00 | | | | | | | | | | | | | | | Balance, December 31, 2015 | | 4,237 | | 14,554 | | | 2,298.00 | | | | Shares reserved (1) | | 2,976,486 | | — | | | — | | | | Options granted | | (2,174) | | 2,174 | | | 45.35 | | | | Options exercised | | — | | — | | | — | | | | Options cancelled | | 9,694 | | (9,694) | | | 2,134.47 | | | | | | | | | | | | | | | Balance, December 31, 2016 | | 2,988,243 | | 7,034 | | $ | 1,824.87 | | $ | — |
(1)Reflects the board of directors’ February 8, 2017 adjustment of number of shares reserved under the Plan from 40,000,000 to 3,000,000.
On June 27, 2016 the Company completed an option exchange offer to its employees whereby certain outstanding options to purchase shares of the Company’s common stock were tendered by employees in exchange for new options with the exercise price to be set at the then current market price of the Company’s common stock. Options to purchase 6,424 shares of the Company’s common stock, which included all the options eligible for exchange, were tendered by employees and cancelled by the Company. On the same date, options to purchase 1,083 shares of the Company’s common stock were issued with an exercise price of $23.28 per share, which was the Company’s closing stock price on June 27, 2016. Because the fair value of the tendered options immediately before the exchange approximated the fair value of the new options granted, no additional compensation expense was recognized.
In addition to the stock options granted pursuant to the Plan, the Company from time to time grants options to individuals as an inducement to accepting management positions (Inducement Grants). These Inducement Grants are made at the discretion of the board of directors and our issued outside of the Plan. Inducement Grants are summarized below:
| | | | | | | | | | | | | | | Outstanding Options | | | | | | | | | | | | | | | | | Shares | | | | | | | Aggregate | | | Available For | | Number of | | Weighted-Average | | Intrinsic | | | Grant | | Shares | | Exercise Price | | Value | Balance, December 31, 2014 | | — | | — | | | — | | | | Shares reserved | | 7,380 | | — | | | | | | | Options granted | | (7,380) | | 7,380 | | $ | 262.50 | | | | Options exercised | | — | | — | | | | | | | Options cancelled | | — | | — | | | — | | | | | | | | | | | | | | | Balance, December 31, 2015 | | — | | 7,380 | | | 262.50 | | $ | — | Shares reserved | | 5,426 | | — | | | — | | | | Options granted | | (5,426) | | 5,426 | | | 94.05 | | | | Options exercised | | — | | — | | | — | | | | Options cancelled | | — | | — | | | — | | | | | | | | | | | | | | | Balance, December 31, 2016 | | — | | 12,806 | | $ | 191.12 | | $ | — |
Each of the Inducement Grants will vest as follows: 25% of the shares will vest as of one year from the date of the officer’s employment agreement, and the remaining 75% of the shares will then vest in equal 2.0833% installments each month thereafter for 36 months. The options awarded as Inducement Grants were not eligible for the option exchange program
The options outstanding, vested and currently exercisable for the Plan and Inducement Grants are set forth by exercise price at December 31, 2016 in the following table:
| | | | | | | | | | | | | | | | | | Outstanding Options and Expected to Vest | | Options Exercisable and Vested | | | | | Weighted-Average | | | | | | | | | | | | | | Number of | | Remaining | | Aggregate | | | | | | | Aggregate | Exercise | | Shares | | Contractual Life | | Intrinsic | | Number of | | Weighted-Average | | Intrinsic | Price | | Outstanding | | (Years) | | Value | | Options | | Exercise Price | | Value | $0.01 to $25.00 | | 829 | | 9.5 | | $ | — | | 498 | | $ | 23.12 | | $ | — | $25.01 to $175.00 | | 6,416 | | 9.1 | | | — | | 846 | | | 72.56 | | | — | $175.01 to $350.00 | | 7,644 | | 8.8 | | | — | | 2,407 | | | 260.78 | | | — | $350.01 to $1,475.00 | | 2,073 | | 7.2 | | | — | | 2,041 | | | 1,321.12 | | | — | > $1,475.00 | | 2,878 | | 5.1 | | | — | | 2,870 | | | 3,460.40 | | | — | | | 19,840 | | | | $ | — | | 8,662 | | $ | 1,538.71 | | $ | — |
Stock-Based Compensation for Nonemployees
Stock-based compensation expenses related to stock options granted to nonemployees is recognized as the stock options are earned. The Company believes that the fair value of the stock options is more reliably measurable than the fair value of the services received. The fair value of the stock options granted is calculated at each reporting date, using the Black-Scholes option-pricing model, until the award vests or there is a substantial disincentive for the nonemployee not to perform the required services. The fair value for the years ended December 31, 2015 and 2014 was calculated using the following assumptions, defined below:
| | | | | | | | | | Year Ended December 31, | | | | | | | | | | | | 2016 | | 2015 | | 2014 | | Risk-free interest rates | | N/A | | 0.02%–2.10% | | 0.08%–2.63% | | Expected life | | N/A | | 0.08 years–8.51 years | | 0.50 years–9.51 years | | Expected dividends | | N/A | | 0% | | 0% | | Expected volatility | | N/A | | 37.36%–132.01% | | 56.54%–139.65% | |
Stock-based compensation expense charged to operations on options granted to nonemployees for the years ended December 31, 2016, 2015 and 2014 was $3,535, $(34,712) and $181,323, respectively.
Employee Stock-Based Awards
Compensation cost for employee stock-based awards is based on the estimated grant-date fair value and is recognized over the vesting period of the applicable award on a straight-line basis. The weighted average estimated fair value of the employee stock options granted for the years ended December 31, 2016, 2015 and 2014 was $60.00, $426.30, and $1,486.00 per share, respectively.
The Company uses the Black-Scholes pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the Company’s expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates and expected dividends. The estimated grant-date fair values of the employee stock options were calculated using the Black-Scholes valuation model, based on the following assumptions for the years ended December 31, 2016, 2015 and 2014:
| | | | | | | | | | Year Ended December 31, | | | | | | | | | | | | 2016 | | 2015 | | 2014 | | Risk-free interest rates | | 0.87%–1.64% | | 1.49%–1.80% | | 1.73%–1.96% | | Expected life | | 4.0 years–6.25 years | | 5.50 years–6.25 years | | 6.00 years–6.25 years | | Expected dividends | | 0% | | 0% | | 0% | | Expected volatility | | 88.43%–114.38% | | 83.36%–111.77% | | 118.64%–120.70% | |
Expected Life. The expected life is based on the “simplified” method described in the SEC Staff Accounting Bulletin, Topic 14: Share-Based Payment.
Volatility. The expected volatility was based on the Company’s historical volatility.
Risk-Free Interest Rate. The risk-free rate is based on the daily yield curve rate from the U.S. Treasury with remaining terms similar to the expected term on the options.
Dividend Yield. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.
Forfeitures. The Company is required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. If the Company’s actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.
As of December 31, 2016 there was approximately $2.8 million of total unrecognized compensation costs, net of estimated forfeitures, related to employee unvested stock option awards, which are expected to be recognized over a weighted-average period of 2.2 years.
There were no stock option exercises for the years ended December 31, 2016, 2015 and 2014.
(13)Warrants
Stock warrant activity is as follows:
| | | | | | | | | | Weighted | | | | | Average | | | Common | | Exercise | | | Shares | | Price | Balance, December 31, 2013 | | 24,331 | | $ | 1,964.90 | Granted | | — | | | — | Exercised | | (1,265) | | | 1,772.40 | Cancelled | | (22) | | | 50,988.00 | Balance, December 31, 2014 | | 23,044 | | | 1,929.20 | Granted (1) | | 32,155 | | | 116.20 | Exercised | | — | | | — | Cancelled | | (324) | | | 2,299.50 | Balance, December 31, 2015 | | 54,875 | | | 1,929.20 | Granted (1) | | 19,308 | | | 325.50 | Exercised | | (1,428) | | | 3.50 | Cancelled | | (17,706) | | | 2,257.50 | Balance, December 31, 2016 | | 55,049 | | $ | 238.90 |
(1)See Notes 8 and 10 for discussions relating to the issuance of warrants in 2016 and 2015.
At December 31, 2016 and 2015, the weighted-average remaining contractual life of outstanding warrants was 2.76 and 2.18 years, respectively. All of the warrants outstanding are currently exercisable at the option of the holder into the equivalent number of shares of common stock.
(14)Related Party Transactions
.
Consulting Agreement—Anthony Jansz
The Company entered into a consulting agreement with Anthony Jansz, who is a former member of the board of directors, for the period from June 1, 2011 through April 30, 2015. In exchange for consulting services provided, Mr. Jansz was entitled to receive consulting fees and options to purchase 16,663 shares of common stock at a weighted average exercise price of $29.78. Total stock-based compensation expense recorded was approximately $600 and $40,000 for the years ended December 31, 2015 and 2014, respectively. Due to a failure to meet certain performance conditions, 471 shares of the options granted to Mr. Jansz did not vest. In addition to the option grants, the Company paid Mr. Jansz approximately $75,000 and $196,000 in fees and expenses for consulting services provided during the years ended December 31, 2015 and 2014, respectively. No consulting fees or expenses were paid to Mr. Jansz in 2016.
