Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-Q


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

For the quarterly period ended September 30, 2019 2020

OR

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

For the transition period from to

Commission file number: 1-33818


RESHAPE LIFESCIENCES INC.

(Exact name of registrant as specified in its charter)


Delaware

48-1293684

(State or other jurisdiction
of incorporation)incorporation or organization)

(IRS Employer
Identification No.)

1001 Calle Amanecer, San Clemente, California 92673
(Address of principal executive offices, including zip code)

(949) 429-6680
(Registrant’s telephone number, including area code)


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

Title of Each Class

Trading Symbol

Name of Each Exchange on which Registered

Common stock, $0.001 par value per share

RSLS

OTCQB Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

Large accelerated filer

Accelerated Filer

Non-accelerated filer

  

Smaller Reporting Company

Emerging Growth Company

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

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

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

Title of Class

Trading Symbol

Name of Exchange on which Registered

Common stock, $0.001 par value per share

RSLS

OTCQB Market

As of November 12, 2019,  353,79411, 2020, 5,586,554 shares of the registrant’s Common Stock were outstanding.


Table of Contents

INDEX

INDEX

PART I – FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements (unaudited)

3

Condensed Consolidated Balance Sheets at September 30, 20192020 and December 31, 20182019

3

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 20192020 and 20182019

4

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 20192020 and 20182019

5

Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 20192020 and 20182019

6

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20192020 and 20182019

8

Notes to Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

26

28

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

27

28

Item 1A.

Risk Factors

28

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

29

Item 3.

Defaults Upon Senior Securities

28

29

Item 4.

Mine Safety Disclosures

28

29

Item 5.

Other Information

28

29

Item 6.

Exhibits

29

30

SIGNATURES

31

2


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1.        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

RESHAPE LIFESCIENCES INC.

Condensed Consolidated Balance Sheets

(dollars in thousands, except per share amounts; unaudited)

 

 

 

 

 

 

 

September 30, 

 

December 31, 

    

2019

    

2018

September 30, 

December 31, 

    

2020

    

2019

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,717

 

$

5,548

$

1,857

 

$

2,935

Accounts and other receivables (net of allowance for bad debts of $558 at September 30, 2019 and $236 at December 31, 2018)

 

 

2,971

 

 

917

Finished goods inventory

 

 

1,189

 

 

985

Prepaid expenses and other current assets (Note 4)

 

 

1,796

 

 

1,269

Restricted cash

50

50

Accounts and other receivables (net of allowance for doubtful accounts of $893 and $709 respectively)

 

2,951

 

 

4,096

Inventory (Note 3)

 

1,988

 

 

1,317

Prepaid expenses and other current assets (Note 3)

 

1,304

 

 

1,711

Total current assets

 

 

13,673

 

 

8,719

 

8,150

 

 

10,109

Property and equipment, net

 

 

 6

 

 

64

 

431

 

 

16

Operating lease right-of-use assets (Note 7)

 

 

828

 

 

 —

Other intangible assets, net (Note 5)

 

 

29,090

 

 

36,927

Operating lease right-of-use assets (Note 6)

540

758

Other intangible assets, net

27,424

28,674

Other assets

 

 

586

 

 

563

 

46

 

 

99

Total assets

 

$

44,183

 

$

46,273

$

36,591

 

$

39,656

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

3,851

 

$

1,628

$

3,761

 

$

4,263

Accrued and other liabilities (Note 4)

 

 

5,591

 

 

4,829

Asset purchase consideration payable, current (Note 6)

 

 

1,980

 

 

1,907

Operating lease liabilities, current (Note 7)

 

 

285

 

 

 —

Accrued and other liabilities (Note 3)

 

3,257

 

 

3,821

Warranty liability, current

383

105

Debt, current portion, net of deferred financing costs

6,558

1,909

Operating lease liabilities, current (Note 6)

309

291

Total current liabilities

 

 

11,707

 

 

8,364

 

14,268

 

 

10,389

Asset purchase consideration payable, noncurrent (Note 6)

 

 

4,579

 

 

4,403

Operating lease liabilities, noncurrent (Note 7)

 

 

552

 

 

 —

Debt, noncurrent portion

3,204

2,728

Operating lease liabilities, noncurrent (Note 6)

243

477

Warranty liability, noncurrent

1,091

1,253

Deferred income taxes

 

 

1,258

 

 

1,844

702

702

Common stock warrant liability (Note 8 and Note 9)

 

 

41,749

 

 

 —

Total liabilities

 

 

59,845

 

 

14,611

19,508

 

15,549

Commitments and contingencies (Note 13)

 

 

 

 

 

 

Stockholders’ (deficit) equity:

 

 

 

 

 

 

Commitments, contingencies (Note 12)

Stockholders’ equity:

Preferred stock, 5,000,000 shares authorized:

 

 

 

 

 

 

Series B convertible preferred stock, $0.01 par value; 3 and 159 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

 —

 

 

 —

Series C convertible preferred stock, $0.01 par value; 95,388 shares issued and outstanding at September 30, 2019 and December 31, 2018

 

 

 1

 

 

 1

Common stock, $0.001 par value; 275,000,000 shares authorized at September 30, 2019 and December 31, 2018; 353,794 and 73,092 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

 —

 

 

 —

Series B convertible preferred stock, $0.001 par value; 3 issued and outstanding at September 30, 2020 and December 31, 2019, respectively

Series C convertible preferred stock, $0.001 par value; 95,388 shares issued and outstanding at September 30, 2020 and December 31, 2019

1

1

Common stock, $0.001 par value; 275,000,000 shares authorized at September 30, 2020 and December 31, 2019; 5,586,554 and 391,739 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

 

5

 

 

Additional paid-in capital

 

 

452,486

 

 

450,651

 

523,442

 

 

517,311

Accumulated deficit

 

 

(468,140)

 

 

(418,990)

 

(506,291)

 

 

(493,197)

Accumulated other comprehensive loss

 

 

(9)

 

 

 —

(74)

(8)

Total stockholders’ (deficit) equity

 

 

(15,662)

 

 

31,662

Total stockholders’ equity

 

17,083

 

 

24,107

Total liabilities and stockholders’ equity

 

$

44,183

 

$

46,273

$

36,591

 

$

39,656

See accompanying notes to Condensed Consolidated Financial Statements.

3


Table of Contents

RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Operations

(dollars in thousands, except per share amounts; unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

2020

2019

    

2020

2019

Revenue

$

3,602

$

3,515

$

8,092

$

11,039

Cost of revenue

1,321

 

1,413

 

3,471

 

3,849

Gross profit

2,281

 

2,102

 

4,621

 

7,190

Operating expenses:

Sales and marketing

1,160

 

950

 

3,446

 

3,338

General and administrative

2,434

4,412

7,809

14,237

Research and development

859

 

858

 

2,619

 

2,874

Impairment of intangible assets

6,588

Loss on litigation settlement

1,500

1,500

Total operating expenses

4,453

 

7,720

 

13,874

 

28,537

Operating loss

(2,172)

 

(5,618)

 

(9,253)

 

(21,347)

Other expense (income), net:

Interest expense, net

739

74

1,632

390

Loss on extinguishment of debt

2,435

2,435

71

Warrant expense

22,564

26,821

Gain on foreign currency exchange

(128)

(229)

(118)

(229)

Other, net

 

727

 

1,336

Loss before income tax provision

(5,218)

(28,754)

(13,202)

(49,736)

Income tax benefit

(39)

(108)

(586)

Net loss attributable to common shareholders

$

(5,179)

$

(28,754)

$

(13,094)

$

(49,150)

Net loss per share - basic and diluted:

Net loss per share - basic and diluted

$

(0.74)

$

(106.44)

$

(1.89)

$

(235.42)

Shares used to compute basic and diluted net loss per share

6,968,221

 

270,136

 

6,913,188

 

208,777

See accompanying notes to Condensed Consolidated Financial Statements.

34


RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Operations Comprehensive Loss

(dollars in thousands, except per share amounts;thousands; unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

2020

    

2019

    

2020

2019

Net loss

$

(5,179)

$

(28,754)

$

(13,094)

$

(49,150)

Foreign currency translation adjustments

(45)

(9)

(66)

(9)

Other comprehensive loss, net of tax

(45)

(9)

(66)

(9)

Comprehensive loss

$

(5,224)

$

(28,763)

$

(13,160)

$

(49,159)

See accompanying notes to Condensed Consolidated Financial Statements.

5


Table of Contents

RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Stockholders’ Equity

(dollars in thousands; unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

 

2019

 

 

2018

    

 

2019

 

 

2018

Revenue

 

$

3,515

 

$

 8

 

$

11,039

 

$

157

Cost of revenue

 

 

1,413

 

 

23

 

 

3,849

 

 

86

Gross profit

 

 

2,102

 

 

(15)

 

 

7,190

 

 

71

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

5,362

 

 

4,288

 

 

17,575

 

 

14,951

Research and development

 

 

858

 

 

992

 

 

2,874

 

 

5,545

Impairment of intangible assets (Note 5)

 

 

 —

 

 

 —

 

 

6,588

 

 

14,005

Legal settlement (Note 13)

 

 

1,500

 

 

 —

 

 

1,500

 

 

 —

Total operating expenses

 

 

7,720

 

 

5,280

 

 

28,537

 

 

34,501

Operating loss

 

 

(5,618)

 

 

(5,295)

 

 

(21,347)

 

 

(34,430)

Other expense (income), net:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

74

 

 

(1)

 

 

390

 

 

 1

Loss on extinguishment of debt (Note 6)

 

 

 —

 

 

 —

 

 

71

 

 

 —

Warrant expense (Note 8 and Note 9)

 

 

22,564

 

 

 —

 

 

26,821

 

 

145

(Gain) loss on foreign currency transactions

 

 

(229)

 

 

 —

 

 

(229)

 

 

 —

Other, net

 

 

727

 

 

(7)

 

 

1,336

 

 

(9)

Loss from continuing operations before income taxes

 

 

(28,754)

 

 

(5,287)

 

 

(49,736)

 

 

(34,567)

Income tax benefit

 

 

 —

 

 

531

 

 

586

 

 

3,122

Loss from continuing operations

 

 

(28,754)

 

 

(4,756)

 

 

(49,150)

 

 

(31,445)

Loss from discontinued operations, net of tax

 

 

 —

 

 

(2,249)

 

 

 —

 

 

(22,044)

Net loss

 

$

(28,754)

 

$

(7,005)

 

$

(49,150)

 

$

(53,489)

Less: Down round adjustments for convertible preferred stock and warrants

 

 

 —

 

 

(132)

 

 

 —

 

 

(3,974)

Net loss attributable to common shareholders

 

$

(28,754)

 

$

(7,137)

 

$

(49,150)

 

$

(57,463)

Net loss per share - basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

 

(106.44)

 

 

(2,256.69)

 

$

(235.42)

 

$

(43,036.45)

Discontinued operations

 

 

 —

 

 

(1,038.32)

 

 

 —

 

 

(26,784.93)

Net loss per share - basic and diluted

 

$

(106.44)

 

$

(3,295.01)

 

$

(235.42)

 

$

(69,821.38)

Shares used to compute basic and diluted net loss per share

 

 

270,136

 

 

2,166

 

 

208,777

 

 

823

Three Months Ended September 30, 2020

Series B Convertible

Series C Convertible

Additional

Accumulated Other

Total

Preferred Stock

Preferred Stock

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

     

Capital

    

Deficit

    

Income (Loss)

     

Equity

Balance June 30, 2020

3

$

95,388

$

1

5,586,554

$

5

$

520,288

$

(501,112)

$

(29)

$

19,153

Net loss

(5,179)

(5,179)

Other comprehensive loss, net of tax

(45)

(45)

Stock-based compensation expense

255

255

Issuance of warrants

2,899

2,899

Institutional exercise of warrants

Cashless exercise of warrants

Common stock issued for professional services

Balance September 30, 2020

3

$

95,388

$

1

5,586,554

$

5

$

523,442

$

(506,291)

$

(74)

$

17,083

Nine Months Ended September 30, 2020

Series B Convertible

Series C Convertible

Additional

Accumulated Other

Total

Preferred Stock

Preferred Stock

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

     

Capital

    

Deficit

    

Income (Loss)

     

Equity

Balance December 31, 2019

3

$

95,388

$

1

391,739

$

$

517,311

$

(493,197)

$

(8)

$

24,107

Net loss

(13,094)

(13,094)

Other comprehensive income (loss), net of tax

(66)

(66)

Stock-based compensation expense

1,029

1,029

Issuance of warrants

4,292

4,292

Institutional exercise of warrants

5,085,834

5

605

610

Cashless exercise of warrants

58,981

Common stock issued for professional services

50,000

205

205

Balance September 30, 2020

3

$

95,388

$

1

5,586,554

$

5

$

523,442

$

(506,291)

$

(74)

$

17,083

See accompanying notes to Condensed Consolidated Financial Statements.

