UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
FORM Form 10-Q
For the quarterly period ended March 31, 20212022
orOR
For the transition period from to
Commission File Number: 001-37897file number: 1-37897
RESHAPE LIFESCIENCES INC.
OBALON THERAPEUTICS, INC.
(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)
its charter)
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Delaware | 26-1828101 | |
(State or other jurisdiction |
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(844) 362-25661001 Calle Amanecer, San Clemente, California92673
(Address of principal executive offices, including zip code)
(949)429-6680
(Registrant’s Telephone Number, Including Area Code)telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of | Trading | Name of | |||
Common stock, $0.001 par value |
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Indicate by check mark whether the registrant: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 and posted 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 and post 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”,filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.Act.
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| Emerging |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financingfinancial 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 ⌧☒
TotalAs of May 19, 2022, 18,693,219 shares of common stock outstanding as of the close of business on May 5, 2021 was 10,021,568registrant’s Common Stock were outstanding.
INDEX
12
PART I.I – FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
RESHAPE LIFESCIENCES INC.
Condensed Consolidated Balance Sheets
(unaudited)
(dollars in thousands, except per share amounts)
| | | | | | |
| | March 31, | | December 31, | ||
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| 2022 |
| 2021 | ||
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 15,410 |
| $ | 22,765 |
Restricted cash | | | 50 | | | 50 |
Accounts and other receivables (net of allowance for doubtful accounts of $1,087 and $1,172 respectively) | |
| 2,410 |
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| 2,815 |
Inventory | |
| 3,998 |
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| 3,003 |
Prepaid expenses and other current assets | |
| 1,759 |
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| 1,622 |
Total current assets | |
| 23,627 |
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| 30,255 |
Property and equipment, net | |
| 1,371 |
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| 1,454 |
Operating lease right-of-use assets | | | 524 | | | 266 |
Other intangible assets, net | | | 20,371 | | | 20,827 |
Other assets | |
| 1,377 |
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| 1,456 |
Total assets | | $ | 47,270 |
| $ | 54,258 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | 3,598 |
| $ | 3,468 |
Accrued and other liabilities | |
| 3,463 |
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| 3,169 |
Warranty liability, current | | | 649 | | | 415 |
Operating lease liabilities, current | | | 441 | | | 279 |
Total current liabilities | |
| 8,151 |
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| 7,331 |
Operating lease liabilities, noncurrent | | | 86 | | | — |
Warranty liability, noncurrent | | | 41 | | | 300 |
Deferred income taxes | | | 367 | | | 555 |
Total liabilities | | | 8,645 |
| | 8,186 |
Commitments and contingencies | | | | | | |
Stockholders’ equity: | | | | | | |
Preferred stock, 10,000,000 shares authorized: | | | | | | |
Series C convertible preferred stock, $0.001 par value; 95,388 shares issued and outstanding at March 31, 2022 and December 31, 2021 | | | — | | | — |
Common stock, $0.001 par value; 100,000,000 shares authorized at both March 31, 2022 and December 31, 2021; 18,597,522 and 17,831,875 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | |
| 19 |
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| 18 |
Additional paid-in capital | |
| 623,652 |
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| 622,906 |
Accumulated deficit | |
| (584,975) |
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| (576,760) |
Accumulated other comprehensive loss | | | (71) | | | (92) |
Total stockholders’ equity | |
| 38,625 |
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| 46,072 |
Total liabilities and stockholders’ equity | | $ | 47,270 |
| $ | 54,258 |
See accompanying notes to Condensed Consolidated Financial StatementsStatements.
3
RESHAPE LIFESCIENCES INC.
Condensed Consolidated Statements of Operations
OBALON THERAPEUTICS, INC.(unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except shares and par value data)per share amounts)
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| | March 31, | | December 31, | ||
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| 2021 |
| 2020 | ||
Assets |
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Current assets: |
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Cash and cash equivalents | | $ | 8,972 | | $ | 3,905 |
Other current assets | |
| 3,822 | |
| 3,930 |
Total current assets | |
| 12,794 | |
| 7,835 |
Lease right-of-use assets | |
| 421 | |
| 521 |
Property and equipment, net | |
| 891 | |
| 957 |
Clinical-use assets | | | 1,304 | | | 1,304 |
Other long-term assets | |
| 1,933 | |
| — |
Total assets | | $ | 17,343 | | $ | 10,617 |
Liabilities and Stockholders’ Equity | |
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Current liabilities: | |
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Accounts payable | | $ | 582 | | $ | 615 |
Accrued compensation | |
| 602 | |
| 65 |
Debt | | | 430 | | | — |
Other current liabilities | |
| 4,699 | |
| 3,802 |
Current portion of lease liabilities | |
| 550 | |
| 564 |
Total current liabilities | |
| 6,863 | |
| 5,046 |
Lease liabilities, long-term | |
| 344 | |
| 438 |
Long-term debt | | | — | | | 430 |
Other long-term liabilities | |
| 38 | |
| 38 |
Total liabilities | |
| 7,245 | |
| 5,952 |
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Commitments and contingencies (See Note 10) | |
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Stockholders’ equity: | |
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Common stock, $0.001 par value; 100,000,000 shares authorized as of March 31, 2021 and December 31, 2020, 10,021,568 and 7,770,698 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively | |
| 10 | |
| 8 |
Additional paid-in capital | |
| 199,019 | |
| 189,421 |
Accumulated deficit | |
| (188,931) | |
| (184,764) |
Total stockholders’ equity | |
| 10,098 | |
| 4,665 |
Total liabilities and stockholders’ equity | | $ | 17,343 | | $ | 10,617 |
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| | Three Months Ended March 31, | ||||
| | | 2022 | | | 2021 |
Revenue | | $ | 2,440 | | $ | 3,221 |
Cost of revenue | | | 1,222 | |
| 937 |
Gross profit | | | 1,218 | |
| 2,284 |
Operating expenses: | | | | | | |
Sales and marketing | | | 4,707 | |
| 1,250 |
General and administrative | | | 4,163 | | | 2,720 |
Research and development | | | 748 | |
| 571 |
Total operating expenses | | | 9,618 | |
| 4,541 |
Operating loss | | | (8,400) | |
| (2,257) |
Other expense (income), net: | | | | | | |
Interest expense, net | | | (1) | | | 599 |
Loss on extinguishment of debt, net | | | — | | | 1,960 |
Other, net | | | (11) | | | — |
(Gain) Loss on foreign currency exchange, net | | | (16) | | | 33 |
Loss before income tax provision | | | (8,372) | | | (4,849) |
Income tax (benefit) expense | | | (157) | | | 25 |
Net loss | | $ | (8,215) | | $ | (4,874) |
Net loss per share - basic and diluted: | | | | | | |
Net loss per share - basic and diluted | | $ | (0.44) | | $ | (1.24) |
Shares used to compute basic and diluted net loss per share | | | 18,539,568 | |
| 3,927,986 |
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See accompanying notes to unaudited interim condensed consolidated financial statements.Condensed Consolidated Financial Statements.
24
OBALON THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
RESHAPE LIFESCIENCES INC.
Condensed Consolidated Statements of Comprehensive Loss
(unaudited)
(dollars in thousands, except shares and per share data)thousands)
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| | Three Months Ended March 31, | ||||
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| 2022 | | 2021 | ||
Net loss | | $ | (8,215) | | $ | (4,874) |
Foreign currency translation adjustments | | | 21 | | | 19 |
Other comprehensive income, net of tax | | | 21 | | | 19 |
Comprehensive loss | | $ | (8,194) | | $ | (4,855) |
See accompanying notes to Condensed Consolidated Financial Statements.
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| | Three Months ended March 31, | ||||
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| 2021 |
| 2020 | ||
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Revenue | | $ | — | | $ | 780 |
Cost of revenue | |
| — | |
| 541 |
Gross profit | |
| — | |
| 239 |
Operating expenses: | |
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Research and development | |
| 112 | |
| 1,257 |
Selling, general and administrative | |
| 4,056 | |
| 3,893 |
Total operating expenses | |
| 4,168 | |
| 5,150 |
Loss from operations | |
| (4,168) | |
| (4,911) |
Interest income (expense), net | |
| 1 | |
| 35 |
Other expense | |
| — | |
| (385) |
Net loss | |
| (4,167) | |
| (5,261) |
Net loss and comprehensive loss | | $ | (4,167) | | $ | (5,261) |
Net loss per share, basic and diluted | | $ | (0.44) | | $ | (0.68) |
Weighted-average common shares outstanding, basic and diluted | |
| 9,444,241 | |
| 7,725,205 |
5
RESHAPE LIFESCIENCES INC.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited)
(dollars in thousands)
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| | Three Months Ended March 31, 2022 | ||||||||||||||||||||
| | Series C Convertible | | | | Additional | | | | | Accumulated Other | | Total | |||||||||
| | Preferred Stock | | Common Stock | | Paid-in | | Accumulated | | Comprehensive | | Stockholders’ | ||||||||||
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| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Loss |
| Equity | ||||||
Balance December 31, 2021 | | 95,388 | | $ | — | | 17,831,875 | | $ | 18 | | $ | 622,906 | | $ | (576,760) | | $ | (92) | | $ | 46,072 |
Net loss | | — | | | — | | — | | | — | | | — | | | (8,215) | | | — | | | (8,215) |
Other comprehensive income, net of tax | | — | | | — | | — | | | — | | | — | | | — | | | 21 | | | 21 |
Stock compensation | | — | | | — | | — | | | — | | | 747 | | | — | | | — | | | 747 |
Issuance of stock from RSUs | | — | | | — | | 765,647 | | | 1 | | | (1) | | | — | | | — | | | — |
Balance March 31, 2022 | | 95,388 | | $ | — | | 18,597,522 | | $ | 19 | | $ | 623,652 | | $ | (584,975) | | $ | (71) | | $ | 38,625 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2021 | |||||||||||||||||||||||||
| | 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 | | Loss |
| Equity | |||||||
Balance December 31, 2020 | | 3 | | $ | — | | 95,388 | | $ | 1 | | 3,486,253 | | $ | 3 | | $ | 529,432 | | $ | (514,827) | | $ | (121) | | $ | 14,488 |
Net loss | | — | | | — | | — | | | — | | — | | | — | | | — | | | (4,874) | | | — | | | (4,874) |
Other comprehensive income, net of tax | | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | 19 | | | 19 |
Stock-based compensation expense | | — | | | — | | — | | | — | | — | | | — | | | 101 | | | — | | | — | | | 101 |
Series G warrants issued | | — | | | — | | — | | | — | | — | | | — | | | 2,974 | | | — | | | — | | | 2,974 |
Balance March 31, 2021 | | 3 | | $ | — | | 95,388 | | $ | 1 | | 3,486,253 | | $ | 3 | | $ | 532,507 | | $ | (519,701) | | $ | (102) | | $ | 12,708 |
See accompanying Notes to Condensed Consolidated Financial Statements.
6
RESHAPE LIFESCIENCES INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(dollars in thousands)
| | | | | | |
| | Three Months Ended March 31, | ||||
| | 2022 | | 2021 | ||
Cash flows from operating activities: | | | |
| | |
Net loss | | $ | (8,215) | | $ | (4,874) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | |
Depreciation expense | |
| 94 | |
| 7 |
Amortization of intangible assets | | | 456 | | | 411 |
Noncash interest expense | | | — | | | 43 |
Loss on extinguishment of debt, net | | | — | | | 1,960 |
Stock-based compensation | | | 747 | | | 101 |
Bad debt expense | | | 26 | | | 27 |
Provision for inventory excess and obsolescence | | | 78 | | | 1 |
Deferred income tax | | | (187) | | | — |
Amortization of debt discount and deferred debt issuance costs | | | — | | | 461 |
Other noncash items | | | (20) | | | 17 |
Change in operating assets and liabilities, net of business combination: | |
| | |
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Accounts and other receivables | |
| 379 | |
| (780) |
Inventory | |
| (1,073) | |
| 182 |
Prepaid expenses and other current assets | |
| (137) | |
| 237 |
Accounts payable and accrued liabilities | | | 420 | | | 296 |
Warranty liability | |
| (25) | |
| (50) |
Other | |
| 79 | |
| — |
Net cash used in operating activities | | | (7,378) | | | (1,961) |
Cash flows from investing activities: | | | | | | |
Capital expenditures | | | (7) | | | (119) |
Proceeds from sale of capital assets | | | 9 | | | — |
Cash provided by (used in) investing activities: | | | 2 | | | (119) |
Cash flows from financing activities: | | | | | | |
Proceeds from credit agreement | | | — | | | 1,000 |
Net cash provided by financing activities | | | — | | | 1,000 |
Effect of currency exchange rate changes on cash and cash equivalents | |
| 21 | |
| 19 |
Net decrease in cash, cash equivalents and restricted cash | |
| (7,355) | |
| (1,061) |
Cash, cash equivalents and restricted cash at beginning of period | | | 22,815 | | | 3,007 |
Cash, cash equivalents and restricted cash at end of period | | $ | 15,460 | | $ | 1,946 |
Supplemental disclosure: | | | | | | |
Cash paid for income taxes | | $ | — | | $ | 31 |
Noncash investing and financing activities: | | | | | | |
Capital expenditures accruals | | $ | 9 | | $ | 141 |
Fair value of warrants included as a component of loss on extinguishment of debt | | | — | | | 2,974 |
See accompanying notes to unaudited interim condensed consolidated financial statements.Condensed Consolidated Financial Statements.
37
OBALON THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
ReShape Lifesciences Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(dollars in thousands, except shares and per share data)
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| | | | | | | Additional | | | | | Total | ||
| | Common stock | | paid-in | | Accumulated | | stockholders’ | ||||||
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| Shares |
| Amount |
| capital |
| deficit |
| equity | ||||
Balance at December 31, 2020 |
| 7,770,698 | | $ | 8 | | $ | 189,421 | | $ | (184,764) | | $ | 4,665 |
Stock-based compensation |
| — | |
| — | |
| 91 | |
| — | |
| 91 |
Exercise of warrants for the purchase of common stock |
| 2,250,870 | |
| 2 | |
| 9,507 | |
| — | |
| 9,509 |
Net loss |
| — | |
| — | |
| — | |
| (4,167) | |
| (4,167) |
Balance at March 31, 2021 |
| 10,021,568 | | $ | 10 | | $ | 199,019 | | $ | (188,931) | | $ | 10,098 |
See accompanying notes to unaudited interim condensed consolidated financial statements.
4
OBALON THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYamounts; unaudited)
(unaudited)
(in thousands, except shares and per share data)
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| | | | | | | Additional | | | | | Total | ||
| | Common stock | | paid-in | | Accumulated | | stockholders’ | ||||||
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| Shares |
| Amount |
| capital |
| deficit |
| equity | ||||
Balance at December 31, 2019 |
| 7,724,100 | | $ | 8 | | $ | 188,271 | | $ | (172,430) | | $ | 15,849 |
Stock-based compensation |
| — | |
| — | |
| 470 | |
| — | |
| 470 |
Vesting of stock awards, net of cancellations |
| 7,533 | |
| — | |
| — | |
| — | |
| — |
Vesting of early exercised stock options |
| — | |
| — | |
| 14 | |
| — | |
| 14 |
Net loss |
| — | |
| — | |
| — | |
| (5,261) | |
| (5,261) |
Balance at March 31, 2020 |
| 7,731,633 | | $ | 8 | | $ | 188,755 | | $ | (177,691) | | $ | 11,072 |
See accompanying notes to unaudited interim condensed consolidated financial statements.