Consulting Agreement—Jon Tremmel
Effective August 10, 2015, the Company entered into a one year consulting agreement with Jon Tremmel & Associates, LLC, which is wholly-owned by Jon Tremmel, a member of the board of directors. In exchange for consulting services provided, Mr. Tremmel was entitled to receive consulting fees and an option to purchase 16,666 shares of common stock at $3.45 per share. Total stock-based compensation expense recorded was approximately $3,000 and $13,000 for the years ended December 31, 2016 and 2015, respectively. In addition to the option grant, the Company paid Mr. Tremmel approximately $50,000 in fees and expenses for consulting services provided during the year ended December 31, 2015. No consulting fees or expenses were paid to Mr. Tremmel in 2016.
Other
The Company entered into an agreement with an advisory firm to provide various consulting services. The advisory firm is partially owned by a company with whom a member of our board of directors is a partner. The Company recognized $253,000 in selling, general and administrative expense for the year ended December 31, 2014 for consulting services provided by the advisory firm.
(15)Commitments and Contingencies
Operating Lease
The Company rents its office, warehouse and laboratory facilities under an operating lease, which was originally set to expire on September 30, 2015. On August 25, 2015, the Company entered into an amendment extending the term of the operating lease for three years until September 30, 2018, with monthly base rent ranging from $18,925 to $20,345. Total rent expense recognized for the years ended December 31, 2016, 2015 and 2014, respectively, was $229,000, $262,000 and $271,000. Facility related expenses are included as general and administrative costs on the consolidated statements of operations.
The following is a schedule of total future minimum lease payments due as of December 31, 2016:
| | | | Year ending December 31, | | | | 2017 | | $ | 237,749 | 2018 | | | 183,103 | | | $ | 420,852 |
Product Liability Claims
The Company is exposed to product liability claims that are inherent in the testing, production, marketing and sale of medical devices. Management believes any losses that may occur from these matters are adequately covered by insurance, and the ultimate outcome of these matters will not have a material effect on the Company’s financial position or results of operations. The Company is not currently a party to any litigation and is not aware of any pending or threatened litigation that could have a material adverse effect on the Company’s business, operating results or financial condition.
Clinical Trials
The Company is evaluating the vBloc System in human clinical trials, including the EMPOWER trial and ReCharge trial. Both of these clinical trials require patients to be followed out to 60 months. The Company is required to pay for patient follow up visits only to the extent they occur. In the event a patient does not attend a follow up visit, the Company has no financial obligation. The Company is also required to pay for explants or revisions, including potential conversions of ReCharge control devices to active devices, should a patient request or be required to have one during the course of the clinical trials. The Company has no financial obligation unless an explant, revision or conversion is requested or required. Clinical trial costs are expensed as incurred.
Litigation
On February 28, 2017, the Company received a class action and derivative complaint filed on February 24, 2017 in U. S. District Court for the District of Delaware by Vinh Du, one of the Company’s shareholders. The complaint names as defendants EnteroMedics, the board of directors and four members of our senior management, namely, Scott Youngstrom, Nick Ansari, Peter DeLange and Paul Hickey, and contains a purported class action claim for breach of fiduciary duty against the board of directors and derivative claims for breach of fiduciary duty against the board of directors and unjust enrichment against our senior management. The allegations in the complaint relate to the increase in the number of shares authorized for grant under our Second Amended and Restated 2003 Stock Incentive Plan (the “Plan”), which was approved by our shareholders at the Special Meeting of Shareholders held on December 12, 2016 (the “Special Meeting”), and to our subsequent grant of stock options on February 8, 2017, to the Company’s Directors and senior management to purchase an aggregate of 1,093,450 shares of our common stock (the “Option Grants”). In the complaint, the plaintiff contends that (i) the number of shares authorized for grant under the Plan, as adjusted by the board of directors after the Special Meeting for the subsequent recapitalization of the Company, resulted from an alleged breach of fiduciary duties by the board of directors, and (ii) our senior management was allegedly unjustly enriched by the subsequent Option Grants. The plaintiff seeks relief in the form of an order rescinding the Plan as approved by the shareholders at the Special Meeting, an order cancelling the Option Grants, and an award to plaintiff for his costs, including fees and disbursements of attorneys, experts and accountants. We believe the allegations in the complaint are without merit, and intend to defend the action vigorously.
Except as disclosed in the foregoing paragraph, the Company is not currently a party to any litigation and the Company is not aware of any pending or threatened litigation against it that could have a material adverse effect on the Company’s business, operating results or financial condition. The medical device industry in which the Company operates is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. As a result, the Company may be involved in various legal proceedings from time to time.
(16)Retirement Plan
Product Liability Claims The Company hasis exposed to product liability claims that are inherent in the testing, production, marketing and sale of medical devices. Management believes any losses that may occur from these matters are adequately covered by insurance, and the ultimate outcome of these matters will not have a 401(k) profit-sharingmaterial effect on the Company’s financial position or results of operations. The Company is not currently a party to any product liability litigation and is not aware of any pending or threatened product liability litigation that could have a material adverse effect on the Company’s business, operating results or financial condition. Agreement and Plan of Merger On January 19, 2021, the Company entered into an agreement and plan that provides retirement benefitsof merger with Obalon Therapeutics, Inc., a Delaware corporation (“Obalon”) and Optimus Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Obalon (“Merger Sub”), pursuant to employees. Eligible employees may contributewhich Merger Sub will merge with and into ReShape as the surviving corporation and a percentagewholly-owned subsidiary of their annual compensation,Obalon (the “Merger”). As a result of the Merger, Obalon will be renamed “ReShape Lifesciences Inc.” Subject to the terms and conditions of the Merger Agreement, at the closing of the Merger, each outstanding share of ReShape common stock and series B convertible preferred stock will be converted into the right to receive shares of common stock of Obalon (“Obalon Shares”) based on the exchange ratio set forth in the Merger Agreement. Upon completion of the Merger, ReShape stockholders will own approximately 51% of the combined company’s outstanding common stock and Obalon stockholders will own approximately 49%, subject to the terms of the Merger Agreement. Obalon will, at the effective time of the Merger, assume the outstanding warrants and series C convertible preferred stock of ReShape, subject to the terms of the Merger Agreement. All outstanding stock options of ReShape will be cancelled and terminated at the effective time of the Merger without any right to receive any consideration. No fractional shares will be issued in connection with the Merger and Obalon will pay cash in lieu of any such fractional shares. The Merger is intended to qualify for federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Service limitations. The Company’s matching is at the discretionCode of 1986, as amended. Consummation of the Company’s boardMerger is subject to certain closing conditions, including, among other things, approval by the stockholders of directors. ForReShape and Obalon and the years ended December 31, 2016, 2015NASDAQ Stock Market’s approval of (i) the Listing of Additional Shares Notice covering the Obalon Shares to be issued in the Merger and 2014,(ii) the Company didcontinued listing of the combined company following completion of the Merger ((i) and (ii) together, the “NASDAQ Approvals”). Pursuant to the Merger Agreement, ReShape has agreed to exercise its reasonable best efforts to take all necessary steps to obtain the NASDAQ Approvals following the execution of the Merger Agreement, which may include procuring additional equity or debt investments, financings or other capital raising efforts. The Merger Agreement contains specified termination rights for both ReShape and Obalon. If Obalon terminates the Merger Agreement as a result of ReShape’s breach of its covenant to use its reasonable best efforts to obtain the NASDAQ Approvals, or if either party terminates the Merger Agreement because the NASDAQ Approvals have not provide any matchingbeen obtained within 30 days following the later of employees’ contributions.the Obalon Stockholders’ Meeting and the ReShape Stockholders’ Meeting, then ReShape will be required to pay Obalon a $1.0 million termination fee, which amount has been deposited with a third-party escrow agent. At the effective time of the Merger, the Board of Directors of the combined company is expected to consist of the five current members of the Board of Directors of ReShape and the executive officers of the combined company will be the current executive officers of ReShape. (17)Quarterly Data (unaudited)In addition, under the terms of the Merger Agreement, Obalon has agreed to file with NASDAQ a Listing of Additional Shares Notice covering the Obalon shares to be issued in connection with the Merger on the NASDAQ Stock
Market and to seek approval of NASDAQ to change its name to ReShape Lifesciences Inc. and its trading symbol for its shares of common stock to “RSLS” upon the effective time of the Merger. The following table representsMerger Agreement contains customary representations, warranties and covenants by ReShape and Obalon. ReShape and Obalon have agreed, among other things, subject to certain unaudited quarterlyexceptions, not to (1) directly or indirectly initiate, seek, or solicit, or knowingly encourage or facilitate any offer or alternative proposal for specified alternative transactions, or (2) participate or engage in discussions or negotiations regarding such an offer or proposal with, or furnish any nonpublic information forregarding such an offer or proposal to, any person that has made or, to ReShape’s or Obalon’s knowledge, is considering making such an offer or proposal, (3) terminate, amend, modify, or waive any standstill or similar obligation (subject to certain conditions), or (4) enter into any agreement with respect to an alternative proposal. In addition, certain covenants require each of the eight quarters inparties to use, subject to the period ended December 31, 2016. In management’s opinion, this information has been prepared onterms and conditions of the same basisMerger Agreement, their commercially reasonable efforts to cause the Merger to be consummated as promptly as practicable. Subject to certain exceptions, the audited consolidated financial statementsMerger Agreement also requires each of ReShape and includes allObalon to call and hold stockholders’ meetings and requires the adjustments necessaryboard of directors of each of ReShape and Obalon to fairly staterecommend approval of the unaudited quarterly results of operations (in thousands, except per share data).Merger. | | | | | | | | | | | | | | | First | | Second | | Third | | Fourth | | | Quarter | | Quarter | | Quarter | | Quarter (1) | 2016: | | | | | | | | | | | | | Revenue | | $ | 72 | | $ | 276 | | $ | 297 | | $ | 142 | Net loss | | $ | (7,409) | | $ | (4,995) | | $ | (6,522) | | $ | (4,434) | Basic and diluted net loss per share | | $ | (66.14) | | $ | (33.96) | | $ | (11.77) | | $ | (2.65) | 2015: | | | | | | | | | | | | | Revenue | | $ | — | | $ | 79 | | $ | 64 | | $ | 149 | Net loss | | $ | (7,174) | | $ | (7,404) | | $ | (4,151) | | $ | (6,770) | Basic and diluted net loss per share | | $ | (103.56) | | $ | (104.48) | | $ | (41.92) | | $ | (66.70) |
(1)The $2.4 million reduction in the 2016 fourth quarter net loss compared with the 2015 fourth quarter net loss reflects a $3.5 mllion decrease in operating expenses partially offset by a $0.6 million increase in interest expense and a $0.5 million increase in expenses from net changes in warrant liability and convertible note liability valuations.
