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Registered Trademarks and Trademark Applications: In the United States we have registered trademarks for vBLOC®, ENTEROMEDICS®, MAESTRO®,  RESHAPE®, RESHAPE DUO®, and RESHAPE MEDICAL®,  each registered with the United States Patent and Trademark Office, and trademark applications for RESHAPE vBLOC, POWER TO CHOOSERESHAPE VEST, RESHAPE LIFESCIENCES AND DESIGN, and VBLOC POWER TO CHOOSE ANDRESHAPE BALLOON & COLOR DESIGN. In addition, some or all of the marks vBLOC, ENTEROMEDICS, MAESTRO, MAESTRO SYSTEM ORCHESTRATING OBESITY SOLUTIONS, vBLOC POWER TO CHOOSE, vBLOC POWER TO CHOOSE AND DESIGN, RESHAPE, RESHAPE DUO, RESHAPE MEDICAL and RESHAPE LIFESCIENCESMEDICAL are the subject of either a trademark registration or application for registration in Australia, Brazil, Canada, China, the European Community, India, Kuwait, Mexico, Saudi Arabia, Switzerland and the United Arab Emirates. We believe that we have common law trademark rights to GASTRICRESHAPE VEST. This Quarterly Report on Form 10-Q containsmay contain other trade names and trademarks and service marks of ReShape Lifesciences and of other companies.

PART I – FINANCIAL INFORMATION

ITEM 1.        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

RESHAPE LIFESCIENCES INC.

Condensed Consolidated Balance Sheets

(Unaudited)

RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Operations

(Unaudited)

RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Cash Flows 

(Unaudited)

ReShape Lifesciences Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1)  Summary of Significant Accounting Policies

Description of Business

ReShape Lifesciences Inc. (the Company) is focused on the design, development and commercialization of minimally invasive medical devicestransformative technologies to treat obesity and metabolic diseasesdiseases. Our growing and other gastrointestinal disorders. differentiated product portfolio is utilized by bariatric surgeons, general surgeons, and gastroenterologists. We believe obesity is a global epidemic and that the majority of patients need treatment options that are anatomy friendly and provide for weight loss and comorbidity improvements along with long-term, ongoing obesity support and prevention.

The Company was incorporated in the state of Minnesota on December 19, 2002, originally as two separate legal entities, Alpha Medical, Inc. and wasBeta 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. In January 2006, the Company established EnteroMedics Europe Sárl, a wholly-owned subsidiary located in Switzerland.  Prior to October 23, 2017, the Company was known as EnteroMedics Inc. While the Company is currently headquartered in St. Paul, Minnesota, in conjunction with its acquisition of ReShape Medical, Inc. (ReShape Medical) on October 2, 2017, it announced its intention to move its headquarters to San Clemente, California.  See further information regarding the Company’s acquisition of ReShape Medical in Note 11, Subsequent Events.  

The Company’s board of directors and stockholders approved a 1-for-70 reverse split (the Reverse Stock Split) of the Company’s outstanding common stock that became effective after trading on December 27, 2016. The Reverse Stock Split did not change the par value of the Company’s stock or the number of preferred shares authorized by the Company’s Fifth Amended and Restated Certificate of Incorporation. An amendment to the Certificate of Incorporation was also approved in connection with the Reverse Stock Split to increase the number of shares of the Company’s common stock authorized for issuance to 300 million shares, effective immediately after the Reverse Stock Split. All share and per share amounts have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented.

On October 26, 2017, the Company filed a Certificate of Amendment to its Sixth Amended and Restated Certificate of Incorporation to reduce the number of authorized shares of the Company’s common stock from 300 million to 275 million

Risks and Uncertainties

The Company is focused on the development and commercialization of minimally invasive medical devices to treat obesity, metabolic diseases and other gastrointestinal disorders. vBloc® Neurometabolic Therapy (vBloc Therapy), delivered by a U.S. Food and Drug Administration (FDA)-approved pacemaker-like device called the vBloc®System, is designed to help patients feel full and eat less by intermittently blocking hunger signals on the vagus nerve. 

We have a limited operating history and only recently received FDA approval to sell the vBloc System in the United States. In addition, we have regulatory approval to sell the vBloc System in the European Economic Area and other countries that recognize the European CE Mark and do not have any other significant source of revenue currently. We havehas devoted substantially all of ourits resources to recruiting personnel, developing its product technology, obtaining patents to protect its intellectual property, commercialization activities and raising capital and has commenced commercial operations in the development and commercialization ofUnited States deriving revenues from its primary business activity in 2015 with the vBloc System which was formerly known as the Maestro or vBloc Rechargeable System.