5
OBALON THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| | | | | | |
| | Three months ended March 31, | ||||
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| 2021 |
| 2020 | ||
Operating activities: |
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Net loss | | $ | (4,167) | | $ | (5,261) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
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Depreciation | |
| 66 | |
| 103 |
Stock-based compensation | |
| 91 | |
| 470 |
Amortization of right-of-use assets | |
| 100 | |
| 122 |
Change in operating assets and liabilities: | |
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Accounts receivable, net | |
| — | |
| (176) |
Inventory | |
| — | |
| (326) |
Other current assets | |
| 108 | |
| (2,828) |
Other long-term assets | | | (1,933) | | | — |
Accounts payable | |
| (33) | |
| 422 |
Accrued compensation | |
| 537 | |
| (446) |
Deferred revenue | |
| — | |
| 38 |
Lease liabilities, net | |
| (108) | |
| (14) |
Other current and long-term liabilities | |
| 897 | |
| 3,082 |
Net cash used in operating activities | |
| (4,442) | |
| (4,814) |
Investing activities: | |
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Purchases of property and equipment | |
| — | |
| (326) |
Net cash used in investing activities | |
| — | |
| (326) |
Financing activities: | |
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Proceeds from exercise of warrants | |
| 9,509 | |
| — |
Net cash provided by financing activities | |
| 9,509 | |
| — |
Net increase (decrease) in cash and cash equivalents | |
| 5,067 | |
| (5,140) |
Cash and cash equivalents at beginning of period | |
| 3,905 | |
| 14,055 |
Cash and cash equivalents at end of period | | $ | 8,972 | | $ | 8,915 |
Supplemental cash flow information: | |
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Interest paid | | $ | — | | $ | — |
Income taxes paid | | $ | — | | $ | — |
See accompanying notes to unaudited interim condensed consolidated financial statements.
6
OBALON THERAPEUTICS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and(1) Basis of Presentation
Obalon Therapeutics, Inc., or the Company, was incorporated in the state of Delaware on January 2, 2008. The Company is a vertically-integrated medical device company focused on developing and commercializing innovative medical devices to treat obesity. Using its patented technology, the Company has developed the Obalon® balloon system, the first and only U.S. Food and Drug Administration, or FDA, approved swallowable, gas-filled intragastric balloon designed to provide progressive and sustained weight loss in obese patients.
The unauditedaccompanying interim condensed consolidated financial statements include the accountsand related disclosures of Obalon Therapeutics,Reshape Lifesciences Inc., and its wholly owned subsidiary, Obalon Center for Weight Loss, Inc.
The accompanying unaudited interim condensed consolidated financial statements (the “Company” or “ReShape”) have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP,pursuant to the rules and include the Company’s accounts and accounts of its wholly-owned subsidiary. The Company also consolidates variable interest entities or VIE for which it is the primary beneficiary. The primary beneficiary has both (a) the power to direct the activitiesregulations of the VIE that most significantly affect the entity’s economic performanceSecurities and (b) either the obligation to absorb losses or the right to receive benefits. Refer to Note 11, “Variable Interest Entity” for further details. All intercompany transactions and balances have been eliminated in consolidation.
The Company’s principal operations are located in Carlsbad, California, and it operates in one business segment.
Liquidity
As reflected in the accompanying unaudited interim condensed financial statements, the Company has a limited operating history and the sales and income potential of the Company’s business are unproven. The Company has not been profitable since inception, and as of March 31, 2021, its accumulated deficit was $188.9 million. Since inception, the Company has financed its operations primarily through private placements of its preferred stock, the sale of common stock in its IPO and in subsequent public and private placements, and, to a lesser extent, debt financing arrangements.
The Company may need additional funding to pay expenses relating to its operating activities, including selling, general and administrative expenses and research and development expenses. Adequate funding, if needed, may not be available to the Company on acceptable terms, or at all.
The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. In late 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread globally. To date, COVID-19 has had, and will continue to have, an adverse impact on the Company’s operations and expenses as a result of the preventive and precautionary measures that the Company, its customers, other businesses, and governments are taking, including the temporary deferral of elective medical procedures and diversion of capital and other resources. In March 2020, the Company suspended all new patient treatments at its Obalon-branded retail centers due to the ongoing COVID-19 pandemic, suspended product shipment to all customers and halted manufacturing. Throughout 2020, the Company took further steps to significantly reduce expenses in an effort to extend its cash runway while the Company evaluated the potential to obtain third-party payer reimbursement for its products and explored various strategic alternatives, which ultimately led to the Merger. The Company significantly reduced the organization to only essential personnel and since August 2020, only two full-time employees remain. All Obalon-branded retail centers have been shut down with no intention to reopen, and the Company has halted plans for future retail center expansion. The Company does not expect to restart shipments to U.S. customers and the Company has terminated the agreement with its international distributor, Al Danah Medical Company W.L.L. The decision to shift the Company’s strategy to focus on pursuing reimbursement, while also evaluating other strategic options, occurred after the end of the first quarter of 2020. In the fourth quarter of 2020, the Company determined that the timeline for obtaining third-party reimbursement was longer than the cash runway available and it ceased its efforts related to reimbursement, including terminating its consulting agreement with Blue Ox Healthcare Partners, LLC. The Company then focused its full efforts on
7
consummating a strategic alternative transaction that would be in the best interest of its stockholders. On January 19, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Optimus Merger Sub, Inc., a Delaware corporation and our direct, wholly owned subsidiary (“Merger Sub”Exchange Commission ("SEC") and ReShape Lifesciences, Inc., a Delaware corporation (“ReShape”). Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of the conditions specified therein, Merger Sub shall be merged with and into ReShape, with ReShape surviving as a wholly owned subsidiary of Obalon (the “Merger”). The failure to consummate the Merger with ReShape or alternatively, obtain sufficient funds on acceptable terms could have a material adverse effect on the Company’s business, results of operations or financial condition.
The Company expects that its existing cash and cash equivalents, including the gross proceeds it received from January through March 2021, will be sufficient to fund its forecasted operating expenses, capital expenditures and debt service payments for at least the next twelve months from the issuance of these unaudited interim condensed financial statements. However, there can be no assurance that the Company will be able to continue to raise additional capital in the future.
2. Summary of Significant Accounting Policies
There were no significant changes to the accounting policies during the three months ended March 31, 2021, from the significant accounting policies described in Note 2 of the “Notes to Consolidated Financial Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed on March 12, 2021.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.
Reported amounts and note disclosures reflect the overall economic conditions that are most likely to occur and anticipated measures management intends to take. Actual results could differ materially from those estimates. All revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Unaudited Interim Condensed Consolidated Financial Statements
The interim condensed consolidated financial statements as of March 31, 2021 and for the three months ended March 31, 2021 and 2020 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and reflect, in the opinion of management, all adjustments of a normal and recurring nature that are necessary for the fair presentation of the Company’s condensed consolidated financial position as of March 31, 2021 and its condensed consolidated results of operations for the three months ended March 31, 2021 and 2020, statements of stockholders’ equity for the three months ended March 31, 2021 and 2020, and cash flows for the three months ended March 31, 2021 and 2020. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any other future annual or interim period. The balance sheet as of December 31, 2020 included herein was derived from the audited financial statements as of that date. These financial statements should be read in conjunction with the Company’s auditedconsolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020,2021, filed on March 12, 2021.April 8, 2022. 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.
CashIn 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 Split and Cash EquivalentsMerger Exchange Ratio
On June 15, 2021, and immediately prior to the closing of the merger of Obalon Therapeutics, Inc. and ReShape Lifesciences Inc., the Company effected a 1-for-3 reverse stock split. Accordingly, all share and per share amounts for the period presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the reverse stock split. No fractional shares were issued in connection with the reverse stock split. Unless otherwise noted, all references to shares of the Company’s common stock and per share amounts have also been adjusted to reflect the exchange ratio of 0.5367 Obalon shares for one ReShape share in connection with the merger.
Acquisition
The Company considers all highly liquid investmentsaccounts for business combinations in accordance with original maturitiesAccounting Standards Codification (“ASC”) 805, Business Combinations. The results of three months or less atbusinesses acquired in a business combination are included in the Company’s consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business generally being recorded at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill. Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative related costs in the consolidated statements of operations. The Company performs valuations of assets acquired and liabilities assumed and allocates the purchase price to be cash equivalents. Cashits respective assets and cash equivalents include cashliabilities. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates.
Upon completion of the business combination with Obalon on June 15, 2021, the transaction was treated as a “reverse acquisition” for financial accounting purposes. As a result of the controlling interest of the former shareholders of ReShape, for financial statement reporting and accounting purposes, ReShape was considered the acquirer under the acquisition method of accounting in readily available checkingaccordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805-10-55. The reverse acquisition is deemed a capital transaction in substance whereas the historical assets and money market accounts.liabilities of Obalon before the business combination were replaced with the historical financial statements of ReShape in all future filings with the SEC.
Goodwill and Long-Lived Assets
Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination.
8
Comprehensive Loss
Comprehensive loss is defined as the changeIndefinite-lived intangible assets relate to in-process research and development ("IPR&D") acquired in equity during a period from transactions and other events and circumstances from non-owner sources.business combinations. The Company’s comprehensive loss was the same as its reported net loss for all periods presented.
Fair Value Measurements
The carryingestimated fair values of the Company’s financial instruments, including cashIPR&D projects acquired in a business combination which have not reached technological feasibility are capitalized and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their fair values due to the short maturity of these instruments. The carrying valueaccounted for as indefinite-lived intangible assets until completion or abandonment of the loan approximates its fair value as the interest rateprojects. In accordance with guidance within FASB ASC 350 “Intangibles - Goodwill and other termsOther,” goodwill and identifiable intangible assets with indefinite lives are that which are currently availablenot subject to the Company.amortization but must be evaluated for impairment.
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in oneWe evaluate long-lived assets, including finite-lived intangible assets, for impairment by comparison of the following levels in accordance with authoritative accounting guidance:
Inventory
Inventory is stated at the lower of cost (which approximates actual cost on a first-in, first-out basis) orcarrying amounts to future net realizable value, computed on a standard cost basis. Inventory that is obsolete or is in excess of forecasted usage is written down to its estimated net realizable value based on assumptions about future demand. Inventory write-downs are charged to cost of revenue and establish a new cost basis for the inventory.
The Company evaluated whether the shift in business strategy to pursue a reimbursement model was indicative of inventory impairment. The Company performed an impairment assessment on its inventory stock and recognized $0.1 million in impairment charges during the year ended December 31, 2020 related to excess inventory notundiscounted cash flows expected to be used in clinical trials to pursue reimbursement. The Company determined that the remaining inventory balance has an alternative future use in clinical trials and reclassified it to other currentgenerated by such assets and other long-term assets in 2020. As a result, the Company does not have any inventory as of March 31, 2021.
Impairment of Long-Lived Assets
The Company evaluates property and equipment for impairment wheneverwhen events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. RecoverabilityShould an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s fair value or estimates of future discounted cash flows.
For goodwill and indefinite-lived intangible assets, in-process research and development, we review for impairment annually and upon the occurrence of certain events as required by ASC Topic 350, “Intangibles — Goodwill and Other.” Goodwill and indefinite-lived intangible assets are tested at least annually for impairment and more frequently if events or changes in circumstances indicate that the asset might be impaired. We review goodwill for impairment by first assessing qualitative factors to determine whether it is measured by comparisonmore likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If we are able to determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, we would conclude that goodwill is not impaired. If the carrying amount of a reporting unit is zero or negative, the assets to the future undiscounted net cash flows, which the assets are expected to generate. If such assets are considered to be impaired,second step of the impairment test is performed to be recognizedmeasure the amount of impairment loss, if any, when it is measured as the difference between the carrying amount and the fair value of the impaired asset.
Nomore likely than not that a goodwill impairment charges were recorded for each of the three months ended March 31, 2021 and 2020.
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Net Loss per Share
Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period without consideration for common stock equivalents. Diluted net loss per share is the same as basic net loss per common share, since the effects of potentially dilutive securities are anti-dilutive due to the net loss position of all periods presented.
Potentially dilutive common stock equivalents are comprised of warrants, if material, unvested restricted stock awards (RSAs), and unexercised stock options outstanding under the Company’s equity plan.
Recently Issued and Adopted Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.
In December 2020, the FASB issued authoritative guidance intended to simplify the accounting for income taxes: ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. This guidance is effective for annual periods after December 15, 2020, including interim periods within those annual periods.exists. The Company adopted this guidance effective January 1, 2021 and the adoption of this standard did not have a material impact on its interim condensed consolidated financial statements.
Recently Issued Accounting Pronouncements not yet adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses, which changes the accounting0t record any impairment loss for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financialgoodwill or indefinite-lived intangible assets with credit deterioration since their origination. In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate a material impact on results of operations. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements.
3. Fair Value Measurements
Instruments Recorded at Fair Value on a Recurring Basis
The Company has segregated all financial assets and liabilities that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below.
10
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020 are as follows (in thousands):
| | | | | | | | | | | | |
| | | | | Fair value measurements at reporting date using | |||||||
| | | | | Quoted prices | | Significant | | | | ||
| | | | | in active | | other | | Significant | |||
| | | | | markets for | | observable | | unobservable | |||
| | Balance as of | | identical assets | | inputs | | inputs | ||||
|
| March 31, 2021 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Assets: |
| |
|
| |
|
| |
|
| |
|
Cash | | $ | 3,580 | | $ | 3,580 |
| | — |
| | — |
Cash Equivalents: | |
|
| |
|
|
| |
|
| |
|
Money Market Funds | |
| 5,392 | |
| 5,392 |
| $ | — |
| $ | — |
Total assets | | $ | 8,972 | | $ | 8,972 | | $ | — | | $ | — |
| | | | | | | | | | | | |
| | | | | Fair value measurements at reporting date using | |||||||
| | | | | Quoted prices | | Significant | | | | ||
| | | | | in active | | other | | Significant | |||
| | | | | markets for | | observable | | unobservable | |||
| | Balance as of | | identical assets | | inputs | | inputs | ||||
|
| December 31, 2020 |
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Assets: |
| |
|
| |
|
| |
|
| |
|
Cash | | $ | 823 | | $ | 823 |
| | — |
| | — |
Cash Equivalents: | |
|
| |
|
|
| |
|
| |
|
Money Market Funds | |
| 3,082 | |
| 3,082 |
| | — |
| | — |
Total assets | | $ | 3,905 | | $ | 3,905 | | $ | — | | $ | — |
The Company’s investments in Level 1 assets are valued based on publicly available quoted market prices for identical securities as of March 31, 2021 and December 31, 2020.
The warrant liabilities are recorded at fair value using the Black-Scholes option pricing model based on the following assumptions as of March 31, 2020:
|
|
|
|
|
|
| |
|
| ||
|
|
| |
|
|
| |
|
|
| |
|
|
|
The assumptions were determined as follows:
Assumed risk-free interest rate — Based on the average yield of U.S. Treasury bills as of the valuation date for the expected term of the awards.
Assumed volatility — Based on the historical volatility of a number of publicly traded companies comparable in size, business model, industry and business description.
Expected life — Based on the remaining contractual term of warrant or the equity award as of the valuation date.
Expected dividend yield — Based upon the Company’s historic dividends and dividend expectations for the foreseeable future.
As of March 31, 2021, reasonable changes in the unobservable inputs would not be expected to have a significant impact on the consolidated financial statements. The Company’s policy is to recognize transfers between levels of the fair value
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hierarchy on the date of the event or change in circumstances that caused the transfer. There were no significant transfers into or out of Level 1, 2, or 3 for the three months ended March 31, 2022 and 2021.
Fair Value of Financial Instruments
The following table provides reconciliation for allcarrying amounts of cash equivalents, accounts receivable, accounts payable and certain accrued and other liabilities measured atapproximate fair value using significant unobservable inputs (Level 3) fordue to their short-term maturities. Refer to Note 5 regarding the three months ended March 31, 2021 (in thousands):
| | | |
|
| Fair value | |
| | measurements at | |
| | reporting date | |
| | using significant | |
| | unobservable | |
| | inputs (Level 3) | |
Balance as of December 31, 2020 | | $ | 38 |
Issuance of cash settled equity awards | |
| — |
Change in fair value of warrant and cash settled award liabilities | |
| — |
Balance as of March 31, 2021 | | $ | 38 |
Instruments Not Recorded at Fair Value on a Recurring Basis
The estimated fair value of the Company’s long-term loan is determined by Level 2 inputsdebt instruments and is based primarily on quoted market prices for the same or similar issues. The recorded value of the Company’s long-term loan approximates the currentNote 9 regarding fair value as the interest ratemeasurements and other terms are more favorable than that which are currently available to the Company.inputs of warrants.