(18) Subsequent Events
Credit Facility Agreement On January 23, 2017,19, 2021, concurrently with the Company closedexecution of the Merger Agreement, ReShape entered into a Credit Facility Agreement (“Credit Facility Agreement”) with Armistice, which is ReShape’s existing secured lender and majority stockholder, pursuant to which Armistice agreed to provide ReShape with a $15.0 million line of credit that ReShape may access from time to time until December 31, 2022. ReShape has not drawn down any amounts under the Credit Facility Agreement, but any advances will bear interest at a rate per annum equal to the LIBOR rate plus 2.5%. Any advances under the Credit Facility Agreement would be subject to the Guarantee and Collateral Agreement between ReShape and Armistice dated March 25, 2020. Under the terms of the Credit Facility Agreement, Armistice agrees that the transactions contemplated by the Merger Agreement will not be deemed an underwritten public offering consisting“Event of units of common stock, convertible preferred stockDefault” under the Credit Agreement (as defined below) and agrees to waive its right to require ReShape to purchase any outstanding warrants to purchase common stock. Gross proceedscapital stock of ReShape held by Armistice that may be triggered by the completion of the offering were $19.0 million, priortransactions contemplated by the Merger Agreement, including to deducting underwriting discountsthe extent the Merger may be considered a “Fundamental Transaction” under the terms of such warrants. Waiver of Bigger Capital Fund LP and commissionsDistrict 2 Capital Fund, LP On January 19, 2021, concurrently with the execution of the Merger Agreement, Bigger Capital Fund LP and offering expensesDistrict 2 Capital Fund, LP each waived its right to require ReShape to purchase any outstanding warrants to purchase capital stock of approximately $2.5 million.ReShape held by Bigger Capital Fund LP and District 2 Capital Fund, LP that may be triggered by the completion of the transactions contemplated by the Merger Agreement, including to the extent the Merger may be considered a “Fundamental Transaction” under the terms of such warrants. Amendment to Credit Agreement The offering was comprisedOn January 19, 2021, concurrently with the execution of Class A Units, priced atthe Merger Agreement, ReShape and Armistice entered into a public offering price of $5.31 per unit, with each unit consisting of one share of common stock and one five-year warrant (each, a "2017 Warrant"fourth amendment (the “Credit Agreement Amendment”) to the Credit Agreement, dated March 25, 2020 (as amended, the “Credit Agreement”), pursuant to which ReShape borrowed an additional $1.0 million, which amount was used to fund the $1.0 escrow fund securing the termination fee under the Merger Agreement described above. As an inducement to Armistice to enter into the amendment and make the additional loan contemplated thereby, ReShape issued to Armistice a warrant to purchase one sharean aggregate of 1,000,000 shares of ReShape’s common stock, with an exercise price of $5.84 per share equal to $3.50.
On March 10, 2021, the Company and Class B Units, pricedthe Lender entered into the fifth amendment to the credit agreement, dated March 25, 2020. Under the terms of this amendment the maturity date as amended from March 31, 2021 to March 31, 2022 or, if earlier, the date that is 15 days after the Company completes a capital raising transaction resulting in gross proceeds of at least $15 million. As a public offering priceresult of $1,000 per unit, with each unit comprisedthis amendment, the Company retroactively reclassified the outstanding balance net of one sharedebt discount from a short-term liability to long-term as of Series A Preferred Stock (the Preferred Stock), which was convertible into 188 shares of common stock, and 2017 Warrants to purchase 188 shares of common stock. The conversion price of the Preferred Stock issued in the transaction as well as the exercise price of the 2017 Warrants are fixed priced and do not contain any variable pricing features nor any price based anti-dilutive features apart from customary adjustments for splits and reverse splits of common stock. The Preferred Stock included a beneficial ownership limitation of 4.99%, but had no dividend preference (except to extent dividends are also paid on the common stock), liquidation preference or other preferences over common stock. The securities comprising the units were immediately separable were issued separately.December 31, 2020. A total of 1,218,107 shares of common stock, 12,531 shares of Preferred Stock convertible into 2,359,894 shares of common stock, and 2017 Warrants to purchase 3,577,994 shares of common stock were issued in the offering
including the underwriters’ exercise of their over-allotment option to purchase 466,695 shares of common stock and 2017 Warrants to purchase an additional 466,695 shares of common stock.
On January 23 and January 24, 2017 all shares of Preferred Stock issued in conjunction with the offering were converted by their holders into 2,359,894 shares of common stock.
Between January 1, 2017 and March 6, 2017, common stock warrants for 559,256 shares of common stock were exercised by warrant holders with proceeds to the Company of $3.1 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURESPROCEDURES Evaluation of Disclosure Controls and Procedures We have evaluatedThe Company’s management, including the Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of ourthe Company’s disclosure controls and procedures (as defined in RulesRule 13a-15(e) and 15d-15(e) ofunder the Securities Exchange Act of 1934, as amended (the Exchange Act)“Exchange Act”), as of the end of the period covered by this report (the Evaluation Date). Our management, includingDecember 31, 2020.
Based on their evaluation, the Chief Executive Officer and the Chief Financial Officer supervised and participated in the evaluation. Based on the evaluation, wehave concluded that, as of December 31, 2020 that the Evaluation Date, ourCompany’s disclosure controls and procedures wereare designed at a reasonable assurance level and are effective in providing reasonable assurance that the information required to be disclosed by usthe Company in the reports we fileit files or submitsubmits under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and rules, and the materialthat such information relating to the Company is accumulated and communicated to the Company’s management, including ourthe Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management’s Report on Internal Control Over Financial Reporting Control systems, no matter how well designedThe Company’s management, including the Chief Executive Officer and operated, can provide only reasonable, not absolute, assurance thatChief Financial Officer, is responsible for establishing and maintaining adequate internal control objectives are met. Becauseover financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of inherent limitations in all control systems, nothe Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of controls can provide assurance that allthe effectiveness of its internal control issues and instancesover financial reporting based on the framework in Internal Control–Integrated Framework (2013) issued by the Committee of fraud, if any, within a company will be detected. Additionally, controls can be circumvented by individuals, by collusion of two or more people or by management override. Over time, controls can become inadequate because of changes in conditions or the degree of compliance may deteriorate. Further, the design of any system of controls is based in part upon assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions. Becausesponsoring Organizations of the inherent limitations in any cost-effectiveTreadway Commission (COSO). Based on that evaluation, the Company’s management concluded that its internal control system, misstatements due to errors or fraud may occur and not be detected.over financial reporting was effective as of December 31, 2020.
Changes in Internal Control Over Financial Reporting There was no changeNo changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during theour most recent fiscal quarter ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishingWe believe that a control system, no matter how well designed and maintaining adequate internal control over financial reporting foroperated, cannot provide absolute assurance that the Company as defined in Rules 13a-15(c) and 15d-15(c)objectives of the Exchange Act. Internal control over financial reporting is a process designed tosystem are met, and no evaluation of controls can provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonableabsolute assurance that transactions are recorded as necessary to permit preparationall control issues and instances of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that couldfraud, if any, within any company have a material effect on the financial statements.been detected.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has evaluated the design and operating effectiveness of our internal control over financial reporting as of December 31, 2016 utilizing the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Based upon the evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2016.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to permanent exemption rules of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permit the Company to provide only management’s report in this annual report.
ITEM 9B. OTHER INFORMATION None.