46


RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Comprehensive Loss Stockholders’ Equity (Continued)

(dollars in thousands; unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

 

2019

    

2018

    

2019

 

2018

Net loss

 

$

(28,754)

 

$

(7,005)

 

$

(49,150)

 

$

(53,489)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(9)

 

 

 —

 

 

(9)

 

 

 —

Other comprehensive income (loss), net of tax

 

 

(9)

 

 

 —

 

 

(9)

 

 

 —

Comprehensive loss

 

$

(28,763)

 

$

(7,005)

 

$

(49,159)

 

$

(53,489)

Three Months Ended September 30, 2019

Series B Convertible

Series C Convertible

Series E Convertible

Additional

Accumulated

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 June 30, 2019

3

$

95,388

$

1

$

237,544

$

$

452,777

$

(439,386)

$

$

13,392

Net loss

(28,754)

(28,754)

Other comprehensive income (loss), net of tax

(9)

(9)

Stock-based compensation expense

(497)

(497)

Institutional sales of common stock and warrants, net of issuance costs

69,167

150

150

Issuance of common stock upon exercise of warrants

47,083

56

56

Balance September 30, 2019

3

$

95,388

$

1

$

353,794

$

$

452,486

$

(468,140)

$

(9)

$

(15,662)

Nine Months Ended September 30, 2019

Series B Convertible

Series C Convertible

Series E Convertible

Additional

Accumulated

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

(49,150)

(49,150)

Other comprehensive income (loss), net of tax

(9)

(9)

Stock-based compensation expense

1,486

1,486

Warrant expense

131

131

Institutional sales of common stock and warrants, net of issuance costs

200,202

478

478

Warrant adjustment

(312)

(312)

Conversion of common stock into convertible preferred stock

1,192,000

12

(9,933)

(12)

Conversions of convertible preferred stock into common stock

(156)

(1,192,000)

(12)

9,933

12

Issuance of common stock upon exercise of warrants, net of issuance costs

80,500

51

51

Balance September 30, 2019

3

$

95,388

$

1

$

353,794

$

$

452,486

$

(468,140)

$

(9)

$

(15,662)

See accompanying notesNotes to Condensed Consolidated Financial Statements.

57


RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Stockholders’ (Deficit) EquityCash Flows

(dollars in thousands; unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

 

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 June 30, 2019

 

 3

 

$

 —

 

95,388

 

$

 1

 

 —

 

$

 —

 

237,544

 

$

 —

 

$

452,777

 

$

(439,386)

 

$

 —

 

$

13,392

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(28,754)

 

 

 —

 

 

(28,754)

Other comprehensive income (loss), net of tax

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(9)

 

 

(9)

Stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(497)

 

 

 —

 

 

 —

 

 

(497)

Issuance of common stock upon exercise of warrants

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

47,083

 

 

 —

 

 

56

 

 

 —

 

 

 —

 

 

56

Institutional sales of common stock and warrants, net of issuance and other costs

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

69,167

 

 

 —

 

 

150

 

 

 —

 

 

 —

 

 

150

Balance September 30, 2019

 

 3

 

$

 —

 

95,388

 

$

 1

 

 —

 

$

 —

 

353,794

 

$

 —

 

$

452,486

 

$

(468,140)

 

$

(9)

 

$

(15,662)

Nine Months Ended September 30, 

2020

2019

Cash flows from operating activities:

    

    

Net loss

$

(13,094)

$

(49,150)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation expense

 

8

 

36

Amortization of intangible assets

1,249

1,249

Impairment of intangible assets

6,588

Noncash interest expense

175

880

Fair value adjustment to embedded derivative

(481)

Loss on extinguishment of debt

2,435

71

Stock-based compensation

1,029

1,486

Bad debt expense

184

287

Provision for inventory excess and obsolescence

244

Warrant expense

26,821

Amortization of debt discount and deferred debt issuance costs

1,392

Deferred income tax benefit

(586)

Other noncash items

21

31

Change in operating assets and liabilities:

 

Accounts and other receivables

 

962

(2,343)

Inventory

 

(915)

(204)

Prepaid expenses and other current assets

 

613

(527)

Accounts payable and accrued liabilities

(1,260)

2,986

Warranty liability

116

Other

 

53

(23)

Net cash used in operating activities

 

(6,788)

 

(12,879)

Cash flows from investing activities:

Capital expenditures

(230)

Cash used in investing activities:

(230)

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

15,083

Payments of equity issuance costs

(44)

Proceeds from institutional exercise of warrants

 

610

 

239

Proceeds from credit agreement

4,500

Proceeds from PPP loan

955

Net cash provided by financing activities

 

6,006

 

15,057

Effect of currency exchange rate changes on cash and cash equivalents

(66)

(9)

Net decrease in cash, cash equivalents and restricted cash

 

(1,078)

 

2,169

Cash, cash equivalents and restricted cash at beginning of period

 

2,985

 

5,548

Cash, cash equivalents and restricted cash at end of period

$

1,907

$

7,717

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

2,899

Capital expenditures accruals

193

Conversion of common stock to convertible preferred stock

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

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

 

 —

 

$

 —

 

73,087

 

$

 —

 

$

450,651

 

$

(418,990)

 

$

 —

 

$

31,662

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(49,150)

 

 

 —

 

 

(49,150)

Other comprehensive income (loss), net of tax

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(9)

 

 

(9)

Stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,486

 

 

 —

 

 

 —

 

 

1,486

Warrant expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

131

 

 

 —

 

 

 —

 

 

131

Institutional sales of common stock and warrants, net of issuance and other costs

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

200,207

 

 

 —

 

 

479

 

 

 —

 

 

 —

 

 

479

Warrant adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(312)

 

 

 —

 

 

 —

 

 

(312)

Conversion of common stock into convertible preferred stock

 

 —

 

 

 —

 

 —

 

 

 —

 

1,192,000

 

 

12

 

(9,933)

 

 

 —

 

 

(12)

 

 

 —

 

 

 —

 

 

(12)

Conversion of convertible preferred stock into common stock

 

(156)

 

 

 —

 

 —

 

 

 —

 

(1,192,000)

 

 

(12)

 

9,933

 

 

 —

 

 

12

 

 

 —

 

 

 —

 

 

12

Issuance of common stock upon exercise of warrants

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

80,500

 

 

 —

 

 

51

 

 

 —

 

 

 —

 

 

51

Balance September 30, 2019

 

 3

 

$

 —

 

95,388

 

$

 1

 

 —

 

$

 —

 

353,794

 

$

 —

 

$

452,486

 

$

(468,140)

 

$

(9)

 

$

(15,662)

See accompanying notes to Condensed Consolidated Financial Statements.

68


RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Stockholders’ (Deficit) Equity (Continued)

(dollars in thousands; unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

Series B Convertible

 

Series C Convertible

 

Series D Convertible

 

 

 

Additional

 

 

 

 

Total

 

 

Preferred Stock

 

Preferred Stock

 

Preferred Stock

 

Common Stock

 

Paid-in

 

Accumulated

 

Stockholders’

 

 

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

     

Capital

    

Deficit

     

Equity

Balance June 30, 2018

 

2,957

 

$

 —

 

95,388

 

$

 1

 

4,750

 

$

 —

 

215

 

$

 —

 

$

424,194

 

$

(385,085)

 

$

39,110

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(7,005)

 

 

(7,005)

Stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

757

 

 

 —

 

 

757

Down  round adjustments for convertible preferred stock and warrants

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

132

 

 

(132)

 

 

 —

Institutional sales of common stock and warrants, net of issuance costs

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

134

 

 

 —

 

 

2,726

 

 

 —

 

 

2,726

Issuance of common stock and warrants in September 2018 public offering

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

696

 

 

 —

 

 

447

 

 

 —

 

 

447

Conversions of convertible preferred stock into common stock

 

(2,798)

 

 

 —

 

 —

 

 

 —

 

(4,213)

 

 

 —

 

3,943

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Issuance of common stock upon exercise of warrants, net of transaction costs

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

10

 

 

 —

 

 

14

 

 

 —

 

 

14

Balance September 30, 2018

 

159

 

$

 —

 

95,388

 

$

 1

 

537

 

$

 —

 

4,998

 

$

 —

 

$

428,270

 

$

(392,222)

 

$

36,049

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

Series B Convertible

 

Series C Convertible

 

Series D Convertible

 

 

 

Additional

 

 

 

 

Total

 

 

Preferred Stock

 

Preferred Stock

 

Preferred Stock

 

Common Stock

 

Paid-in

 

Accumulated

 

Stockholders’

 

 

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

     

Capital

    

Deficit

     

Equity

Balance December 31, 2017

 

6,055

 

$

 —

 

95,388

 

$

 1

 

 —

 

$

 —

 

123

 

$

 —

 

$

411,125

 

$

(334,759)

 

$

76,367

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(53,489)

 

 

(53,489)

Stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

2,307

 

 

 —

 

 

2,307

Down  round adjustments for convertible preferred stock and warrants

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

3,974

 

 

(3,974)

 

 

 —

Institutional sale of convertible preferred stock and warrants in April 2018, net of issuance costs

 

 —

 

 

 —

 

 —

 

 

 —

 

6,000

 

 

 —

 

 —

 

 

 —

 

 

5,081

 

 

 —

 

 

5,081

Institutional sales of common stock and warrants, net of issuance costs

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

184

 

 

 —

 

 

5,227

 

 

 —

 

 

5,227

Issuance of common stock and warrants in September 2018 public offering

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

696

 

 

 —

 

 

447

 

 

 —

 

 

447

Redemption of convertible preferred stock

 

 —

 

 

 —

 

 —

 

 

 —

 

(500)

 

 

 —

 

 —

 

 

 —

 

 

(500)

 

 

 —

 

 

(500)

Conversions of convertible preferred stock into common stock

 

(5,896)

 

 

 —

 

 —

 

 

 —

 

(4,963)

 

 

 —

 

3,978

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Issuance of common stock upon exercise of warrants, net of transaction costs

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

17

 

 

 —

 

 

609

 

 

 —

 

 

609

Balance September 30, 2018

 

159

 

$

 —

 

95,388

 

$

 1

 

537

 

$

 —

 

4,998

 

$

 —

 

$

428,270

 

$

(392,222)

 

$

36,049

 

See accompanying Notes to Condensed Consolidated Financial Statements.

7

RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Cash Flows 

(dollars in thousands; unaudited)

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

2019

 

2018

Cash flows from operating activities:

 

 

 

    

 

 

Net loss

 

$

(49,150)

 

$

(53,489)

Loss from discontinued operations, net of tax

 

 

 —

 

 

22,044

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation expense

 

 

36

 

 

210

Amortization of intangible assets

 

 

1,249

 

 

101

Impairment of intangible assets

 

 

6,588

 

 

14,005

Bad debt expense

 

 

287

 

 

72

Noncash interest expense

 

 

880

 

 

 —

Fair value adjustment to embedded derivative

 

 

(481)

 

 

 —

Loss on extinguishment of debt

 

 

71

 

 

 —

Stock-based compensation

 

 

1,486

 

 

2,307

Warrant expense

 

 

26,821

 

 

145

Deferred income tax benefit

 

 

(586)

 

 

(3,124)

Other noncash items

 

 

31

 

 

 —

Change in operating assets and liabilities:

 

 

 

 

 

 

Accounts and other receivables

 

 

(2,343)

 

 

(115)

Inventory

 

 

(204)

 

 

1,636

Prepaid expenses and other current assets

 

 

(527)

 

 

(133)

Other assets

 

 

(23)

 

 

918

Accounts payable and accrued liabilities

 

 

2,986

 

 

1,793

Net cash used in operating activities - continuing operations

 

 

(12,879)

 

 

(13,630)

Net cash used in operating activities - discontinued operations

 

 

 —

 

 

(6,770)

Net cash used in operating activities

 

 

(12,879)

 

 

(20,400)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

 —

 

 

(7)

Net cash used in investing activities - continuing operations

 

 

 —

 

 

(7)

Net cash used in investing activities

 

 

 —

 

 

(7)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of subordinated convertible debentures

 

 

2,000

 

 

 —

Payments of debt financing costs

 

 

(21)

 

 

 —

Repayment of subordinated convertible debentures

 

 

(2,200)

 

 

 —

Proceeds from warrants exercised

 

 

239

 

 

502

Proceeds from sale and issuance of equity securities

 

 

15,083

 

 

12,829

Payments of equity issuance costs

 

 

(44)

 

 

(2,114)

Preferred stock redemption

 

 

 —

 

 

(500)

Net cash provided by financing activities - continuing operations

 

 

15,057

 

 

10,717

Net cash provided by financing activities

 

 

15,057

 

 

10,717

Effect of currency exchange rate changes on cash and cash equivalents

 

 

(9)

 

 

 

Net decrease in cash and cash equivalents

 

 

2,169

 

 

(9,690)

Cash and cash equivalents at beginning of period

 

 

5,548

 

 

10,163

Cash and cash equivalents at end of period

 

$

7,717

 

$

473

Noncash investing and financing activities:

 

 

 

 

 

 

Down round adjustment for convertible preferred stock and warrants

 

$

 —

 

$

3,974

Conversion of common stock to convertible preferred stock

 

 

(1)

 

 

 —

Conversion of convertible preferred shares to common stock

 

 

 —

 

 

 —

See accompanying notes to Condensed Consolidated Financial Statements.