4. Net Loss perPer Share
The following table sets forth the computation of basic and diluted net loss per sharepotential shares of common stock (in thousands, except shares and per share data):
| | | | | | |
| | Three months ended March 31, | ||||
|
| 2021 |
| 2020 | ||
Net loss | | $ | (4,167) | | $ | (5,261) |
Weighted-average common shares outstanding, basic and diluted | |
| 9,444,241 | |
| 7,725,205 |
Net loss per share, basic and diluted | | $ | (0.44) | | $ | (0.68) |
The following table sets forth the outstanding potentially dilutive securities determined using the treasury stock method that have been excludedare not included in the calculation of diluted net loss per share because to do so would be anti-dilutive (in common stock equivalent shares):
| | | | |
| | Three months ended March 31, | ||
|
| 2021 |
| 2020 |
Stock options to purchase common stock |
| 1,099,855 |
| 496,452 |
Warrants to purchase common stock | | 1,110,999 | | 3,271,875 |
Total |
| 2,210,854 |
| 3,768,327 |
5. Balance Sheet Details
Other current assets consistas of the following (in thousands):end of each period presented:
| | | | |
| | March 31, | ||
|
| 2022 |
| 2021 |
Stock options |
| 833,974 |
| 23 |
Unvested restricted stock units | | 897,823 | | — |
Convertible preferred stock | | 38 | | 726 |
Warrants |
| 6,952,335 |
| 8,164,319 |
Recent Accounting Pronouncements
There were no new accounting standards adopted by the Company in 2022.
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 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
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2021 |
| 2020 | ||
Prepaid expenses | | $ | 495 | | $ | 599 |
Insurance receivable | | | 3,150 | | | 3,150 |
Other assets | |
| 177 | |
| 181 |
Total | | $ | 3,822 | | $ | 3,930 |
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additional clarification. This guidance is effective for the fiscal years and interim periods within those years beginning after December 15, 2022. The Company is currently evaluating the impact the guidance will have on its consolidated financial statements.
Property(2) Liquidity and equipment, net consistManagement’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 primarily due to the unpredictability of new variants of COVID-19, which may result in a slow-down of elective surgeries and restrictions in some locations. The Company believes that the following (in thousands):actions presently being taken to further implement the Company’s business plan to expand sales with a direct to consumer marketing strategy will provide the opportunity for the Company to generate sufficient revenues to continue as a going concern. The Company believes in the viability of its business strategy and in its ability to raise additional funds, there can be no assurance to that effect. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate revenues.
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2021 |
| 2020 | ||
Computer hardware | | $ | 261 | | $ | 261 |
Computer software | |
| 274 | |
| 274 |
Leasehold improvements | |
| 427 | |
| 427 |
Furniture and fixtures | |
| 179 | |
| 179 |
Scientific equipment | |
| 2,013 | |
| 2,013 |
Construction in progress, or CIP | |
| 407 | |
| 407 |
| |
| 3,561 | |
| 3,561 |
Less: accumulated depreciation | |
| (2,670) | |
| (2,604) |
Total | | $ | 891 | | $ | 957 |
Depreciation expense was $0.1 million for both the three months endedAs of March 31, 20212022, the Company had net working capital of approximately $15.5 million, primarily due to cash and 2020, respectively.
Other long-term assets consist entirelycash equivalents and restricted cash of manufacturing use assets$15.5 million. The Company’s principal source of liquidity as of March 31, 2021.2022, consisted of approximately $15.5 million of cash and cash equivalents and restricted cash, and $2.4 million of accounts receivable.
Other current liabilities consistThe Company’s anticipated operations include plans to (i) manufacture, and promote the sales and operations of the following (in thousands):LAP-BAND® product line in order to expand sales domestically and internationally as well as to obtain cost savings synergies, (ii) introduce to the market place reshapecareTM and ReShape Marketplace as an extension of reshapecare (iii) continue clinical testing of the ReShape Vest, (iv) continue development of the Diabetes Bloc-Stim Neuromodulation, (v) seek opportunities to leverage our intellectual property portfolio and custom development services to provide third-party sales and licensing opportunities, and (vi) explore and capitalize on synergistic opportunities to expand our portfolio and offer future minimally invasive treatments and therapies in the obesity continuum of care, which includes the Obalon product line from the merger with Obalon that was completed on June 15, 2021. With the July 2021 financing transaction, the Company believes that it has the flexibility to manage the growth of its expenditures and operations.
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2021 |
| 2020 | ||
Accrued legal and professional fees | | $ | 403 | | $ | 529 |
Accrued bonus | |
| 700 | |
| — |
Accrued litigation | | | 3,150 | | | 3,150 |
Other accrued expenses | |
| 446 | |
| 123 |
Total | | $ | 4,699 | | $ | 3,802 |
COVID-19 Risk and Uncertainties and CARES Act
6. Loan
Payroll Protection Program LoanSince the first quarter of 2020, the COVID-19 pandemic has led to unprecedented restrictions on, distributions in, and other related impacts on business and personal activities, including a shift in healthcare priorities, which resulted in a significant decline in medical procedures in 2020 in the United States and foreign countries. Concerns remain regarding the pace of economic recovery due to virus resurgence, including new variants, across the globe as well as vaccine distribution and hesitancy. The United States and other foreign governments may continue existing measures or implement new restrictions and other requirements in light of the continuing spread of the COVID-19 pandemic. Due to the uncertainty caused by the COVID-19 pandemic, the full extent to which the pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including sales, expenses, manufacturing, clinical trials, research and development costs, reserves and allowances, will depend on future developments that are highly uncertain and difficult to predict. These developments include, but are not limited to, the duration and spread of the outbreak (including new and more contagious variants of COVID-19), its severity, the actions to contain the virus or address its impact, the timing, distribution, public acceptance and efficacy of vaccines and other treatments, United States and foreign governments actions to respond to the reduction of global activity, and how quickly and to what extent normal economic and operating conditions can resume.
On April 22,March 27, 2020, President Trump signed into law the Company executed a promissory note (the “Note”) with Silicon Valley Bank (the “Lender”) evidencing an unsecured loan in the aggregate principal amount of $0.4 million (the “PPP Loan”), which was made pursuant to the Paycheck Protection Program (the “PPP”). The PPP was established under the Coronavirus“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”Act established the Paycheck Protection Program (“PPP”), under which was enacted on March 27, 2020,the Company received a PPP loan. On February 3, 2021, the Company submitted the application for PPP loan forgiveness according to the terms and is administered byconditions
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of the U.S.United States Small Business AdministrationAdministration’s (“SBA”) Loan Forgiveness Application (Revised June 24, 2002). AllOn March 1, 2021, the funds underCompany received confirmation from the SBA that, the PPP Loan were disbursed to the Company on April 23, 2020.
The Note provides for a fixed interest rate of one percent per year with a maturity date of April 22, 2022 (the “Maturity Date”). Loan payments may be deferred until August 2021, which date is 10 months after the end of the Company’s 24-week covered period for the PPP Loan. If the Company applies for loan forgiveness, loan payments may be deferred until the SBA remits the Company’s loan forgiveness amount to the lender. As of March 31, 2021, the Company has not filed for forgiveness and the loan will be repayablehad been forgiven in full in the event of a change of control, such as the proposed Merger, unless the lender agrees otherwise. The PPP Loanincluding all interest incurred. This may be prepaid by the Company at any time prior to the Maturity Date with no prepayment penalties or premiums. The Note contains customary event of default provisions.
Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loans granted under the PPP. Such forgiveness willstill be subject to approvalaudit by the SBA or relevant authorities, subject to terms and conditions of the PPP program. The Company was also able to benefit from the employee retention credit. For further details on the PPP loan and the Lender and determined, subject to limitations, based on factors set forthemployee retention credit, see Note 5 below.
(3) Supplemental Balance Sheet Information
Components of selected captions in the CARES Act, including verificationcondensed consolidated balance sheets consisted of the use of loan proceeds for payment of payroll costs and payments of mortgage interest, rent and utilities. In the event the PPP Loan, or any portion thereof, is forgiven, the amount forgiven is applied to outstanding principal. The terms of any forgiveness may also be subject to further regulations and guidelines that the SBA may adopt. The Company will carefully monitorfollowing:
13Inventory:
| | | | | | |
| | March 31, | | December 31, | ||
| | 2022 |
| 2021 | ||
Raw materials | | $ | 1,028 | | $ | 829 |
Sub-assemblies | | | 1,231 | | | 682 |
Finished goods | |
| 1,739 | |
| 1,492 |
Total inventory | | $ | 3,998 | | $ | 3,003 |
all qualifying
Prepaid expenses and other requirements necessary to attain loan forgiveness; however, no assurance is provided that the Company will obtain forgivenesscurrent assets:
| | | | | | |
| | March 31, | | December 31, | ||
| | 2022 |
| 2021 | ||
Prepaid insurance | | $ | 597 | | $ | 736 |
Prepaid advertising and marketing | | | 947 | | | 698 |
Other current assets | | | 215 | | | 188 |
Total prepaid expenses and other current assets | | $ | 1,759 | | $ | 1,622 |
Accrued and other liabilities:
| | | | | | |
| | March 31, | | December 31, | ||
| | 2022 |
| 2021 | ||
Payroll and benefits | | $ | 1,858 | | $ | 1,527 |
Customer deposits | | | 596 | | | 549 |
Taxes | | | 299 | | | 307 |
Accrued insurance premium | | | — | | | 301 |
Accrued professional | | | 396 | | | 300 |
Other liabilities | |
| 314 | |
| 185 |
Total accrued and other liabilities | | $ | 3,463 | | $ | 3,169 |
(4) Goodwill and Intangible Assets
Indefinite-lived intangible assets consist of the PPP Loan in whole or in part.
As of December 31, 2020, the Company has used all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments.
7. Stock-Based Compensation
Equity Incentive Plan
As of March 31, 2021, 376,329 stock options and awards remained available for future grant under the 2016 Equity Incentive Plan.
The Company recorded total non-cash compensation, including non-cash compensation to employees and nonemployees in the consolidated statements of operations and comprehensive loss as follows (in thousands):
| | | | | | |
| | Three months ended March 31, | ||||
|
| 2021 |
| 2020 | ||
Cost of revenue | | $ | — | | $ | 1 |
Research and development | |
| 26 | |
| 98 |
Selling, general and administrative | |
| 65 | |
| 371 |
Total | | $ | 91 | | $ | 470 |
Unrecognized stock-based compensation expense at March 31, 2021 for all stock-based compensation pertaining to options was approximately $0.5 million, which is expected to be recognized over a weighted-average term of 2.18 years.
Incentive Stock Options
The following table summarizes stock option transactionsIPR&D for the 2016 Equity Incentive PlanReShape Vest recorded in connection with the Company’s 2017 acquisition of BarioSurg, Inc and developed technology recorded in connection with the Obalon acquisition. The Company’s finite-lived intangible assets consists of developed technology, trademarks and tradenames, and covenant not to compete. The estimated useful lives of these finite-lived intangible assets range from 3 to 10 years. The amortization expenses for the three months ended March 31, 2022 and 2021, (in thousands, except shareswere $0.5 million and per share data):
| | | | | | | | | | |
|
| |
| | |
| Weighted- |
| | |
| | | | | | | average | | | |
| | | | Weighted- | | remaining | | | | |
| | | | average | | contractual | | Aggregate | ||
| | Number of | | exercise | | life | | intrinsic value | ||
| | shares | | price per share | | (in years) | | (in thousands) | ||
Outstanding at December 31, 2020 |
| 1,099,855 | | | 11.97 |
| 8.70 |
| | — |
Options granted |
| — | |
| — |
|
|
| |
|
Options exercised |
| — | |
| — |
|
|
| |
|
Options canceled |
| — | |
| — |
|
|
| |
|
Outstanding at March 31, 2021 |
| 1,099,855 | | $ | 11.97 |
| 8.45 | | $ | — |
Vested and expected to vest at March 31, 2021 |
| 1,099,855 | | $ | 11.97 |
| 8.45 | | $ | — |
Vested and exercisable at March 31, 2021 |
| 474,561 | | $ | 25.47 |
| 6.22 | | $ | — |
$0.4 million, respectively.
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Restricted Stock Awards(5) Debt
The following table summarizes restricted stock award transactions for the 2016 Equity Incentive Plan for the three months ended March 31, 2021:
| | | | | |
|
| |
| Weighted- | |
| | | | average | |
| | Number of | | grant date | |
| | awards | | fair value | |
Outstanding at December 31, 2020 |
| 3,000 | | | 71.50 |
Awards granted |
| — | |
| — |
Awards released |
| (1,500) | |
| 71.50 |
Awards canceled |
| — | |
| — |
Outstanding at March 31, 2021 |
| 1,500 | | $ | 71.50 |
The Company’s current restricted stock awards vest 100% at various terms from the grant date, subject to continued employment. The fair-value of each restricted stock award is determined on the grant date using the closing price of the Company’s common stock on the grant date.
Restricted Stock Units
There were no restricted stock units outstanding as of March 31, 2021.
8. Stockholders’ Equity
Blue OxCARES Act
On August 11,April 24, 2020, the Company entered into a consultingPPP Loan agreement (the “Consulting Agreement”with Silicon Valley Bank (“SVB”) with Blue Ox Healthcare Partners, LLCunder the PPP, which is part of the CARES Act administered by the United States Small Business Administration (“Blue Ox”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 its assigned entities. Pursuantour ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the Consulting Agreement, Blue Ox will work to (i) secure an agreement betweenbusiness. Under this program, the Company and a major health plan to conduct an outcomes study that will expandreceived proceeds of $1.0 million from the current clinical evidence base to include health economic analysis onPPP Loan. In accordance with the cost of care reductions from userequirements of the Obalon Balloon System, (ii) advisePPP, the Company’s management regardingCompany used proceeds from the development ofPPP Loan primarily for payroll costs, rent and utilities. The PPP Loan has a coverage1.00% interest rate per annum, matures on April 24, 2022 and reimbursement-based market strategy,is subject to the terms and (iii) secure agreements with health plans and other entities that result in reimbursementconditions applicable to loans administered by the SBA under the PPP.
On February 23, 2021, the Company submitted the application for and/or utilization of the Obalon Balloon System, among other services. Pursuant to, andPPP loan forgiveness, in accordance with the terms and conditions of the ConsultingSBA’s Loan Forgiveness Application (revised June 24, 2020). On March 1, 2021, the Company received confirmation from the SBA that the PPP Loan was forgiven in full including all interest incurred, which resulted in a gain on debt extinguishment of $1.0 million, during the three months ended March 31, 2021.
On December 27, 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 expanded certain benefits made available under the enhanced CARES Act, including modifying and extending the employee retention credit. As modified, the employee retention credit provides eligible employers with less than 500 employees a refundable tax credit against the employer’s share of social security taxes. The employee retention credit is equal to 70% of qualified wages paid to employees during calendar year 2021 for a maximum credit of $7,000 per employee for each calendar quarter through September 30, 2021. The Company recognized a $0.3 million employee retention credit during the three months ended March 31, 2021, which was offset against payroll tax expense.
Credit Agreement
On January 19, 2021, the Company and the Lender entered into an amendment to the credit agreement, originally entered into on March 25, 2020, that increased the amount available under delayed draw term loans by $1.0 million, and issued an additional 1,000,000 Series G Warrants. The Company evaluated the accounting related to the amendment and in conjunction with the warrants issued. Based on this analysis the Company determined the agreements are substantially different and extinguished the original credit agreement and recorded the amended credit agreement as a new debt at a fair value of $10.0 million. As a result, during the three months ended March 31, 2021, the Company recorded a debt discount of approximately $0.5 million and a $3.0 million loss on extinguishment of debt, which is comprised of the fair value of the warrants and unamortized debt issuance cost with the original credit agreement, offset by the debt discount. At March 31, 2021, there was approximately $0.1 million of unamortized debt discount. Pursuant to the amendment of the credit agreement, the maturity date of the loans are March 31, 2021 and the loans bear interest at LIBOR plus 2.5%.