PART III.PART III. Certain information required by Part III is omitted from this report, and is incorporated by reference to our Definitive Proxy Statement to be filed with the SEC pursuant to Regulation 14A (the Proxy Statement) in connection with our 2017 Annual Meeting of Stockholders.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERSOFFICERS AND CORPORATE GOVERNANCE Director Compensation Compensation for ReShape’s directors is designed to result in compensation that is competitive with that provided by comparably-sized, publicly-traded, medical device companies. For 2020 (i) each non-employee director received an annual retainer of $35,000 for serving on the Board, (ii) each non-employee director who served on the Audit Committee, the Compensation Committee or the Nominating and Governance Committee, other than the chair of each of the committees, received an additional annual retainer of $8,000, $5,000 and $3,000, respectively, (iii) each of the chairs of the Audit Committee, the Compensation Committee and the Nominating and Governance Committee received an additional annual retainer of $17,500, $10,000 and $6,000, respectively, and (iv) ReShape’s Lead Director received a $15,000 annual retainer in that role. ReShape reimburses all of its non-employee directors for reasonable travel and other expenses incurred in attending Board and committee meetings. Directors who also serve as employees of ReShape receive no additional compensation for serving as a director. Mr. Bandy is the only director who is also an employee of ReShape. In February 2019, ReShape’s Board approved and adopted a Change in Control Plan (the “CIC Plan”), which provides for certain benefits and payments to members of the Board and certain members of its senior management team in the event of a change in control of ReShape, as defined in the CIC Plan. The CIC Plan was adopted to ensure that ReShape will have the continued dedication of members of the Board and certain members of ReShape’s senior management team, to diminish the distraction of such individuals that may occur as a result of a change in control, and to provide such individuals with compensation upon a change in control that is competitive with that of other similarly situated companies. In the event of a change in control, a participant is entitled to receive a grant of shares of ReShape’s common stock immediately prior to the effective time of the change in control such that the total number of shares of common stock owned by the participant would equal the participant’s target percentage if such participant’s then current ownership percentage was less than their target percentage, which is calculated assuming the conversion of any outstanding shares of preferred stock and the exercise of any outstanding warrants, stock options and other equity-based awards. The information required by this Item concerning ourtarget percentage for each of ReShape’s non-employee directors is set forth below: | | | | | |
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| Target % | Dan Gladney | | | | 2.00% | Gary Blackford | | | | 1.00% | Lori McDougal | | | | 1.00% | Arda Minocherhomjee | | | | 1.00% |
The ReShape Board has approved the termination of the CIC Plan subject to and executive officerseffectively immediately prior to completion of the Merger. Therefore, the members of the ReShape Board will not be entitled to any compensation under the CIC Plan if the Merger is hereby incorporated by reference tocompleted. The following table shows the sectionscompensation of the non-employee members of ReShape’s Board during fiscal year 2020:
Director Compensation in 2020 | | | | | | | | Fees Earned or | | | | | | Paid in Cash | | | | Name(1) | | ($)(2) | | | Total ($) | Dan Gladney | | 60,500 | | | 60,500 | Gary Blackford | | 59,000 | | | 59,000 | Lori McDougal | | 57,500 | | | 57,500 | Arda Minocherhomjee | | 51,000 | | | 51,000 |
(1) | Bart Bandy, who currently serves as President and Chief Executive Officer of ReShape, is not included in this table because he was an employee of ReShape during 2020 and thus received no compensation for his services as a director. The compensation that Mr. Bandy received as an employee of ReShape is shown in the “Summary Compensation Table.” |
(2) | The amounts in this column include the annual Board of Director and committee retainer amounts for 2020 described above under the heading “Director Compensation.” |
The directors held options as of December 31, 2020, as follows: | | | | | Name | | Vested Options | | Unvested Options | Dan Gladney | | 17 | | 4 | Gary Blackford | | — | | — | Lori McDougal | | — | | — | Arda Minocherhomjee | | — | | — |
Audit Committee We have a separately-designated standing Audit Committee of our Proxy StatementBoard of Directors established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Audit Committee consists of Lori McDougal (Chair), Gary Blackford and Arda Minocherhomjee. All of the Audit Committee members meet the existing independence and experience requirements of the OTCQB Market and the SEC. Our Board of Directors has determined that Lori McDougal, our current Audit Committee Chair, is a financial expert under the headings “Nominees,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance”rules of the SEC. Code of Business Conduct and “Board Meetings and Committees—Audit Committee.”Ethics We have adopted a code of business conduct and ethics, which applies to all directors and employees, including executive officers, including, without limitation, our principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. A copy of this code of business conduct and ethics is available on our website at www.enteromedics.comwww.reshapelifesciences.com (under “Investors,” “Corporate Governance”) and we intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any waivers from or amendments to any provision of the code of business conduct and ethics by disclosing such information on the same website. In addition, we intend to promptly disclose (1) the nature of any amendment to our code of business conduct and ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and (2) the nature of any waiver, including an implicit waiver, from a provision of our code of business conduct and ethics that is granted to one of these specified officers, the name of such person who is granted the waiver and the date of the waiver on our website in the future.
ITEM 11. EXECUTIVE COMPENSATIOEXECUTIVE COMPENSATIONN Executive Compensation Summary Compensation Table The following table sets forth information requiredregarding compensation earned by this Item is hereby incorporated by referenceReShape’s named executive officers during its fiscal years ended December 31, 2020 and 2019. Summary Compensation Table | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non- | | | | | | | | | | | | | | | | | | | | equity | | | | | | | | | | | | | | | | | | | | Incentive | | | | | | | | | | | | | | | | | Option | | Plan | | All Other | | | | Name and | | | | | | | Bonus | | Awards | | Compensation | | Compensation | | | | Principal Position | | Year | | Salary ($) | | ($) | | ($) | | ($) | | ($) | | Total ($) | Bart Bandy(1) | | 2020 | | | 377,000 | | | — | | | — | | | — | | | — | | | 377,000 | President and Chief Executive Officer | | 2019 | | | 292,500 | | | — | | | — | | | — | | | — | | | 292,500 | Tom Stankovich(2) | | 2020 | | | 290,000 | | | — | | | — | | | — | | | — | | | 290,000 | Chief Financial Officer | | 2019 | | | 53,461 | | | — | | | — | | | — | | | — | | | 53,461 |
(1)Mr. Bandy was hired as President and Chief Executive Officer effective as of April 1, 2019. (2)Mr. Stankovich was hired as Chief Financial Officer effective as of October 30, 2019. Employment Agreement with Bart Bandy On August 26, 2019, ReShape entered into an executive employment agreement with Mr. Bandy, its President and Chief Executive Officer. The agreement has an initial term of one year and automatically renews for successive one year terms unless either party delivers written notice 90 days prior to the sectionsexpiration of the current term or unless it is earlier terminated as described below. Pursuant to the agreement, Mr. Bandy is entitled to a base salary of $390,000, or a higher annual rate if approved by the Board of Directors, and to cash and equity awards pursuant to ReShape’s incentive compensation plan, contingent on Mr. Bandy meeting certain annual objectives determined by the Compensation Committee. The agreement establishes that Mr. Bandy is eligible for an annual incentive compensation of up to 50% of his base salary for that year. Mr. Bandy’s executive employment agreement also provides for the receipt of certain benefits upon the occurrence of particular termination events or a change in control. In addition, Mr. Bandy’s agreement includes a non-disclosure and assignment provision and non-competition, non-solicitation and no recruitment commitments each lasting for a period of one year following termination. Offer Letter with Tom Stankovich Pursuant to Mr. Stankovich’s offer letter, he will be paid an annual salary of $300,000 with a target bonus of up to 30% of his base salary. In addition, Mr. Stankovich would be entitled to severance equal to six months of his base salary if he is terminated by ReShape without cause. Management Incentive Plan ReShape’s Management Incentive Plan is designed to provide executive officers with annual incentive compensation based on the achievement of certain pre-established performance objectives. By utilizing a combination of objective and subjective performance factors critical to ReShape’s success, this program incentivizes ReShape’s executive officers to achieve results that benefit them and ReShape.