8

ReShape Lifesciences Inc.

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts; unaudited)

(1)  Basis of Presentation

The accompanying interim condensed consolidated financial statements and related disclosures of Reshape Lifesciences Inc. (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019, filed on April 30, 2020. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") have been condensed or omitted.

In the opinion of management, the interim consolidated condensed financial statements reflect all adjustments considered necessary for a fair statement of the interim periods. All such adjustments are of a normal, recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

Reverse Stock SplitSplits

During the fourth quarterofyear ended December 31, 2019, the Company’s board of directors and stockholders approved a 1-for-120the following 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.split:

In connection with the 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 reverse stock split 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 splits for all periods presented.

1-for-120 reverse 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 and preferred 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.

Fair Value of Financial Instruments

The carrying amounts of cash equivalents, accounts receivable, accounts payable and certain accrued and other liabilities approximate fair value due to their short-term maturities. Refer to Note 65 regarding the fair value of debt instruments and Note 8 and Note 9 regarding fair value measurements and inputs of warrants.

Net Loss Per Share

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:

 

 

 

 

 

September 30, 

    

2019

    

2018

September 30, 

 

    

2020

    

2019

 

Stock options

 

155

 

35

 

46

 

155

Convertible preferred stock

 

1,288

 

959

1,288

1,288

Warrants

 

13,647,740

 

791

 

9,483,446

 

13,647,740

9

Table of Contents

Recent Accounting Pronouncements

New accounting standards adopted by the Company in 20192020 are discussed below or in the related notes, where appropriate.

In February 2016,August 2018, the Financial Accounting Standards Board ("FASB"(“FASB”) issued ASU No. 2016-02 Leases (Topic 842) that amended the guidance on leases. The amendment improves transparency and comparability among companies by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. The guidance was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Reporting entities could elect to adjust comparative periods and record the cumulative effect adjustment at the beginning of the earliest comparative period, or to not adjust comparative periods and record the cumulative effect adjustment at the effective date.

The Company adopted the new guidance as of the effective date of January 1, 2019 using the modified retrospective approach with no adjustments to the comparative period presented in the financial statements. In addition, the Company elected the package of practical expedients permitted under the transition guidance to not reassess (1) whether any expired or existing contracts are, or contain, leases, (2) the lease classification for expired or existing leases, and (3) initial direct costs for existing leases.

The adoption of the guidance resulted in the recognition of right-of-use ("ROU"Accounting Standards Update (“ASU”) assets and lease liabilities for operating leases of $1.2 million as of January 1, 2019. The guidance did not have an impact on the Company's Condensed Consolidated Statements of Operations or Cash Flows. See Note 7 for disclosures related to the Company's leases

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, which is intended to simplify the accounting for nonemployee share-based payment transactions by expanding the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance was effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. The Company adopted this guidance effective January 1, 2019. The adoption of this guidance had no effect on the Company’s consolidated financial statements as there were no share-based payment transactions with nonemployees in 2018 and such transactions in prior years, all of which had an established measurement date, were not material.  

New accounting standards not yet adopted are discussed below.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure

9


Table of Contents

Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements and is intended to improve the effectiveness of disclosures, including the consideration of costs and benefits. The guidance is effective for the fiscal years and interim periods within those years beginning after January 1, 2020. Early adoption is permitted, and an entity is permitted to early adopt any removed or modified disclosures and delay adoption of additional disclosures until their effective date. The Company is evaluatingthis guidance did not have a material impact on the effects of ASU 2018-13 on itsCompany’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing ArrangementThat 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. Early adoption of this guidance did not have a material impact on the ASU is permitted. The Company is evaluating the effects of ASU 2018-15 on its consolidatedCompany’s financial statements.

New accounting standards not yet adopted are discussed below.

In June 2016, the FASB issued ASU No. 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 2019, the FASB issued ASU No. 2019-05, which amended the new standard by providing targeted transition relief. The new guidance replaces the existing incurred loss impairment methodology with a methodology that requires

10

consideration of a broader range of reasonable and supportable forward-looking information to estimate all expected credit losses. In November 2019, the FASB issued ASU No. 2019-11, which amended the new standard by providing additional clarification. This guidance is effective for the fiscal years and interim periods within those years beginning after December 15, 2019 (or 2022, if deferral proposal adopted) and early adoption is permitted for fiscal years and interim periods within those years beginning after December 15, 2018.The2022. The Company is currently evaluating the effects of ASU 2016-13impact the guidance will have on its consolidated financial statements.

(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 does not generate revenue sufficient to offset operating costs and anticipates such shortfalls to continue in the short-term to the next eighteen months.short-term. The Company’s history of operating losses and limited cash resources and lack of certainty regarding obtaining significant third-party reimbursement of its products, raise substantial doubt about its ability to continue as a going concern.

As of September 30, 2019,2020 the Company had net negative working capital of $2.0approximately $6.1 million. The Company’s principal source of liquidity as of September 30, 20192020 consisted of approximately $7.7$1.9 millionof cash and cash equivalents and restricted cash, and $3.0 million of accounts receivable.

The Company’s anticipated operations include plans to (i) continue to integrate the sales and operations of the Company with the Lap-Band product line, acquired in December 2018; (ii) continue development of the ReShape Vest, (iii) seek opportunities to leverage the Company’s intellectual property portfolio and custom development services to provide third partythird-party sales and licensing opportunities, and (iv) 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. However, the Company will ultimately need to achieve sufficient revenues from product sales and obtain additional equity or debt financing to support its operations.

Management is currently pursuing various funding options, including seeking additional equity or debt financing as well as a strategic merger or other transaction to obtain additional funding to support the expansion of Lap-Band product sales and to continue the development of, and to successfully commercialize, the ReShape Vest. While the acquisition of the Lap-Band product line does provide incremental revenues and cash flows to the Company, total expenses, including the cost to support the clinical trials of the ReShape Vest, isare expected to exceed internally generated cash flows for the foreseeable future. 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. 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

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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)     Discontinued OperationsCOVID-19 Risk and Uncertainties and CARES Act

DuringAdditionally, on January 30, 2020, the fourth quarterWorld Health Organization (“WHO”) announced a global health emergency because of 2018,a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus 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 sold substantially all ofimplemented various short-term cost reductions and cash flow improvement actions, such as reducing the assets exclusively related to its ReShape Balloon product line, which consisted of inventory, propertycompensation for executives, management and equipmentkey employees and the related intellectual property underlying the intangible assets. Thedecreasing operating results of the ReShape Balloon product line have been reflected as discontinued operations in the Condensed Consolidated Financial Statements.expenses where possible. In addition, the cash flows associated with discontinued operations are presented separately inCompany also identified temporary headcount reductions and made the accompanying Condensed Consolidated Statementsdecision to furlough a portion of Cash Flows. 

There were no assets associated with the ReShape Balloon product line at September 30, 2019 and December 31, 2018. As described in Note 4 of the Company's Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2018, the Company recorded an impairment charge of approximately $13.2 million inworkforce. During the second quarter of 2018 for2020, 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 write-downmagnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the goodwill that had been recordedglobal 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 connectionpay, and furloughs of certain positions along with its acquisitiondeferrals in October 2017 of ReShape Medical, Inc. (“ReShape Medical”). The ReShape Balloon product line

11

waspayment for cash preservation. Given the primary operating activity of ReShape Medical. The components of loss from discontinued operations for the three and nine months ended September 30, 2018 consisteddaily evolution of the following:  

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Revenue

 

$

342

 

$

1,797

Loss from discontinued operations before income taxes

 

 

(2,249)

 

 

(22,044)

Income tax benefit

 

 

 —

 

 

 —

Loss from discontinued operations, net of tax

 

$

(2,249)

 

$

(22,044)

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 2020.

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 5 below. We continue to examine the impact that the CARES Act may have on our business and the PPP loan.

(4)

(3)  Supplemental Balance Sheet Information

Components of selected captions in the condensed consolidated balance sheets consisted of the following:

Inventory:

September 30, 

December 31, 

2020

    

2019

Raw materials

$

137

$

Sub-assemblies

827

Finished goods

 

1,024

 

1,317

Total inventory

$

1,988

$

1,317

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Prepaid expenses and other current assets:

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

2019

    

2018

September 30, 

December 31, 

2020

    

2019

Prepaid contract research organization expenses

 

$

1,278

 

$

1,064

$

580

$

1,356

Prepaid insurance

 

 

395

 

 

58

431

190

Other current assets

 

 

123

 

 

147

Other

293

165

Total prepaid expenses and other current assets

 

$

1,796

 

$

1,269

$

1,304

$

1,711

Accrued and other liabilities:

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

2019

    

2018

Payables, Apollo

 

$

664

 

$

 —

Professional service related expenses

 

 

1,876

 

 

3,095

Payroll related expenses

 

 

1,078

 

 

1,146

vBloc related expenses

 

 

1,411

 

 

 —

Equity transaction related expenses

 

 

211

 

 

 —

Insurance premium

 

 

64

 

 

 —

Other accrued liabilities

 

 

287

 

 

588

Total accrued liabilities and other liabilities

 

$

5,591

 

$

4,829

September 30, 

December 31, 

2020

    

2019

Accrued professional services

$

599

$

1,432

Payroll and benefits

 

1,526

 

1,021

Taxes

200

373

Equity transaction related liability

211

Customer deposits

357

202

Accrued insurance premium

87

Other

 

575

 

495

Total accrued and other liabilities

$

3,257

$

3,821

In connection with the Company’s December 2018 acquisition of the Lap-Band product line from Apollo Endosurgery, Inc. (“Apollo”), the Company entered into transition services, supply and distribution agreements with Apollo. The receivables from, and payables to, Apollo are primarily related to services performed under these agreements. During the second quarter of 2019, the invoicing and collection of Lap-Band orders from customers in the United States and Canada were transitioned to the Company. Apollo will continue to serve as the Company’s distributor of Lap-Band product in certain other geographical areas outside the United States for up to one year from the acquisition date. In addition, for a period of up to 24 months from the acquisition date, Apollo issues purchase orders and procures certain accessory Lap-Band products from third-party suppliers on the Company’s behalf. Remittances from and to Apollo are subject to a reconciliation of the credits/charges for services performed under the agreements.

(5)  Impairment of(4) Intangible Assets

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. The Company’s finite-lived intangible assets consists of developed technology, trademarks and tradenames, and covenant not compete. The estimated useful lives of these finite-lived intangible assets ranges from 3 to 10 years. The amortization expenses for both the three months ended September 30, 2020 and 2019 was $0.4 million, and for both the nine months ended September 30, 2020 and 2019 was $1.2 million.

During the second quarter of 2020, the Company performed a qualitative impairment analysis of the IPR&D and finite-lived intangible assets and did not identify any impairment as a result of this analysis.

Impairment of Intangible Assets – Second Quarter 2019

The Company has completed the feasibility study for the ReShape Vest and began clinical trials in Europe 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

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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 ana one-time nonrecurring impairment charge of approximately $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 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.

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(5)  Debt

September 30, 

December 31, 

2020

    

2019

Asset purchase consideration

$

4,813

$

4,637

Credit agreement

4,500

PPP Loan

955

Total debt

10,268

4,637

Less: unamortized debt discount

506

Less: current portion of debt

6,558

1,909

Debt, noncurrent portion

$

3,204

$

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, matures on April 24, 2022 and is subject to the terms and conditions applicable to loans administered by the SBA under the PPP. Under the terms of PPP, all or certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described in Note 8the CARES Act, which the Company continues to evaluate. Further, if despite the good-faith belief that given the Company’s circumstances all eligibility requirements for the PPP Loan were satisfied, if it is later determined the Company had violated any applicable laws or regulations or it is otherwise determined the Company was ineligible to receive the PPP Loan, it may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties.

The Company continues to examine the impact that the CARES Act may have on its business. Currently the Company is unable to determine the impact that the CARES Act will have on its financial condition, results of operation or liquidity.

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 an 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 Company's Consolidated Financial Statements includedavailable amount immediately and the remaining $1.0 million will be available in its Annual Report on Form 10-K forincrements of least $500 thousand with at least 30 days between borrowings and issued an additional 1,200,000 Series G Warrants. The Company evaluated the year ended December 31, 2018, subsequentaccounting related to the Company’s registered direct securities offeringamendment and in conjunction with the warrants issued. Based 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 ofanalysis the Company may be in excessdetermined 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 its fair market value and conducted an impairment analysis during the second quarter of 2018.$3.9 million. As a result, the Company recorded an impairment chargea debt discount of approximately $14.0$0.6 million for the full write-downand a $2.4 million loss on extinguishment of debt which is comprised of the goodwill recordedfair 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%.