On March 10, 2021, the Company and the Lender entered into an amendment to the credit agreement that extended the maturity date from March 31, 2021 to March 31, 2022. The Company has accounted for this amendment as a debt modification. The associated unamortized debt discount on the January 19, 2021 amendment of $0.1 million will be amortized as interest expense over the term of the amended credit agreement.
On June 28, 2021, the Company entered into a warrant exercise agreement with existing investors, including the Lender, to exercise certain outstanding warrants. For further details on this transaction see Note 9. The Company used some of the proceeds from this transaction to pay off the $10.5 million of debt outstanding under the credit agreement.
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
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of the Company’s assets, but that security interest terminated in accordance with its terms in October 2019. At December 31, 2021, the Company had paid off the purchase consideration in full.
(6) Leases
The Company has noncancelable operating leases for office and warehouse space in San Clemente and Carlsbad, California, as well as 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. The Company extended the San Clemente lease by twelve months with an end date of June 30, 2023 and extended the Carlsbad lease by three months with an end date of June 30, 2022. 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 were $0.2 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively. Variable lease costs were not material.
Supplemental information related to operating leases is as follows:
| | | |
Balance sheet information at March 31, 2022 | | | |
Operating lease ROU assets | | $ | 524 |
| | | |
Operating lease liabilities, current portion | | $ | 441 |
Operating lease liabilities, long-term portion | | | 86 |
Total operating lease liabilities | | $ | 527 |
| | | |
Cash flow information for the three months ended March 31, 2022 | | | |
Cash paid for amounts included in the measurement of operating leases liabilities | | $ | 200 |
Maturities of operating lease liabilities were as follows:
| | | |
Twelve months ending March 31, 2022 |
| |
|
2023 | | $ | 451 |
2024 | | | 87 |
Total lease payments | | | 538 |
Less: imputed interest | | | 11 |
Total lease liabilities | | $ | 527 |
| | | |
Weighted-average remaining lease term at end of period (in years) | | | 1.0 |
Weighted-average discount rate at end of period | | | 5.5 |
(7) Acquisition
On June 15, 2021, the Company completed the previously announced merger with Obalon, which was treated as a reverse acquisition for accounting purposes, for an aggregate purchase price of $30.6 million. This includes the issuance of 3,340,035 shares of common stock valued at $30.6 million at the closing market price on the day of merger and the cancellation of 2,680,301 shares of common stock. As a result of the controlling interest of the former shareholders of ReShape, for financial statement reporting and accounting purposes, ReShape was considered the acquirer under the acquisition method of accounting in accordance with ASC 805-10-55. The reverse acquisition is deemed a capital transaction in substance whereas the historical assets and liabilities of Obalon before the business combination were replaced with the historical financial statements of ReShape in all future filings with the SEC. There were 0 acquisition related costs recognized for the three months ended March 31, 2022 and 2021.
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Tangible and intangible assets acquired were recorded based on their estimated fair values at the acquisition date. The excess of the purchase price over the fair value of the net assets acquired was recorded to goodwill. The following table summarizes the fair values of the assets acquired and liabilities assumed, primarily related to inventory, developed technology, goodwill (including the deductibility for tax purposes) and income tax related accruals:
| | | |
Current assets | | $ | 5,887 |
Property and equipment, net | | | 796 |
Right-of-use assets | | | 335 |
Other assets | | | 1,898 |
Goodwill | | | 21,566 |
Developed technology | | | 2,730 |
Liabilities assumed | | | (2,650) |
Total purchase price | | | 30,562 |
Less: cash acquired | | | (5,207) |
Total purchase price, net of cash acquired | | $ | 25,355 |
As part of the warrant agreements there was a provision that would provide the holders, at their election, a cash payment based on a Black-Scholes valuation of the warrants in connection with certain fundamental transactions. This clause could be exercised by the holders for 30 days subsequent to the date of the transaction. The Company performed a preliminary valuation of the warrants and recorded a liability at the time of the merger of $2.0 million. During the third quarter of 2021, the Company completed its valuation of these warrants which resulted in a liability for the warrants of $1.3 million, a decrease of $0.7 million, which had a corresponding decrease to goodwill. The Company had 1 of the holders exercise the fundamental transaction option, and rather than paying cash both parties agreed on the Company issuing shares of common stock and new warrants to this investor. See Notes 8 and 9 below for additional details. As the 30 day period passed, the Company valued the remaining warrants using a Black-Scholes model with an exercise price ranging from $13.20 to $15.00 per share, a risk free rate of 0.44%, a volatility rate of 122.1% and a dividend rate of 0. This resulted in a total fair value of $0.9 million as of July 15, 2021, with the change in fair value being recognized as a component of warrant expense. The ending liability of $0.5 million was reclassified from a current liability to additional paid-in capital.
As of March 31, 2022, the Company is still finalizing the impact of acquisition accounting on deferred income taxes, which will be finalized when the pre-merger Obalon tax return is finalized.
Goodwill includes expected synergies and other benefits the Company believes will result from the acquisition. The developed technology has been capitalized at fair value as an intangible asset with an estimated life of 15 years. The developed technology was determined using the income approach. This approach determines fair value based on cash flow projections which are discounted to present value using a risk-adjusted rate of return, using nonrecurring Level 3 inputs. The discount rate used was 22.0%. For the year ended December 31, 2021, the Company fully impaired goodwill due to the decline in market capitalization.
(8) Equity
Common Stock Issued Related to Restricted Stock Units
During the three months ended March 31, 2022, the Company issued 765,647 shares of common stock subject to vesting of the restricted stock units. For further details see Note 12. There were 0 shares issued during the three months ended March 31, 2021.
August 2021 Issuance of Common Stock for Services
On August 11, 2021, the Company entered into a consulting agreement in which the Company issued to Blue Oxthe consultant 37,500 shares of restricted common stock for the consulting services in a warrantprivate placement in reliance on Rule 4(a)(2) under the Securities Act of 1933, as amended (the “Warrant’“Securities Act”). The shares were deemed earned on the day of the agreement and became unrestricted six months after the agreement date which is when the contract term ends.
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July 2021 Exchange of Warrants for Common Stock
On July 16, 2021, the Company entered into an exchange agreement (the “Exchange Agreement”) with existing institutional investors to exchange certain outstanding warrants (the “Exchange Warrants”) for shares of common stock and new warrants to purchase common stock. The investors held common stock purchase warrants issued by the Company prior to the merger of Obalon and ReShape. The merger constituted a fundamental transaction under the Exchange Warrants and, as a result thereof, pursuant to the terms and conditions of the Exchange Warrants, the investors were entitled to a cash payment equal to the Black Scholes value of the Exchange Warrants, calculated in accordance with the terms of the Exchange Warrants (the “Black Scholes Payment”).
Subject to the terms and conditions set forth in the Exchange Agreement and, in reliance on Section 3(a)(9) of the Securities Act, in lieu of the Black Scholes Payment, the Company and the Investors agreed to exchange all of the Exchange Warrants for (a) a total of 504,861 shares of common stock, which was calculated by dividing the Black Scholes Payment by $4.038, which was equal to 95% of the closing market price of the Company’s common stock on The Nasdaq Capital Market on July 16, 2021 and (b) new warrants to purchase up to 100,000a total of 400,000 shares of common stock at an exercise price of $4.038 with a term of five years. For further details on the warrants see Note 9 below.
June 2021 Exercises of Warrants for Common Stock
On June 28, 2021, the Company entered into a warrant exercise agreement with existing accredited investors to exercise certain outstanding warrants to purchase up to an aggregate of 7.9 million shares of the Company’s common stock, par value $0.001 per share, at an exercise price of $0.8285, subject to adjustment pursuant towhich 7.1 million shares were issued in July in accordance with the terms of the Warrant.warrant exercise agreement. In consideration for the immediate exercise of the existing warrants for cash, the exercising holders received new unregistered warrants to purchase up to an aggregate of 5.9 million shares (equal to 75% of the shares of common stock issued in connection with the exercise) of the Company’s common stock (the “New Warrants”) in a private placement pursuant to Section 4(a)(2) of the Securities Act. The Warrant is exercisable immediately and will expire on August 10, 2025. Theinvestors paid a cash purchase price for the New Warrants equal to $0.09375 per share of common stock underlying the New Warrants. In connection with the exercise, the Company also agreed to reduce the exercise price represents a 15% premiumof certain of the existing warrants to $6.00, which is equal to the averagemost recent closing price of the Company’s common stock foron The Nasdaq Capital Market prior to the 10 days preceding the effective dateexecution of the Consulting Agreement. warrant exercise agreement. For further details on the warrants see Note 9 below.
The Warrant may be exercised, in whole or in part, through a cashlessgross proceeds to the Company from the exercise in which caseand the holder would receive upon such exercisesale of the New Warrants was approximately $45.5 million, prior to deducting placement agent fees and estimated offering expenses. The Company used approximately $10.8 million to pay off the credit agreement, including $10.5 million of debt and $0.3 million of accrued interest under its secured credit agreement dated March 25, 2020, as amended, see Note 5 above for further details. The Company intends to use the remainder of the net number ofproceeds for working capital and general corporate purposes.
On June 18, 2021, the Company issued 100,000 shares of common stock determined according to the formula set forth in the Warrant. If the Consulting Agreement is terminated within six months of the effective date of the Consulting Agreement, then the number of2 healthcare focused institutional investors, totaling 200,000 shares of common stock that may be purchasedand on June 21, 2021, the Company issued 130,445 and 57,229 shares of common stock to 2 healthcare focused institutional investors totaling 187,674 shares of common stock, as an exercise of pre-funded warrants issued in connection with the September 2019 private placement transactions. The Company received approximately $0.1 million in connection with the exercises
(9) Warrants
On July 16, 2021, the Company entered into an exchange agreement with an existing accredited investor to exchange certain outstanding warrants for shares of common stock and issued new warrants to purchase up to total of 400,000 shares of common stock at an exercise price of $4.038 per share with a term of 5 years. These new warrants were valued at $1.5 million using the fair value approach at the time of issuance. The fair value of the new warrants was determined using a Black Scholes option pricing model using a risk free rate of 0.79%, an expected term of 5 years, expected dividends of 0 and expected volatility of 157.7%.
On June 28, 2021, the Company entered into a warrant exercise agreement with existing accredited investors to exercise certain outstanding warrants. As part of this agreement the Company modified the Series E warrants issued September 23, 2019 from an exercise price of $10.64 per share to $6.00 per share, the Series G warrants issued on March 25, 2020 from an exercise price of $6.56 per share to $6.00 per share, the Series G warrants issued on December 17,
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2020 from an exercise price of $6.21 per share to $6.00 per share and the Series G warrants issued on January 21, 2021 from an exercise price of $6.21 per share to $6.00 per share. The Company issued a total of 7,929,384 shares of common stock in connection with this transaction and issued an additional 5,947,039 new warrants. These new warrants were valued at $18.5 million using the fair value approach at the time of issuance. The fair value the new warrants was determined using a Black Scholes option pricing model using a risk free rate of 0.898%, an expected term of 5 years, expected dividends of 0 and expected volatility of 97.6%.
On January 19, 2021, the Company issued 1,000,000 Series G Warrants, pre-merger, which were adjusted by Blue Ox under the Warrant shall be reduced on a pro rata basis.exchange ratio in the merger, to an institutional investor in connection with an amendment to the credit agreement. The Warrant was deemed to qualify for equity treatment under authoritative accounting guidanceSeries G Warrants were valued at $3.0 million using the fair value approach at the time of issuance and an immaterial amount was recorded within equityas a component of the loss on extinguishment of debt during the three months ended March 31, 2021. See Note 5 above for details. The fair value of the Series G Warrants was determined using a Black Scholes option pricing model using a risk free rate of 0.45%, an expected term of 5 years; expected dividends of 0 and expected volatility of 97.1%.
(10) 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 months ended March 31, 2022 and 2021, the Company primarily only sold the Lap-Band system. The following table presents the Company’s condensed consolidated statementrevenue disaggregated by geography:
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2022 |
| 2021 | ||
United States | | $ | 1,844 | | $ | 2,520 |
Australia | | | 181 | | | 293 |
Europe | | | 414 | | | 379 |
Rest of world | | | 1 | | | 29 |
Total revenue | | $ | 2,440 | | $ | 3,221 |
Operating Segments
The Company conducts operations worldwide and is managed in the following geographical regions: United States, Australia, Europe and the Rest of stockholders’ equityWorld (primarily in the Middle East). All regions sell the Lap-Band system, which consisted of nearly all our revenue and gross profit for the yearthree months ended DecemberMarch 31, 2020.2022 and 2021. During the three months ended March 31, 2022 and 2021, there was minimal revenue for reshapecare. There was 0 revenue or gross profit recorded for the ReShape Vest or Diabetes Bloc-Stim Neuromodulation for the three months ended March 31, 2022 and 2021 as these 2 products are still in the development stage. There was also 0 revenue recorded for the recently acquired Obalon line.
(11) Income Taxes
During the three months ended March 31, 2022, a $0.2 million tax benefit was recorded primarily due to a reduction in the valuation allowance related to an impairment of indefinite lived assets partially offset by state and foreign taxes. During the three months ended March 31, 2021, 90,000 warrants were exercised at a price of $0.8285.
The Warrant provides for certain piggy back registration rights if, during the period beginning six (6) months after the date of the Consulting Agreement$25 thousand tax expense was recorded, primarily due to U.S. state minimum taxes and ending six (6) months after the expiration date of the Warrant, the Company proposes to file a registration statement under the Securities Act of 1933, as amended, with respect an offering by the Company of its common stock (other than certain registration statements as set forthprojected income in the Warrant).
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The Consulting Agreement was terminated during the fourth quarter of 2020Australia and the warrants were subsequently fully exercised in the first quarter of 2021.
Public Offering and related warrants
On August 1, 2019, the Company entered into an underwriting agreement with A.G.P./Alliance Global Partners, as underwriter, in connection with a public offering of the Company’s securities, pursuant to which the Company issued and sold (i) 2,427,500 shares of common stock (including 412,500 shares of common stock pursuant to the partial exercise of the underwriters’ over-allotment option to purchase 562,500 additional shares), (ii) pre-funded warrants to purchase up to 1,735,000 shares of common stock (“Pre-funded Warrants”), (iii) accompanying warrants to purchase up to 3,234,375 shares of common stock (including the exercise in full of the underwriters’ over-allotment option to purchase additional warrants to purchase 421,875 shares of common stock) (“Purchase Warrants”) and (iv) an additional warrant to the underwriters for the purchase 37,500 shares of common stock (“Representative Warrant”).Netherlands. The offering was made pursuant to a registration statement on Form S-1. The offering closed on August 6, 2019 resulting in gross proceeds of approximately $15.4 million. The Company incurred $0.7 million of legal, accounting, and other fees related to the offering. The shares of common stock and accompanying Purchase Warrants were sold at a public offering price of $4.00 per share, the Pre-funded Warrants and accompanying Purchase Warrants were sold at a public offering of $3.999. The Purchase Warrants were immediately exercisable upon issuance, will expire on August 6, 2024 and have an exercise price of $4.40 and the Representative Warrant has an exercise price of $5.00, in each case subject to adjustment in the event of stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events.
The Representative Warrant became exercisable in February 2020 and expires on August 6, 2024. All of the Pre-funded warrants were exercised during the third quarter of 2020. 37,500 of the Purchase or Representative Warrants have been exercised as of March 31, 2021. All of the warrants were recorded within equity in accordance with authoritative accounting guidance.
Lincoln Park Purchase Agreement
On February 5, 2020, the Company entered into a new purchase agreement (the “Purchase Agreement”) and registration rights agreement (the “Registration Rights Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park has committed to purchase up to $15.0 million of the Company’s common stock, $0.001 par value per share (the “Common Stock”). The new Purchase Agreement replaces an existing purchase agreement, dated December 27, 2018, by and between the Company and Lincoln Park, pursuant to which Lincoln Park committed to purchase up to $20.0 million of the Company’s Common Stock. In connection with entering into the new Purchase Agreement, the Company and Lincoln Park terminated the prior purchase agreement, effective February 5, 2020.
Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $15.0 million of the Company’s Common Stock. Such sales of common stock by the Company, if any, will be subject to certain limitations, and may occur from time to time, at the Company’s sole discretion, over the 36-month period commencing on February 28, 2020 date that a registration statement covering the resale of shares of Common Stock that have been and may be issued under the Purchase Agreement, which the Company agreed to file with the Securities and Exchange Commission (the “SEC”) pursuant to the Registration Rights Agreement, was declared effective by the SEC and a final prospectus in connection therewith was filed and the other conditions set forth in the purchase agreement were satisfied (such date on which all of such conditions are satisfied, the “Commencement Date”).
The Company incurred approximately $0.3 million of legal, accounting, and other fees related to the offering. As of March 31, 2021 the Company has not sold any shares under the Purchase Agreement to Lincoln Park. The Company determined that there is a low probability that the equity line will be utilized for the remainder of 2020 due to adverse market circumstances. As a result, the Company fully expensed the $0.3 million of fees in March 2020.
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Common Stock Reserved for Future Issuance
Common stock reserved for future issuance consists of the following as of March 31, 2021:
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9. Income Taxes
The Company’s effectiveincome tax rate was 0.00% and 0.00%provisions for the three months ended March 31, 2022 and year ended December 31, 2021, and 2020, respectively,were calculated using the discrete year-to-date method. The effective tax rate differs from the statutory tax rate of 21% primarily due to the existence of valuation allowances against net deferred tax assets and current liabilities resulting from the estimated state income tax liabilities and foreign tax liability.
In assessing the realization of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Based on the level of historical losses, projections of losses in future periods and potential limitations pursuant to changes in ownership under Internal Revenue Code Section 382, the Company provided a valuation allowance at both March 31, 2022 and December 31, 2021.
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(12) Stock-based Compensation
Stock-based compensation expense related to stock options and RSUs issued under the ReShape Lifesciences Inc. Second Amended and Restated 2003 Stock Incentive Plan (the “Plan”) for the three months ended March 31, 2022 and 2021 were as follows:
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
| | 2022 | | 2021 | ||
Sales and marketing | | $ | 104 | | $ | — |
General and administrative | | | 570 | | | 101 |
Research and development | | | 73 | | | — |
Total stock-based compensation expense | | $ | 747 | | $ | 101 |
Stock Options
A summary of the status of the Company’s stock options as of March 31, 2022 and changes during the three months ended March 31, 2022 are as follows:
| | | | | | | | | | |
|
| | | | | | Weighted | | | |
| | | | Weighted | | Average | | Aggregate | ||
| | | | Average | | Remaining | | Intrinsic | ||
| | |
| Exercise Price | | Contractual | | Value | ||
| | Shares | | Per Share | | Life (years) | | (in thousands) | ||
Outstanding at December 31, 2021 |
| 885,039 | | | 7.97 | | | | $ | — |
Options granted |
| — | | | — | | | | | |
Options exercised |
| — | | | — | | | | | |
Options cancelled |
| (51,065) | | | 3.62 | | | | | |
Outstanding at March 31, 2022 |
| 833,974 | | | 8.23 | | 8.9 | | $ | — |
Exercisable at March 31, 2022 | | 612,410 | | | 9.90 | | 8.7 | | | — |
Vested and expected to vest at March 31, 2022 | | 833,974 | | | 8.23 | | 8.9 | | | — |
There was no intrinsic value of the outstanding stock options at March 31, 2022. The unrecognized share-based expense at March 31, 2022 was $0.8 million and will be recognized over a weighted average period of 2.2 years.
Stock option awards outstanding under the Company’s incentive plans have been granted at exercise prices that are equal to the market value of its common stock on the date of grant. Such options generally vest over a period of four years and expire at ten years after the grant date. The Company recognized compensation expense ratably over the vesting period. The Company uses a Black-Scholes option-pricing model to estimate the fair value of stock options granted, which requires the input of both subjective and objective assumptions as follows:
Expected Term – The estimate of expected term is based on the historical exercise behavior of grantees, as well as the contractual life of the options granted.
Expected Volatility – The expected volatility factor is based on the volatility of the Company’s common stock for a period equal to the term of the stock options.
Risk-free Interest Rate – The risk-free interest rate is determined using the implied yield for a traded zero-coupon U.S. Treasury bond with a term equal to the expected term of the stock options.
Expected Dividend Yield – The expected dividend yield is based on the Company’s historical practice of paying dividends on its common stock.
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Restricted Stock Units
During the three months ended March 31, 2022, the Company did not grant or cancel any RSUs.
A summary of the Company’s unvested RSUs award activity for the three months ended March 31, 2022, were as follows:
| | | | | |
| | | | Weighted | |
| | | | Average | |
| | |
| Grant Date | |
| | Shares | | Fair Value | |
Unvested RSUs at December 31, 2021 |
| 1,711,318 | | $ | — |
Granted |
| — | | | 4.36 |
Vested (1) |
| (813,495) | | | 4.36 |
Cancelled/Forfeited |
| — | | | — |
Non-vested RSUs at March 31, 2022 |
| 897,823 | | | 4.36 |
| (1) | At March 31, 2022, there were 47,848 shares of common stock related to RSU awards that had vested and the shares were not distributed to the participants until April of 2022. The Company recorded a liability to account for these shares and reversed the liability once the shares were issued to the participants. |
The fair value of each RSU is the closing stock price on the Nasdaq of the Company’s common stock on the date of grant. Upon vesting, a portion of the RSU award may be withheld to satisfy the statutory income tax withholding obligation. The remaining RSUs will be settled in shares of the Company’s common stock after the vesting period. The unrecognized compensation cost related to the RSUs at March 31, 2022 was $3.9 million and expected to be recognized over a period of 1.8 years.
(13) Commitment and Contingencies
Litigation
On August 6, 2021, Cowen and Company, LLC filed a complaint against ReShape, as successor in interest to Obalon Therapeutics, in the Supreme Court of the State of New York based on an alleged breach of contract arising out of Cowen’s prior engagement as Obalon’s financial advisor. The complaint alleges that Cowen is entitled to be paid a $1.35 million fee in connection with ReShape’s merger with Obalon under the terms of Cowen’s engagement agreement with Obalon. The complaint also seeks reimbursement of Cowen’s attorneys’ fees and interest in connection with its claim. The Company is unable to predict the ultimate outcome of this matter; therefore, no amounts have been accrued. The Company intends to vigorously defend this matter.
On August 18, 2021, H.C. Wainwright & Co., LLC filed a complaint against ReShape in the Supreme Court of the State of New York based on an alleged breach of contract arising out of Wainwright’s prior engagement by ReShape in connection with certain capital raising transactions by ReShape. The complaint alleges that Wainwright is entitled to be paid a fee in connection with ReShape’s capital raising transaction under the warrant exercise agreement that ReShape entered into on June 28, 2021. Wainwright alleges that its June and September 2019 engagement agreements with ReShape require ReShape to pay Wainwright a cash fee equal to 8.0% of the gross proceeds that ReShape received from the exercise of warrants issued pursuant to those engagement agreements, including warrants that were exercised in the June 2021 transaction. The complaint also seeks reimbursement of Wainwright’s attorneys’ fees and interest in connection with its claim. The Company is unable to predict the ultimate outcome of this matter or estimate a range of possible exposure; therefore, no amounts have been accrued. The Company intends to vigorously defend this matter.
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.
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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 most recent Annual Report on Form 10-K.
Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this report.
Overview
We are the premier global weight-loss solutions company, offering an integrated portfolio of proven products and services that manage and treat obesity and associated metabolic disease. Our primary operations are in the following geographical areas: United States, Australia and certain European and Middle Eastern countries. Our current portfolio includes the Lap-Band Adjustable Gastric Banding System, the reshapecare virtual health coaching program, the ReShape Marketplace, the Obalon Balloon System, the ReShape Vest, an investigational device to help treat more patients with obesity, and the Diabetes Bloc-Stim Neuromodulation device, a technology under development as a new treatment for type 2 diabetes mellitus. There has been no revenue recorded for the ReShape Vest or the Diabetes Bloc-Stim Neuromodulation as these products are still in the development stage. We continue to explore the compliance requirements, manufacturing viability and quality system controls necessary for re-introducing the Obalon Balloon System.
Recent Developments
On February 16, 2022, the Company renewed the office space lease in San Clemente, California for one year. This lease renewal will commence on July 1, 2022, and end on June 30, 2023.
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Results of Operations
The following table sets forth certain data from our unaudited consolidated statements of operations expressed as percentages of revenue (in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, | | |||||||||
| 2022 | | | 2021 | | ||||||
Revenue | $ | 2,440 | | 100.0 | % | | $ | 3,221 | | 100.0 | % |
Cost of goods sold | | 1,222 | | 50.0 | % | | | 937 | | 29.1 | % |
Gross profit | | 1,218 | | 50.0 | % | | | 2,284 | | 70.9 | % |
Operating expenses: | | | | | | | | | | | |
Sales and marketing | | 4,707 | | 192.9 | % | | | 1,250 | | 38.8 | % |
General and administrative | | 4,163 | | 170.6 | % | | | 2,720 | | 84.5 | % |
Research and development | | 748 | | 30.7 | % | | | 571 | | 17.7 | % |
Total operating expenses | | 9,618 | | 394.2 | % | | | 4,541 | | 141.0 | % |
Operating loss | | (8,400) | | (344.2) | % | | | (2,257) | | (70.1) | % |
Other expense (income), net: | | | | | | | | | | | |
Interest expense, net | | (1) | | — | % | | | 599 | | 18.6 | % |
Loss on extinguishment of debt, net | | — | | — | % | | | 1,960 | | 60.9 | % |
Other, net | | (11) | | (0.5) | % | | | — | | — | % |
Gain on foreign currency | | (16) | | (0.7) | % | | | 33 | | 1.0 | % |
Loss before income tax provision | | (8,372) | | (343.0) | % | | | (4,849) | | (150.5) | % |
Income tax benefit | | (157) | | (6.4) | % | | | 25 | | 0.8 | % |
Net loss | $ | (8,215) | | (336.6) | % | | $ | (4,874) | | (151.3) | % |
Non-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 measurement process. Adjusted EBITDA is defined as net loss before interest, taxes, depreciation and amortization, stock-based compensation, and other one-time costs.
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The following table contains a reconciliation of non-GAAP net loss to GAAP net loss attributable to common stockholders for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | |
| Three Months Ended March 31, | ||||
| 2022 | | 2021 | ||
GAAP net loss | $ | (8,215) | | $ | (4,874) |
Adjustments: | | | | | |
Interest expense, net | | (1) | | | 599 |
Income tax expense (benefit) | | (157) | | | 25 |
Depreciation and amortization | | 550 | | | 418 |
Stock-based compensation expense | | 747 | | | 101 |
Loss on extinguishment of debt, net | | — | | | 1,960 |
Non-GAAP loss | $ | (7,076) | | $ | (1,771) |
Comparison of Results of Operations
Three months ended March 31, 2022 and March 31, 2021
Revenue: The following table summarizes our unaudited revenue by geographic location based on the location of customers for the three months ended March 31, 2022 and 2021, as well as the percentage of each location to total revenue and the amount of change and percentage of change (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | Amount | | Percentage | | ||||||||||
| 2022 | | | 2021 | | | Change | | Change | | |||||||
United States | $ | 1,844 | | 75.6 | % | | $ | 2,520 | | 78.2 | % | | $ | (676) | | (26.8) | % |
Australia | | 181 | | 7.4 | % | | | 293 | | 9.1 | % | | | (112) | | (38.2) | % |
Europe | | 414 | | 17.0 | % | | | 379 | | 11.8 | % | | | 35 | | 9.2 | % |
Rest of world | | 1 | | — | % | | | 29 | | 0.9 | % | | | (28) | | (96.6) | % |
Total revenue | $ | 2,440 | | 100.0 | % | | $ | 3,221 | | 100.0 | % | | $ | (781) | | (24.2) | % |
Revenue totaled $2.4 million for the three months ended March 31, 2022, which represents a contraction of 24.2%, or $0.8 million for the same period in 2021. The primary reason, is due to the emergence in late 2021 of the fast-spreading omicron variant of COVID-19 resulting in a significant rise in global cases causing a significant number of bariatric centers to close December 2021 through February 2022. During March 2022, we experienced a significant increase in revenue compared to January and February 2022, as the omicron variant began to subside. Our expectation is revenue will continue to increase through the remainder of 2022, as we have witnessed a significant growth in our web traffic and doctor consultations, attributable to the direct to consumer marketing campaign we launched during the fourth quarter of 2021.
Cost of Goods Sold and Gross Profit: The following table summarizes our unaudited cost of revenue and gross profit for the three months ended March 31, 2022 and 2021, as well as the percentage compared to total revenue and amount of change and percentage of change (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | Amount | | Percentage | | ||||||||||
| 2022 | | | 2021 | | | Change | | Change | | |||||||
Revenue | $ | 2,440 | | 100.0 | % | | $ | 3,221 | | 100.0 | % | | $ | (781) | | (24.2) | % |
Cost of goods sold | | 1,222 | | 50.0 | % | | | 937 | | 29.1 | % | | | 285 | | 30.4 | % |
Gross profit | $ | 1,218 | | 50.0 | % | | $ | 2,284 | | 70.9 | % | | $ | (1,066) | | (46.7) | % |
Gross Profit. Gross profit for the three months ended March 31, 2022, was $1.2 million, compared to $2.3 million for the same period in 2021, a decrease of $1.1 million. Gross profit as a percentage of total revenue for the three months ended March 31, 2022, was 50.0% compared to 70.9% for the same period in 2021. The decrease in gross profit margin is primarily due to a reduction in revenue compiled with department expenses, which are more fixed in nature, such as payroll related expenses, consulting fees, depreciation, along with increased freight costs.
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Operating Expenses: The following table summarizes our unaudited operating expenses for the three months ended March 31, 2022, and 2021, as well as the percentage of total revenue and the amount of change and percentage of change (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | Amount | | Percentage | | ||||||||||
| 2022 | | | 2021 | | | Change | | Change | | |||||||
Sales and marketing | $ | 4,707 | | 192.9 | % | | $ | 1,250 | | 38.8 | % | | $ | 3,457 | | 276.6 | % |
General and administrative | | 4,163 | | 170.6 | % | | | 2,720 | | 84.5 | % | | | 1,443 | | 53.1 | % |
Research and development | | 748 | | 30.7 | % | | | 571 | | 17.7 | % | | | 177 | | 31.0 | % |
Total operating expenses | $ | 9,618 | | 394.2 | % | | $ | 4,541 | | 141.0 | % | | $ | 5,077 | | 111.8 | % |
Sales and Marketing Expense. Sales and marketing expenses for the three months ended March 31, 2022, increased by $3.5 million, or 276.6%, to $4.7 million, compared to $1.2 million for the same period in 2021. The increase is primarily due to an increase in advertising and marketing costs of $2.8 million, as the Company launched its direct to consumer marketing campaign during the fourth quarter of 2021, and 2020,expanded this campaign during the first quarter of 2022, increasing its presence within video, print and social media platforms. In addition, we had an increase in payroll related expenses of $0.5 million, as we continue to strengthen our commercial organization and have hired a senior VP of Commercial Operations, as well as additional sales personnel. We also had an increase in stock-based compensation expense of $0.1 million, during the third quarter of 2021, as the Company issued both RSUs and stock options, which were the first equity grants issued since 2018. The Company had an increase of travel expenses of $0.1 million, primarily due to relaxing of COVID-19 restrictions.
General and Administrative Expense. General and administrative expenses for the three months ended March 31, 2022, increased by $1.4 million, or 53.1%, to $4.1 million, compared to $2.7 million for the same period in 2021. The increase is drivenprimarily due to an increase of $0.5 million in stock-based compensation expense related to the issuance during the third quarter of 2021 of both RSUs and stock options. In addition, the Company had an increase in payroll related expenses of $0.3 million, due primarily to increases in salaries. The Company had an increase in legal and patent fees of $0.2 million, primarily related to a legal settlement during the first quarter of 2022. There was an increase in audit, consulting, legal and other professional services of $0.1 million. The Company had increases of $0.2 million and $0.1 million, in rent and facilities, and insurance respectively, directly attributable to the merger with Obalon.