At the beginning of each year, the Compensation Committee approves, subject to review by the Board of Directors, new corporate objectives for the Management Incentive Plan. The objectives are established and measured on an annual basis to better align personal objectives with the direction and objectives of ReShape. When these objectives are established and approved, each objective, and, if applicable, the subparts to each objective, is weighted and assigned a percentage value relative to the corporate objectives taken as a whole. At that time, the Compensation Committee also establishes the maximum bonus amount for each of ReShape’s executive officers, based on a set percentage of each executive officer’s base salary, that the corporate objectives are worth. The Compensation Committee may modify or re-weight the objectives during the course of the fiscal year, if necessary, to reflect changes in ReShape’s business plan. Change in Control Plan The target percentages for Mr. Bandy and Mr. Stankovich under our Proxy Statement entitledCIC Plan, which is described in more detail above under the heading “Director Compensation,” “Executiveare 4.0% and 1.25%, respectively. As discussed above, the ReShape Board has approved the termination of the CIC Plan subject to and effectively immediately prior to completion of the Merger. Therefore, Mr. Bandy and Mr. Stankovich will not be entitled to any compensation under the CIC Plan if the Merger is completed. Long-Term Incentives ReShape’s Second Amended and Restated 2003 Stock Incentive Plan, as amended, allows ReShape the opportunity to grant stock options, restricted stock and other equity-based awards. In general, ReShape reviews equity awards as incentives for future performance and not as compensation for past accomplishments. ReShape also believes that equity awards reward continued employment by an executive officer, with an associated benefit to ReShape of employee continuity and retention. The exercise price of stock options awarded by the Compensation” “Compensation Committee Interlockshas been and Insider Participation”will continue to be the closing sales price of ReShape’s common stock on the date of grant. The Compensation Committee and “Compensationthe Board of Directors do not grant equity awards according to a prescribed formula or target, although they review equity data from comparable companies to inform their decisions. In determining the number of equity awards granted to executive officers, individual responsibilities and experience, as well as contributions and achievements are considered, and, in appropriate circumstances, the Compensation Committee Report.”considers the recommendations of the Chief Executive Officer. The objectives utilized to assess individual contributions and achievements vary depending on the individual executive, but relate generally to strategic factors such as clinical and regulatory progress, commercialization, research and development, continued establishment of intellectual property and implementation of appropriate financing strategies. While the Chief Executive Officer may provide recommendations to the Compensation Committee regarding the number of equity awards granted to other executive officers from time to time, he does not make a recommendation as to his equity awards. Outstanding Equity Awards at Fiscal Year-End ReShape’s named executive officers did not hold any outstanding equity award at December 31, 2020. Option Exercises and Stock Vested There were no option exercises or restricted stock awards that vested during ReShape’s fiscal year ended December 31, 2020. Pension Benefits None of ReShape’s named executive officers participate in or have account balances in qualified or non-qualified defined benefit plans sponsored by ReShape. Non-Qualified Deferred Compensation ReShape currently does not have any non-qualified defined contribution plans or other deferred compensation plans.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS (a) Equity Compensation Plans The following table sets forth information as of December 31, 20162020 with respect to our equity compensation plans: | | | | | | | | | | | | | | | | | Number of Securities | | | | | Number of | | Weighted- | | Remaining Available | | | | | Securities to be | | Average | | for Future Issuance | | | | | Issued Upon | | Exercise Price | | Under Equity | | | | | Exercise of | | of Outstanding | | Compensation Plans | | | | | Outstanding | | Options, | | (Excluding Securities | | | | | Options, Warrants | | Warrants and | | Reflected in Second | | | | | | | | | | | | | | | | | | | | | Number of Securities | | | | | Number of | | Weighted- | | Remaining Available | | | | | Securities to be | | Average | | for Future Issuance | | | | | Issued Upon | | Exercise Price | | Under Equity | | | | | Exercise of | | of Outstanding | | Compensation Plans | | | | | Outstanding | | Options, | | (Excluding Securities | | | | | Options, Warrants | | Warrants and | | Reflected in Second | | Plan Category | | and Rights | | Rights | | Column) | | | and Rights | | Rights | | Column) | | Equity compensation plans approved by security holders | | 7,034 | (1) | $ | 1,824.87 | | 2,988,243 | (2) | | 25 | (1) | $ | 3,264,298.08 | | — | (2) | Equity compensation plans not approved by security holders | | 12,806 | (3) | | 191.12 | | — | | | 15 | (3) | | 316,897.88 | | — | | Total | | 19,840 | | $ | 770.35 | | 2,988,243 | | | 40 | | $ | 2,130,682.62 | | — | |
(1) | Consists of options awarded under the Second Amended and Restated 2003 Stock Incentive Plan, which was amended (the “Plan), as amended. |
(2) | (1)Consists of options awarded under the Amended and Restated 2003 Stock Incentive Plan, which was amended and restated as the Second Amended and Restated 2003 Stock Incentive Plan (the “Plan) on December 12, 2016.
(2)Represents the maximum number of shares of common stock available to be awarded under the Plan as of December 31, 2020. Pursuant to an automatic share increase provision in the Plan that provides for an annual increase on the first day of each year beginning in 2020 such that the number of shares of common stock available under the Plan equals 15% of the total shares of common stock outstanding as of the last day of the immediately preceding fiscal year, an additional 997,679 shares of common stock became available for issuance under the Plan on January 1, 2021.
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(3) | Consists of the inducement grants awarded to executives and other employees, see Note 13 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. |
(b) Security Ownership The following table shows the beneficial ownership of ReShape Shares by each person or group who beneficially owned 5% or more of the outstanding ReShape Shares, each of ReShape’s directors, each of ReShape’s executive officers named in the Summary Compensation Table in this joint proxy statement/prospectus and ReShape’s directors and executive officers as a group, as of March 1, 2021. Percentage ownership calculations for beneficial ownership are based on 6,166,554 shares outstanding as of March 1, 2021. However, for purposes of computing the percentage of outstanding shares of common stock availableheld by each person or group of persons named above, any shares which that person or persons has or have the right to acquire within 60 days following March 1, 2021 is deemed to be awarded underoutstanding for that person’s calculation, but is not deemed to be outstanding for the Plan aspurpose of December 31, 2016 adjustedcomputing the percentage ownership of any other person. For example, the percent of outstanding common stock reported for Armistice Capital, LLC assumes that it exercised all of its warrants reported below (all of which are currently exercisable), but that Bigger Capital Fund, LP did not exercise of any of its warrants (all of which are currently exercisable), and the percent of outstanding common stock reported for Bigger Capital assumes that it exercised all of its warrants reported below, but that Armistice Capital did not exercise any of its warrants. Therefore, the total percent of outstanding common stock reported for Armistice Capital and Bigger Capital exceeds 100%. The information regarding the beneficial owners of more than 5% of the outstanding ReShape Shares is based upon information supplied to reflect the Company’s board of directors’ February 8, 2017 action to adjust the number of shares reserved under the Plan from 40,000,000 to 3,000,000 in connectionus by ReShape’s directors, officers and principal stockholders or on Schedules 13D or 13G filed with the Company’s recapitalization.SEC. Unless otherwise noted, the directors and executive officers listed in the table have sole voting and investment power with respect to the shares of common stock owned by them and their address is c/o ReShape Lifesciences Inc., 1001 Calle Amanecer, San Clemente, California 92673. (3)Consists of the inducement grants awarded in 2015 and 2016 to four executives in connection with their hiring.
| | | Name and Address of Beneficial Owner | Number of Shares of Common Stock | Percent of Outstanding Common Stock | 5% Stockholders | | | Armistice Capital, LLC(1) 510 Madison Avenue, 7th Floor New York, New York 10022 | 17,980,277 | 95.6% | Bigger Capital Fund, LP(2) 175 W. Carver Street Huntington, NY 11743 | 2,833,340 | 33.8% | Directors and Executive Officers | | * | Bart Bandy | 0 | * | Tom Stankovich | 4,635 | * | Dan Gladney(3) | 22 | * | Gary Blackford | 0 | * | Arda Minocherhomjee | 0 | * | Lori McDougal | 0 | * | All directors and executive officers as a group (6 persons)(3) | 4,657 | * |
* | The percentage of shares of common stock beneficially owned does not exceed one percent of the outstanding shares of common stock. |
(1) | Consists of (i) 5,330,277 shares of common stock, which represents 86.4% of ReShape’s common stock outstanding as of March 1, 2021, (ii) 2,652,000 shares of common stock issuable upon exercise of series A warrants at an initial exercise price of $2.64 per share, (iii) 2,652,000 shares of common stock issuable upon exercise of series E warrants at an initial exercise price of $6.00 per share, (iv) 1,200,000 shares of common stock issuable upon exercise of series G warrants at an initial exercise price of $3.70 per share, (v) 1,200,000 shares of common stock issuable upon exercise of series G warrants at an initial exercise price of $3.25 per share, and (vi) 5,000,000 shares of common stock issuable upon exercise of series G warrants at an initial exercise price of $3.50 per share. The shares of common stock and warrants are held directly by Armistice Capital Master Fund Ltd. (the “Master Fund”), whose principal business address is c/o dms Corporate Services Ltd., 20 Genesis Close, P.O. Box 314, Grand Cayman KY1-1104, Cayman Islands. Armistice is an investment adviser registered with the SEC that is principally engaged in the business of providing investment management services to private investment vehicles, including the Master Fund. Steven Boyd is the managing member of Armistice Capital and a director of the Master Fund. Mr. Boyd’s principal business address is 510 Madison Avenue, 7th Floor, New York, New York 10022. Armistice Capital and Mr. Boyd may be deemed to be the beneficial owners of the shares reported as beneficially owned by the Master Fund. Each of the Master Fund, Armistice Capital and Mr. Boyd has the sole power to dispose or direct the disposition of 0 shares and the shared power to dispose or direct the disposition of all of the shares. |
(2) | Consists of (i) 310,590 shares of common stock owned by District 2 Capital Fund LP (“District 2 CF”) and 304,413 shares of common stock owned by Bigger Capital Fund, LP (“Bigger Capital”), which collectively represents 9.9% of ReShape’s common stock outstanding as of March 1, 2021 (ii) 416,667 shares of common stock issuable upon exercise of series A warrants held by District 2 CF and 291,667 shares of common stock issuable upon exercise of series A warrants held by Bigger Capital at an initial exercise price of $2.64 per share (iii) 522,746 shares of common stock issuable upon exercise of prefunded warrants held by District 2 CF and 278,923 shares of common stock issuable upon exercise of prefunded warrants held by Bigger Capital at an exercise price of $0.12 per share, and (iv) 416,667 shares of common stock issuable upon exercise of series E warrants held by District 2 CF and 291,667 shares of common stock issuable upon exercise of series E warrants held by Bigger Capital at an exercise price of $6.00 per share. Bigger Capital Fund GP, LLC (“Bigger GP”) is a general partner of Bigger Capital and District 2 Capital LP (“District 2”) is the investment manager of District 2 CF. Michael Bigger is the managing member of Bigger GP and District and District 2 Holdings LLC (“District 2 Holdings”), which is the managing member of District 2 GP LLC (“District 2 GP”), the general partner of District 2 CF. Therefore, Mr. Bigger, District 2, District 2 Holdings and District 2 CF may be deemed to be the beneficial owner, and have the shared power to dispose of or direct the disposition, of the shares reported as beneficially owned by District 2 CF and Mr. Bigger and Bigger GP may be deemed to be the beneficial owner, and have the shared power to dispose of or direct the disposition, of the shares reported as beneficially owned by Bigger Capital. |
(3) | Includes 18 shares subject to options exercisable by Mr. Gladney currently or within 60 days of March 1, 2021. |
(b) Security Ownership
The information required by this Item is hereby incorporated by reference to the section of our Proxy Statement entitled “Security Ownership of Certain Beneficial Owners and Management.”