(ReShape vBloc). On May 22, 2017, the Company acquired BarioSurg, Inc. (BarioSurg), a company developing the Gastric Vest System™ (GastricSystem (ReShape Vest) through the acquisition of BarioSurg, Inc. The Gastric Vest is an investigational, minimally invasive, laparoscopically implanted medical device being studied for weight loss in obese and morbidly obese patients. The Gastric Vest wraps around a plicated stomach, emulating the effect of conventional weight-loss surgery, and is intended to enable gastric volume reduction without permanently changing patient anatomy.

Onon October 2, 2017 the Companyit acquired ReShape Medical, Inc. (ReShape Medical), a privately-held medical technology company that develops, manufactures and markets the ReShape® Dual Weight Loss Balloon (the ReShape Balloon), an FDA-approved,a minimally invasive intragastric balloon (ReShape Balloon) designed to treat certain obesity patients withpatients. ReShape Medical LLC became a body mass index (BMI) between 30wholly-owned subsidiary of the Company on October 2, 2017 and 40, with one or more related comorbid conditions.  Becauseits balance sheet and statement operations for the closing of this acquisition was after September 30,period October 2, 2017 the Company’s Consolidated Balance Sheets and Statements of Operationsthrough December 31, 2017 are included with this Quarterly Report on Form 10-Q do not reflectthe Company's 2017 consolidated financial statements.  Subsequent to the acquisition of ReShape Medical.

After the close of market on November 7, 2018, the Company effected a 1-for-140 reverse split of the Company’s outstanding common stock (the “November Reverse Stock Split”). As a result of the November Reverse Stock Split, each 140 shares of issued and outstanding common stock and equivalents was converted into one share of common stock. Any fractional shares of common stock resulting from the November Reverse Stock Split were rounded up to the nearest whole share. As a result of the November Reverse Stock Split, proportional adjustments were made to the number of shares of common stock issuable upon exercise or conversion, and the per share exercise or conversion price, of the Company’s outstanding warrants, stock options and convertible preferred stock, in each case in accordance with their terms. The November Reverse Stock Split did not reduce the number of authorized shares of common stock and preferred stock of the Company. Therefore, the effect of the November Reverse Stock Split was to increase the number of shares of common stock and preferred stock available for issuance relative to the number of shares issued and outstanding. The November Reverse Stock Split did not alter the par value of the common stock or preferred stock or modify any voting rights or other terms of the common stock or any series of preferred stock.

All share and per-share amounts have been retroactively adjusted to reflect both the June Reverse Stock Split and the November Reverse Stock Split for all periods presented herein.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary.subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation.

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.  Certain of the Company’s common stock warrants are required to be reported at fair value and the Company has 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 values of senior amortizing convertible notes (the Notes) outstanding, if any, are valued using a Binomial Lattice model.5 – Fair Value Measurements. 

Common Stock Warrant Liability

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

Property and Equipment, Net

Property and equipment are stated at cost less accumulated depreciation and amortization.depreciation. 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 condensed consolidated balance sheets and the resulting gain or loss is reflected in the condensed consolidated statements of operations. Repairs and maintenance are expensed as incurred.

Impairment of Long-Lived Assets, Intangible Assets and Goodwill

The Company evaluates its long-lived assets, including its finite-lived intangible assets, for impairment by comparison of 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 asset over the asset’sasset's fair value or estimates of future discounted cash flows. The

For goodwill and indefinite-lived intangible assets, in-process research and development, the Company has not identified any suchreviews for impairment losses to date.  The Company testsannually and upon the occurrence of certain events as required by Accounting Standards Codification ("ASC") Topic 350, "Intangibles - Goodwill and Other." Goodwill and indefinite-lived intangible assets are tested at least annually for impairment annuallyand more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company reviews goodwill for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company is able to determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would conclude that goodwill is not impaired.  If the carrying amount of the reporting unit exceeds the estimated fair value of the reporting unit, a non-cash goodwill impairment loss is recognized as required.an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized will not exceed the total amount of goodwill allocated to that reporting unit.

The Company recorded $27.2 million for goodwill impairment losses during the quarter ended June 30, 2018.  See Note 4 for additional information.

