UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction | (IRS Employer |
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
| Trading Symbol | Name of Each Exchange on which Registered |
|---|---|---|---|
The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ☐ | Accelerated Filer | ☐ |
☒ | Smaller Reporting Company | ||
Emerging Growth Company |
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 financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of May 19, 2022,
INDEX
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PART 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, | |||||
| 2022 |
| 2021 | |||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | |
| $ | | |
Restricted cash | | | ||||
Accounts and other receivables (net of allowance for doubtful accounts of $ |
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Inventory |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets | | | ||||
Other intangible assets, net | | | ||||
Other assets |
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Total assets | $ | |
| $ | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable | $ | |
| $ | | |
Accrued and other liabilities |
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Warranty liability, current | | | ||||
Operating lease liabilities, current | | | ||||
Total current liabilities |
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Operating lease liabilities, noncurrent | | — | ||||
Warranty liability, noncurrent | | | ||||
Deferred income taxes | | | ||||
Total liabilities | |
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Commitments and contingencies | ||||||
Stockholders’ equity: | ||||||
Preferred stock, | ||||||
Series C convertible preferred stock, $ | ||||||
Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
| ( |
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| ( | |
Accumulated other comprehensive loss | ( | ( | ||||
Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | |
| $ | | |
See accompanying notes to Condensed Consolidated Financial Statements.
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RESHAPE LIFESCIENCES INC.
Condensed Consolidated Statements of Operations
(unaudited)
(dollars in thousands, except per share amounts)
Three Months Ended March 31, | ||||||
2022 | 2021 | |||||
Revenue | $ | | $ | | ||
Cost of revenue | |
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Gross profit | |
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Operating expenses: | ||||||
Sales and marketing | |
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General and administrative | | | ||||
Research and development | |
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Total operating expenses | |
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Operating loss | ( |
| ( | |||
Other expense (income), net: | ||||||
Interest expense, net | ( | | ||||
Loss on extinguishment of debt, net | — | | ||||
Other, net | ( | — | ||||
(Gain) Loss on foreign currency exchange, net | ( | | ||||
Loss before income tax provision | ( | ( | ||||
Income tax (benefit) expense | ( | | ||||
Net loss | $ | ( | $ | ( | ||
Net loss per share - basic and diluted: | ||||||
Net loss per share - basic and diluted | ( | ( | ||||
Shares used to compute basic and diluted net loss per share | |
| | |||
See accompanying notes to Condensed Consolidated Financial Statements.
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RESHAPE LIFESCIENCES INC.
Condensed Consolidated Statements of Comprehensive Loss
(unaudited)
(dollars in thousands)
Three Months Ended March 31, | ||||||
| 2022 | 2021 | ||||
Net loss | $ | ( | $ | ( | ||
Foreign currency translation adjustments | | | ||||
Other comprehensive income, net of tax | | | ||||
Comprehensive loss | $ | ( | $ | ( | ||
See accompanying notes to Condensed Consolidated Financial Statements.