ITEM 13. CERTAIN RELATIONSHIPSCERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Review of Related Person Transactions In accordance with its written charter, our Audit Committee is responsible for reviewing all related party transactions as they are presented, and the approval of the Audit Committee is required for all such transactions. The term “related party transactions” refers to transactions required to be disclosed in our filings with the SEC pursuant to Item 404 of Regulation S-K. As a smaller reporting company, we are also required to review and approve any transaction, arrangement or relationship in which our company is a participant, the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, and a
related person has a direct or indirect material interest. In considering related party transactions, our Audit Committee is guided by its fiduciary duty to our stockholders. Our Audit Committee does not have any written or oral policies or procedures regarding the review, approval and ratification of transactions with related parties. Additionally, each of our directors and executive officers are required to annually complete a directors’ and officers’ questionnaire that elicits information about related party transactions. Our Nominating and Governance Committee and Board of Directors annually review all transactions and relationships disclosed in the director and officer questionnaires, and the Board makes a formal determination regarding each director’s independence. Director Independence Our Board of Directors reviews at least annually the independence of each director. During these reviews, our Board of Directors considers transactions and relationships between each director (and his or her immediate family and affiliates), ReShape Lifesciences and our management to determine whether any such transactions or relationships are inconsistent with a determination that the director was independent. This review is based primarily on responses of the directors to questions in a directors’ and officers’ questionnaire regarding employment, business, familial, compensation and other relationships with ReShape Lifesciences and our management. Our Board of Directors has determined that no transactions or relationships existed that would disqualify any of our directors under the OTCQB Market rules or require disclosure under SEC rules, with the exception of Bart Bandy, our President and Chief Executive Officer, and Dan Gladney, our former President and Chief Executive Officer, because of their current or former employment relationship with ReShape Lifesciences. Based upon that finding, the Board of Directors determined that Ms. McDougal and Messrs. Blackford and Mr. Minocherhomjee are “independent” and the composition of our Board of Directors meets the requirements for independence under the OTCQB Market. Each of our Audit and Compensation Committees is composed only of independent directors. Our Nominating and Governance Committee includes two independent directors who are responsible for our director nomination process.] ITEM 14. PRINCIPAL ACCOUNTing FEES AND SERVICES During 2020 and October 2019 through December 2019, BDO was retained as the Company’s independent auditor. January through September 2019, Deloitte & Touche was the Company’s independent auditor. The table below represents aggregate fees billed to provide audit services in the following categories by BDO (in thousands): | | | | | | | | | Year Ended December 31, | | | 2020 | | 2019 | Audit fees (1) | | $ | 246 | | $ | 61 | Audit-related fees (2) | | | — | | | — | Tax fees (3) | | | — | | | — | All other fees (4) | | | — | | | — | Total | | $ | 246 | | $ | 61 |
The information requiredtable below represents aggregate fees billed to provide audit services in the following categories by this Item is hereby incorporated by reference to the sectionDeloitte & Touche (in thousands): | | | | | | | | | Year Ended December 31, | | | 2020 | | 2019 | Audit fees (1) | | $ | — | | $ | 530 | Audit-related fees (2) | | | 20 | | | 111 | Tax fees (3) | | | — | | | — | All other fees (4) | | | — | | | — | Total | | $ | 20 | | $ | 641 |
| (1) | Include aggregate fees for the audit of our consolidated financial statements and the three quarterly reviews of the Company’s reports on Form 10-Q and other SEC filings. |
| (2) | Fees for miscellaneous audit and consulting services. |
| (3) | Primarily for professional services rendered in connection with consultation on financial accounting and reporting standards. |
| (4) | For other permitted professional services. |
ITEM 14. PART IV.PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is hereby incorporated by reference to the section of our Proxy Statement entitled “Principal Accountant Fees and Services” and “Administration of Engagement of Independent Auditor.”
PART IV.
ITEM 15. EXHIBITS FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (a) Financial Statements and Schedules: Consolidated Financial Statements for the three years ended December 31, 2016 are included in Part II, Item 8 of this Annual Report on Form 10-K. All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
(b) Exhibits: The list of exhibits on the Exhibit Index on page 89 of this report is incorporated herein by reference.
| (a) | The following documents are filed as part of this report: |
| 1. | Consolidated Financial Statements. See “Index to Consolidated Financial Statements” in Part II, Item 8 herein. |
| 2. | Financial Statement Schedules. Other schedules are not applicable and have not been included herein. |
ITEM 16. FORM 10-K SUMMARY Not applicable
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| Description of Document |
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2.1 | | Asset Purchase Agreement, dated December 17, 2018, by and between the Company and Apollo Endosurgery, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 19, 2018). | 2.2 | | Agreement and Plan of Merger, dated as of January 19, 2021, by and among Obalon Therapeutics, Inc. Optimus Merger Sub, Inc., and the Company (incorporated by reference to Exhibit 2.1 to the Company’s Current report on Form 8-K filed with the Securities and Exchange Commission on January 20, 2021). | 3.1 | | Sixth Amended and Restated Certificate of Incorporation of the Company. (Incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 28, 2016 (File No. 1-33818)). | 3.2 | | Amended and Restated Bylaws of the Company, as currently in effect. (Incorporated herein by reference to Exhibit 3.4 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 filed on July 6, 2007 (File No. 333-143265)). | 3.3 | | Certificate of Designation of Series B Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 16, 2017). | 3.4 | | Certificate of Designation of Series C Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 3, 2017). | 3.5 | | Certificate of Amendment to Sixth Amended and Restated Certificate of Incorporation of the Company, dated October 20, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 23, 2017). | 3.6 | | Certificate of Amendment to Sixth Amended and Restated Certificate of Incorporation of the Company, dated October 26, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 30, 2017). | 3.7 | | Certificate of Amendment to Sixth Amended and Restated Certificate of Incorporation, dated June 1, 2018 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 1, 2018). | 3.8* | | Certificate of Amendment to Sixth Amended and Restated Certificate of Incorporation, dated November 7, 2018 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 7, 2018). | 3.9 | | Certificate of Amendment to Sixth Amended and Restated Certificate of Incorporation of the Company, dated November 8, 2019 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2019). | 4.1* | | Description of Registrant’s Securities | 4.2 | | Form of Series A Common Stock Purchase Warrant issued November 28, 2018 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 28, 2018). | 4.3 | | Form of Pre-Funded Common Stock Purchase Warrant issued November 28, 2018 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 28, 2018). | 4.4 | | Form of Placement Agent’s Common Stock Purchase Warrant issued November 28, 2018 (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 28, 2018). |
| | |
|---|
Exhibit
Number |
| Description of Document |
|---|
4.5 | | Form of Common Stock Purchase Warrant issued September 20, 2018 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 20, 2018). | 4.6 | | Form of Placement Agent’s Common Stock Purchase Warrant issued September 20, 2018 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 20, 2018). | 4.7 | | Form of Common Stock Purchase Warrant issued August 3, 2018 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 2, 2018). | 4.8 | | Form of Placement Agent’s Common Stock Purchase Warrant issued August 3, 2018 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 2, 2018). | 4.9 | | Form of Common Stock Purchase Warrant issued July 12, 2018 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 12, 2018). | 4.10 | | Form of Placement Agent’s Common Stock Purchase Warrant issued July 12, 2018 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 12, 2018). | 4.11 | | Form of Common Stock Purchase Warrant issued June 21, 2018 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2018). | 4.12 | | Form of Placement Agent’s Common Stock Purchase Warrant issued June 21, 2018 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2018). | 4.13 | | Form of Common Stock Purchase Warrant issued June 8, 2018 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 8, 2018). | 4.14 | | Form of Placement Agent’s Common Stock Purchase Warrant issued June 8, 2018 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 8, 2018). | 4.15 | | Form of Common Stock Purchase Warrant issued April 3, 2018 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 3, 2018). | 4.16 | | Form of Warrant, dated August 16, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 16, 2017). | 4.17 | | Form of Series C Warrant, dated as of July 8, 2015, by and between the Company and several accredited investors. (Incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on July 7, 2015 (File No. 1-33818)). | 4.18 | | Form of Warrant. (Incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on November 5, 2015 (File No. 1-33818)). | 4.19 | | Form of Warrant to purchase shares of Common Stock. (Incorporated herein by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-1 filed on January 11, 2017 (File No. 333-213704)). | 10.1† | | Second Amended and Restated 2003 Stock Incentive Plan, as amended on May 23, 2018 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 25, 2018). |