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 provided a full valuation allowance against the grossnet deferred tax assets.assets, excluding indefinite-lived deferred tax assets and liabilities, as of September 30, 2018 and December 31, 2017. The Company’s policy is to classify interest and penalties related to income taxes as income tax expense in the condensed consolidated statements of operations.

Medical Device Excise Tax

On January 14, 2015, the Company received FDA approval for vBloc Therapy, delivered via the vBloc System, and starting in the second quarter of 2015 revenues were generated from sales in the United States. As a result, the Company is now required to pay a quarterly Medical Device Tax which is a part of the Affordable Care Act, which

Patent Costs

Costs associated with the submission of a patent application are expensed as incurred given the uncertainty of the patents resulting in probable future economic benefits to the Company.

Stock-Based Compensation

The Company recognized stock-based compensation expense associated with stock options and other stock-based awards in accordance with the authoritative guidance for stock-based compensation. The cost of a stock-based award is measured at the grant date based on the estimated fair value methodof the award, and is applied to all share-based payment awards issued to employees and where appropriate, nonemployees, unless another source of literature applies. All option grants are expensedrecognized as expense on a straight-line basis over the vesting period.requisite service period of the award. The fair value of stock options is estimated using the Black-Scholes option valuation model, which requires the input of subjective assumptions, including price volatility of the underlying stock, risk-free interest rate, dividend yield, and expected life of the option.

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. 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.

605, Revenue Recognition. Based upon the Company’s contracts which were not completed as of December 31, 2017, the Company was not required to make an adjustment to the opening balance of retained earnings as of January 1, 2018. See Note 8 – Revenue Recognition for further discussion.

In February 2016 FASB issued ASU No. 2016-02 Leases (Topic 842) that changes the recognition of lease assets and lease liabilities by lessees for those leases classified as operating lease. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for a public business entity. The Company intends to adopt the standard as required January 1, 2019 using the modified retrospective method and, in so doing, expects to record operating lease right-of-use assets and liabilities on its consolidated balance sheet on the date of adoption.  The Company expects that the impact on its consolidated statement of operations will be immaterial with respect to its current lease obligations.

In January 2017 FASB issued ASU No. 2017-04 Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment. Under the amendments in this update an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments in this Update are required for public business entities in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted the standard during the second quarter of 2018. Please refer to Note 4 – Goodwill and Other Intangible Assets for further discussion.

In March 2018, FASB issued ASU No. 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.  The ASU updates the income tax accounting in U.S. GAAP to reflect the SEC interpretive guidance released on December 22, 2017, when the legislation referred to as the Tax Cuts and Jobs Act (the "2017 Tax Act") was signed into law.  We have adopted this ASU, as further discussed in Note 12 – Income Taxes.

On August 17, 2018, the Securities and Exchange Commission (SEC) issued a final rule 22 that amended certain of its disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded.  The final rule was issued as part of the SEC Division of Corporation Finance’s overall effort to improve the effectiveness of the SEC’s financial reporting requirements and to implement certain elements of the Fixing America’s Surface Transportation Act.  The Company believes that the impact of the new rule will be that the Company will be required to include a consolidated statement of shareholder’s equity with its interim financial statements beginning with the quarter ending March 31, 2019.

There have been no other significant changes in recent accounting pronouncements during the nine months ended September 30, 20172018 as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.

(2)  Liquidity and Management’s Plans

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company currently is not generating revenue from operations that is significantsufficient relative to its level of operating expenses and does not anticipate generating revenue sufficient to offset operating costs infor at least the short-term to mid-term.next several years. The Company has financed its operations to date principally through the sale of equity securities and debt financing and interest earned on investments.financing. The Company’s history of operating losses, limited cash resources and lack of certainty regarding obtaining significant third-party reimbursement for the vBloc System or timing thereof,its product portfolio, raise substantial doubt about ourits ability to continue as a going concern absent a strengthening of ourits cash position.

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 $2.5 million. 

On August 16, 2017, the Company closed an underwritten public offering consisting of units of Series B Convertible Preferred Stock and warrants to purchase common stock.  Gross proceeds of the offering were $20.0 million, prior to deducting underwriting discounts and commissions and offering expenses of approximately $2.0 million.