Research and Development Expense. Research and development expenses for the three months ended March 31, 2022, increased by pre-tax$0.2 million, or 31.0%, to $0.8 million, compared to $0.6 million for the same period in 2021. The increase is due to an increase of $0.1 million in stock-based compensation expense related to the issuance during the third quarter of 2021 of both RSUs and stock options. In addition, the Company had an increase of $0.1 million in payroll related expenses.
Net Interest Expense. Net interest expense for the three months end March 31, 2022, decreased by $0.6 million to $1 thousand compared to $0.6 million for the same period in 2021. The reason for the decrease is due to the Company paying off all of its debt during the second quarter of 2021.
(Gain) Loss on Foreign Currency. The Company had a gain on foreign currency of $16 thousand for the three months ended March 31, 2022, compared to a loss equity compensation andof $33 thousand for the changesame period in 2021.
Income Tax (Benefit) Expense. The Company had an income tax benefit of $0.2 million for the three months ended March 31, 2022, primarily due to a reduction in the valuation allowance. Aallowance related to an impairment of indefinite lived assets. An income tax provisionexpense of $0 and $0$25 thousand was recorded for the three months ended March 31, 2021, primarily related to projected income in Australia and 2020, respectively.Netherlands.
10. CommitmentsLiquidity and ContingenciesCapital Resources
Operating Lease
The Company leases its facilitiesOur sources of cash liquidity consist of cash and retail treatment center under noncancelable operating leasescash equivalents and cash from operations. We believe that these sources are sufficient to fund the current requirements of working capital, capital expenditures, and other financial commitments for the next twelve months. As of March 31, 2022, we had $15.5 million of cash and cash equivalents, which expire on various dates between 2022 and 2025. In July 2019, the Company entered into an office lease agreement to launch an Obalon-branded retail treatment center in San Diego, California, which expires on August 5, 2021. In January 2020, the Company entered into lease agreements for two additional Obalon-branded retail treatment centers in Orange County, California and Sacramento, California, respectively. Under the termsincludes $50 thousand of the facilities and retail center leases, the Company is required to pay its proportionate sharerestricted cash.
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The Company’s landlord in Carlsbad, Gildred Development Company (“Gildred”), has since sent a demand letter for rent. On October 13, 2020, Gildred served the Company with an unlawful detainer action in the Superior Court of California, County of San Diego (Gildred Development Company v. Obalon Therapeutics, Inc., Case No. 37-2020-00035927-CU-UD-CTL). Gildred alleges that the Company owes more than $113,000 of unpaid rent and fees to Gildred and seeks damages for unpaid rent and continued occupancy of the premises. On November 18, 2020, Gildred filed an ex parte application for a writ of attachment or, in the alternative, a temporary protective order. The application was denied on November 24, 2020. On December 28, 2020, Gildred filed another application for a writ of attachment or, in the alternative, a temporary protective order. On January 22, 2021, the court granted Gildred’s application for a writ of attachment. The Company has paid the amount of the writ in full, which was $469,000. The Company is current on its rent obligations underalso evaluating further funding options, including seeking additional equity or debt financing to support the lease with Gildred.expansion of the Lap-Band system, reshapecare, and the continued development of the ReShape Vest and the ReShape Diabetes Bloc-Stim Neuromodulation; and the re-introduction of the Obalon Balloon System and other strategic market opportunities.
The following table summarizes our change in cash and cash equivalents and restricted cash (in thousands):
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
| | 2022 |
| 2021 | ||
Net cash used in operating activities | | $ | (7,378) | | $ | (1,961) |
Net cash received (used) in investing activates | | | 2 | | | (119) |
Net cash provided in financing activities | |
| — | |
| 1,000 |
Effect of exchange rate changes | | | 21 | | | 19 |
Net change in cash and cash equivalents | | $ | (7,355) | | $ | (1,061) |
Net Cash Used in Operating Activities
Upon the Company’s adoption of ASC 842 as of January 1, 2020, the Company recognized a ROU assetNet cash used in operating activities from operations was $7.4 million and lease liability for its building lease, assuming a 7.0% discount rate. Any short-term leases defined as 12 months or less or month-to-month leases were excluded and continue to be expensed each month. Total costs associated with short-term leases$2.0 million for the three months ended March 31, 2022 and 2021, were immaterial.
The Company determines if an arrangement is a lease at inception. The exercise of lease renewal options is at the Company’s sole discretion and were not included in the calculation of the Company’s lease liability as the Company is not able to determine without uncertainty if the renewal option will be exercised. The depreciable life of assets and leasehold improvements are limited to the expected term, unless there is a transfer of title or purchase option reasonably
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certain of exercise. The Company’s lease agreements do not contain any variable lease payments, residual value guarantees or any restrictive covenants.
The Company’s ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date of the lease or the ASC 842 adoption date, whichever is later, based on the present value of lease payments over the lease term. When readily determinable, the Company uses the implicit rate in determining the present value of lease payments, or 7.0%, as of the adoption date. When leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date or adoption date, including the lease term. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company recorded an immaterial amount of lease liabilities, ROU assets, and interest expense associated with finance leases as of and forrespectively. For the three months ended March 31, 2021 and 2020, respectively. The current and long-term portions of operating and finance lease liabilities are presented within the current portion of lease liabilities and lease liabilities long-term line items on the consolidated balance sheet, respectively. Operating and finance lease ROU assets are presented within the lease right-of-use assets line item on the consolidated balance sheet.
Future minimum annual lease payments under such leases were as follows as of March 31, 2021 (in thousands):
| | | |
Operating leases: |
| |
|
2021 (remaining nine months) | | $ | 433 |
2022 | | | 219 |
2023 | | | 105 |
2024 | |
| 108 |
2025 | |
| 61 |
Total undiscounted lease payments - operating leases | | | 926 |
Less: imputed interest | | | (32) |
Lease liability | | | 894 |
Less: current portion of lease liability | | | (550) |
Lease liability, less current portion | | $ | 344 |
As of March 31, 2021, the Company’s remaining lease term ranges from 1.0 to 4.25 years. Rent expense totaled $0.1 million for both the three months ended March 31, 2021 and 2020, respectively. The Company paid $0.1 million of cash payments related to its operating lease agreements for the three months ended March 31, 2021. The Company’s weighted average discount rate for leases as of March 31, 2021 was 6.0%.
Supplier Contracts
The Company enters into contracts in the normal course of business with clinical trial sites and clinical supply manufacturing organizations and with vendors for preclinical studies, research supplies and other services and products for operating purposes. These contracts generally provide for termination after a notice period, and, therefore, are cancelable contracts.
Shareholder Lawsuit
On February 14 and 22, 2018, plaintiff stockholders filed class action lawsuits against us and certain of our executive officers in the United States District Court for the Southern District of California (Hustig v. Obalon Therapeutics, Inc., et al., Case No. 3:18-cv-00352-AJB-WVG, and Cook v. Obalon Therapeutics, Inc. et al., Case No. 3:18-cv-00407-CAB-RBB). On July 24, 2018, the court consolidated the lawsuits and appointed Inter-Local Pension Fund GCC/IBT as lead plaintiff. On October 5, 2018, plaintiffs filed an amended complaint. The amended complaint alleges that we and certain of our executive officers made false and misleading statements and failed to disclose material adverse facts about our business, operations, and prospects in violation of Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the Exchange Act. The amended complaint also alleges violations of Section 11 of the Exchange Act arising out of the
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Company’s initial public offering. The plaintiffs seek damages, interest, costs, attorneys' fees, and other unspecified equitable relief. The underwriters from our initial public offering have also been named as defendants in this case and we have certain obligations under the underwriting agreement to indemnify them for their costs and expenses incurred in connection with this litigation. On September 25, 2019, the court granted in part and denied in part the defendants’ motion to dismiss. The court dismissed the Section 11 claims entirely, without leave to amend, and accordingly dismissed the underwriters and certain directors from the case. The Court also dismissed certain statements from the Section 10 claims. On August 17, 2020, the parties submitted a final settlement agreement of the securities class action for court approval. The settlement provided for a payment of $3.15 million to the plaintiffs, which was paid by the Company’s insurance carriers, and provided that the defendants continue to deny the allegations and claims asserted by the plaintiffs, and are entering into the settlement solely to eliminate the burden and expense of further litigation. On April 22, 2021, the court approved the settlement and dismissed the case.
Gildred Matter
On October 13, 2020, Gildred Development Company (“Gildred”), our landlord in Carlsbad, served us with an unlawful detainer action in the Superior Court of California, County of San Diego (Gildred Development Company v. Obalon Therapeutics, Inc., Case No. 37-2020-00035927-CU-UD-CTL). Gildred alleges that we owe more than $113,000 of unpaid rent and fees to Gildred and seeks damages for unpaid rent and continued occupancy of the premises. On November 18, 2020, Gildred filed an ex parte application for a writ of attachment or, in the alternative, a temporary protective order. The application was denied on November 24, 2020. On December 28, 2020, Gildred filed another application for a writ of attachment or, in the alternative, a temporary protective order. On January 22, 2021, the court granted Gildred’s application for a writ of attachment. The Company has paid the amount of the writ in full, which was $469,000. The Company is current on its rent obligations under the lease with Gildred.
11. Variable Interest Entity
In conjunction with the Company’s strategic focus to open weight loss treatment centers to provide medical services to patients who wish to lose weight through the Obalon balloon system, the Company entered into a consulting agreement with a lead doctor to open the first treatment center and oversee the treatment center’s activities. The treatment center was opened in September 2020 as a professional corporation (“PC”) in the State of California and, as a result of state regulatory requirements, may not be owned by a corporation. The Company fully funds all the activities of the treatment center and no financial contributions are made by the lead doctor. In addition, the Company is authorized and expected to provide daily oversight of the activities of the center, with the exception of directly providing medical services.
As the PC’s equity investment at risk is not sufficient to permit the entity to finance its activities without subordinated financial support, the PC is considered a variable interest entity. Although the Company does not own any equity interest in the PC, the Company holds the controlling financial interest as the sole funding source for the entity and through the ability to provide daily oversight. Therefore, the Company was determined to be the primary beneficiary of the PC and consolidated the PC’s balances and activity within its condensed consolidated financial statements.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of this Quarterly Report on Form 10-Q. These forward-looking statements may include, but are not limited to, statements regarding our future results of operations and financial position, business strategy, market size, potential growth opportunities, timing and results of preclinical and clinical development activities, selection of specific financial and strategic alternatives, and potential regulatory approval and commercialization of products and product candidates. In some cases, forward looking-statements may be identified by terminology such as “believe,” “may,” “will,” “should,” “predict,” “goal,” “strategy,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect,” “seek” and similar expressions and variations thereof. These words are intended to identify forward-looking statements.
We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, research and development, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.
As used in this Quarterly Report on Form 10-Q, the terms “Obalon,” “the Company,” “we,” “us,” and “our” refer to Obalon Therapeutics, Inc. and, where appropriate, its consolidated subsidiary, unless the context indicates otherwise.
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes thereto for the year ended December 31, 2020, included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed on March 12, 2021.
OVERVIEW
We are a vertically integrated medical device company focused on developing and commercializing innovative medical devices to treat people with obesity. Our current product offering is the Obalon Balloon System, the first and only U.S. Food and Drug Administration, or FDA, approved swallowable, gas-filled intragastric balloon designed to provide progressive and sustained weight loss in patients with obesity. We believe the Obalon Balloon System offers patients and physicians benefits over prior weight loss devices including, but not limited to, clinically meaningful weight loss, a favorable safety profile, improved patient tolerability and comfort, progressive weight loss with durable results, simple and convenient placement, and potentially attractive economics.
The Obalon Balloon System is FDA approved for temporary use to facilitate weight loss in adults with obesity having a body mass index, or BMI, of 30 to 40, or approximately 30 to 100 pounds overweight, who have failed to lose weight through diet and exercise. The system is intended to be used as an adjunct to a moderate intensity diet and behavior modification program. All balloons must be removed six months after the first balloon is placed. We believe the Obalon
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Balloon System provides a cost-effective, non-surgical and reversible treatment for weight loss solution in an outpatient setting.
The Obalon Balloon System consists of a swallowable capsule that contains an inflatable balloon attached to a microcatheter; the Obalon Navigation System console, which is a combination of hardware and software used to track and display the location of the balloon during placement without x-ray; the Obalon Touch Inflation Dispenser, which is a semi-automated, hand-held inflation device used to inflate the balloon once it is placed; and a disposable canister filled with our proprietary mixture of gas. Placement of a balloon typically occurs in less than 15 minutes and can be accomplished in an outpatient setting without the need for anesthesia or sedation. Patients receive a total of three balloons over the course of eight to 12 weeks and all balloons are removed six months after the first balloon is placed.
In clinical studies, the Obalon Balloon System has demonstrated clinically meaningful weight loss with durable results. In our published pivotal SMART trial, patients in the Obalon treatment group lost, on average, approximately twice as much body weight as patients in the sham-control group, with an average of 15.1 pounds of weight loss, resulting in an average 6.9% reduction in total body weight and an average 2.4 point decrease in BMI. In the study, 66.7% of patients lost at least 5% of their total body weight and the study showed statistically significant improvements in cardiometabolic risk factors, including fasting glucose, systolic blood pressure, cholesterol and triglycerides. Patients in the treatment group were followed for 48 weeks and showed, on average, that 89.5% of the weight loss achieved during the initial 24-week balloon treatment period was maintained at 48 weeks, or 24 weeks after the balloons were removed.
In addition, data published and presented from our commercial registry demonstrates greater weight loss in the commercial setting as compared to our pivotal clinical study used to support FDA approval. In May 2019, we updated data from our commercial registry to include 1,411 total patients from 143 treatment sites in the United States. In this data set, for those patients receiving three balloons and at least 20 weeks of therapy, the average weight loss was 21.7 pounds, resulting in a 10.2% reduction in total body weight. Of note, 50.7% of patients lost 10% or more total body weight and 77.9% lost 5% or more total body weight.
We commenced U.S. commercialization of our prior generation Obalon balloon system in January 2017. In March 2020, we announced that the overall economic uncertainty, the restriction on elective procedures and the specific directives issued by the Governor of California as a result of the COVID-19 pandemic had a significant impact on our business. As a result, we halted sales to new patients in our Obalon-branded retail treatment centers, terminated expansion plans for additional retail centers, subsequently closed the two retail treatment centers we had opened and halted manufacturing. Additionally, since August 2020, we have only had two full-time employees: Andy Rasdal, our President and Chief Executive Officer, and Nooshin Hussainy, our Chief Financial Officer. Although we scaled back operations, we continued to strive to execute on our corporate and strategic objectives. For example, we continue to pursue third-party reimbursement of the Obalon Balloon System, explore strategic alternatives, tend to our obligations to care for patients who had been treated at our Obalon-branded retail treatment centers, follow-up on and support product-related issues involving customers that have used Obalon products, and review and comply with our regulatory obligations, including FDA and SEC requirements.
Given those impacts and the significant concern about an economic recovery that would allow consumers to feel confident enough to spend on a cash-pay procedure like the Obalon Balloon System, we do not currently plan to re-open our retail treatment centers, re-initiate our retail treatment center expansion plans, or plan to ship orders to U.S. customers or our former international distributor. As a result, we would not expect to report any new revenue for the foreseeable future.
We have not been profitable since inception, and as of March 31, 2021, our accumulated deficit was $188.9 million. From inception through December 31, 2020, we have financed our operations primarily through private placements of our preferred stock, the sale of common stock in our IPO and in subsequent public and private placements, and, to a lesser extent, debt financing arrangements.
On April 22, 2020, we executed a promissory note in favor of Silicon Valley Bank evidencing an unsecured loan in the aggregate principal amount of $0.4 million, which was made pursuant to the Paycheck Protection Program and which we refer to as the PPP Loan. The Paycheck Protection Program was established under the Coronavirus Aid, Relief and
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Economic Security Act, which was enacted on March 27, 2020 and is administered by the U.S. Small Business Administration. All the funds under the PPP Loan were disbursed to us on April 23, 2020. If the PPP Loan is not repaid prior to the closing of the Merger, the loan will become due in full upon closing of the Merger. As of March 31, 2021, we had cash and cash equivalents of $9.0 million.
In the fourth quarter of 2020, we determined that the timeline for obtaining third-party reimbursement was longer than the cash runway available and we ceased our efforts related to reimbursement, including terminating its agreement with Blue Ox. We then focused its full efforts on consummating a strategic alternative transaction that would be in the best interest of our stockholders.
Merger Agreement
On January 19, 2021, we, Optimus Merger Sub, Inc., a Delaware corporation, and our direct, wholly owned subsidiary (“Merger Sub”), and ReShape Lifesciences, Inc., a Delaware corporation (“ReShape”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of the conditions specified therein, Merger Sub shall be merged with and into ReShape, with ReShape surviving as our wholly owned subsidiary (the “Merger”).
Merger Consideration
At the effective time of the Merger (the “Effective Time”), each share of common stock, par value $0.001 per share, of ReShape (“ReShape Common Stock”) and each share of Series B Preferred Stock, par value $0.01 per share, of ReShape (together with ReShape Common Stock, “ReShape Shares”) issued and outstanding immediately prior to the Effective Time (other than the shares that are owned by us, ReShape, or Merger Sub) will be converted into the right to receive a number of fully paid and non-assessable shares of our common stock(an “Obalon Share”) according to a ratio determined at least 10 days prior to the our Stockholders’ Meeting that will result in the holders of such ReShape Shares owning 51% of the outstanding Obalon Shares immediately after the Effective Time (such ratio, the “Exchange Ratio”).
Treatment of Equity
The Merger Agreement provides that, at the Effective Time, each outstanding warrant to purchase capital stock of ReShape (“ReShape Warrant”) will be converted into warrants to purchase a number of Obalon Shares equal to the number of shares of ReShape Common Stock issuable upon exercise of such ReShape Warrant multiplied by the Exchange Ratio with an exercise price equal to the exercise price of such ReShape Warrant divided by the Exchange Ratio. In addition, each outstanding option to purchase ReShape Common Stock, whether vested or unvested, (“ReShape Option”) shall be cancelled and terminated without any payment. We will assume the obligations of the Series C Preferred Stock, par value $0.01 per share of ReShape (“ReShape Series C Preferred Stock”) and shall file a new certificate of designation with the same terms and conditions as the ReShape Series C Certificate of Designation. Each outstanding option to purchase Obalon Shares and each outstanding restricted stock unit granted under our equity plan will become fully vested at the Effective Time.
Governance
The Merger Agreement provides that as of the Effective Time, we will be renamed ReShape Lifesciences Inc. (the “Combined Company”) and the five current directors of ReShape will be comprise the board of directors of the Combined Company: Dan W. Gladney, Barton P. Bandy, Arda M. Minocherhomjee, Ph.D., Lori C. McDougal and Gary D. Blackford. Mr. Gladney will serve as the chairperson and Mr. Blackford will serve as lead director of the board of directors. As of the Effective Time, Mr. Bandy will serve as chief executive officer and Tom Stankovich will serve as the chief financial officer of the Combined Company. No current Obalon directors, officer or employees are expected to continue with the new combined company.
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Conditions to the Merger
The consummation of the Merger is subject to customary closing conditions, including (i) approval of the issuance of Obalon Shares in connection with the Merger by the affirmative vote of the majority of Obalon Shares cast at the Obalon Shareholders’ Meeting in favor of the issuance of Obalon Shares in connection with the Merger, (ii) the adoption of the Merger Agreement by the affirmative vote of the holders of a majority of all outstanding shares of ReShape common stock entitled to vote thereon, (iii) the absence of any law or order by any governmental entity in effect that seeks to enjoin, make illegal, delay or otherwise restrain or prohibits the consummation of the Merger, (iv) Nasdaq’s approval of the Obalon Shares to be issued in the Merger being listed on the Nasdaq, (v) Nasdaq’s approval of the continued listing application for the Combined Company to maintain the Company’s Nasdaq listing, (vi) subject to certain materiality exceptions, the accuracy of certain representations and warranties of each of us and ReShape contained in the Merger Agreement and the compliance by each party with the covenants contained in the Merger Agreement, (vii) the absence of a material adverse effect with respect to each of us and ReShape and (viii) the registration statement registering the merger consideration becoming effective.
Landlord Dispute
On October 13, 2020, Gildred Development Company (“Gildred”), our landlord in Carlsbad, served us with an unlawful detainer action in the Superior Court of California, County of San Diego (Gildred Development Company v. Obalon Therapeutics, Inc., Case No. 37-2020-00035927-CU-UD-CTL). Gildred alleges that we owe more than $113,000 of unpaid rent and fees to Gildred and seeks damages for unpaid rent and continued occupancy of the premises. On November 18, 2020, Gildred filed an ex parte application for a writ of attachment or, in the alternative, a temporary protective order. The application was denied on November 24, 2020. On December 28, 2020, Gildred filed another application for a writ of attachment or, in the alternative, a temporary protective order. On January 22, 2021, the court granted Gildred’s application for a writ of attachment. We have paid the amount of the writ in full, which was $469,000. We are current on our rent obligations under the lease with Gildred.
COMPONENTS OF OUR RESULTS OF OPERATIONS
Revenue
We do not currently plan to re-open our retail treatment centers, re-initiate our retail treatment center expansion plans, restart manufacturing operations, or plan to ship orders to U.S. customers or our former international distributor. As a result, we would not expect to report any meaningful revenue for the foreseeable future.
Cost of revenue and gross margin
In March 2020, we suspended manufacturing of the Obalon Balloon System due to the ongoing COVID-19 pandemic. We restarted manufacturing on a limited basis in June 2020 to convert a small amount of work-in-progress inventory to finished goods, in order to have units available for clinical trials and unexpected physician sales, but did not continue manufacturing past July 30, 2020 and we have no future plans for restarting.
Research and development expenses
Research and development, or R&D, expenses consist of the cost of engineering, clinical affairs, regulatory affairs and quality assurance associated with developing our Obalon Balloon System. R&D expenses consist primarily of:
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We expense R&D costs as incurred.
Selling, general and administrative expenses
Selling, general and administrative, or SG&A, expenses consist of employee-related expenses, including salaries, commissions, benefits, travel expense and stock-based compensation expense. Other SG&A expenses include promotional and advertising activities, marketing, conferences and trade shows, professional services fees, including legal fees, accounting fees, insurance costs, general corporate expenses, and allocated facilities-related expenses. SG&A expenses decreased significantly starting in the second quarter of 2020 due to suspension of business operations and the reduction of employee personnel to only certain key employees. SG&A expenses during the first quarter of 2021 were primarily related to the merger.
RESULTS OF OPERATIONS
| | | | | | |
| | Year ended March 31, | ||||
|
| 2021 |
| 2020 | ||
| | | | | | |
Consolidated statements of operations data: |
| |
|
| |
|
Revenue | | $ | — | | $ | 780 |
Cost of revenue | |
| — | |
| 541 |
Gross profit | |
| — | |
| 239 |
Operating expenses: | |
|
| |
|
|
Research and development | |
| 112 | |
| 1,257 |
Selling, general and administrative | |
| 4,056 | |
| 3,893 |
Total operating expenses | |
| 4,168 | |
| 5,150 |
Loss from operations | |
| (4,168) | |
| (4,911) |
Interest income (expense), net | |
| 1 | |
| 35 |
Other expense, net | |
| — | |
| (385) |
Net loss | |
| (4,167) | |
| (5,261) |
Net loss and comprehensive loss | | $ | (4,167) | | $ | (5,261) |
Comparison of three months ended March 31, 2021 and 2020
Revenue. Revenue decreased $0.8 million to none during the three months ended March 31, 2021, compared to $0.8 million during the three months ended March 31, 2020. The revenue decrease was primarily due to the suspension of operations and abandonment of the retail treatment model in 2020.
Cost of revenue and gross profit (deficit). Cost of revenue decreased $0.5 million to none during the three months ended March 31, 2021, compared to $0.5 million during the three months ended March 31, 2020. The decrease in cost of revenue was primarily attributable to the suspension of all commercial operations in 2020.
Research and development expenses. R&D expenses decreased $1.1 million to $0.1 million during the three months ended March 31, 2021, compared to $1.3 million during the three months ended March 31, 2020. This decrease was primarily driven by the significant reduction in operations and personnel related to the COVID-19 pandemic and the closing of its operations.
Selling, general and administrative expenses. SG&A expenses increased $0.2 million to $4.1 million during the three months ended March 31, 2021, compared to $3.9 million during the three months ended March 31, 2020. The increase from the prior period was primarily driven by the increase in legal and accounting fees as result of the proposed merger which were offset by a decrease in other expenses as a result of suspending operations.
Interest (expense) income, net. Interest expense,2022, net decreased an immaterial amount during the three months ended March 31, 2021, compared to the three months ended March 31, 2020. This decrease was attributable to the paying off all the outstanding debt on the Term Loan in the third quarter of 2020.
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Other expense, net. Other expense, net decreased $0.4 million to none during the three months ended March 31, 2021, compared to $0.4 million for the prior period. This decrease was attributable to increased equity issuance costs during the first three months of 2020 compared to the current period.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2021, we had cash and cash equivalents of $9.0 million and an accumulated deficit of $188.9 million. Our primary sources of capital have been private placements of our preferred securities, the sale of common stock in our initial Public Offering or IPO, in October 2016, a subsequent private placement in August 2018, and various equity financings in 2019 including a follow-on offering in August 2019, and, to a lesser extent, debt financing arrangements. We are continuing to significantly reduce expenditures to extend our cash runway during the suspension of our business operations. From January 1, 2021 through March 31, 2021, the Company’s warrant holders covering 2.3 million shares exercised the warrants and common stock was issued in exchange for proceeds of $9.5 million. We believe our current cash and cash equivalents as of March 31, 2021 are sufficient to fund our operations through the end of June 2022.
The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. In late 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread globally. To date, COVID-19 has had, and will continue to have, an adverse impact on the Company’s operations and expenses. In March 2020, the Company suspended all new patient treatments at our Obalon-branded retail centers due to the ongoing COVID-19 pandemic, suspended product shipment to all customers and halted manufacturing. The Company took further steps to significantly reduce expenses in an effort to extend our cash runway while the Company evaluated potential business options, strategic alternatives and the potential for third-party payer reimbursement that may be available when and if the current COVID-19 crisis stabilizes and the economy rebounds. The Company significantly reduced the organization to only essential personnel and since August 2020, only two full-time employees remain. All Obalon-branded retail centers have been shut down with no intention to reopen, and the Company has halted plans for future retail center expansion. The Company does not expect to restart shipments to U.S. customers and the Company has terminated the agreement with our international distributor, Al Danah Medical Company W.L.L. The decision to shift the Company’s strategy to focus on pursuing reimbursement, while also evaluating other strategic options, occurred after the end of the first quarter of 2020. In the fourth quarter of 2020, we determined that the timeline for obtaining third-party reimbursement was longer than the cash runway available and we ceased our efforts related to reimbursement, including terminating its agreement with Blue Ox. We then focused its full efforts on consummating a strategic alternative transaction that would be in the best interest of our stockholders. Since entering into the Merger Agreement with ReShape, we have suspended our efforts to obtain coverage and reimbursement from third-party payors. The Merger is subject to a number of closing conditions and, if one of more of those conditions are not satisfied or waived, the Merger may not close and we would have to continue as a standalone company. As a standalone company, we may not be able to restart commercial operations, renew our efforts to seek third-party reimbursement or determine and launch a different commercial strategy.
On April 22, 2020, we executed a promissory note in favor of Silicon Valley Bank evidencing an unsecured loan in the aggregate principal amount of $0.4 million, which was made pursuant to the Paycheck Protection Program and which we refer to as the PPP Loan. The Paycheck Protection Program was established under the Coronavirus Aid, Relief and Economic Security Act, which was enacted on March 27, 2020, and is administered by the U.S. Small Business Administration. All the funds under the PPP Loan were disbursed to us on April 23, 2020. The Note provides for a fixed interest rate of one percent per year with a maturity date of April 22, 2022 (the “Maturity Date”). Loan payments may be deferred until August 2021, which date is 10 months after the end of our 24-week covered period for the PPP Loan. If we apply for loan forgiveness, loan payments may be deferred until the SBA remits our loan forgiveness amount to the lender. As of December 31, 2020, we have not applied for loan forgiveness. The PPP Loan may be prepaid at any time prior to the Maturity Date with no prepayment penalties or premiums. The Note contains customary event of default provisions.
Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loans granted under the PPP. Such forgiveness will be subject to approval by the SBA and the Lender and determined, subject to limitations, based on factors set forth in the CARES Act, including verification of the use of loan proceeds for payment of payroll costs and payments of mortgage interest, rent and utilities. In the event the PPP Loan, or
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any portion thereof, is forgiven, the amount forgiven is applied to outstanding principal. The terms of any forgiveness may also be subject to further regulations and guidelines that the SBA may adopt. We will carefully monitor all qualifying expenses and other requirements necessary to attain loan forgiveness; however, no assurance is provided that we will obtain forgiveness of the PPP Loan in whole or in part. We have used all proceeds to date from the PPP Loan to retain employees, maintain payroll and make lease and utility payments. We have not filed for forgiveness and the loan will be repayable in full in the event of a change of control, such as the proposed Merger, unless the lender agrees otherwise.
CASH FLOWS
The following table provides a summary of the net cash flow activity for each of the periods set forth below (in thousands):
| | | | | | |
| | Year ended March 31, | ||||
|
| 2021 |
| 2020 | ||
Net cash (used in) provided by: |
| |
|
| |
|
Operating activities | | $ | (4,442) |
| $ | (4,814) |
Investing activities | |
| — |
| | (326) |
Financing activities | |
| 9,509 |
| | — |
Net (decrease) increase in cash and cash equivalents | | $ | 5,067 | | $ | (5,140) |
Net cash used in operating activities was primarily the result of our net loss of $8.2 million, partially offset by non-cash adjustments for stock-based compensation expense of $0.7 million, amortization of intangible assets of $0.5 million, depreciation expense of $0.1 million, provision for excess and obsolete inventory of $0.1, and a charge in deferred income tax of $0.2 million. We show a negative cash impact to inventory of $1.1 million, as the Company is building up its inventory to meet the expected increase in demand due to the direct to consumer marketing campaign and a negative cash impact to prepaid and other current assets of $0.1 million. This was offset by a positive cash impact to accounts and other receivables of $0.4 million and accounts payable and accrued liabilities of $0.4 million.
DuringFor the three months ended March 31, 2021, net cash used in operating activities was $4.4 million, consisting primarily the result of aour net loss of $4.2$4.9 million, primarily related to an increase of cost related to the merger, and an increase in net operating assets of $0.5 million. These items were partially offset by non-cash chargesadjustments for amortization of $3.0intangible assets of $0.4 million, consisting primarilynet loss on extinguishment of debt of $2.0 million, stock-based compensation expense of $0.1 million, and amortization of right-of-use assets.debt discount of $0.5 million. In addition, we had an increase in sales that resulted in a cash inflow related to inventory of $0.2 million. We also had a positive cash effect due to prepayments made late in 2020 of $0.2 million, as well as a positive cash effect related to accounts payable and accrued liabilities of $0.3 million. This was offset by a $0.8 million negative cash effect from increased accounts receivable primarily attributable to late sales during the first quarter.
DuringNet Cash Provided (Used in) by Investing Activities
Net cash provided by investing activities for the three months ended March 31, 2020, net2022, was minimal.
Net cash used in operatinginvesting activities was $4.8 million, consisting primarily of a net loss of $5.3 million, an increase in net operating assets of $0.2 million. These items were partially offset by non-cash charges of $0.7 million, consisting primarily of stock-based compensation expense, depreciation expense, and right-of-use asset amortization.
Net cash (used in) provided by investing activities
Duringfor the three months ended March 31, 2021 netwas $0.1 million, comprised of capital expenditures related to the process of moving manufacturing from Costa Rica to the United States, and product development.
Net Cash Provided by Financing Activities
There were no cash used by investingflows from financing activities was none as the Company was winding down operations.
Duringfor the three months ended March 31, 2020, net cash used in investing activities was $0.3 million, consisting primarily of capital expenditures..2022.
Net cash provided by financing activities
During was $1.0 million for the three months ended March 31, 2021, due to $1.0 million received from the credit agreement with an institutional investor.
Operating Capital and Capital Expenditure Requirements
Our anticipated operations include plans to (i) integrate the sales and operations of the Company raised $9.5 million fromwith the exercise of warrants.
During the three months ended March 31, 2020 there were no financing activities.
OFF-BALANCE SHEET ARRANGEMENTS
We currently have no off-balance sheet arrangements, suchLap-Band product line in order to expand sales domestically and internationally as structured finance, special purpose entities or variable interest entities.well as to obtain cost savings synergies,
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES(ii) introduce to the market place reshapecare and ReShape Marketplace as an extension, (iii) ramp up marketing efforts to increase brand recognition, create customer awareness and increase in patient demand, (iv) continue clinical trials of the ReShape Vest, (v) continue development of the Diabetes Bloc-Stim Neuromodulation, (vi) seek opportunities to leverage our intellectual property portfolio and custom development services to provide third-party sales and licensing opportunities, and (vii) explore and capitalize on synergistic opportunities to expand our portfolio and offer future minimally invasive treatments and therapies in the obesity continuum of care, including the recently acquired Obalon Balloon System. 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.
Our management’s discussionforecast 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 analysisthe cost to commercialize our products are forward-looking statements and involve risks and uncertainties, and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in Part I, Item 1A, “Risk Factors”, of our financial conditionAnnual Report on Form 10-K. We have based these estimates on assumptions that may prove to be wrong, and resultswe could utilize our available capital resources sooner than we currently expect.
Because of operations is basedthe numerous risks and uncertainties associated with the development of medical devices, such as our ReShape Vest and Diabetes Bloc-Stim Neuromodulation, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to complete the development of the ReShape Vest and Diabetes Bloc-Stim Neuromodulation or other additional products and successfully deliver a commercial product to the market. Our future capital requirements will depend on many factors, including, but not limited to, the following:
| ● | the cost and timing of establishing sales, marketing and distribution capabilities; |
| ● | the cost of establishing clinical and commercial supplies of our ReShape Vest and Diabetes Bloc-Stim Neuromodulation, and any products that we may develop; |
| ● | the rate of market acceptance of our ReShape Vest and Diabetes Bloc-Stim Neuromodulation, and any other product candidates; |
| ● | 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; |
| ● | the effect of competing products and market developments; |
| ● | the cost of explanting clinical devices; |
| ● | the terms and timing of any collaborative, licensing or other arrangements that we may establish; |
| ● | any revenue generated by sales of our Lap-Band, reshapecare, ReShape Marketplace, Obalon Balloon System, ReShape Vest, Diabetes Bloc-Stim Neuromodulation or our future products; |
| ● | the scope, rate of progress, results and cost of our clinical trials and other research and development activities; |
| ● | the cost and timing of obtaining any further required regulatory approvals; and |
| ● | 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 which have been prepared in accordance with U.S.accounting principles generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requiresin the United States which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements as well as the reported revenue generated and revenues and
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expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.periods reported. Actual results maycould differ from these estimates under different assumptions or conditions. We believe that the accounting policies relatedthose estimates. Information with respect to revenue recognition, accrued research and development costs, stock-based compensation expense and income taxes are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
There have been no significant changes in our critical accounting policies and estimates as compared towhich we believe could have the critical accounting policiesmost significant effect on our reported results and estimates disclosedrequire subjective or complex judgments by management is contained in Management’sItem 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations, included in the” of our Annual Report on Form 10-K for the year ended December 31, 2020, filed on2021. There have been no significant changes from the information discussed therein.
During the three months ended March 12, 2021.
RECENT ACCOUNTING PRONOUNCEMENTS
Except as31, 2022 there were no material changes to our significant accounting policies above, which are fully described in Note 2 to our Unaudited Interim Condensed Consolidated Financial Statements under the heading “Recently Issued and Adopted Accounting Pronouncements”, there have been no new accounting pronouncements or changes to accounting pronouncements during the three months ended March 31, 2021, as compared to the recent accounting pronouncements describedconsolidated financial statements included in the Company’sour Annual Report on Form 10-K for the year ended December 31, 2020, filed on March 12, 2021.
JOBS ACT ACCOUNTING ELECTIONRecent Accounting Pronouncements
In April 2012, the JOBS Act was enacted. Section 107See Note 1 to our condensed consolidated financial statements for a discussion of the JOBS Act provides that an emerging growth company can take advantagerecent accounting pronouncements.
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ITEM 3. Quantitative and Qualitative Disclosures about Market RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide disclosure pursuant to this item.
Not applicable.
ITEM 4. Controls and ProceduresCONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
OurRule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “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, with the participation of ourincluding its principal executive officer and our principal financial officer, evaluated,officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness ofMarch 31, 2022, 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) are designed at a reasonable level and effective as of the end of the period covered in the report in providing reasonable assurance that the information we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934, as amended, oris recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Act). Based onCommission’s rules and forms, and that evaluation, our principal executive officersuch information is accumulated and principal financial officer have concluded that as of March 31, 2021, our disclosure controls and procedures were effective at the reasonable assurance level. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives andcommunicated to our management necessarily applies its judgment in evaluatingincluding the cost-benefit relationship of possible controlsChief Executive Officer and procedures.Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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Changes in Internal Control over Financial Reporting
There werehave been no changes in our internal controlcontrols over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended March 31, 20212022 that have materially affected, or are reasonably likely to materially affect, our internal controlcontrols over financial reporting.
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PART II-OTHERII – OTHER INFORMATION
From timeOn August 6, 2021, Cowen and Company, LLC filed a complaint against ReShape, as successor in interest to time, we are involved in legal proceedingsObalon Therapeutics, in the ordinary courseSupreme Court of business.
On February 14 and 22, 2018, plaintiff stockholders filed class action lawsuits against us and certainthe State of our executive officers in the United States District Court for the Southern DistrictNew York based on an alleged breach of California (Hustig v. Obalon Therapeutics, Inc., et al., Case No. 3:18-cv-00352-AJB-WVG, and Cook v. Obalon Therapeutics, Inc. et al., Case No. 3:18-cv-00407-CAB-RBB). On July 24, 2018, the court consolidated the lawsuits and appointed Inter-Local Pension Fund GCC/IBTcontract arising out of Cowen’s prior engagement as lead plaintiff. On October 5, 2018, plaintiffs filed an amended complaint.Obalon’s financial advisor. The amended complaint alleges that weCowen is entitled to be paid a $1.35 million fee in connection with ReShape’s merger with Obalon under the terms of Cowen’s engagement agreement with Obalon. The complaint also seeks reimbursement of Cowen’s attorneys’ fees and certaininterest in connection with its claim. The Company is unable to predict the ultimate outcome of our executive officers made false and misleading statements and failedthis matter; therefore, no amounts have been accrued. The Company intends to disclose material adverse facts about our business, operations, and prospectsvigorously defend this matter.
On August 18, 2021, H.C. Wainwright & Co., LLC filed a complaint against ReShape in violation of Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a)the Supreme Court of the Exchange Act. The amended complaint also alleges violationsState of Section 11New York based on an alleged breach of the Exchange Actcontract arising out of the Company’s initial public offering. The plaintiffs seek damages, interest, costs, attorneys' fees, and other unspecified equitable relief. The underwriters from our initial public offering have also been named as defendants in this case and we have certain obligations under the underwriting agreement to indemnify them for their costs and expenses incurredWainwright’s prior engagement by ReShape in connection with this litigation. On September 25, 2019, the court granted in part and denied in part the defendants’ motion to dismiss.certain capital raising transactions by ReShape. The court dismissed the Section 11 claims entirely, without leave to amend, and accordingly dismissed the underwriters and certain directors from the case. The Court also dismissed certain statements from the Section 10 claims. On August 17, 2020, the parties submitted a final settlement agreement of the securities class action for court approval. The settlement provided for a payment of $3.15 million to the plaintiffs, which was paid by the Company’s insurance carriers, and provided that the defendants continue to deny the allegations and claims asserted by the plaintiffs, and are entering into the settlement solely to eliminate the burden and expense of further litigation. On April 22, 2021, the court approved the settlement and dismissed the case.
On October 13, 2020, Gildred Development Company (“Gildred”), our landlord in Carlsbad, served us with an unlawful detainer action in the Superior Court of California, County of San Diego (Gildred Development Company v. Obalon Therapeutics, Inc., Case No. 37-2020-00035927-CU-UD-CTL). Gildredcomplaint alleges that we owe more than $113,000 of unpaid rent and feesWainwright is entitled to Gildred and seeks damages for unpaid rent and continued occupancy of the premises. On November 18, 2020, Gildred filed an ex parte application forbe paid a writ of attachment or, in the alternative, a temporary protective order. The application was denied on November 24, 2020. On December 28, 2020, Gildred filed another application for a writ of attachment or, in the alternative, a temporary protective order. On January 22, 2021, the court granted Gildred’s application for a writ of attachment. We have paid the amount of the writ in full, which was $469,000. We are current on our rent obligations under the lease with Gildred.
As of April 29, 2021, eight lawsuits have been filed by alleged Obalon stockholders against us and our directors related to the Merger. A complaint captioned Machkovsky v. Obalon Therapeutics, Inc. et al, Case No. 1:21-cv-03160, was filed by Gregory Machkovsky in the United States District Court for the Southern District of New York on April 12, 2021. A complaint captioned Mohammed v. Obalon Therapeutics, Inc. et al, Case No. 1:21-cv-03279, was filed by Mohammed Mohammed in the United States District Court for the Southern District of New York on April 15, 2021. A complaint captioned Hengen v. Obalon Therapeutics, Inc. et al, Case No. 1:21-cv-02058, was filed by Lisa Hengen in the United States District Court for the Eastern District of New York on April 15, 2021. A complaint captioned McCall v. Obalon Therapeutics, Inc. et al, Case No. 1:21-cv-03404, was filed by Jason McCall in the United States District Court for the Southern District of New York on April 19, 2021. A complaint captioned Franchi v. Obalon Therapeutics, Inc. et al, Case No. 1:21-cv-00553-UNA, was filed by Adam Franchi in the United States District Court for the District of Delaware on April 19, 2021. A complaint captioned Finger v. Obalon Therapeutics, Inc. et al, Case No. 3:21-cv-00798-WQH-AGS, was filed by Susan Finger in the United States District Court for the Southern District of California on April 22, 2021. A complaint captioned Redfield v. Obalon Therapeutics, Inc. et al, Case No. 2:21-cv-01897, was filed by Denise Redfield in the United States District Court for the Eastern District of Pennsylvania on April 23, 2021. A complaint captioned Roura v. Obalon Therapeutics, Inc. et al, Case No. 1:21-cv-03694, was filed by Pedro Roura in the United States District Court for the Southern District of New York on April 26, 2021. The Machkovsky, Hengen, Franchi, McCall, Finger and Roura complaints name as defendants Obalon and certain members of our Board. The
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Mohammed and Redfield complaints name as defendants Obalon, certain members of our Board, Reshape Lifesciences Inc., and Optimus Merger Sub, Inc.
Each of the complaints allege violations of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. The complaints generally allege that our various filings with the SEC, including Form 424B3 Prospectuses and Form S-4s, filed between March 3, 2021 and April 13, 2021, omit and/or misrepresent material information with respect to the proposed transaction, and prevent our stockholders from making a fully informed voting decision on the stock issuance proposal before the May 13, 2021 stockholder vote. The Machkovsky and Roura complaints also allege that the individual defendants breached their fiduciary duty of candorfee in connection with ReShape’s capital raising transaction under the Merger.
Eachwarrant exercise agreement that ReShape entered into on June 28, 2021. Wainwright alleges that its June and September 2019 engagement agreements with ReShape require ReShape to pay Wainwright a cash fee equal to 8.0% of the complaints seek, among other things, (i) injunctive relief preventinggross proceeds that ReShape received from the consummationexercise of warrants issued pursuant to those engagement agreements, including warrants that were exercised in the proposed transaction, (ii) damages and (iii) plaintiffs’June 2021 transaction. The complaint also seeks reimbursement of Wainwright’s attorneys’ and experts’ fees and expenses.
We believe thatinterest in connection with its claim. The Company is unable to predict the claims asserted in the complaints are without merit andultimate outcome of this matter or estimate a range of possible exposure; therefore, no supplemental disclosure is required under applicable law. However, in orderamounts have been accrued. The Company intends to avoid the riskvigorously defend this matter.
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ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors set forth in Item 1A. “Risk Factors
Under Item 1AFactors” of our 2021 Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 12, 2021, we identified important factors that could affect our financial performance and could cause our actual results for future periods to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statements made in this Quarterly Report on Form 10-Q. There has been no material change in our risk factors subsequent to the filing of our Annual Report, except for the factors described below. However, the risks described in our Annual Report, and below are not the only risks we face. Additional risks and uncertainties that we currently deem to be immaterial or not currently known to us, as well as other risks reported from time to time in our reports to the SEC, also could cause our actual results to differ materially from our anticipated results or other expectations.
We are subject to securities class action litigation.
On February 14 and 22, 2018, plaintiff stockholders filed class action lawsuits against us and certain of our executive officers in the United States District Court for the Southern District of California (Hustig v. Obalon Therapeutics, Inc., et al., Case No. 3:18-cv-00352-AJB-WVG, and Cook v. Obalon Therapeutics, Inc. et al., Case No. 3:18-cv-00407-CAB-RBB). On July 24, 2018, the court consolidated the lawsuits and appointed Inter-Local Pension Fund GCC/IBT as lead plaintiff. On October 5, 2018, plaintiffs filed an amended complaint. The amended complaint alleges that we and certain of our executive officers made false and misleading statements and failed to disclose material adverse facts about our business, operations, and prospects in violation of Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The amended complaint also alleges violations of Section 11 of the Exchange Act arising out of the Company’s initial public offering. The plaintiffs seek damages, interest, costs, attorneys’ fees, and other unspecified equitable relief. The underwriters from our initial public offering have also been named as defendants in this case and we have certain obligations under the underwriting agreement to indemnify them for their costs and expenses incurred in connection with this litigation.
On September 25, 2020, the court granted in part and denied in part the defendants’ motion to dismiss. The court dismissed the Section 11 claims entirely, without leave to amend, and accordingly dismissed the underwriters and certain directors from the case. The Court also dismissed certain statements from the Section 10 claims.
On August 17, 2020, the parties submitted a final settlement agreement of the securities class action for court approval. The settlement provided for a payment of $3.15 million to the plaintiffs, which was paid by the Company’s insurance carriers, and provided that the defendants continue to deny the allegations and claims asserted by the plaintiffs, and are
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entering into the settlement solely to eliminate the burden and expense of further litigation. On April 22, 2021, the court approved the settlement and dismissed the case.8, 2022.
Such litigation could subject us to substantial costs, divert resources and the attention of management from our business and harm our business, results of operations, financial condition, reputation, and cash flows. These factors may materially and adversely affect the market price of our common stock. Such litigation could subject us to substantial costs, divert resources and the attention of management from our business and harm our business, results of operations, financial condition, reputation, and cash flows. These factors may materially and adversely affect the market price of our common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities and Use
None, except as described above in this Form 10-Q.
Recent Sales from Sale of UnregisteredRegistered Securities
None.
UsePurchases of ProceedsEquity Securities
None.
ITEM 3. Defaults Upon Senior SecuritiesDEFAULTS UPON SENIOR SECURITIES
None.
Not applicable.
ITEM 4. Mine Safety DisclosuresMINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. Other InformationOTHER INFORMATION
None.Not applicable.
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ITEM 6. ExhibitsEXHIBITS
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† This certification is deemed not filed for purpose of section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.
‡ Management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereuntothereunto duly authorized.
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| RESHAPE LIFESCIENCES INC. |
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| President | |
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| BY: | /S/ thomas stankovich | ||
| | Thomas Stankovich | ||
| | Senior Vice President and Chief Financial Officer | ||
| | (principal financial and accounting officer) | ||
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Dated: May 23, 2022 | | | ||
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