| | |
|---|
Exhibit
Number |
| Description of Document |
|---|
10.2† | | Form of Stock Option Grant Notice and Stock Option Agreement under Second Amended and Restated 2003 Stock Incentive Plan (Incorporated herein by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2017). | 10.3 | | Form of Indemnification Agreement entered into by and between the Company and each of its executive officers and directors. (Incorporated herein by reference to Exhibit 10.17 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 filed on July 6, 2007 (File No. 333-143265)). | 10.4†* | | Executive Employment Agreement, dated August 26, 2019, by and between the Company and Barton P. Bandy. | 10.5†* | | Executive Employment Agreement, dated October 29, 2019, by and between the Company and Thomas Stankovich. | 10.6† | | Executive Employment Agreement, dated as of May 22, 2017, by and between the Company and Dr. Raj Nihalani (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2017). | 10.7 | | Non-Competition and Non-Solicitation Agreement, dated as of May 22, 2017, by and between theCompany and Dr. Raj Nihalani (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2017). | 10.8† | | 2017 Employment Inducement Incentive Award Plan (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2017). | 10.9† | | Form of Stock Option Grant Notice and Stock Option Agreement under 2017 Employment Inducement Incentive Award Plan (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed on November 14, 2017 (File No. 1-33818)). | 10.10† | | Management Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 12, 2008 (File No. 1-33818)). | 10.11† | | Amendments to the Management Incentive Plan described in Item 5.02(e). (Incorporated herein by reference to Item 5.02(e) of the Company’s Current Report on Form 8-K filed on May 10, 2016 (File No. 1-33818)). | 10.12† | | Amendments to the Management Incentive Plan described in Item 5.02(e). (Incorporated herein by reference to Item 5.02(e) of the Company’s Current Report on Form 8-K filed on September 20, 2016 (File No. 1-33818)). | 10.13 | | Lease agreement, entered into January 20, 2017, by and between ReShape Medical, Inc. and San Clemente Holdings, LLC (incorporated by reference to Exhibit 10.38 to the Company’s Annual Report on Form 10-K filed on April 2, 2018). | 10.14 | | Clinical Trial Agreement by and between the Company and Southern California Permanente Medical Group effective as of June 1, 2017 (Incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 15, 2017 (File No. 1-33818)). | 10.15 | | Form of Securities Purchase Agreement, dated June 13, 2019, by and between the Company and the purchasers party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2019). | 10.16 | | Form of Series A Warrant issued June 18, 2019 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2019). | 10.17 | | Form of Series B Warrant issued June 18, 2019 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2019). | 10.18 | | Form of Series C Pre-Funded Warrant issued June 18, 2019 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2019). |
| | |
|---|
Exhibit
Number |
| Description of Document |
|---|
10.19 | | Form of Registration Rights Agreement, dated June 18, 2019 (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 19, 2019). | 10.20 | | Form of Warrant Exercise Agreement dated September 23, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 30, 2019). | 10.21 | | Form of Series E Warrant (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K files with the Securities and Exchange Commission on September 30, 2019). | 10.22 | | Form of Series F Warrant (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 30, 2019). | 10.23 | | Form of Amended and Restated Registration Rights agreement (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 30, 2019. | 10.24† | | ReShape Lifesciences Inc. Change in Control Plan, dated as of February 28, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 5, 2020). | 10.25 | | Credit Agreement, dated March 25, 2020, by and between the Company and Armistice Capital Master Fund Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 31, 2020). | 10.26 | | First Amendment to Credit Agreement, dated March 31, 2020 by and between the Company and Armistice Capital Master Fund Ltd. (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 31, 2020). | 10.27 | | Second Amendment to Credit Agreement, dated September 14, 2020, by and between the Company and Armistice Capital Master Fund Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 31, 2020). | 10.28 | | Third Amendment to Cred Agreement, dated December 16, 2020, by and between the Company and Armistice Capital Master Fund Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 15, 2020). | 10.29 | | Fourth Amendment to Credit Agreement, dated January 19, 2021, by and between the Company and Armistice Capital Master Fund Ltd. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K file with the Securities and Exchange Commission on January 20, 2021). | 10.30 | | Guarantee and Collateral Agreement, dated March 25, 2020, by and between the Company, ReShape Medical LLC and Armistice Capital Master Fund Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 31, 2020 | 10.31 | | Registration Rights Agreement, dated March 25, 2020, by and between the Company and Armistice Capital Master Fund Ltd. (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 31, 2020). | 10.32 | | Form of Series G Common Stock Purchase Warrant issued by the Company to Armistice Capital Master Fund Ltd. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission on March 31, 2020). | 10.33 | | Form of Voting and Support Agreement by and among the Company and certain stockholders of Obalon Therapeutics, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 20, 2021). | 10.34 | | Credit Facility Agreement, dated as of January 19, 2021, by and between the Company and Armistice Capital Master Fund Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 20, 2021). |
* Filed herewith. † Indicates management contract or compensation plan or agreement.
SIGNATURES SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | RESHAPE LIFESCIENCES INC. | | | ENTEROMEDICS INC.
| | | | | By: | /S/ DAN W. GLADNEYBARTON P. BANDY | | | Dan W. GladneyBarton P. Bandy
| | | Chairman, President and Chief Executive Officer
|
Dated: March 8, 201710, 2021 POWERS OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dan W. GladneyBarton P. Bandy and Scott P. Youngstrom,Thomas Stankovich, and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature |
| Title |
| Date |
|---|
| Signature
| | | Title
| | Date
| | | | | | /S/ DAN W. GLADNEYBARTON P. BANDY | | Chairman of the Board, President, and Chief Executive Officer
(principal executive officer) | | March 8, 201710, 2021 | Dan W. GladneyBarton P. Bandy
| | | | | | | | | | | | /S/ SCOTT P. YOUNGSTROMThomas Stankovich | | Senior Vice President and Chief Financial Officer and Chief Compliance Officer (principal financial and accounting officer) | | March 8, 201710, 2021 | Scott P. YoungstromThomas Stankovich
| | | | | | | | | | /S/ DAN W. GLADNEY | | Chairman of the Board | | March 10, 2021 | Dan W. Gladney | | | | | | | | | | /S/ GARY D. BLACKFORD | | Director | | March 8, 201710, 2021 | Gary D. Blackford | | | | | | | | | | | | /S/ CARL GOLDFISCHER, M.D.
| | Director
| | March 8, 2017
| Carl Goldfischer, M.D.
| | | | | | | /S/ BOBBY I. GRIFFIN
| | Director
| | March 8, 2017
| Bobby I. Griffin
| | | | | | | /S/ LORI C. MCDOUGAL | | Director | | March 8, 201710, 2021 | Lori McDougal | | | | | | | | | | | | /S/ NICHOLAS L. TETI, JR.ARDA MINOCHERHOMJEE | | Director | | March 8, 201710, 2021 | Nicholas L. Teti, Jr.Arda Minocherhomjee
| | | | | | | /S/ JON T. TREMMEL
| | Director
| | March 8, 2017
| Jon T. Tremmel
| |
| | | Exhibit
Number
| | Description of Document
| 3.1
| | Sixth Amended and Restated Certificate of Incorporation of the Company. (Incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 28, 2016 (File No. 1-33818)).
| 3.2
| | Form of Certificate of Designation of Series A Preferred Stock. (Incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 filed on January 11, 2017 (File No. 333-213704)).
| 3.3
| | Form of Series A Preferred Stock Certificate. (Incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 filed on January 11, 2017 (File No. 333-213704)).
| 3.4
| | Amended and Restated Bylaws of the Company, as currently in effect. (Incorporated herein by reference to Exhibit 3.4 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 filed on July 6, 2007 (File No. 333-143265)).
| 10.1
| | Form of Warrant to purchase stock under Loan and Security Agreement, dated April 16, 2012, between the Company and Silicon Valley Bank. (Incorporated herein by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on May 10, 2012 (File No. 1-33818)).
| 10.2
| | Securities Purchase Agreement, dated as of February 22, 2013, by and between Craig-Hallum Capital Group LLC and the Company. (Incorporated herein by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on February 22, 2013 (File No. 1-33818)).
| 10.3
| | Form of Common Stock Warrant, dated as of February 22, 2013, by and between the Company and several accredited investors. (Incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 22, 2013 (File No. 1-33818)).
| 10.4
| | Sales Agreement, dated as of June 13, 2014, by and between Cowen and Company, LLC and the Company. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 13, 2014 (File No. 1-33818)).