During the nine months ended September 30, 2017, common stock warrants2018, the Company completed a number of financing transactions involving issuance of equity instruments.  These financing transactions are summarized below.  See Footnote 10 “Stock Sales” for 599,670further information:

On October 2, 2018, we entered into a sales agreement with H.C. Wainwright & Co., LLC to act as our sales agent with respect to the issuance and sale of up to $15,000,000 of our shares of common stock were exercisedfrom time to time in an at-the-market public offering.  Sales of the shares through Wainwright under the sales agreement may be made directly on the Nasdaq Capital Market, on any other existing trading market for the shares, to or through a market maker or through an electronic communications network, or by warrant holdersany other method permitted by law. In addition, if expressly authorized by us, Wainwright may also sell the shares in privately negotiated transactions. Wainwright is not required to sell any specific number or dollar amount of warrantsshares, but acts as a sales agent using commercially reasonable efforts consistent with its normal trading and sales practices, on mutually agreed terms between Wainwright and the Company. The shares in the at-the-market offering are sold and issued January 23, 2017 with proceedspursuant to our shelf registration statement on Form S-3 (File No. 333-225083), which was previously declared effective by the Securities and Exchange Commission, and a related prospectus. We have agreed to pay Wainwright in cash, upon each sale of shares pursuant to the Companysales agreement, a commission equal to 8.0% of $3.3 million.the gross proceeds from each sale of shares and an additional management fee equal to 1.0% of the gross proceeds from the sale of shares pursuant to the sales agreement. Since entering into the sales agreement and through November 13, 2018, we sold an aggregate of 2,453,137 shares of common stock under the sales agreement at an average selling price of approximately $3.58 per share, which resulted in gross proceeds of approximately $8.8 million and net proceeds of approximately $7.8 million after payment of the sales agent commission and fees and other offering costs. For additional details, see Footnote 13 “Subsequent Events.”

As of September 30, 2017,2018, the Company had $23.4 million$473,000 of cash and cash equivalents available to fund its operations through 2017 early 2018.  operations.

The Company’s anticipated operations include plans to (i) integrate the salescontinue to support clinical trial activities and operations of the Company with the newly acquired ReShape Medical in order to expand sales of both the ReShape Balloon and vBloc as well as to obtain cost savings synergies, (ii) expand the controlled commercial launch of vBloc Therapy, delivered via the vBloc System, (iii) continue development of the GastricReShape Vest, (vi)(ii) seek opportunities to leverage the Company’s intellectual property portfolio and

custom development services to provide third party sales and licensing opportunities, (iii) continue to support and develop markets and technology related to the ReShape Balloon, (iv) continue to support the combination block/stimulation vBloc technology that can assist with type 2 diabetes, and (v) 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, which could include reducing expenditures for marketing, clinical and product development activities.   The Company has additionally committed to reducing its operating spending to conserve resources. However, the Company will ultimately need to achieve sufficient revenues from product sales and obtain additional debt or equity financing to support its operations.

Management is currently pursuing various funding options, including seeking additional equity financing as well as a strategic merger or other transaction to obtain additional funding or expand its product line to continuefunding. As of August 10, 2018, the developmentCompany’s public float exceeded $75 million, based on the number of and to successfully commercialize, the ReShape Balloon, the vBloc Systemshares of our common stock held by non-affiliates outstanding on August 10, 2018 and the Gastric Vest. Whilehighest closing price of our common stock within the acquisition of ReShape Medical does provide incremental revenues60 days prior to August 10, 2018. Therefore, the Company is no longer subject to General Instruction I.B.6 of Form S-3, which limits the costaggregate market value of the securities sold by or on behalf of the registrant during the 12-month period immediately prior to further develop and commercializeincluding the ReShape Balloon is expecteddate of the sale to significantly exceed revenuesno more than one-third of all common voting and nonvoting equity held by non-affiliates of the registrant. The Company will reevaluate its public float at the time it files its annual report on Form 10-K for the foreseeable future.fiscal year ending December 31, 2018 to determine if it will become subject to General Instruction I.B.6 at that time. While there can be no assurance that the Company will be successful in its efforts, the Company has a long history of raising equity financing to fund its development activities.activities, though such equity financing has been more challenging to obtain in 2018 than it was in 2017.  Should the Company be unable to obtain adequate financing in the near term, the Company’s business, result of operations, liquidity and financial condition would be materially and negatively affected, and the Company would be unable to continue as a going concern. Additionally, there can be no assurance that, assuming the Company is able to strengthen its cash position, it will achieve sufficient revenue or profitable operations to continue as a going concern.