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As required by the terms of this credit agreement, the lender exercised its warrants to purchase 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 connection with its acquisitionwhich the Company received net proceeds of BarioSurg.$0.6 million. In addition, the Company issued to the lender 1,200,000 Series G warrants to purchase an aggregate of 1,200,000 shares of common stock. As an inducement to the Lender to enter into the amendment and make the additional loans contemplated thereby, the Company issued to the Lender an additional 1,200,000 Series G warrants dated September 14, 2020 to purchase an aggregate of 1,200,000 shares of common stock. The original Series G warrants were valued using the relative fair value basis and the amount was recorded as described in Note 3, discontinued operations for the nine months ended September 30, 2018 include a goodwill impairment charge for the full write-downpart of the goodwill recorded in connection with the Company’s acquisition of ReShape Medical.

(6)  Debtdebt issuance costs, see Note 8 for additional details.

Asset Purchase Consideration Payable

The asset purchase consideration payable related to the Company’s December 2018 acquisition of the Lap-Band product line from Apollo Endosurgery, Inc. (“Apollo”), was initially recorded at net present value using a discount rate of 5.1%. The asset purchase consideration payable was originally secured by a first security interest in substantially all of the Company’s assets, but that security interest terminated in accordance with its terms in October 2019. At September 30, 2019,2020, the aggregate carrying value of the current and noncurrent asset purchase consideration payable of approximately $6.6$4.8 million, as adjusted for accretion of interest of approximately $0.3 million, and due to the first security interest held by Apollo, approximates fair value.$0.5 million.

Convertible Subordinated Debentures

On 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 bifurcated embedded conversion features discussed below. The initial carrying amount of the debentures, net of discounts and deferred financing costs, was approximately $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 debentures, the Company recorded a loss on extinguishment of debt of approximately $0.1 million, which consisted of the unamortized debt discount and deferred financing costs.million.

The debentures contained a conversion feature that provided that, at any time after June 28, 2019, if the debentures had not been repaid, but subject to certain 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 during the 20 trading days prior to conversion. The Company 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 approximately $0.5 million as of the issuance date using a Monte Carlo model and primarily Level 3 inputs using a risk-free rate of 2.19%; probability of conversion of 98.0%; probability of repayment at each conversion of 2.0%; volatility of 161.74%; option-adjusted spread of 50.0%; and a discount for lack or marketability of 20.0%. 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. TheAs the Company did not elect the fair value adjustmentoption for the debentures, the initial carrying amount of the debentures, net of discounts and deferred financing costs of $1.5 million, which was accreted to the embedded derivative

13

liability of approximately $0.5 million was recorded as a reductionface amount over the term to Interest Expense for the nine months ended September 30, 2019.maturity.

In connection with the financing, the Company amended the exercise price of warrants to purchase up to 66,6678,000,000 shares of common stock held by the investors that were issued on November 28, 2018 from $180.00$1.50 per share to $120.00$0.01 per share. The value attributable to the exercise price reduction of $130$0.1 million was recorded in Warrant Expense for the nine months ended September 30, 2019 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%.

(7)(6) Leases

On the date of adoption of Topic 842, theThe Company hadhas a noncancelable operating leaseslease for office and warehouse space in San Clemente, California and noncancelable operating leases for certain office equipment that expire at various dates through 2022. The Company does not have any short-term leases or 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.

Operating lease costs was $0.1 million for both the three months ended September 30, 2020 and 2019, and $0.2 million and $0.4 million for the nine months ended September 30, 2019 were $0.1 million2020 and $0.4 million,2019, respectively. Variable lease costs were not material.

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Table of Contents

Supplemental information related to operating leases is as follows:

 

 

 

 

Balance Sheet Information at September 30, 2019

 

 

 

 

Balance Sheet Information at September 30, 2020

Operating lease ROU assets

 

$

828

 

$

540

 

 

 

 

Operating lease liabilities, current portion

 

$

285

 

$

309

Operating lease liabilities, long-term portion

 

 

552

 

243

Total operating lease liabilities

 

$

837

 

$

552

 

 

 

 

Cash Flow Information for the Nine Months Ended September 30, 2019

 

 

 

 

Cash Flow Information for the Nine Months Ended September 30, 2020

Cash paid for amounts included in the measurement of operating leases liabilities

 

$

353

 

$

242

Maturities of operating lease liabilities at September 30, 2019 were as follows:

 

 

 

 

Twelve Months Ending September 30,

    

 

    

 

2020

 

$

321

 

Twelve months ending September 30,

    

    

2021

 

 

330

 

$

330

2022

 

 

248

 

248

2023

Total lease payments

 

 

899

 

578

Less: imputed interest

 

 

62

 

26

Total lease liabilities

 

$

837

 

$

552

 

 

 

 

Weighted-average remaining lease term at end of period (in years)

 

 

2.7

 

1.7

Weighted-average discount rate at end of period

 

 

5.1

%

5.1

%

(7)  Equity

14

TableJune 2020 Cashless Exercise of Contents

Warrants for Common Stock

Disclosures related to periods prior to adoptingOn June 23, 2020, the new lease guidance

Future minimum lease commitments under noncancelable operating leasesCompany issued 58,981 shares of common stock as of December 31, 2018 were as follows:

 

 

 

 

Year Ending December 31, 

    

 

    

2019

 

$

449

2020

 

 

332

2021

 

 

331

2022

 

 

166

Total

 

$

1,278

(8)  Equity

As described in Note 12 of the Company's Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2018, certain of the Company’s issuances of convertible preferred stock and warrants contain non-standard down round features which result in adjustments to the conversion price of the preferred stock anda cashless exercise price of the warrants in the event of future stock sales at a lower unit price. As of September 30, 2019, warrants issued to investorsthe placement agents in connection with the saleJune 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 convertible preferredcommon 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 over the minimum life of the agreement.

April 2020 Exercise of Warrants for Common Stock

As discussed in August 2017 and warrants issued to investorsNote 5 above, in connection with the salecredit agreement, the lender exercised its Series C and Series F warrants to purchase an aggregate of 5,085,834 shares of common stock in June, July and August 2018, as amended, contain such down round features. At September 30, 2019, thewith a current exercise price of warrants with these down round features was $0.02$0.12 per share, as last reset effective with a direct financing completedwarrant on September 23, 2019.

Down round adjustments were not material during the nine months ended September 30, 2019. During the three and nine months ended September 30, 2018,April 15, 2020, in which the Company recorded total down round adjustments attributable to changes in the conversion pricereceived net proceeds of convertible preferred stock and reductions in the exercise price of warrants of approximately $0.1 million and approximately $4.0 million, respectively. The value attributable to the warrant exercise price reductions in the nine months ended September 30, 2018 was estimated using the Black Scholes model using risk-free interest rates ranging from 2.13% to 2.96%;  expected lives ranging from less than one year to 9.4 years; expected dividends of zero and expected volatility ranging from 111.63% to 293.32%.

The Company had the following equity transactions during the nine months ended September 30, 2019 and 2018:$0.6 million.

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 and seriesSeries C prefundedpre-funded warrants to purchase 3,203,334 shares of common stock at a purchase price of $0.019$2.28 per share. The exercise price of each pre-funded warrant is $0.001$0.12 per share. The Company also issued seriesSeries A warrants to purchase 3,333,334 shares of common stock at an exercise price of $0.022$2.64 per share and seriesSeries B warrants to purchase 3,333,334 shares of common stock at an exercise price of $0.020$2.40 per share. The series B warrants were exercised for 69,167 shares of common stock and series F prefunded warrants to purchase 3,264,167 shares of common stock. For further details on this transaction see Note 9. Net proceeds from the private placement were $6.9 million after deducting

15


Table of Contents

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 $0.025$3.00 per share. The warrants issued to the placement agent are not exercisable until after the Company effects a reverse stock split.

The prefunded series C and the series A and B warrants were exercisable upon the closing of the private placement; however, until the Company effects a reverse stock split, the number of warrants that may be exercised is limited to the number of available unissued authorized shares, as defined in the warrant agreements (“Issuable Maximum”). Because the warrant holders may elect to exercise any of the series C prefunded or series A and B warrants up to their pro rata share of the Issuable Maximum, the $7.3 million in gross proceeds from the sale of the series C prefunded warrants was recorded as a liability. As a result of the liability treatment of the prefunded warrants, the

15

Company included $0.7 million of the transaction costs in Other, net in the Condensed Consolidated Statements of Operations.

The series A and B warrants, series C prefunded warrants and common stock issued contain variable price features until the Company effects a reverse stock split. As a result, the total number of the shares of common stock and series C prefunded warrants purchased and the exercise prices of the series A and B warrants are not fixed until after the Company effects a reverse stock split. The Company analyzed the variable price features and established a warrant liability at the issuance date of approximately $16.0 million. As the initial value of the warrant liability exceeded the proceeds received from the equity offering, the excess value of $8.3 million was recorded as Warrant Expense. The warrant liability is being revalued at each financial reporting period and the total decrease in fair value of $2.2 million was recorded as a reduction of Warrant Expense in the Condensed Consolidated Statements of Operations. The fair values of the warrant liability were determined using a Monte Carlo model and primarily Level 3 inputs.

February 2019 Conversion of Common Stock into New Series of Convertible Preferred Stock

On February 1, 2019, pursuant to an exchange agreement with Sabby Volatility Warrant Master Fund, Ltd. (“Sabby”) 9,9349,993 shares of the Company’s common stock were exchanged for an aggregate of 1,192,000 shares of seriesSeries E convertible preferred stock, par value $0.01 per shareConvertible Preferred Stock (“Series E Preferred Stock”), were issued in a noncash transaction. Each share of Series E Preferred Stock was convertible into one share of common stock at Sabby’s election.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.

Conversion of Series B Convertible Preferred Stock into Common Stock

During the nine months ended September 30, 2019, 156 shares of Series B convertible preferred stockConvertible Preferred Stock (“Series B Preferred Stock”) were converted into 1,040 shares of common stock. At September 30, 2019,2020, the remaining 3 shares of Series B Preferred stock are convertible into 1,250 shares of common stock.

September 2018 Issuance of Common Stock and(8) Warrants and Exchange of Series D Convertible Preferred Stock for Common Stock and Warrants

On September 20, 2018,14, 2020, the Company completedissued 1,200,000 Series G Warrants to an institutional investor in connection with an amendment to the credit agreement. The Series G Warrants were valued at $2.9 million using the fair value approach at the time of issuance was recorded as a public offering which includedcomponent of the issuanceloss on extinguishment of 696 sharesdebt, see Note 5 above for details. The fair value of common stock atthe Series G Warrants was determined using a purchase priceBlack Scholes option pricing model using a risk-free interest rate of $756.00 per share0.27%, an expected term of five years; expected dividends of zero and warrantsexpected volatility of 101.1%.

On March 25, 2020, the Company issued 1,200,000 Series G Warrants to purchase 348 shares of common stock at an exercise price of $756.00 per share. Ininstitutional investor in connection with the public offering,credit agreement, see Note 5 above for details. The Series G Warrants were valued at $1.4 million using the placement agent received warrants to purchase 49 sharesrelative fair value approach at the time of common stock at an exercise price of $945.00 per share. Net proceeds from the public offering were $0.4 million, after deducting placement agent feesissuance and other transaction costs.

Pursuant to the termswas recorded as deferred debt issuance cost. The relative fair value of the April 2018 securities purchase agreement, on September 20, 2018, the purchasers exercised their right to exchange their sharesSeries G Warrants was determined using a Black Scholes option pricing model using a risk-free interest rate of series D convertible preferred stock into the common stock0.56%; an expected term of five years; expected dividends of zero and warrants included in the September 2018 public offering. As a result, an aggregateexpected volatility of 178.9 shares of series D convertible preferred stock was exchanged for the issuance of 237 shares of common stock and warrants to purchase 119 shares of common stock at an exercise price of $756.00 per share.

August 2018 Issuance of Common Stock and Warrants

On August 3, 2018, the Company completed a registered direct offering which included the sale of 60 shares of common stock at a purchase price of $10,080.00 per share and warrants to purchase 60 shares of common stock at an initial exercise price of $18,480.00 per share. Net proceeds from the registered direct offering were approximately $0.5 million, after deducting placement agent fees and other transaction costs.

July 2018 Issuance of Common Stock and Warrants

On July 12, 2018, the Company completed a registered direct offering which included the sale of 74 shares of common stock at a purchase price of $34,440.00 per share and warrants to purchase 74 shares of common stock at an initial exercise price of $34,608.00 per share. Net proceeds from the registered direct offering were approximately $2.0 million, after deducting placement agent fees and other transaction costs.

16

June 2018 Issuances of Common Stock and Warrants

On June 21, 2018, the Company completed a registered direct offering which included the sale of 28 shares of common stock at a purchase price of $51,576.00 per share per share and warrants to purchase 28 shares of common stock at an initial exercise price of $51,744.00 per share. Net proceeds from the registered direct offering were $1.3 million, after deducting placement agent fees and other transaction costs. The Company used $0.5 million of the net proceeds of the offering to redeem 500 of the then currently 5,250 outstanding shares of its series D convertible preferred stock, which the Company agreed to as an inducement to obtain the required consent of the holder of series D convertible preferred stock for the Company to complete the offering.

On June 9, 2018, the Company completed a registered direct offering which included the sale of 23 shares of common stock at a purchase price of $65,856.00 per share per share and warrants to purchase 17 shares of common stock at an initial exercise price of $66,024.00 per share. Net proceeds from the registered direct offering were approximately $1.3 million, after deducting placement agent fees and other transaction costs.

April 2018 Issuance of Convertible Preferred Stock and Warrants

On April 3, 2018 the Company completed a registered direct offering which included the sale of 6,000 shares of series D convertible preferred stock, par value $0.01 per share (“Series D Preferred Stock”), at a purchase price of $1,000 per share and warrants to purchase 139 shares of common stock at an initial exercise price of $189,000.00 per share. Net proceeds from the registered direct offering were approximately $5.1 million, after deducting placement agent fees and other transaction costs. In April 2019, the remaining warrants to purchase 137 shares of common stock, net of the warrants exercised in May 2018, expired in accordance with their terms. 

(9) Warrants97.00%.

On September 23, 2019, the Company entered into a warrant exercise agreement with the holders of seriesSeries B warrants issued in the June 2019 private placement. The holders agreed to early exercisedexercise 3,333,334 seriesSeries B warrants issued in the private placement in exchange for 69,167 shares of common stock and 3,264,167 common stock equivalents in the form of Series F prefunded warrants. The net proceeds from the early exercise of seriesSeries B warrants were approximately $7.1$6.9 million, after deducting placement agent fees and other transaction costs. As an incentive for the warrant holders to exercise their seriesSeries B warrantswarrant in full, the warrant holders were issued new five-year series E warrants to purchase up to 3,333,334 unregistered shares of the Company’s common stock, in aggregate, at an exercise price of $0.05$6.00 per share, through a private placement.

The series E In connection with the registered direct offering, the placement agent received warrants and series F prefunded warrants and common stock issued contain variable price features until the Company effects a reverse stock split. As a result, the total number of theto purchase 233,334 shares of common stock and series F prefunded warrants purchased and theat an exercise price of the series E warrants are not fixed until after the Company effects a reverse stock split. The Company analyzed the variable price features and established a warrant liability at the issuance date of approximately $24.6 million. As the initial value of the warrant liability exceeded the proceeds received from the equity offering, the excess value of $17.2 million was recorded as warrant expense. The warrant liability is being revalued at each financial reporting period and the total increase in fair value of approximately $3.4 million was recorded as additional warrant expense in the Condensed Consolidated Statement of Operations. The fair value of the warrant liability were determined using a Monte Carlo model and primarily Level 3 inputs using a risk-free rate of 1.59%; volatility of 93.2%; discount rate of 99.8%; and a discount for lack of marketability of 32.0%.

On May 24, 2018, an institutional investor agreed to exercise an aggregate of 751 warrants to purchase common stock in exchange for a reduction in the warrant exercise price. The warrant exercise was accounted for as a warrant inducement and the related fair value adjustment to the exercised warrants of $0.1 million was recorded in Warrant Expense in the Consolidated Statements of Operations for the nine months ended September 30, 2018. The value attributable to the exercise price reductions was estimated using the Black Scholes option pricing model using risk-free interest rates ranging from 2.28% to 2.65%; expected terms ranging from less than one year to 3.7 years; expected dividends of zero and expected volatility ranging from 120.44% to 142.78%.

$6.00 per share.

1716


(10)(9) Revenue Disaggregation and Operating Segments

The Company conducts operations worldwide and has sales in the following regions: United States, Australia, Europe and Rest of World. For the three and nine months ended September 30, 2020 and 2019, the Company only sold the LAP-BAND products. The following table presents the Company’s revenue disaggregated by product and geography:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

Three Months Ended September 30, 2018

 

    

U.S.

    

OUS *

    

Total

    

U.S.

    

OUS

    

Total

Lap-Band product

 

$

3,143

 

$

372

 

$

3,515

 

$

 —

 

$

 —

 

$

 —

ReShape vBloc product

 

 

 —

 

 

 —

 

 

 —

 

 

8  

 

 

 —

 

 

 8

Total

 

$

3,143

 

$

372

 

$

3,515

 

$

8  

 

$

 —

 

$

 8

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

United States

$

2,594

$

3,143

$

6,006

$

10,219

Australia

307

372

725

820

Europe

637

1,273

Rest of world

64

88

Total net revenue

$

3,602

$

3,515

$

8,092

$

11,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

Nine Months Ended September 30, 2018

 

    

U.S.

    

OUS *

    

Total

    

U.S.

    

OUS

    

Total

Lap-Band product

 

$

10,219

 

$

820

 

$

11,039

 

$

 —

 

$

 —

 

$

 —

ReShape vBloc product

 

 

 —

 

 

 —

 

 

 —

 

 

157

 

 

 —

 

 

157

Total

 

$

10,219

 

$

820

 

$

11,039

 

$

157

 

$

 —

 

$

157


*The next largest individual country outside the U.S.United States was Australia, which was 10.5% and 7.2%of total revenuesUnited Kingdom for the three months ended September 30, 2020 which was 9.6% of total revenues, and Australia for the nine months ended September 30, 2020 which was 9.0% of total revenues. Australia was the next largest individual country outside the United States for both the three and nine months ended September 30, 2019 respectively. Sales to Apollo for Europe were included in U.S. sales. Beginning in the quarter ended December 31, 2019, the Company will recognize sales in Europe directly through their own distributors and will be included in the OUS column.

As described in Note 4was 10.5% and 7.2%, respectively, of the Company's Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2018, the Company acquired the Lap-Band product line in December 2018.  As a result of the acquisition of the Lap-Band product line, the Company is no longer actively marketing the ReShape vBloc product.total revenues.

Operating Segments

The Company’s operating segments currently consist of the Lap-Band segment and the ReShape Vest segment. These two operating 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 gross profit.profit, which currently only consists of LAP-BAND. 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.

(10) Income Taxes

The Company’s tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter the Company acquired the established Lap-Band product line in December 2018, and the Lap-Band product line accounted for allupdates its estimate of the annual effective tax rate. The Company’s revenuesquarter tax provision, and gross profit forquarterly estimate of annual effective tax rate, are subject to significant volatility due to several factors, including the Company’s ability to accurately predict pre-tax income and loss. During the three and nine months ended September 30, 2019. There were no revenues or gross profit2020 a $39 thousand and $108 thousand, respectively, tax benefit was recorded, for the ReShape Vest operating segment for the three months and nine months ended September 30, 2019 and 2018 because the ReShape Vest is stillprimarily due to adjusted pre-tax income in the development stage.

The Company’s CODM no longer evaluates performance related to ReShape vBloc, as revenues and gross profit during each of the three months ended June 30 and September 30, 2018 were insignificant, and there have been no revenues or gross profit associated with the ReShape vBloc product since September 30, 2018. In addition, the Company is no longer actively marketing the ReShape vBloc product.

(11) Income Taxes

Australia. No income tax expense or benefit was recorded for the three months ended September 30, 2019 due to the valuation of allowance on deferred tax assets. In connection with the impairment of IPR&D discussed in Note 5, which resulted in a reduction in the deferred tax liability associated with the indefinite-lived intangible asset, theThe Company recorded an income tax benefit of $0.6 million for the nine months ended September 30, 2019. The income tax benefit is net2019, in connection with the impairment of an increase toIPR&D, which resulted in a reduction in the deferred tax valuation allowanceliability associated with the indefinite-lived intangible asset.

In assessing the realization of $1.1million fordeferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax liability reversal that had been netted with theassets will not be realized. The ultimate realization of deferred tax asset associated with U.S. federal net operating loss carryforwards that do not expire.

Theassets is dependent upon the generation of future taxable income tax benefit from continuing operations forduring periods in which those temporary differences become deductible. Based on the threelevel of historical losses, projections of losses in future periods and nine months endedpotential limitations pursuant to changes in ownership under Internal Revenue Code (“IRC”) Section 382, the Company provided a valuation allowance at both September 30, 2018 of $0.5 million2020 and $3.1 million, respectively, reflects the tax impact of the net operating losses from continuing operationsDecember 31, 2019.

1817


generated in the periods which have an indefinite carryover period. A portion of these net operating losses were supported by expected taxable income from the reversal of indefinite-lived intangibles, such that they are more likely than not to be realized.

(12)(11)  Stock-based Compensation

The Company recognized a stock-based compensation benefit of $0.5 million and an expense of $0.8 million, for the three months ended September 30, 2019 and September 30, 2018, respectively, and expenses of $1.5 million and $2.3 million for the nine months ended September 30, 2019 and September 30, 2018, respectively. The $0.5 million benefit for the three months ended September 30, 2019 was primarily due to cancelations of grants relating to a recently settled litigation matter. As of September 30, 2019, there was approximately $3.0 million of total unrecognized compensation costs related to unvested stock option awards, which are expected to be recognized over a weighted-average period of 2.4 years.

Stock-based compensation expense related to stock options issued under the ReShape Lifesciences Inc. Second Amended and Restated 2003 Stock Incentive Plan (the “Plan”) and as inducement grants for the three and nine months ended September 30, 20192020 and 20182019 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

 

2019

 

2018

 

2019

 

2018

Selling, general and administrative

 

$

(498)

 

$

726

 

$

1,443

 

$

2,178

Research and development

 

 

 1

 

 

30

 

 

43

 

 

128

Total

 

$

(497)

 

$

756

 

$

1,486

 

$

2,306

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2020

2019

2020

2019

Sales and marketing

$

$

(78)

$

$

70

General and administrative

255

(420)

1,029

43

Research and development

 

1

 

 

1,373

Total stock-based compensation expense

$

255

$

(497)

$

1,029

$

1,486

As of September 30, 2020 there was approximately $0.5 million of total unrecognized compensation costs related to unvested stock option awards, which are to be recognized over a weighted-average period of 1.4 years. There were no stock options granted during both the three and nine months ended September 30, 20192020 and the three months ended September 30, 2018.  During the nine months ended September 30, 2018, the Company granted 24 stock options under the Plan at a  weighted average exercise price of $161,616.00per share. There were no stock options exercised during the three and nine months ended September 30, 2019 and 2018.2019.

The weighted-average assumptions used in the Black-Scholes option pricing model to estimate the grant date fair value of stock options  granted during the nine months ended September 30, 2018 were as follows:

Risk-free interest rate

2.85

%

Expected term (in years)

6.25

Expected dividend yield

0

%

Expected volatility

121.52

%

The total estimated fair value of stock options granted during the nine months ended September 30, 2018 was approximately $3.4 million.

(13)(12)  Commitments and Contingencies

Litigation

Fulfillium. On April 20, 2017, Fulfillium, Inc. filed a complaint against ReShape Medical, Inc. (which the Company acquired in October 2017 and which is now a wholly owned subsidiary of the Company) in the U.S. District Court for the District of Delaware, which alleged misappropriation of trade secrets and infringement of two U.S. Patents (“Fulfillium I”). On July 28, 2017, ReShape Medical moved to dismiss both the trade secret claim and certain aspects of the patent infringement claim, and to transfer the litigation to the U.S. District Court for the Central District of California. On October 16, 2017, the Court granted ReShape Medical’s motion to dismiss the trade secret and willful infringement claims, and ordered the case transferred to the U.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,

19

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 parties held a mediation on April 9, 2019, but were unable to resolve the matter. On September 6, 2019, the Company entered into a confidential settlement agreement (the “Settlement Agreement”) with Fulfillium pursuant to which Fulfillium agreed to dismiss with prejudice the previously-disclosed lawsuits filed by Fulfillium against the Company in exchange for $1.5 million in cash, $0.5 million of which was paid following the settlement and the remaining $1.0 million of which will be payable in four quarterly installments beginning in January 2020. The Company has recorded a contingent loss relating to the settlement of $1.5 million in its consolidated financial statements as of September 30, 2019.

Except as disclosed in the foregoing paragraphs, the Company is not currently a party to any material litigation and the Company is not aware of any pending or threatened litigation against it that is reasonably possible tocould 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,litigations, 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.

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 product liability litigation and is not aware of any pending or threatened product liability litigation that is reasonably possible to have a material adverse effect on the Company’s business, operating results or financial condition.

(13) Subsequent Events

As part of the amendment to the credit agreement discussed in Note 5 above, the Company is permitted to make two additional delayed drawdowns. On November 13, 2020, the Company received the first additional draw of $500 thousand dollars.

2018


ITEM  2.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. 

Except for the historical information contained herein, the matters discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements that involve risks and uncertainties. In some cases, these statements may be identified by terminology such as "may," "will," "should," "expects," "could," "intends," "might," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue," or the negative of such terms and other comparable terminology. These statements involve known and unknown risks and uncertainties that may cause our results, level of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to such differences include, among others, those discussed in the "Risk Factors" section included in Item 1A of our Annual Report on Form 10-K filed on May 16, 2019. April 30, 2020. 

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 a developer of minimally invasive medical devices that advance bariatric surgery to treat obesity and metabolic diseases. Our current portfolio includes the LAP-BAND® Adjustable Gastric Banding System and the ReShape VestTM, an investigational device, to help treat more patients with obesity. There has been no revenue recorded for the ReShape Vest as the product is still in the development stage. Following our acquisition

Recent Developments

On January 30, 2020, WHO announced a global health emergency because of a new strain of coronavirus and the risks to the 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 coronavirus outbreak. In response to the COVID-19 pandemic, on March 27, 2020, President Trump signed into law the CARES Act, which provides for the PPP. The Company received a PPP Loan of $1.0 million dollars. See Note 2 and Note 5 to the condensed 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 5 to the condensed 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, 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 Lap-Band product lineeasing, the Company did see sales volumes improve as we progressed through the third quarter. 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.

On September 14, 2020, the Company entered into an 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 December 2018, we are no longer actively marketing the ReShape vBloc product.amount available under delayed draw term loans, the maturity date of the loans under the credit agreement, including those under the amendment, was extended from September 24, 2020 to March 31, 2021. See Note 5 to the condensed consolidated financial statements for further details.

19


Table of Contents

During the third quarter of 2020, the Company launched ReShapeCareTM. 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.

Results of Operations

Continuing OperationsThe following table sets forth certain data from our unaudited consolidated statements of operations expressed as percentages of net revenue (in thousands):

Three Months Ended September 30, 

Nine Months Ended September 30, 

2020

2019

2020

2019

Revenue

$

3,602

100.0

%

$

3,515

100.0

%

$

8,092

100.0

%

$

11,039

100.0

%

Cost of goods sold

1,321

36.7

%

1,413

40.2

%

3,471

42.9

%

3,849

34.9

%

Gross profit

2,281

63.3

%

2,102

59.8

%

4,621

57.1

%

7,190

65.1

%

Operating expenses:

Sales and marketing

1,160

32.2

%

950

27.0

%

3,446

42.6

%

3,338

30.2

%

General and administrative

2,434

67.6

%

4,412

125.5

%

7,809

96.5

%

14,237

129.0

%

Research and development

859

23.8

%

858

24.4

%

2,619

32.4

%

2,874

26.0

%

Impairment of intangible assets

%

%

%

6,588

59.7

%

Loss on litigation settlement

%

1,500

42.7

%

%

1,500

13.6

%

Total operating expenses

4,453

123.6

%

7,720

219.6

%

13,874

171.5

%

28,537

258.5

%

Operating loss

(2,172)

(60.3)

%

(5,618)

(159.8)

%

(9,253)

(114.3)

%

(21,347)

(193.4)

%

Other expense (income), net:

Interest expense, net

739

20.5

%

74

2.1

%

1,632

20.2

%

390

3.5

%

Loss on extinguishment of debt

2,435

68

%

%

2,435

30

%

71

0.6

%

Warrant expense

%

22,564

641.9

%

%

26,821

243.0

%

(Gain) loss on foreign currency

(128)

(3.6)

%

(229)

(7)

%

(118)

(1.5)

%

(229)

(2)

%

Other, net

%

727

20.7

%

%

1,336

12.1

%

Loss from continuing operations before income taxes

(5,218)

(144.9)

%

(28,754)

(818.0)

%

(13,202)

(163.1)

%

(49,736)

(450.5)

%

Income tax benefit

(39)

(1.1)

%

%

(108)

(1.3)

%

(586)

(5.3)

%

Net loss

$

(5,179)

(143.8)

%

$

(28,754)

(818.0)

%

$

(13,094)

(161.8)

%

$

(49,150)

(445.2)

%

Revenue. RevenueNon-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 period-to-period operating results and that, in some respects, these non-GAAP financial measures are more indicative of the Company’s ongoing core operating performance than their GAAP equivalents.

Management believes that the presentation of this non-GAAP financial information provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, and amortization methods, which provides a more complete understanding of our financial performance, competitive position, and prospects for the future. However, the non-GAAP financial measures presented in the Form 10-Q have certain limitations in that they do not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. Therefore, investors should consider non-GAAP financial measures in addition to, and not 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.

Adjusted EBITDA

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

20


Table of Contents

measurement process. Adjusted EBITDA is defined as net loss before interest, taxes, depreciation and amortization, stock-based compensation, and other one-time costs.

The following table contains a reconciliation of non-GAAP net loss to GAAP net loss attributable to common stockholders for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

2020

2019

2020

2019

GAAP net loss attributable to common stockholders

$

(5,179)

$

(28,754)

$

(13,094)

$

(49,150)

Adjustments:

Interest expense, net

739

74

1,632

390

Income tax benefit

(39)

(108)

(586)

Depreciation and amortization

419

423

1,257

1,286

Stock-based compensation expense

255

(497)

1,029

1,486

Loss on extinguishment of debt

2,435

2,435

71

Warrant expense

22,564

26,821

Loss on litigation settlement

1,500

1,500

Impairment of intangible assets

6,588

Other, net

727

1,336

Non-GAAP loss

$

(1,370)

$

(3,963)

$

(6,849)

$

(10,258)

Comparison of $3.5 millionResults of Operations

Three months ended September 30, 2020 and $11.0 million, respectively, consistedSeptember 30, 2019

Net Revenue: The following table summarizes our unaudited net revenue by geographic location based on the location of sales of our Lap-Band product which we acquired in December 2018. While July and August experienced some seasonality that has been seen industry-wide, September numbers were in-line with previous quarters and expectations, and we are seeing this trend continue to right itself. As a result of this seasonality our revenues in the third quarter decreased  $0.9million from $4.4 million in revenues in the second quarter of 2019, which was primarily due to a decrease of revenue of $0.9million in the U.S. over the previous quarter. Year-to-date through September, our revenues in the U.S. are showing a continued positive trend. U.S. revenue has represented the majority of our sales and has the highest margins. In addition, as a result of our obtaining all distribution rightscustomers for the Lap-Band product in April 2019, we had revenues in the current quarter and year to date periods of $0.4 million and $0.8 million, respectively, in Australia. As a reminder, our OUS revenue consisted of direct sales to our Australian customers while sales to Apollo for customers in Europe were included in U.S. revenue. For the three months ended December 31,September 30, 2020 and 2019, we will beginas well as the percentage of each location to recognize European revenues as OUS sales through our distributors. Fortotal revenue and the nineamount of change and percentage of change (dollars in thousands):

Three Months Ended September 30, 

Amount

Percentage

2020

2019

Change

Change

United States

$

2,594

72.0

%

$

3,143

89.4

%

$

(549)

(17.5)

%

Australia

307

8.5

%

372

10.6

%

(65)

(17.5)

%

Europe

637

17.7

%

%

637

100.0

%

Rest of World

64

1.8

%

%

64

100.0

%

Total net revenue

$

3,602

100.0

%

$

3,515

100.0

%

$

87

2.5

%

Revenue totaled $3.6 million for the three months ended September 30, 2018,2020, compared to $3.5 million for the same period in 2019. The primary reason for the increase in revenue of $0.2$0.1 million or 2.5%, is due to increased sales in Europe. Sales in Europe increased by 100%, as there was comprised of sales of our ReShape vBloc product. 

Revenueslimited distribution in Europe during the current quarter increased $0.4 million over the firstthird quarter of 2019, whichand such was primarily due to theincluded within United States’ revenue.

Cost of Goods Sold and Gross Profit: The following table summarizes our unaudited cost of revenue in Australia, which is attributable to the Company obtaining all distribution rightsand gross profit for the Lap-Band productthree months ended September 30, 2020 and 2019, as well as the percentage compared to total revenue and amount of change and percentage of change (dollars in April 2019 creating revenue in Australia.thousands):

Three Months Ended September 30, 

Amount

Percentage

2020

2019

Change

Change

Revenue

$

3,602

100.0

%

$

3,515

100.0

%

$

87

2.5

%

Cost of goods sold

1,321

36.7

%

1,413

40.2

%

(92)

(6.5)

%

Gross profit

$

2,281

63.3

%

$

2,102

59.8

%

$

179

8.5

%

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Table of Contents

Gross profit.Profit. Gross profit for the three months ended September 30, 2020 was $2.3 million compared to $2.1 million for the same period in the third quarter and first nine months2019, an increase of 2019 of $2.1million and $7.2 million, respectively, reflects cost of sales associated with the established Lap-Band product line.$0.2 million. Gross profit as a percentage of total revenue for the three months ended September 30, 2020 was 63.3% compared to 59.8% for the same period in 2019. The increase in gross profit margin is primarily due to increased average selling prices and ninereduced period expenses, including lower overhead department expenses.

Operating Expenses: The following table summarizes our unaudited operating expenses for the three months ended September 30, 2020 and 2019, as well as the percentage of total revenue and the amount of change and percentage of change (dollars in thousands):

Three Months Ended September 30, 

Amount

Percentage

2020

2019

Change

Change

Sales and marketing

$

1,160

32.2

%

$

950

27.0

%

$

210

22.1

%

General and administrative

2,434

67.6

%

4,412

125.5

%

(1,978)

(44.8)

%

Research and development

859

23.8

%

858

24.4

%

1

0.1

%

Loss on litigation settlement

%

1,500

42.7

%

(1,500)

(100.0)

%

Total operating expenses

$

4,453

123.6

%

$

7,720

219.6

%

$

(3,267)

(42.3)

%

Sales and Marketing Expense. Sales and marketing expenses for the three months ended September 30, 2020 increased by $0.2 million or 22.1%, to $1.2 million, compared to $1.0 million for the same period in 2019. The increase is primarily due to an increase in payroll related expenses of $0.1 million, global sales commissions of $0.1 million and stock-based compensation expense of $0.1 million compared to the third quarter of 2019. This is offset by a reduction of approximately $0.1 million in travel and entertainment expenses, due to reduced travel from the COVID-19 pandemic.

General and Administrative Expense. General and administrative expenses were $2.4 million for the three months ended September 30, 2020 as compared to $4.4 million for the same period in 2019, a decrease of $2.0 million, or 44.8%. The decrease is primarily due to decreases in audit, consulting and other professional service provider expense of $1.2 million, legal fees of $1.2 million and bad debt expense of $0.2 million; offset by an increase in stock-based compensation expense of $0.7 million, due to forfeitures and cancellations of options during the third quarter of 2019.

Research and Development Expense. Research and development expenses were $0.9 million for both the three months ended September 30, 2020 and 2019. The Company did have a decrease in research and development expenses due to a slowdown in the clinical trials for the ReShape Vest as a result of the COVID-19 pandemic. This was offset by an increase in payroll related expenses.

Loss on Litigation Settlement. During the third quarter of 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 filed by Fulfillium.

Warrant Expense. There was no warrant expense for the three months ended September 30, 2020. Warrant expense for the three months ended September 30, 2019 includes approximately $17.2 million for issuance of the prefunded Series F Warrants and Series E Warrants. Additionally, there was 60 percent and 65 percent, respectively, as compared with 64 percent and 68 percentapproximately $5.4 million of additional expense for the increase in fair value of the warrant liability during the period.

Net Interest Expense. Net interest expense for the three and six months ended JuneSeptember 30, 2019, respectively, and 73 percent2020 was $0.7 million compared to $0.1 million for the first threemonths ofsame period in 2019. The lower gross profit ratesprimary reason for the increase is $0.6 million is due to the amortization of deferred issuance costs and debt discount recorded as interest expense, related to the credit agreement with an institutional investor.

Loss on Extinguishment of Debt. Loss on extinguishment of debt for the three months ended September 30, 2020, was $2.4 million due to the extinguishment of debt, relating to the fair value of the warrants issued in connection with the third quartercredit agreement amendment and first nine months of 2019 are primarily the result of sales during 2019to a subsidiary of Apollo Endosurgery, Inc. (“Apollo”). Pursuant to a distribution agreement, Apollo serves as the Company’s distributor of Lap-Band product in certain geographical areasdebt discount.

2122


outsideGain on Foreign Currency Exchange. Gain on foreign currency exchange for the U.S.three months ended September 30, 2020 was $0.1 million compared to a $0.2 million for athe same period of up to one year from the acquisition date of the Lap-Band product line. Gross profit on sales of the ReShape vBloc product in the first nineprior year, primarily due to exchange rate fluctuations between the United States dollar and Euro and Australian dollar.