| 10.5
| | Amendment No. 1 to the Sales Agreement, dated as of August 25, 2015, by and between Cowen and Company, LLC and the Company. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 1, 2015 (File No. 1-33818)).
| 10.6
| | Underwriting Agreement, dated as of July 7, 2015, by and between Canaccord Genuity Inc. and the Company. (Incorporated herein by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed on July 7, 2015 (File No. 1-33818)).
| 10.7
| | Form of Series A Warrant, dated as of July 8, 2015, by and between the Company and several accredited investors. (Incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on July 7, 2015 (File No. 1-33818)).
| 10.8
| | Form of Series C Warrant, dated as of July 8, 2015, by and between the Company and several accredited investors. (Incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on July 7, 2015 (File No. 1-33818)).
| 10.9
| | Form of Securities Purchase Agreement. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 5, 2015 (File No. 1-33818)).
| 10.10
| | Form of Amendment No. 1 to the Securities Purchase Agreement dated November 4, 2015, between the Company and the buyers listed therein. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 6, 2016 (File No. 1-33818)).
| 10.11
| | Form of Amendment No. 2 to the Securities Purchase Agreement dated November 4, 2015, as amended by Amendment No.1 thereto dated May 2, 2016, among the Company and the buyers listed therein. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 15, 2016 (File No. 1-33818)).
|
| | | Exhibit
Number
| | Description of Document
| 10.12
| | Form of Senior Convertible Note. (Incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 5, 2015 (File No. 1-33818)).
| 10.13
| | Form of Warrant. (Incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on November 5, 2015 (File No. 1-33818)).
| 10.14
| | Form of Underwriting Agreement. (Incorporated herein by reference to Exhibit 1.1 to the Company’s Registration Statement on Form S-1 filed on January 11, 2017 (File No. 333-213704)).
| 10.15
| | Form of Warrant to purchase shares of Common Stock. (Incorporated herein by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-1 filed on January 11, 2017 (File No. 333-213704)).
| 10.16
| | Warrant Agency Agreement, by and between the Company and Wells Fargo Bank, National Association, dated January 20, 2017. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 24, 2017 (File No. 1-33818)).
| 10.17†
| | Second Amended and Restated 2003 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 14, 2017 (File No. 1-33818)).
| 10.18†
| | Standard form of Incentive Stock Option Agreement pursuant to the Amended and Restated 2003 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 filed on May 25, 2007 (File No. 333-143265)).
| 10.19†
| | Standard form of Non-Incentive Stock Option Agreement pursuant to the Amended and Restated 2003 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.14 to the Company’s Registration Statement on Form S-1 filed on May 25, 2007 (File No. 333-143265)).
| 10.20†
| | Form of Non-Incentive Stock Option Agreement for the new options granted October 29, 2010 pursuant to the option exchange program. (Incorporated herein by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q filed on November 8, 2010 (File No. 1-33818)).
| 10.21†
| | Form of 2012 Senior Management Non-Incentive Stock Option Agreement pursuant to the Amended and Restated 2003 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 13, 2012 (File No. 1-33818)).
| 10.22†
| | Standard form of Restricted Stock Agreement. (Incorporated herein by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 filed on May 25, 2007 (File No. 333-143265)).
| 10.23†
| | Form of Indemnification Agreement entered into by and between the Company and each of its executive officers and directors. (Incorporated herein by reference to Exhibit 10.17 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 filed on July 6, 2007 (File No. 333-143265)).
| 10.24†
| | Form of Tandem Stock Purchase Right and Bonus Share Agreement. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 13, 2015 (File No. 1-33818)).
| 10.25†
| | Inducement Option Plan. (Incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on January 22, 2016 (File No. 1-33818)).
| 10.26†
| | Form of Non-Incentive Stock Option Agreement pursuant to the Inducement Option Plan. (Incorporated herein by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K filed on March 28, 2016 (File No. 1-33818)).
| 10.27†
| | Form of Non-Incentive Stock Option Agreement for New Options granted June 27, 2016 pursuant to the option exchange offer. (Incorporated herein by reference to Exhibit (d)(6) to the Company’s Tender Offer Statement under Section 14(d)(1) on Schedule TO filed on May 27, 2016).
| 10.28†
| | Consulting Agreement, dated as of August 21, 2015, by and between Jon Tremmel & Associates, LLC and the Company. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 25, 2015 (File No. 1-33818)).
|
| | | Exhibit
Number
| | Description of Document
| 10.29†
| | Executive Employment Agreement, dated May 21, 2007, by and between the Company and Greg S. Lea. (Incorporated herein by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1 filed on May 25, 2007 (File No. 333-143265)).
| 10.30†
| | Amendment No. 1 to Executive Employment Agreement, dated May 21, 2007, by and between the Company and Greg S. Lea. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 19, 2010 (File No. 1-33818)).
| 10.31†
| | Amendment No. 2 to Executive Employment Agreement, dated May 21, 2007, by and between the Company and Greg S. Lea, dated January 27, 2016. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 3, 2016 (File No. 1-33818)).
| 10.32†
| | Executive Employment Agreement, dated August 5, 2008, by and between the Company and Katherine S. Tweden. (Incorporated herein by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on May 7, 2009 (File No. 1-33818)).
| 10.33†
| | Executive Employment Agreement, by and between the Company and Brad Hancock, dated November 17, 2014. (Incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 12, 2015 (File No. 1-33818)).
| 10.34†
| | Separation Agreement, by and between the Company and Brad Hancock, dated February 24, 2016. (Incorporated herein by reference to Exhibit 10.45 to the Company’s Annual Report on Form 10-K filed on March 28, 2016 (File No. 1-33818)).
| 10.35†
| | Executive Employment Agreement, dated October 28, 2015, by and between the Company and Dan W. Gladney. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 2, 2015 (File No. 1-33818)).
| 10.36†
| | Form of Non-Incentive Stock Option Agreement for non-plan executive inducement option grants. (Incorporated herein by reference to Exhibit 10.47 to the Company’s Annual Report on Form 10-K filed on March 28, 2016 (File No. 1-33818)).
| 10.37†
| | Executive Employment Agreement, dated January 19, 2016, by and between the Company and Naqeeb “Nick” Ansari. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 22, 2016 (File No. 1-33818)).
| 10.38†
| | Executive Employment Agreement, dated January 18, 2016, by and between the Company and Peter DeLange. (Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 22, 2016 (File No. 1-33818)).
| 10.39†
| | Executive Employment Agreement, dated January 22, 2016, by and between the Company and Paul Hickey. (Incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on January 22, 2016 (File No. 1-33818)).
| 10.40†
| | Executive Employment Agreement, dated October 3, 2016, by and between the Company and Scott Youngstrom. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 6, 2016 (File No. 1-33818)).
| 10.41†
| | Management Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 12, 2008 (File No. 1-33818)).
| 10.42†
| | Amendments to the Management Incentive Plan described in Item 5.02(e). (Incorporated herein by reference to Item 5.02(e) of the Company’s Current Report on Form 8-K filed on May 10, 2016 (File No. 1-33818)).
| 10.43†
| | Amendments to the Management Incentive Plan described in Item 5.02(e). (Incorporated herein by reference to Item 5.02(e) of the Company’s Current Report on Form 8-K filed on September 20, 2016 (File No. 1-33818)).
| 10.44
| | Lease Agreement, effective October 1, 2008, by and between the Company and Roseville Properties Management Company. (Incorporated herein by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K filed on March 12, 2009 (File No. 1-33818)).
|
| | | Exhibit
Number
| | Description of Document
| 10.45
| | First Amendment to Lease Agreement, entered into August 25, 2015, by and between the Company and Roseville Properties Management Company. (Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 1, 2015 (File No. 1-33818)).
| 10.46
| | Distribution Agreement, dated as of March 28, 2011, by and between Device Technologies Australia Pty Limited and the Company. (Incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on May 6, 2011 (File No. 1-33818)).
| 10.47
| | Amendment No. 1, effective as of July 10, 2012, to Distribution Agreement by and between Device Technologies Australia Pty Limited and the Company. (Incorporated herein by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2012 (File No. 1-33818)).
| 10.48
| | Distribution Agreement, dated as of February 21, 2012, by and between Bader Sultan & Brothers Co. W.L.L. and the Company. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 10, 2012 (File No. 1-33818)).
| 10.49
| | Exclusive Federal Government Business Channel Sales Agreement, effective April 25, 2016, by and between the Company and Academy Medical, LLC, as amended July 26, 2016. (Incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 12, 2016 (File No. 1-33818)).
| 14.1
| | Code of Conduct and Ethics of the Company. (Incorporated herein by reference to Exhibit 14.1 to the Company’s Registration Statement on Form S-1 filed on May 25, 2007 (File No. 333-143265)).
| 23.1*
| | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.
| 24.1*
| | Power of Attorney (included on signature page to this Form 10-K).
| 31.1*
| | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| 31.2*
| | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| 32.1*
| | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| 32.2*
| | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| 101*
| | Financial statements from the Annual Report on Form 10-K of the Company for the year ended December 31, 2016, formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Stockholders’ Equity; (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements.
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* Filed herewith.
† Indicates management contract or compensation plan or agreement.
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