(3)  Acquisitions

BarioSurg transaction. There were no adjustments made to the consolidated condensed financial statements were prepared.  Accordingly,recorded fair values as a result of completing our accounting for the allocation of purchase price is preliminary and, therefore, subject to adjustment in future periods.transaction.

condensed consolidated financial statements were prepared.  Accordingly, the allocation of purchase price related to the acquired intangible assets is preliminary and, therefore, subject to adjustment in future periods.

We believe that the amount of goodwill relative to identifiable intangible assets relates to several factors including (i) potential synergies related to market opportunities for multiple product offerings, (ii) future technology, and (iii) intact workforce.

Developed technology consists of the ReShape® Dual Weight Loss Balloon (the ReShape Balloon), an FDA-approved, minimally invasive intragastric balloon designed to treat obesity patients with a body mass index (BMI) between 30 and 40, with one or more related comorbid conditions.  The acquired developed technology assets are valued by estimating cash flows using an income approach and they are amortized over a 12-year period, consistent with the remaining lives of the technology's key patents.  Trademarks/tradenames are valued using the relief from royalty method and are being amortized over a 10-year period.  Customer relationships are valued using the with-and-without method under the income approach and are being amortized over 5 years.  The values of these intangible assets are considered Level 3 measurements.

(4)     Goodwill and Other Intangible Assets

Allocations of purchase prices related to the acquisitions of BarioSurg and ReShape Medical during the year ended December 31, 2017 resulted in the recording of $27.2 million of goodwill and $46.9 million of other intangible assets.

The following table summarizes the activity of intangible assets, excluding goodwill, as of January 1, 2016.September 30, 2018:

(4)

The following table summarizes the expected future amortization of intangible assets as of September 30, 2018:

Evaluation of Goodwill for Impairment

The Company conducts its annual goodwill impairment analysis for its business during the fourth quarter of each year or when circumstances suggest that an indicator for impairment may be present.  Subsequent to the Company’s registered direct securities offering on April 3, 2018, the price of the Company’s common stock declined significantly. Management determined that this event was an indicator of potential impairment as the magnitude of the decline indicated that the net equity of the Company may be in excess of its fair market value.  As a result of the identification of this impairment indicator, the Company performed an impairment analysis that included valuing the business.  

The analysis of potential impairment of goodwill requires the Company to compare the estimated fair value at each of its reporting units to its carrying amount, including goodwill. The carrying amount of the reporting units must be adjusted first for any impairments of other definite or indefinite lived assets; accordingly the first step in performing the goodwill impairment analysis is to determine if other assets are impaired. The Company performed a qualitative impairment analysis on indefinite lived intangible assets, and assessed the recoverability of definite lived assets. The Company did not identify any impairments of indefinite or definite lived assets, other than goodwill, as a result the performance of these analyses.

If the carrying amount of the reporting unit exceeds the estimated fair value of the reporting unit, a non-cash goodwill impairment loss is recognized as an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

The determination of the fair value of the reporting units and the allocation of that value to individual assets and liabilities within those reporting units requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the selection of appropriate peer group companies, control premiums appropriate for acquisitions in the industries in which the Company competes, the discount rate, terminal growth rates, and forecasts of revenue, operating income, and capital expenditures.

The Company has one reporting unit and is operating in one segment. Additionally, for the purpose of assessing the recovery of definite lived assets, the Company has one asset group which includes all assets of the Company. The Company conducted its goodwill impairment analysis during the second quarter of 2018 and determined that the carrying value of the reporting unit exceeded the fair value.  Accordingly, the Company recorded a goodwill impairment charge of $27.2 million, reducing goodwill balances to zero, which was recorded within goodwill impairment in the Consolidated Statements of Operations during the quarter ended June 30, 2018. The fair market value of the reporting unit was determined under an income approach using discounted cash flows. Fair value calculated using a discounted cash flow analysis is classified within level 3 of the fair value hierarchy and requires several assumptions including risk adjusted discount rates and financial forecasts. 

If the Company’s future operating results decline significantly, it may be exposed to additional impairment losses that could be material.  During the second quarter of 2018 we were required to record a non-cash goodwill impairment loss.

(5)  Fair Value Measurements

Fair value of financial assets and liabilities is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy has been

established that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices 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:

The Company’s assets that are measured at fair value on a recurring basis are classified within Level 1 or Level 2 of the fair value hierarchy. The Company does not hold any recurring assets that are measured at fair value using Level 3 inputs.