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RESHAPE LIFESCIENCES INC.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited)
(dollars in thousands)
Three Months Ended March 31, 2022 | ||||||||||||||||||||||
Series C Convertible | Additional | Accumulated Other | Total | |||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Loss |
| Equity | |||||||
Balance December 31, 2021 | | $ | — | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | | | ||||||||||||||
Stock compensation | — | — | — | — | | — | — | | ||||||||||||||
Issuance of stock from RSUs | — | — | | | ( | — | — | — | ||||||||||||||
Balance March 31, 2022 | | $ | — | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
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 | | $ | — | | $ | | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||||
Net loss | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | — | — | | | |||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | — | | — | — | | |||||||||||||||||
Series G warrants issued | — | — | — | — | — | — | | — | — | | |||||||||||||||||
Balance March 31, 2021 | | $ | — | | $ | | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
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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 | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||
Depreciation expense |
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Amortization of intangible assets | | | ||||
Noncash interest expense | — | | ||||
Loss on extinguishment of debt, net | — | | ||||
Stock-based compensation | | | ||||
Bad debt expense | | | ||||
Provision for inventory excess and obsolescence | | | ||||
Deferred income tax | ( | — | ||||
Amortization of debt discount and deferred debt issuance costs | — | | ||||
Other noncash items | ( | | ||||
Change in operating assets and liabilities, net of business combination: |
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Accounts and other receivables |
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| ( | ||
Inventory |
| ( |
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Prepaid expenses and other current assets |
| ( |
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Accounts payable and accrued liabilities | | | ||||
Warranty liability |
| ( |
| ( | ||
Other |
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| — | ||
Net cash used in operating activities | ( | ( | ||||
Cash flows from investing activities: | ||||||
Capital expenditures | ( | ( | ||||
Proceeds from sale of capital assets | | — | ||||
Cash provided by (used in) investing activities: | | ( | ||||
Cash flows from financing activities: | ||||||
Proceeds from credit agreement | — | | ||||
Net cash provided by financing activities | — | | ||||
Effect of currency exchange rate changes on cash and cash equivalents |
| |
| | ||
Net decrease in cash, cash equivalents and restricted cash |
| ( |
| ( | ||
Cash, cash equivalents and restricted cash at beginning of period | | | ||||
Cash, cash equivalents and restricted cash at end of period | $ | | $ | | ||
Supplemental disclosure: | ||||||
Cash paid for income taxes | $ | — | $ | | ||
Noncash investing and financing activities: | ||||||
Capital expenditures accruals | $ | | $ | | ||
Fair value of warrants included as a component of loss on extinguishment of debt | — | | ||||
See accompanying notes to Condensed Consolidated Financial Statements.
7
ReShape Lifesciences Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except per share amounts; unaudited)
(1) Basis of Presentation
The accompanying interim condensed consolidated financial statements and related disclosures of Reshape Lifesciences Inc. (the “Company” or “ReShape”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed on 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.
In the opinion of management, the interim consolidated condensed financial statements reflect all adjustments considered necessary for a fair statement of the interim periods. All such adjustments are of a normal, recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.
Reverse Stock Split and Merger 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 -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
Acquisition
The Company accounts for business combinations in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations. The results of businesses 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 its respective assets and liabilities. 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 accordance 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 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.
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Indefinite-lived intangible assets relate to in-process research and development (IPRD) acquired in business combinations. The estimated fair values of IPRD projects acquired in a business combination which have not reached technological feasibility are capitalized and accounted for as indefinite-lived intangible assets until completion or abandonment of the projects. In accordance with guidance within FASB ASC 350 “Intangibles - Goodwill and Other,” goodwill and identifiable intangible assets with indefinite lives are not subject to amortization but must be evaluated for impairment.
We evaluate long-lived assets, including finite-lived intangible assets, for impairment by comparison of the carrying amounts to future net undiscounted cash flows expected to be generated by such assets when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’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 more 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 second step of the impairment test is performed to measure the amount of impairment loss, if any, when it is more likely than not that a goodwill impairment exists. The Company did
Fair Value of Financial Instruments
The carrying amounts of cash equivalents, accounts receivable, accounts payable and certain accrued and other liabilities approximate fair value due to their short-term maturities. Refer to Note 5 regarding the fair value of debt instruments and Note 9 regarding fair value measurements and inputs of warrants.
Net Loss Per Share
The following table sets forth the potential shares of common stock that are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive as of the end of each period presented:
March 31, | ||||
| 2022 |
| 2021 | |
Stock options |
| |
| |
Unvested restricted stock units | | — | ||
Convertible preferred stock | | | ||
Warrants |
| |
| |
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
9
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.
(2) Liquidity and Management’s Plans
The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company currently does not generate revenue sufficient to offset operating costs and anticipates such shortfalls to continue 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 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.
As of March 31, 2022, the Company had net working capital of approximately $
The Company’s anticipated operations include plans to (i) manufacture, and promote the sales and operations of the LAP-BAND® product line in order to expand sales domestically and internationally as well as to obtain cost savings synergies, (ii) introduce to the 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.
COVID-19 Risk and Uncertainties and CARES Act
Since 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 March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act established the Paycheck Protection Program (“PPP”) under which the Company received a PPP loan. On February 3, 2021, the Company submitted the application for PPP loan forgiveness according to the terms and conditions
10
of the United States Small Business Administration’s (“SBA”) Loan Forgiveness Application (Revised June 24, 2002). On March 1, 2021, the Company received confirmation from the SBA that, the PPP Loan had been forgiven in full including all interest incurred. This may still be subject to audit 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 employee retention credit, see Note 5 below.
(3) Supplemental Balance Sheet Information
Components of selected captions in the condensed consolidated balance sheets consisted of the following:
Inventory:
March 31, | December 31, | |||||
2022 |
| 2021 | ||||
Raw materials | $ | | $ | | ||
Sub-assemblies | | | ||||
Finished goods |
| |
| | ||
Total inventory | $ | | $ | | ||
Prepaid expenses and other current assets:
March 31, | December 31, | |||||
2022 |
| 2021 | ||||
Prepaid insurance | $ | | $ | | ||
Prepaid advertising and marketing | | | ||||
Other current assets | | | ||||
Total prepaid expenses and other current assets | $ | | $ | | ||
Accrued and other liabilities:
March 31, | December 31, | |||||
2022 |
| 2021 | ||||
Payroll and benefits | $ | | $ | | ||
Customer deposits | | | ||||
Taxes | | | ||||
Accrued insurance premium | — | | ||||
Accrued professional | | | ||||
Other liabilities |
| |
| | ||
Total accrued and other liabilities | $ | | $ | | ||
(4) Goodwill and Intangible Assets
Indefinite-lived intangible assets consist of IPRD for the ReShape 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
11
(5) Debt
CARES Act
On April 24, 2020, the Company entered into a PPP Loan agreement with Silicon Valley Bank (“SVB”) under the PPP, which is part of the CARES Act administered by the United States Small Business Administration (“SBA”). As part of the application for these funds, the Company in good faith, has certified that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. Under this program, the Company received proceeds of $
On February 23, 2021, the Company submitted the application for PPP loan forgiveness, in accordance with the terms and conditions of the SBA’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 $
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 $
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 $
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 $
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 $
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
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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
Operating lease costs were $
Supplemental information related to operating leases is as follows:
Balance sheet information at March 31, 2022 | |||
Operating lease ROU assets | $ | | |
Operating lease liabilities, current portion | $ | | |
Operating lease liabilities, long-term portion | | ||
Total operating lease liabilities | $ | | |
Cash flow information for the three months ended March 31, 2022 | |||
Cash paid for amounts included in the measurement of operating leases liabilities | $ | |
Maturities of operating lease liabilities were as follows:
Twelve months ending March 31, 2022 |
|
| |
2023 | $ | | |
2024 | | ||
Total lease payments | | ||
Less: imputed interest | | ||
Total lease liabilities | $ | | |
Weighted-average remaining lease term at end of period (in years) | |||
Weighted-average discount rate at end of period |
(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 $
13
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 | $ | | |
Property and equipment, net | | ||
Right-of-use assets | | ||
Other assets | | ||
Goodwill | | ||
Developed technology | | ||
Liabilities assumed | ( | ||
Total purchase price | | ||
Less: cash acquired | ( | ||
Total purchase price, net of cash acquired | $ | |
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 $
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
(8) Equity
Common Stock Issued Related to Restricted Stock Units
During the three months ended March 31, 2022, the Company issued
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 the consultant
14
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
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
The gross proceeds to the Company from the exercise and the sale of the New Warrants was approximately $
On June 18, 2021, the Company issued
(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
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 $
15
2020 from an exercise price of $
On January 19, 2021, the Company issued
(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 revenue disaggregated by geography:
Three Months Ended | ||||||
March 31, | ||||||
| 2022 |
| 2021 | |||
United States | $ | | $ | | ||
Australia | | | ||||
Europe | | | ||||
Rest of world | | | ||||
Total revenue | $ | $ | ||||
Operating Segments
The Company conducts operations worldwide and is managed in the following geographical regions: United States, Australia, Europe and the Rest of World (primarily in the Middle East). All regions sell the Lap-Band system, which consisted of nearly all our revenue and gross profit for the three months ended March 31, 2022 and 2021. During the three months ended March 31, 2022 and 2021, there was minimal revenue for reshapecare. There was
(11) Income Taxes
During the three months ended March 31, 2022, a $
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 | $ | | $ | — | ||
General and administrative | | | ||||
Research and development | | — | ||||
Total stock-based compensation expense | $ | | $ | | ||
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 |
| | | $ | — | |||||
Options granted |
| — | — | |||||||
Options exercised |
| — | — | |||||||
Options cancelled |
| ( | | |||||||
Outstanding at March 31, 2022 |
| | | $ | — | |||||
Exercisable at March 31, 2022 | | | — | |||||||
Vested and expected to vest at March 31, 2022 | | | — | |||||||
There was no intrinsic value of the outstanding stock options at March 31, 2022. The unrecognized share-based expense at March 31, 2022 was $
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
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 |
| | $ | — | |
Granted |
| — | | ||
Vested (1) |
| ( | | ||
Cancelled/Forfeited |
| — | — | ||
Non-vested RSUs at March 31, 2022 |
| | | ||
| (1) | At March 31, 2022, there were |
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 $
(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 $
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
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 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 primarily 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 $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 of $33 thousand for the same 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 related to an impairment of indefinite lived assets. An income tax expense of $25 thousand was recorded for the three months ended March 31, 2021, primarily related to projected income in Australia and Netherlands.
Liquidity and Capital Resources
Our sources of cash liquidity consist of cash and cash 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 includes $50 thousand of restricted cash.
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The Company is also evaluating further funding options, including seeking additional equity or debt financing to support the 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
Net cash used in operating activities from operations was $7.4 million and $2.0 million for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022, 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.
For the three months ended March 31, 2021, net cash used in operating activities was primarily the result of our net loss of $4.9 million, partially offset by non-cash adjustments for amortization of intangible assets of $0.4 million, net loss on extinguishment of debt of $2.0 million, stock-based compensation expense of $0.1 million, and amortization of 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.
Net Cash Provided (Used in) by Investing Activities
Net cash provided by investing activities for the three months ended March 31, 2022, was minimal.
Net cash used in investing activities for the three months ended March 31, 2021 was $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 flows from financing activities for the three months ended March 31, 2022.
Net cash provided by financing activities 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 with the Lap-Band product line in order to expand sales domestically and internationally as well as to obtain cost savings synergies,
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(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 forecast of the period of time through which our financial resources will be adequate to support our operations, the costs to complete development of products and the cost to commercialize our products are forward-looking statements and involve risks and uncertainties, and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in Part I, Item 1A, “Risk Factors”, of our Annual Report on Form 10-K. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.
Because of the numerous risks and uncertainties associated with the development of medical devices, such as our 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 have been prepared in accordance with accounting principles generally accepted in the United States which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and revenues and
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expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies and estimates which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes from the information discussed therein.
During the three months ended March 31, 2022 there were no material changes to our significant accounting policies above, which are fully described in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Recent Accounting Pronouncements
See Note 1 to our condensed consolidated financial statements for a discussion of recent accounting pronouncements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide disclosure pursuant to this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), defines the term “disclosure controls and procedures” as those controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Based on their evaluation as of March 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, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
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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” of our 2021 Annual Report on Form 10-K filed on April 8, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None, except as described above in this Form 10-Q.
Uses of Proceeds from Sale of Registered Securities
None.
Purchases of Equity Securities
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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ITEM 6. EXHIBITS
Exhibit No. | Description | |||
|---|---|---|---|---|
31.1** | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
31.2** | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
32.1** | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
32.2** | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
101** | Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2022, formatted in Inline XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements. | |||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||
** | Filed herewith. |
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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, thereunto duly authorized.
RESHAPE LIFESCIENCES INC. | ||
BY: | /S/ BARTON P. BANDY | |
Barton P. Bandy | ||
President and Chief Executive Officer | ||
(principal executive officer) | ||
BY: | /S/ thomas stankovich | |
Thomas Stankovich | ||
Senior Vice President and Chief Financial Officer | ||
(principal financial and accounting officer) | ||
Dated: May 23, 2022 | ||
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