Other, net. There were no other, net expenses for the three months ended September 30, 2020. Other, net expenses of 2018 was $0.1 million.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $5.4$0.7 million for the three months ended September 30, 2019 primarily relates to transaction costs required to be expensed as compared with $6.8 milliona result of the liability treatment for the three months ended June  30, 2019 and $4.3 millionwarrants issued in connection with our September equity financing.

Income Tax Benefit. An income tax benefit of $39 thousand was recorded for the three months ended September 30, 2018. For2020, primarily related to adjusted pre-tax income in Australia. There was no income tax expense or benefit for the same period in 2019.

Nine months ended September 30, 2020 and September 30, 2019

Net Revenue. The following table summarizes our unaudited net revenue by geographic location based on the location of customers for the nine months ended September 30, 2020 and 2019, as well as the percentage by location of total revenue and 2018, selling generalthe amount of change and administrative expenses were $17.6million and $15.0 million, respectively. Selling, general and administrative expensespercentage of change (dollars in the first nine months of 2019 include $1.0million of severance costs and $2.0 million of one-time litigation related expenses. The remainder of the increase in 2019 over the same periods in 2018 is primarily the result of an increase in our selling costs due to the increase in sales personnel and higher commissions associated with the increased Lap-Band revenues.thousands):

Nine Months Ended September 30, 

Amount

Percentage

2020

2019

Change

Change

United States

$

6,006

74.2

%

$

10,219

92.6

%

$

(4,213)

(41.2)

%

Australia

725

9.0

%

820

7.4

%

(95)

(11.6)

%

Europe

1,273

15.7

%

%

1,273

100.0

%

Rest of World

88

1.1

%

%

88

100.0

%

Total net revenue

$

8,092

100.0

%

$

11,039

100.0

%

$

(2,947)

(26.7)

%

Research and Development Expenses. Research and development expenses were $0.9 million for the three months ended September 30, 2019 compared with $1.0 million for the three months ended September 30, 2018. For the nine months ended September 30, 2019, research and development expenses were $2.9 million compared with $5.5Revenue totaled $8.1 million for the nine months ended September 30, 2018.2020, compared to $11.0 million for the same period in 2019. The primary reason for the decrease in revenue of $2.9 million, or 26.7%, 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. In the second quarter of 2020, sales volumes began to improve as we progressed through the quarter and continued through the third quarter with revenues in the quarter being consistent with the prior year.

Cost of Goods Sold and Gross Profit: The following table summarizes our unaudited cost of revenue and gross profit for the nine months ended September 30, 2020 and 2019, as well as percentage of total revenue and the amount of change and percentage of change (dollars in thousands):

Nine Months Ended September 30, 

Amount

Percentage

2020

2019

Change

Change

Revenue

$

8,092

100.0

%

$

11,039

100.0

%

$

(2,947)

(26.7)

%

Cost of goods sold

3,471

42.9

%

3,849

34.9

%

(378)

(9.8)

%

Gross profit

$

4,621

57.1

%

$

7,190

65.1

%

$

(2,569)

(35.7)

%

Gross Profit. Gross profit for the nine months ended September 30, 2020 was $4.6 million compared to $7.2 million for the same period in 2019, a decrease of $2.6 million. Gross profit as a percentage of total revenue for the nine months ended September 30, 2020 was 57.1% compared to 65.1% 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 margin than domestic sales.

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Table of Contents

Operating Expenses: The following table summarizes our unaudited operating expenses for the nine months ended September 30, 2020 and 2019, as well as the percentage of total revenue, and the amount of change and percentage of change (dollars in thousands):

Nine Months Ended September 30, 

Amount

Percentage

2020

2019

Change

Change

Sales and marketing

$

3,446

42.6

%

$

3,338

30.2

%

$

108

3.2

%

General and administrative

7,809

96.5

%

14,237

129.0

%

(6,428)

(45.1)

%

Research and development

2,619

32.4

%

2,874

26.0

%

(255)

(8.9)

%

Impairment of intangible assets

%

6,588

59.7

%

(6,588)

(100.0)

%

Loss on litigation settlement

%

1,500

13.6

%

(1,500)

(100.0)

%

Total operating expenses

$

13,874

171.5

%

$

28,537

258.5

%

$

(14,663)

(51.4)

%

Sales and Marketing Expense. Sales and marketing expenses for the nine months ended September 30, 2020 increased by $0.1 million or 3%, to $3.4 million, compared to $3.3 million for the same period in 2019. The increase is primarily due an increase in global commissions of $0.2 million and consulting fees of $0.1 million, offset by a reduction in travel and entertainment expenses of $0.2 million due to a reduction of travel caused by the COVID-19 pandemic.

General and Administrative Expense. General and administrative expenses were $7.8 million for the nine months ended September 30, 2020 as compared to $14.2 million for the same period in 2019, a decrease of $6.4 million, or 45.1%. The decrease is primarily due to decreases in audit, consulting and other professional service provider expense of $3.2 million, legal fees of $2.6 million, stock-based compensation expense of $0.3 million, recruiting fees of $0.2 million and $0.1 million of bad debt expense.

Research and Development Expense. Research and development expenses were $2.6 million for the nine months ended September 30, 2020 as compared to $2.9 million for the same period in 2019. The $0.3 million, or 8.9%, decrease is primarily due to a slowdown of the clinical trials for the ReShape Vest due to the COVID-19 pandemic.

Impairment of Intangible Assets. There was no impairment charge recorded during the nine months ended September 30, 2020. During the nine months ended September 30, 2019, our research and development activities were primarily related to the continued development of the ReShape Vest. Research and development expenses for the 2018 periods included development activities for both the ReShape Vest and ReShape vBloc.

Impairment of Intangible Assets. As a result of an impairment analysis performed during the second quarter of 2019, impairment of intangible assets for the first nine months of 2019 reflectswe recorded an impairment charge of $6.6 million on the indefinite-lived intangible asset recorded in connection with our acquisition of BarioSurg, Inc. (“BarioSurg”) in May 2017. We also assessed the recoverability of finite-lived intangible assets during the second quarter of 2019 and did not identify any impairment as a result the performance of this analysis. Based

Loss on an impairment analysis of our goodwill and intangible assets performed during the second quarter of 2018, impairment of intangible assets forLitigation Settlement. During the nine months ended September 30, 2018 is related to  a goodwill impairment loss of $14.0 million, which eliminated the goodwill balance related to our acquisition of BarioSurg. There were no impairment charges recorded relative to the indefinite and finite-lived intangible assets in 2018. Refer to Note 5 to our Condensed Consolidated Financial statements for additional information about impairment of intangible assets.

Legal Settlement. During the third quarter of 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 filed by Fulfillium.

Net Interest Expense and Loss on Extinguishment of Debt. Net interestWarrant Expense. There was no warrant expense for the third quarter of 2019 of $0.1million is primarily related to accretion of interest expense on the net present value of the asset purchase consideration payable. During the first nine months of 2019, net interest expense included accretion of interest expense on the net present value of the asset purchase consideration payable of $0.3 million and the discount and deferred financing costs on the convertible subordinated debentures of $0.7 million. The noncash interest expense for the first nine months of 2019 was reduced by $0.5 million for the write-off of an embedded derivative liability recorded for the conversion features of the debentures that were eliminated as a result of the repayment of the debentures prior to their maturity date. In connection with the early repayment of the debentures in June 2019, we recorded a loss on extinguishment of debt of $0.1 million, which consisted of the unamortized debt discount and deferred financing costs. Refer to Note 6 to our Condensed Consolidated Financial statements for additional information about the asset purchase consideration payable and the convertible subordinated debentures.

Warrants Expense. Warrant expense for the three months ended September 30, 2019 includes approximately $17.2 million for issuance of the prefunded series F warrants and series E warrants. Additionally, there was approximately $5.4 million of additional expense for the increase in fair value of the warrant liability during the period.2020. Warrant expense for the nine months ended September 30, 2019 includes noncash expense of approximately $26.8 million for the value of variable price features included with the warrants and common stock issued in connection with our equity financing completed in June 2019 and September 2019 in excess of the proceeds received and changes in fair value of the warrant liability. In addition, during

Net Interest Expense. Net interest expense for the nine months ended September 30, 2020 was $1.6 million compared to $0.4 million for the same period in 2019. The primary reason for the increase of $1.2 million is due to the amortization of deferred issuance costs and debt discount recorded as interest expense, related to the credit agreement with an institutional investor, slightly offset by the interest expense related to the subordinated debentures in 2019.

Loss on extinguishment of debt. Loss on extinguishment of debt for the nine months ended September 30, 2020, was $2.4 million due to the extinguishment of debt, relating to the fair value of the warrants issued in connection with the credit agreement amendment and the debt discount. The loss on extinguishment of debt for the nine months ended September 30, 2020, was $0.1 million, relating to the early repayment of the debentures.

24


Table of Contents

Loss on Foreign Currency Exchange. Loss on foreign currency exchange for the nine months ended September 30, 2020 was $0.1 million compared to $0.2 million for the same period 2019, primarily due to exchange rate fluctuations between the United States dollar, Euro and Australian dollar.

Other, net. There were no other, net expenses for the nine months ended September 30, 2020. Other, net expenses of $1.3 million for the nine months ended September 30, 2019 we recorded warrant expense of $0.1 million for the change in fair value of certain warrants held by certain institutional investors for which the exercise price was reduced in connection with the sale of convertible subordinated debenturesprimarily relates to those investors.

22

Other, Net. Other, net for the three months and nine months ended September 30, 2019 includes $0.7 million and $1.3 million, respectively, of transaction costs required to be expensed as a result of the liability treatment for the warrants issued in connection with our June 2019 and September equity financings. See Note 8 and Note 9 to our Condensed Consolidated Financial statements for additional information about our equity financings.financing.

Income Tax Benefit. An income tax benefit.  No income tax expense or benefit of $0.1 million was recorded for the threenine months ended September 30, 2019 due2020, primarily related to the net operating loss. Theexpected losses in Australia. There was an income tax benefit of $0.6 million for the nine months ended September 30,same period in 2019, is due to a 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 June30, 2019. The income tax benefit is net of an increaserelated to the deferred tax valuation allowanceimpairment of $1.1 million for the portion of the deferred tax liability reversal that had been netted with the deferred tax asset associated with U.S. federal net operating loss carryforwards that do not expire. The income tax benefit recorded for the three months and nine ended September 30, 2018 of $0.5 million and $3.1 million, respectively, reflects the tax impact of the net operating loss in the period which have an indefinite carryover period.  A portion of these net operating losses were supported by expected taxable income from the reversal of indefinite-lived intangibles, such that they are more likely than not to be realized.IPR&D.

Discontinued Operations

Loss from discontinued operations for the three and nine months ended September 30, 2018 of $2.2 million and $22.0 million, respectively, reflects the activities of our Reshape Balloon product line, which we sold in December 2018 in connection with our acquisition of the Lap-Band product line assets. The loss for the year to date period includes an impairment charge of $13.2 million for the full write-down of the goodwill recorded in connection with our acquisition of ReShape Medical, Inc. There was no income tax expense or benefit for discontinued operations.

Liquidity and Capital Resources

As of September 30, 2019,2020, we had $7.7$1.9 million of cash and cash equivalents to fund operations. We have financed our operations to date principally through the sale of equity securities and debt financing. Our anticipated operations include plans to (i) continue to integrate the sales and operations of the Company with the newly acquired Lap-Band product line in order to expand sales domestically and internationally as well as to obtain cost savings synergies, (ii) continue development of the ReShape Vest, (iii) seek opportunities to leverage our intellectual property portfolio and custom development services to provide third party sales and licensing opportunities, and (iv) 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. 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 or debt financing as well as a strategic merger or other transaction to obtain additional funding to support the expansion of Lap-Band product sales and to continue the development of, and to successfully commercialize, the ReShape Vest. While the acquisition of the Lap-Band product line does provide incremental revenues and cash flows to the Company, the cost to support the clinical trials of the ReShape Vest is expected to exceed internally generated cash flows for the foreseeable future. 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. 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.

23

The following table summarizes our change in cash and cash equivalents and restricted cash (in thousands):

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

 

2019

    

2018

Net cash used by operating activities - continuing operations

 

$

(12,879)

 

$

(13,630)

Net cash used by operating activities - discontinued operations

 

 

 —

 

 

(6,770)

Net cash used by investing activates

 

 

 —

 

 

(7)

Cash provided by financing activities

 

 

15,057

 

 

10,717

Effect of exchange rate changes

 

 

(9)

 

 

 —

Net change in cash and cash equivalents

 

$

2,169

 

$

(9,690)

Nine Months Ended

September 30, 

2020

    

2019

Net cash used in operating activities

$

(6,788)

$

(12,879)

Net cash used in investing activates

(230)

Net cash provided in financing activities

 

6,006

 

15,057

Effect of exchange rate changes

(66)

(9)

Net change in cash and cash equivalents

$

(1,078)

$

2,169

Net Cash Used in Operating Activities - Continuing Operations

Net cash used in operating activities from continuing operations was $12.9$6.8 million and $13.6$12.9 million for the nine months ended September 30, 2020 and 2019, and 2018, respectively. NetFor the nine months ended September 30, 2020, net cash used in operating activities from continuing operations was primarily the result of our net loss of $49.2$13.1 million, partially offset by non-cash adjustments

25


Table of Contents

for amortization of intangible assets of $1.2 million, impairmentnoncash interest expense of intangible assets$0.2 million, loss on extinguishment of $6.6debt of $2.4 million, stock-based compensation expensesexpense of $1.5$1.0 million, bad debt expense of $0.2 million, provision for inventory excess and warrant expenses of $26.8 million. Increases to accounts receivables of $2.3 million, inventoryobsolescence of $0.2 million and prepaid expensesamortization of debt discount and other current assetsdeferred debt issuance cost of $0.5$1.4 million. In addition, the Company has focused on collection of accounts receivable, which resulted in an increase to cash of $1.0 million, werewhich was offset by an increase in change of inventory of $0.9 million primarily due to expected inventory buildup related to our impending manufacturing transfer, and a decrease in accounts payable and accrued liabilities of $3.0$1.3 million.

Net Cash Used in Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2020 was $0.2 million, comprised of capital expenditures related to the process of moving manufacturing from Costa Rica to the United States. This move is expected to be completed by the start of the first quarter 2021. Because of this, we anticipate net cash used in investing activities to be higher in 2020 compared to 2019. There was no cash used in investing activities for the nine months ended September 30, 2019 and was minimal2019.

Net Cash Provided by Financing Activities

Net cash provided by financing activities of $6.0 million for the nine months ended September 30, 2018.2020, consisted of proceeds received from the credit agreement with an institutional investor of $4.5 million, $1.0 million received under the CARES Act in the form of a PPP Loan and $0.6 million in cash received from the exercise of warrants, offset by approximately $0.1 million of debt issuance costs.

Net Cash Provided by Financing Activities from Continuing Operations

Net cash provided by financing activities of $15.1million for the nine months ended September 30, 2019 was primarily related to the $15.1 million of cash proceeds we received in connection with an equity financingsfinancing completed in June 2019 and September 2019. A portion of the net proceeds from the equity financing were used to repay the $2.2 million face amount of convertible subordinated debentures that were issued at an original issue discount of 10 percent10% in March 2019.

Discontinued Operations

Net cash used in operating activities of discontinued operations of $6.8 million for the nine months ended September 30, 2018, reflects activities of the ReShape Balloon product line. There were no investing or financing activities related to discontinued operations for the nine months ended September 30, 2018.

Operating Capital and Capital Expenditure Requirements

Our anticipated operations include plans to (i) continue to integrate the sales and operations of the Company with the newly acquired Lap-Band product line; (ii) continue development of the ReShape Vest, (iii) seek opportunities to leverage the Company’s intellectual property portfolio and custom development services to provide third party sales and licensing opportunities, and (iv) 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. However, the Company will ultimately need to achieve sufficient revenues from product sales and obtain additional equity or debt financing to support its operations.

24

Obtaining funds through the sale of additional equity and debt securities or the warrant holders’ exercise of outstanding common stock warrants 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 FactorsFactors”, of our Annual Report on Form

26


Table of Contents

10-K. 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.

The Company’s acquisition of the Lap-Band product line provides incremental revenues and cash flows and does not require further product development. In order to continue the development of, and to successfully commercialize the ReShape Vest, the Company’s management is currently pursuing various funding options, including seeking additional equity or debt financing as well as a strategic merger or other transaction to obtain additional funding. The Company has a long history of raising equity financing to fund its development activities; however, there can be no assurance that the Company will continue to be successful in its efforts. Should the Company be unable to obtain adequate financing in the near term, the Company’s business, resultresults 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. The unaudited consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Because of the numerous risks and uncertainties associated with the development of medical devices, such as our ReShape Vest, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to complete the development of the ReShape Vest 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;

·

the cost of establishing clinical and commercial supplies of our ReShape Vest and any products that we may develop;

·

the rate of market acceptance of our ReShape Vest 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;

·

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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·

revenue from sales of our established Lap-Band product, any revenue generated by sales of our ReShape Vest or future products;

·

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.

Critical Accounting Policies and Estimates 

The Condensed Consolidated Financial Statements condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Condensed Consolidated Financial Statementscondensed consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies and estimates which we believe could have the most significant effect on our reported results

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and require subjective or complex judgments by management is contained on pages 37-38 in Item 7, “Management'sManagement's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 31, 2018.2019. There have been no significant changes from the information discussed therein. 

During the three and nine months ended September 30, 20192020 there were no material changes to our significant accounting policies which are fully described in Note 2 to our Consolidated Financial Statementsconsolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.2019. 

Off-Balance Sheet Arrangements 

As of September 30, 2019,2020, we did not have any off-balance sheet arrangements. 

Recent Accounting Pronouncements

See Note 1 to our Condensed Consolidated Financial Statementscondensed consolidated financial statements for a discussion of recent accounting pronouncements.

ITEM  3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide disclosure pursuant to this item.

ITEM  4.       CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)“Exchange Act”), defines the term “disclosure controls and procedures” as those controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based on their evaluation as of September 30, 2019,2020, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were notare designed at a reasonable level and effective as of September 30, 2019 for the reasons described below:

Management has determinedend of the period covered in the report in providing reasonable assurance that the Company has not maintained adequate accounting resources with a sufficient understanding of accounting principles generally acceptedinformation we are required to disclose in the United Statesreports we file or submit under the Securities Exchange Act of America (“GAAP”)1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow the Company to identify and properly account for new complex transactions. Management has determined that this represents a material weakness in the Company’s internal control over financial reporting. As a result of this material weakness, management has identified the following additional material weakness in the Company’s internal control over financial reporting:

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·

The Company did not design and implement internal controls around research and development expenses paid to a Contract Resource Organization (“CRO”). This material weakness resulted in the Company not identifying that certain research and development expenses paid to the CRO in connection with the clinical trial of the ReShape Vest are required to be capitalized under GAAP and recognized into expense as the value of the capitalized asset is realized.

Notwithstanding the material weaknesses in our internal control over financial reporting, we have concluded that the consolidated financial statements and other financial information included in our annual and quarterly filings fairly present in all material respects our financial condition, results of operations and cash flows as of, and for, the periods presented.

Material Weaknesses Remediation Activities

To remediate the material weaknesses in our internal control over financial reporting described above, we established transactional level controls to evaluate and monitor the accounting treatment for research and development-related costs. To remediate the material weaknesses relating to the adequacy of accounting resources with a sufficient understanding of GAAP, we have consulted with outside firms, and brought in additional resources with significant accounting and finance experience, including the hiring of a new Vice President of Finance and Corporate Controller.  We have also re-evaluated the trainings and ongoing professional education that is provided to, andtimely decisions regarding required of, our accounting personnel. Once these processes have been in operation for a sufficient period of time for our management to conclude that the material weaknesses have been fully remediated and our internal controls over financial reporting are effective, we will consider these material weaknesses fully addressed.disclosure.

Changes in Internal Control over Financial Reporting

There werehave been no changes in our internal controlcontrols over financial reporting during the quarter ended September 30, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal controlcontrols over financial reporting, other than as described below.reporting.

·

Activities pertaining to our remediation efforts of material weaknesses (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)•

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Fulfillium. On April 20, 2017, Fulfillium, Inc. filed a complaint against ReShape Medical, Inc. (which the Company acquired in October 2017 and which is now a wholly owned subsidiary of the Company) in the U.S. District Court for the District of Delaware, which alleged misappropriation of trade secrets and infringement of two U.S. Patents (“Fulfillium I”). On July 28, 2017, ReShape Medical moved to dismiss both the trade secret claim and certain aspects of the patent infringement claim, and to transfer the litigation to the U.S. District Court for the Central District of California. On October 16, 2017, the Court granted ReShape Medical’s motion to dismiss the trade secret and willful infringement claims, and ordered the case transferred to the U.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

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originally asserted Fulfillium patents canceled as unpatentable over various combinations of prior art. On November 6, 2018, the PTAB denied those petitions. The parties held a mediation on April 9, 2019, but were unable to resolve the matter. On September 6, 2019, the Company entered into a confidential settlement agreement (the “Settlement Agreement”) with Fulfillium pursuant to which Fulfillium has agreed to dismiss with prejudice the previously-disclosed lawsuits filed by Fulfillium against the Company in exchange for $1.5 million in cash, $0.5 million of which was paid following the settlement and the remaining $1.0 million of which will be payable in four quarterly installments beginning in January 2020. The Company has recorded a contingent loss relating to the settlement of $1.5 million in its consolidated financial statements as of September 30, 2019.

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 is reasonably possiblelikely to 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. Except as disclosed in the foregoing paragraphs, the Company is not currently a party to any litigation and the Company is not aware

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ITEM  1A.    RISK FACTORS

There have been no material changes to the risk factors set forth in Item 1.A 1A. “Risk FactorsFactors” of our 20182019 Annual Report on Form 10-K filed on May 16, 2019.  April 30, 2020.

ITEM  2.       UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

None, except as previously reported in our Current Reports on Form 8-K filed September 30, 2019.None.

Uses of Proceeds from Sale of Registered Securities

None.

Purchases of Equity Securities

None.

ITEM  3.       DEFAULTS UPON SENIOR SECURITIES

None.

ITEM  4.       MINE SAFETY DISCLOSURES

Not applicable.

ITEM  5.       OTHER INFORMATION

On November 8, 2019, the Company filed a Certificate of Amendment to its Sixth Amended and Restated Certificate of Incorporation, as amended (the “Certificate”), with the Secretary of State of the State of Delaware to effect a 1-for-120 reverse split of the Company’s outstanding common stock (the “Reverse Stock Split”) and to reduce the par value of the Company’s common stock and preferred stock from $0.01 per share to $0.001 per share (the “Par Value Reduction”). The Certificate of Amendment to the Certificate became effective after the close of market on November 11, 2019.Not applicable.

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The Reverse Stock Split became effective for trading purposes upon the commencement of trading on November 12, 2019, at which point the Company’s common stock began trading on a split-adjusted basis on OTCQB. As a result of the Reverse Stock Split, each 120 shares of issued and outstanding common stock and equivalents were converted into one share of common stock. Any fractional shares of common stock resulting from the Reverse Stock Split were rounded up to the nearest whole share. Proportional adjustments will be 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 Reverse Stock Split does not reduce the number of authorized shares of common stock and preferred stock under the Certificate. Therefore, the effect of the Reverse Stock Split is 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 Reverse Stock Split will not modify any voting rights or other terms of the common stock or any series of preferred stock.

Following the effectiveness of the Par Value Reduction, the Company’s “capital” under the Delaware General Corporation Law will be adjusted to reflect the Par Value Reduction. The stated capital on the Company’s balance sheet attributable to the Company’s common stock will be reduced to give effect to the decrease in par value from $0.01 to $0.001, and the additional paid-in capital account shall be credited with the amount by which the stated capital is reduced. The Par Value Reduction will have no effect on the rights of the holders of common stock or preferred stock, except for reducing the minimum amount per share the Company must receive upon the issuance of any shares of common stock from $0.01 to $0.001.

A copy of the Certificate of Amendment to the Certificate is attached as Exhibit 3.1 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

ITEM  6.       EXHIBITS

Exhibit No.

Description

Exhibit No.

Description

3.1**

Certificate of Amendment to Sixth Amended and Restated Certificate of Incorporation of the Company, dated November 8, 2019.

10.1

Form of Warrant ExerciseSecond Amendment to Credit Agreement, dated September 23, 201914, 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 30, 2019)15, 2020 (File No. 001-33818)).

10.2

Form of Series EG Common Stock Purchase Warrant, dated September 14, 2020, issued by the Company to Armistice Capital Master Fund Ltd. (incorporated by reference to Exhibitexhibit 10.2 to the Company’s Current Report on Form 8-K files with the Securities and Exchange Commission on September 30, 2019).

10.3

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)15, 2020 (File No. 001-33818)).

10.4

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.

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.

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Exhibit No.

Description

32.2**

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101**

Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2019,2020, formatted in Extensible Business Reporting Language: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements.


**

Filed herewith.

**Filed herewith.

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SIGNATURESSIGNATURES 

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.

RESHAPE LIFESCIENCES INC.

BY:

/S/ BARTON B.P. BANDY

Barton B.P. Bandy

President and Chief Executive Officer

(principal executive officer)

BY:

/S/ thomas stankovich

Thomas Stankovich

Senior Vice President and

Chief Financial Officer

(principal financial and accounting officer)

Dated: November 14, 201913, 2020

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