The Company did not hold any short-term investments classified as available for sale or held to maturity as of September 30, 20172018 and December 31, 2016.2017.

(6)(7)  Commitments and Contingencies

Operating LeaseLeases

The Company rents its headquarters office, warehouse and laboratory facilities in St. Paul, Minnesota, 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.  As of October 1, 2018, the Company has continued to occupy this facility on a month-to-month basis.

With the acquisition of BarioSurg, the Company also leasesleased space in Lake Forest, California under an operating lease with monthly base rent of approximately $2,200 per month through September 30, 2018.  This lease was not renewed.

With the October 2, 2017 acquisition of ReShape Medical, the Company leases separate office and manufacturing/warehouse space in San Clemente, California.  The operating lease for office space has a term that runs through June 30, 2022 with base rent of approximately $24,600 per month and with annual rent escalations of approximately 3%.  The operating lease for manufacturing/warehouse space has a term that runs through October 31, 2019 with base rent of approximately $10,900 per month.

Total rent expense recognized for each of the three month periodsmonths ended September 30, 2018 and 2017 was $195,000 and 2016 was $64,893 and $58,905$65,000, and for each of the nine-month periodsnine months ended September 30, 2018 was $185,436$586,000 and $176,175.$185,000, respectively. At September 30, 2017,2018, future minimum payments for the Company including the lease obligations related to the October 2, 2017 acquisition of ReShape Medical (see also Note11, Subsequent Events) are as follows:

Litigation

Du.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 namesnamed as defendants ReShape Lifesciences, the board of directors and four members of our senior management, namely, Scott Youngstrom, Nick Ansari, Peter DeLange and Paul Hickey, and containscontained 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 relaterelated 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 1,093,450521 shares of our common stock (the “Option Grants”).  In the complaint, the plaintiff contendscontended 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 seekssought 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.  On AprilThe parties have reached an agreement-in-principle concerning the proposed settlement of this matter, which was filed with the court on August 13, 2018. The court has scheduled a hearing for December 17, 2017, we filed a motion2018 to dismissdecide if the complaint based onsettlement will be approved. The terms of the plaintiff’s failuresettlement require us to satisfy Delaware’s demand requirement for a derivative action(i) rescind and failure to state a valid claim.  The motion is now fully briefed andcancel the Court will hear oral argument on November 28, 2017.  We believeOption Grants, with the allegationsexception of options that were already rescinded when certain individuals left the company in the complaint are without merit,last fiscal quarter of 2017, (ii) amend the Plan to add a provision establishing the maximum total annual equity compensation for non-employee directors and intend to defendseek stockholder approval of this amendment at the action vigorously.Company’s next annual meeting of stockholders, and (iii) proportionally adjust all share reserves and limitations in the Plan (and any other equity compensation plan for the company) in connection with any future split of the company’s stock during the next five years unless otherwise brought to and approved by stockholder vote.  During the quarter ended June 30, 2018, the Company recorded an accrued liability and legal expense for $190,000 representing a probable and currently estimable settlement amount for this matter. 

Fulfillium. On April 20, 2017, Fulfillium, Inc., filed a Complaintcomplaint against ReShape Medical, Inc. (which the Company acquired in October 2017 and which is now a wholly owned subsidiary of the Company) in the United StatesU.S. District Court for the District of Delaware, accusing ReShape Medical, Inc., which the Company acquired on October 2, 2017 and is now a wholly-owned subsidiary of the Company,alleged misappropriation of trade secret misappropriation under the California Uniform Trade Secrets Act (CA. Civ. Code §3426 et seq.) and/or Delaware law (Code Ann. Title 6 §2001 et seq);secrets and infringement of two U.S. Patent Nos. 9,445,930 and 9,456,915.Patents (“Fulfillium I”).  On July 28, 2017, ReshapeReShape Medical Inc. filed a Rule 12(b)(6) motionmoved to dismiss both the trade secrets claims as time-barred and/or for failure to state asecret claim and to dismiss mostcertain aspects of the patent infringement claims for failure to state a claim.  ReShape Medical, Inc., also filed a motionclaim, and to transfer the litigation to the United StatesU.S. District Court for the Central District of California.  On October 10, 2017, Fulfillium filed a motion seeking leave to amend its complaint to add an investor in ReShape Medical, Inc. as a co-defendant, but did not amend the substantive allegations of its original Complaint that are the basis of the pending motion to dismiss.  ReShape Medical, Inc. filed an opposition to the motion for leave to amend on October 24, 2017 and Fulfillium filed its Reply on October 31, 2017.  The motions to dismiss and transfer were heard on November 7, 2017, and on November 9,16, 2017, the Court issued an Order granting-in-part thegranted ReShape Medical’s motion to dismiss dismissing the trade secret claim and allegations of willful infringement with leave to amend,claims, and transferringordered the case transferred to the United StatesU.S. District Court for the Central District of California.  Fulfillium twice amended its complaint, narrowing its original trade secret claim and adding further patent infringement claims and additional parties. On June 4, 2018, ReShape Medical filed a motion to dismiss the patent infringement claims for lack of standing, which the Court granted on July 5, 2018.  On August 10, 2018, the Court dismissed without prejudice the trade secret claim for lack of subject matter jurisdiction and terminated the case.  Fulfillium has appealed these dismissals and ReShape Medical has appealed the grant and denial of certain attorney fee awards.  On July 20, 2018, Fulfillium filed a new complaint against ReShape Lifesciences, Inc. (and its wholly owned subsidiary ReShape Medical LLC) in the U.S. District Court for the Central District of California (“Fulfillium II”) reasserting the patent infringement claims asserted in Fulfillium I.  On August 15, 2018, Fulfillium amended its complaint in Fulfillium II to reassert the trade secret misappropriation claim asserted in Fulfillium I against ReShape Medical LLC and others.  On September 7, 2018, Fulfillium filed a complaint in California state court alleging the same trade secret misappropriation claim asserted in both Fulfillium I and Fulfillium II.  On November 7, 2018, the Court dismissed the non-Company parties from Fulfillium II.  On April 20, 2018, ReShape Medical filed Inter Partes Review (“IPR”) petitions with the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office (the “PTAB”) to have all claims of both of the originally asserted Fulfillium patents canceled as unpatentable over various combinations of prior art.  On November 6, 2018, the PTAB denied those petitions.  The Court didCompany intends to continue to vigorously defend itself against Fulfillium’s claims.  We currently are unable to estimate a loss or range of loss for this matter.

not rule on

Alpha and Iroquois.  On July 12, 2018, Alpha Capital Anstalt (“Alpha”) filed a complaint against the motionCompany in the U.S. District Court for leave to amend the complaint to add the proposed new party, which remains fully briefed.  ManagementSouthern District of New York.  In August 2017, Alpha acquired shares of the Company’s series B convertible preferred stock and warrants to purchase shares of the Company’s common stock in an underwritten public offering. Pursuant to the terms of the series B convertible preferred stock and warrants, the conversion price of the series B convertible preferred stock and exercise price of the warrants was subject to adjustment in the case of, among other things, dilutive issuances of securities by the Company. The complaint alleges breach of contract, claiming that the Company should have adjusted the conversion price of the series B convertible preferred stock and exercise price of the warrants to not less than $420.00 per share, rather than the $1,575.00 per share to which the Company actually adjusted such conversion price and exercise price, in connection with its registered direct offering of series D convertible preferred stock and warrants to purchase common stock that it completed and announced in April 2018.  Alpha seeks declaratory relief, damages of not less than approximately $3.6 million (less the proceeds of actual sales of the Company’s common stock made by Alpha) and attorneys’ fees.  The Company believes the claims alleged are without merit and intends to vigorously protect and defend itself.  However, we are currently unable to estimate a loss or range of loss for this matter.

On July 26, 2018, Iroquois Capital Investment Group, LLC and Iroquois Master Fund, Ltd. filed a complaint against the Company in the U.S. District Court for the Southern District of New York, with substantially the same claims and seeking substantially the same relief as Alpha’s complaint described above, except that Iroquois claims that the conversion price of the series D convertible preferred stock and exercise price of the warrants should have been adjusted to $189.00 per share, and Iroquois is claiming damages estimated to exceed $5 million. The Company believes the riskclaims alleged are without merit and intends to vigorously protect and defend itself.  However, we are currently unable to estimate a loss or range of loss remote.for this matter.

Except as disclosed in the foregoing paragraphs, 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.

(7)  Senior Amortizing Convertible Notes(8) Revenue Recognition

On November 9, 2015, January 11, 2016Revenue from Product Sales

The following table presents the Company’s revenue disaggregated by product and May 2, 2016geography, based on management’s assessment of available data: