UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻
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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.
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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 financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
At June 30, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based upon the closing price of a share of the registrant’s common stock as reported by the Nasdaq on that date was $
As of April 14, 2023,
Documents Incorporated by Reference
None.
Forward-looking statements and associated risks
All statements in this Form 10-K that do not directly and exclusively relate to historical facts constitute “forward-looking statements” and include statements related to our ability to successfully remediate the material weaknesses in our internal control over financial reporting disclosed in this Form 10-K in the manner currently anticipated. These statements represent current expectations and beliefs, and no assurance can be given that the results described in such statements will be achieved. Such statements are subject to numerous assumptions, risks, uncertainties and other factors that could cause actual results to differ materially from those described in such statements, many of which are outside of our control. No assurance can be given that any expectation, belief, goal or plan set forth in any forward-looking statement can or will be achieved, and readers are cautioned not to place undue reliance on such statements which speak only as of the date they are made. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events.
You should carefully consider these and other relevant factors, including those risk factors in Item 1A, “Risk Factors” of this Form 10-K and any other information included or incorporated by reference in this report, and information which may be contained in the Company’s other filings with the SEC, when reviewing any forward-looking statement. Investors should understand it is impossible to predict or identify all such factors or risks. As such, you should not consider either foregoing lists, or the risks identified in the Company’s SEC filings, to be a complete discussion of all potential risks or uncertainties associated with an investment in the Company.
EXPLANATORY NOTE
ReShape Lifesciences Inc. (the “Company”) is filing this Annual Report on Form 10-K for the fiscal year ended December 31, 2022, for fiscal years ended December 31, 2022, and December 31, 2021. The Company has restated the consolidated financial statements for the year ended December 31, 2021, and the unaudited consolidated financial information for the quarters ended September 30, 2022, June 30, 2022, March 31, 2022, September 30, 2021, and June 30, 2021.
Restatement
As first disclosed in the Company’s Form 12b-25 filed on April 3, 2023, the Company was evaluating the appropriate accounting treatment for the D&O tail insurance policy for the previous management of Obalon. The Company originally had capitalized this insurance policy and was amortizing the policy over the six-year term. Upon further examination, the Company has concluded the capitalization of this policy was incorrect and should have been expensed by Obalon (the “acquiree”) prior to the merger, resulting in a reduction of assets acquired resulting in an increase to the goodwill recognized in connection with the merger. In addition, the Company concluded there were immaterial errors related to the fair value calculation of stock options awarded during the quarter ended September 30, 2021, an error related to the reserve for uncertain tax position disclosures and valuation allowance related to the impairment of certain assets within our income tax footnote, see Part II, Item 8 – Note 17, and a legal accrual not recorded for the year ended December 31, 2021.
As described in our Current Report on Form 8-K filed with the SEC on April 13, 2023, the Company in consultation with the Audit Committee of its Board of Directors (the “Audit Committee”), concluded the previously issued financial statements and related disclosures for the Quarterly Reports on Form 10-Q as of and for the quarters ended September 30, 2022, June 30, 2022, March 31, 2022, September 30, 2021, and June 30, 2021 and the financial statements and disclosures in the Form 10-K for the year ended December 31, 2021, should no longer be relied upon. Accordingly, the Company has restated its financial statements for the above-mentioned periods to correct such errors in this Form 10-K.
Controls and Procedures
In connection with the restatement of the financial statements and related disclosures for the year ended December 31, 2021, management re-evaluated the effectiveness of the Company’s internal control over financial reporting and identified material weaknesses in the Company’s internal control over financial reporting as of December 31, 2021, described in Part II, Item 9A Control and Procedures of this Form 10-K. The Company’s current Chief Executive Officer and current Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2021, due to the material weaknesses described in Part II, Item 9A Controls and procedures of this Form 10-K. Accordingly, the Company is filing this Form 10-K to amend management’s assessment of the Company’s disclosure controls and procedures to conclude that they were not effective due to the identification of material weaknesses as of December 31, 2021.
RESHAPE LIFESCIENCES INC.
FORM 10-K
TABLE OF CONTENTS
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PART I.
ITEM 1. BUSINESS
Our Company
ReShape Lifesciences Inc. is a worldwide premier weight-loss solutions company, offering an integrated portfolio of proven products and services that manage and treat obesity and metabolic disease throughout the care continuum.
Our current portfolio includes the FDA-approved and reimbursed Lap-Band® system, which provides minimally invasive, long-term treatment of obesity and is a safer surgical alternative to more invasive and extreme surgical stapling procedures such as the gastric bypass or sleeve gastrectomy. Our ReShapeCareTM virtual health coaching program is a novel weight-management program that supports healthy lifestyle changes for all medically managed weight-loss patients, not just individuals who qualify for Lap-Band surgery, further expanding our reach and market opportunity. Our ReShape MarketplaceTM online store provides top of the line products with bariatric patients in mind. Our ReShape OptimizeTM supplement options, purchased through the ReShape Marketplace, include multivitamins, probiotics, calcium, vitamin D, protein, and other therapeutic offerings to optimize health.
In August of 2022, the Board of Directors of the Company appointed Paul F. Hickey as President and Chief Executive Officer. Under this new leadership, the Company has pivoted its business strategy with the intent of helping ensure a path of growth and profitability. The three growth strategies, or pillars for growth that the Company intends to execute are:
| ● | Growth Pillar I: Execute disciplined, metrics-driven business operations. |
This first growth pillar is, in the Company’s opinion, paramount for ReShape in order to deliver shareholder value and, ultimately, profitability. Since shortly after Mr. Hickey’s appointment, ReShape has made a number of operational changes to help ensure future performance and return on investment by prioritizing investments supporting revenue growth. As an example, the Company moved towards a highly targeted, direct-to-consumer marketing campaign to help yield both higher quality and lower cost patient leads in specific markets that align with surgeon advocates. As a result, lead cost in the third and fourth quarters of 2022 dropped over 50% as compared to the second quarter of 2022. The company has also taken steps to right-size the organization in several areas to ensure sustainability and scalability.
In executing the first growth pillar, the Company will continue to focus on revenue growth and profitability.
| ● | Growth Pillar II: Expand the product portfolio and future product pipeline. |
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ReShape’s second growth pillar is intended to further differentiate the Company as a leading provider of innovative products and services to meet unmet customer needs. ReShape is committed to drive and scale its new product development and commercialization capacity, providing a cadence to new product introductions and revenue growth.
Management anticipates that new product revenue in 2023 will include both ReShape Calibration Tube line extensions and ReShapeCare. The ReShape Calibration Tube is utilized in the majority of bariatric surgeries performed today and provides a cross-selling opportunity with access to accounts that may not be utilizing Lap-Band.
ReShapeCare could have revenue opportunities with employees of large, self-insured employers, with potential Lap-Band patient pre- and post-surgical support, as well as individuals who may not need physician-led weight loss management.
Potential new product revenues beyond 2023 include the Lap-Band 2.0, which is anticipated to be filed with the FDA in the first half of 2023 with feedback from the FDA expected by 2023 year-end. The Lap-Band 2.0 is designed to reduce the required postoperative physician office-based Lap-Band adjustments.
The ReShape Obalon® Balloon system is the first and only swallowable, gas filled, FDA-approved balloon system. In 2023 the Company plans on further evaluating OEM partnerships and distribution partnerships that would be intended to support the successful relaunch and commercialization of the balloon system.
ReShape remains committed to furthering our proprietary Diabetes Bloc-Stim Neuromodulation (DBSN) technology that can potentially eliminate the need for medications by those with type 2 diabetes. The DBSN device is a technology under development as a new treatment for type 2 diabetes mellitus. The device is expected to use bioelectronics to manage blood glucose in treatment of diabetes and individualized 24/7 glucose control. The DBSN technology development has received nondilutive NIH grant support.
| ● | Growth Pillar III: Ensuring that the portfolio spans the weight loss care continuum and is evidence-based. |
Recent statements from the bariatric surgeon societies in the U.S. and abroad including the American Society for Metabolic and Bariatric Surgery (ASMBS) and the International Federation for the Surgery of Obesity and Metabolic Disorders (IFSO), confirm that obesity is a complex disease that requires personalized treatment to ensure long-term weight loss goals are achieved. ReShape’s third growth pillar represents the Company’s commitment to collaborate with healthcare professionals worldwide and further develop evidence supporting ReShape’s portfolio of treatment options.
ReShape intends to establish and work closely with its first-ever global Scientific Advisory Board (SAB) to provide needed expertise and feedback on initiatives related to the Company’s growth pillars. The SAB will include surgeons from the U.S. and abroad who have expertise and perspective necessary to validate the Company’s direction and priorities. The SAB was formed during the first quarter of 2023.
Our Product Portfolio
Lap-Band System
The Lap-Band System is designed to provide minimally invasive long-term treatment of severe obesity and is an alternative to more invasive surgical stapling procedures such as the gastric bypass or sleeve gastrectomy. Unlike other invasive anatomy altering procedures, the Lap-Band System is adjustable post-operatively via a saline-filled silicone band that is laparoscopically placed around the upper part of the stomach through small laparoscipic incisions, creating a small pouch at the top of the stomach, which slows the passage of food and creates a sensation of fullness. The procedure can normally be performed as an outpatient procedure and patients can go home the day of the procedure without the need for an overnight hospital stay.
ReShape Calibration Tubes
The ReShape Calibration tubes are multifunctional devices compared to reusable bougies and disposable gastric tubes. The Calibration tubes are designed to fit the lesser curvature of the stomach more easily and quickly reach the pylorus. In August of 2022, we announced FDA clearance of three new sizes – 32, 36, and 40 French – all designed to simplify bariatric procedures such as laparoscopic sleeve gastrectomy, gastric bypass, and adjustable gastric banding. During the first quarter of 2023, we have fully released this product and continue to ramp up production.
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ReShapeCare
ReShapeCare is a HIPAA-compliant, virtual coaching program that enhances behavior change through engagement with ReShape’s Welcome Specialists and certified Health Coaches. The differentiated ReShapeCare program is based on four established dimensions of successful behavior: change sleep, nutrition, exercise and stress. It is designed to provide flexible structure and support from a live ReShapeCare certified health coach in a manner that is simple, affordable and practical.
ReShape Marketplace
ReShape Marketplace is an online store developed with bariatric patients in mind in order to focus on the four dimensions of successful behavior changes. Within the ReShape Marketplace, we have ReShape Optimize, which meets all the nutrient needs to stay healthy. The ReShape Marketplace provides the highest quality products for exercising, that can have immediate and long-term health benefits, sleep which plays a vital role in good health and well-being, and to effectively manage stress to make your life happier, healthier and more productive.
Lap-Band 2.0 System
The Lap-Band 2.0, like the original Lap-Band System, is designed to provide minimally invasive long-term treatment of severe obesity and is an alternative to more invasive surgical stapling procedures such as the gastric bypass or sleeve gastrectomy. Unlike more invasive and anatomy altering surgeries, the Lap-Band 2.0 is adjustable postoperatively to increase or decrease the pressure to the band in order to optimize an individual’s comfort and therapy effectiveness. The Lap-Band 2.0 system includes a reservoir technology designed to minimize postoperative in-office patient band adjustments, thereby potentially improving an individual’s tolerance for the Lap-Band 2.0.
ReShape Obalon Balloon System
The Obalon Balloon System, that is not currently available for commercial sales, 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 dynamically track and display the location of the balloon during placement; 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. We continue to explore the compliance requirements, manufacturing viability and quality system controls necessary for re-introducing the Obalon Balloon System in the global marketplace.
DBSN Device
The DBSN device, that is not currently available for commercial sales, is a technology under development as a new treatment for type 2 diabetes mellitus (T2DM). It combines ReShape Lifesciences’ proprietary Vagus Nerve Block (vBloc) technology platform in combination with Vagus nerve stimulation. This new dual Vagus nerve neuromodulation device selectively modulates vagal blocking and stimulation to the liver and pancreas to manage blood glucose. Our DBSN device is expected to use bioelectronics to manage blood glucose in treatment of diabetes and individualized 24/7 glucose control. The goal is to reduce costs of treatment and complications that arise from poorly controlled blood glucose and non-compliance to T2DM medication.
Our Strategic Focus
Develop and Commercialize a Differentiated Portfolio of Products/Therapies
ReShape Lifesciences Inc. is the premier physician-led weight-loss and metabolic health-solutions company, offering an integrated portfolio of proven products and services that manage and treat obesity and metabolic disease. An overarching strategy for our Company is to develop and commercialize products, programs and services portfolio that is differentiated from our competition by offering transformative technologies that consists of a selection of patient-friendly, non-anatomy changing, lifestyle enhancing products, programs and services that provide alternatives to more invasive bariatric surgeries, and help patients achieve healthy, durable weight loss. Current offerings include the Lap-Band System and accessories, ReShapeCare virtual coaching program, the recently launched ReShape Marketplace, an online collection of quality wellness products, including ReShape Optimize, a collection of premium supplements to help patients achieve their health goals. The FDA approved Obalon Balloon System, which has been off the market since March 2020 and was acquired in connection with the Obalon merger in June of 2021, has not yet been re-introduced to
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the marketplace. If approved for commercial use, we believe the DBSN device will further enhance our multiple compelling and differentiated medical devices offerings. We believe that we are well positioned for the existing market and can serve more of the overweight and obese population with our solutions and thereby help expand the addressable market for obesity.
Drive the Adoption of Our Portfolio through Obesity Therapy Experts and Patient Ambassadors
Our clinical development strategy is to collaborate closely with regulatory bodies, healthcare providers, obesity therapy lifestyle experts and others involved in the obesity management process, patients and their advocates and scientific experts. We have established relationships with physicians, obesity therapy experts, patient advocates, media experts and other market drivers we believe will provide important support towards promoting patient awareness and gaining widespread adoption of the Lap-Band, its accessories, ReShapeCare, ReShape Marketplace, ReShape Optimize and the possible re-introduction of the Obalon Balloon System. Additionally, with these relationships, if developed and approved, we believe we will be able to expand awareness of the DBSN technology to patients with type 2 diabetes mellitus.
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Expand and Protect Our Intellectual Property Position
We believe that our issued patents and our patent applications encompass a broad platform of therapies focused on obesity, diabetes, hypertension and other gastrointestinal disorders. We intend to continue to pursue further intellectual property protection through U.S. and foreign patent applications.
On March 9, 2023, we filed a patent infringement complaint against Allurion Technologies, Inc. in the U.S. District Court for the District of Delaware. The complaint alleges that Allurion is infringing at least two claims of our U.S. Patent No. 10,463,520, which is related to our Obalon balloon system, by making the Allurion Gastric Balloon system in the U.S. for exportation and/or sales from the U.S and/or for potential sales in the U.S. relating to Allurion’s application to the FDA to sell the Allurion Gastric Balloon in the U.S. The complaint seeks, among other relief, damages for Allurion’s alleged infringement of the ‘520 patent, in an amount not less than a reasonable royalty. This matter is in its early stages and we are unable to predict its outcome at this time. However, we intend to continue to aggressively protect and enforce our intellectual property rights.
Alternative Weight Loss Solutions
ReShapeCare is an effective, convenient virtual health coaching program that is reimbursed by most insurance companies and works in partnership with physicians to help patients set and achieve their health and wellness goals. Through board certified coaches, it provides a weight-loss solution through behavioral changes, improving the patients’ sleep, nutrition, exercise and stress. ReShapeCare is appropriate for all weight loss patients, medical weight loss patients, and pre- and post-surgical bariatric patients.
We believe that we will be able to offer distinct weight loss treatment solutions that may be selected by the physician depending on the severity of the patient’s BMI or condition. Together, the Lap-Band, ReShapeCare and potential internal or external pipeline products can provide a minimally invasive continuum of care, independently or in combination, for bariatric surgery or medically managed weight loss patients and their care providers.
Our Market
The Obesity and Metabolic Disease Epidemic
Obesity is a disease that has been increasing at an alarming rate with significant medical repercussions and associated economic costs. The World Health Organization (“WHO”) currently estimates that more than 2.5 billion adults, approximately 30% of the global population, are considered overweight or obese. This number has a projected increase to 50% by 2030. The global economic impact of obesity is approximately $2.0 trillion, or approximately 2.8% of global GDP. Healthcare costs for severely or morbidly obese adults are 81% higher than for healthy weight adults and obesity is responsible for 5% of deaths worldwide. We believe our products and programs and product candidates could address a $1.64 billion per year and growing global surgical device market. The Bariatric Surgical Device market is projected to be a $2.8 billion worldwide market ($1.8 billion in the U.S.) by 2025, the Virtual Healthcare Delivery market is projected to be $95 billion worldwide by 2026, and the Global Weight Loss and Obesity Management market is expected to rise to an estimated value of $300 billion with a compound annual growth rate of 6.7% from 2019 to 2026.
We believe that this epidemic will continue to grow worldwide given dietary trends in developed nations that favor highly processed sugars, larger meals and fattier foods, as well as increasingly sedentary lifestyles. Despite the growing obesity rate, increasing public interest in the obesity epidemic and significant medical repercussions and economic costs associated with obesity, there continues to be a significant unmet need for effective treatments.
The United States Market
Obesity has been identified by the U.S. Surgeon General as the fastest growing cause of disease and death in the United States. Currently, it is estimated that approximately 160 million American adults are overweight or obese, 74 million American adults are overweight, 78 million American adults are obese or severely obese, and 24 million American adults are morbidly obese. It is estimated that if obesity rates stay consistent, 51% of the U.S. population will be obese by 2030. According to data from the U.S. Department of Health and Human Services, almost 80% of adults with a BMI above 30 have comorbidity, and almost 40% have two or more of these comorbidities. According to The Obesity Society and the CDC, obesity is associated with many significant weight-related comorbidities including Type 2
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diabetes, high blood-pressure, sleep apnea, certain cancers, high cholesterol, coronary artery disease, osteoarthritis and stroke. According to the American Cancer Society, 572,000 Americans die of cancer each year, over one-third of which are linked to excess body weight, poor nutrition and/or physical inactivity. Over 75% of hypertension cases are directly linked to obesity, and more than 90% of the approximately 28 million U.S. adults with Type 2 diabetes are overweight or have obesity.
Currently, medical costs associated with obesity in the U.S. are estimated to be up to $210.0 billion per year and nearly 21% of medical costs in the U.S. can be attributed to obesity. Approximately $1.5 billion was spent in 2015 alone in the U.S. on approximately 200,000 bariatric surgical procedures to treat obesity. By 2025, it is estimated that up to $3.8 billion will be spent in the U.S. on approximately 800,000 bariatric surgical procedures to treat obesity. Researchers estimate that if obesity trends continue, obesity-related medical costs could rise by another $44-$66 billion each year in the U.S. by 2030. The medical costs paid by third-party payers for people who are obese were $2,741 per year, or 42% higher than those of people who are normal weight and the average cost to employers is $6,627 to $8,067 per year per obese employee (BMI of 35 to 40 and higher).
Current Treatment Options and Their Limitations
We believe existing bariatric surgery and endoscopic procedural options for the treatment of obesity have seen limited adoption to date, with approximately 1% of the obese population qualifying for treatment actually seeking treatment, due to patient concerns and potential side effects including permanently altered anatomy and morbidity. The recent adoption of GLP-1 agonists for weight loss and related big-pharma marketing efforts have signifiancantly increased the number of overweight and obese individuals who are seeking medically managed weight loss.
The principal treatment alternatives available today for obesity include:
| ● | Behavioral modification. Behavioral modification, which includes diet and exercise, is an important component in the treatment of obesity; however, most obese patients find it difficult to achieve and maintain significant weight loss with a regimen of diet and exercise alone. |
| ● | Pharmaceutical therapy. Pharmaceutical therapies often represent a first option in the treatment of obese patients but carry significant safety risks and may present troublesome side effects and compliance issues. |
| ● | Bariatric Surgery and Endoscopic Procedures. In more severe cases of obesity, patients may pursue more aggressive surgical treatment options such as sleeve gastrectomy and gastric bypass. These procedures promote weight loss by surgically restricting the stomach’s capacity and outlet size. While largely effective, these procedures generally result in major lifestyle changes, including dietary restrictions and food intolerances, and they may present substantial side effects and carry short- and long-term safety and side effect risks that have limited their adoption. |
Given the limitations of behavioral modification, the inaccessibility, side-effects, and durability of pharmaceutical therapy, and the invasive and irreversible nature of other bariatric surgical approaches, we believe that there is a substantial need for the less invasive, adjustable, and reversable Lab-Band.
Our Research and Development
Current R&D Focus
We have an experienced research and development team, including clinical, regulatory affairs and quality assurance, comprised of scientists and mechanical engineers with significant clinical knowledge and expertise. Our research and development efforts are focused in the following major areas:
| ● | supporting the current Lap-Band System; |
| ● | expanding and improving on the Lap-Band portfolio; |
| ● | testing and developing the DBSN device; and |
| ● | support the calibration tube line for gastric and bariatric surgeries. |
We have spent a portion of our capital resources on research and development. Our research and development expenses were approximately $2.5 million and $2.4 million in 2022 and 2021, respectively.
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Our Competition
The market for obesity treatments is competitive, subject to technological change and significantly affected by new product development. Our primary competition in the obesity treatment market is currently from bariatric laparoscopic and endoscopic procedures.
Our Lap-Band System competes, and we expect that our Obalon Balloon System may compete, with surgical and endoscopic obesity procedures, including gastric bypass, gastric balloons, sleeve gastrectomy and the endoscopic sleeve. These current surgical procedures are performed in less than 1% of all eligible obese patients today. Outside of the Obalon Balloon System which we recently acquired, other current manufacturers of gastric balloon and suturing products that are approved in the United States include Boston Scientific (ORBERA Intragastric Balloon System and OverStitch Endoscopic Suturing System) and Spatz Medical.
In June 2016, Aspire Bariatrics, Inc. received FDA approval for the Aspire Assist® System, an endoscopic alternative to weight loss surgery for people with moderate to severe obesity. Due to the financial impact of the COVID-19 pandemic, Aspire Bariatrics shut down operations and withdrew its product from the market in April 2022. We are also aware that GI Dynamics, Inc. has received approvals in various international countries to sell its EndoBarrier Gastrointestinal Liner.
We also compete against the manufacturers of pharmaceuticals that are directed at treating obesity and the 99% of obese patients eligible for surgery that are not willing to pursue a surgical option. We are aware of a number of drugs that are approved for long-term treatment of obesity in the United States: Orlistat, marketed by Roche as Xenical and GlaxoSmithKline as Alli, Belviq marketed by Arena Pharmaceuticals, Inc., Qsymia, marketed by VIVUS, Inc.,Contrave, marketed by Orexigen Therapeutics, Inc. and Wogovy/Ozempic marketed by Novo Nordisk. While considered a competitive therapy, we expect that the marketing of these pharmaceuticals will increase awareness and help normalize obesity treatment. Further, we some surgeons will use pharmaceuticals to coincide with a Lap-Band placement.
In addition to competition from surgical obesity procedures, we compete with several private early-stage companies developing neurostimulation devices for application to the gastric region and related nerves for the treatment of obesity. Further, we know of two intragastric balloon companies in the U.S., Spatz Medical, which received FDA approval of the Spatz3 Adjustable Balloon in October of 2021, and Allurion Technology’s Elipse Balloon, which is in either clinical trials or working toward clinical trials in the U.S. These companies may prove to be significant competitors, particularly through collaborative arrangements with large and established companies. They also compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and subject registration for clinical trials, as well as in acquiring technologies and technology licenses complementary to our programs or advantageous to our business.
We believe that the principal competitive factors in our market include:
| ● | acceptance by healthcare professionals, patients and payers; |
| ● | published rates of safety and efficacy; |
| ● | reliability and high-quality performance; |
| ● | effectiveness at controlling and/or resolving comorbidities such as diabetes and hypertension; |
| ● | invasiveness and the inherent reversibility of the procedure or device; |
| ● | cost and average selling price of products and relative rates of reimbursement; |
| ● | effective marketing, training, education, sales and distribution; |
| ● | regulatory and reimbursement expertise; |
| ● | technological leadership and superiority; |
| ● | speed of product innovation and time to market. |
Many of our competitors are larger than we are, and they may enjoy several competitive advantages over us, including:
| ● | stronger name recognition; |
| ● | existing relations with healthcare professionals, customers and third-party payers; |
| ● | established distribution networks; |
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| ● | significant experience in research and development, manufacturing, preclinical testing, clinical trials, obtaining regulatory approvals, obtaining reimbursement and marketing approved products; and |
| ● | greater financial and human resources. |
As a result, we cannot assure you that we will be able to compete effectively against these companies or their products.
Market Opportunity
Given the limitations of behavioral modification, pharmaceutical therapy and traditional bariatric surgical approaches, we believe there is a substantial need for patient-friendly, safer, effective and durable solutions that:
| ● | provide proven, long-term weight loss; |
| ● | preserve normal anatomy; |
| ● | are adjustable in an office setting for individual patient needs and long term efficacy; |
| ● | are “non-punitive” in that they support continued ingestion and digestion of foods and micronutrients such as vitamins and minerals found in a typical, healthy diet while allowing the user to modify his or her eating behavior appropriately without inducing punitive physical restrictions that physically force a limitation of food intake; |
| ● | diminish undesirable side-effects; |
| ● | facilitate outpatient surgical procedures; |
| ● | minimize the risks of re-operations, malnutrition and mortality; |
| ● | reduce the natural hunger drive of patients; and |
| ● | are reversible, if necessary or desired, while preserving anatomy. |
Our Intellectual Property
In order to remain competitive, we must develop and maintain protection of the proprietary aspects of our technologies. We rely on a combination of patents, trademarks, trade secret laws and confidentiality and invention assignment agreements to protect our intellectual property rights. Our patent applications may not result in issued patents and our patents may not be sufficiently broad to protect our technology. Any patents issued to us may be challenged by third parties as being invalid or unenforceable, or third parties may independently develop similar or competing technology that does not infringe our patents. The laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States.
Lap-Band
As of December 31, 2022, we had approximately 50 total patents, 28 U.S. and 22 foreign, related to our Lap-Band System. The international patents and patent applications are in regions including Germany, France, Spain, the United Kingdom, Mexico, Canada, Italy, the Netherlands, Portugal, Ireland, Belgium, Poland, Australia, and South Korea. The issued patents expire between the years 2022 and 2031.
We also have 48 total U.S. and international trademarks for the Lap-Band brand name.
ReShape Vest
As of December 31, 2022, we had four granted U.S. patents and four granted foreign patents in China, Israel, Canada and Australia related to our ReShape Vest. The patents expire between the years 2028 and 2038.
We also have U.S. and international trademark applications for the ReShape Vest brand name.
Obalon
As of December 31, 2022, we had 43 granted U.S. patents and 5 granted foreign patents related to our Obalon portfolio. The patents expire between the years 2028 and 2031.
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ReShapeCare
As of December 31, 2022, we had 8 U.S. trademarks related to the ReShapeCare covering, tradename, logo, electronic pedometers and electronic day planners for tracking food, body weight, pre-recorded nutritional and fitness; as well as nutritional and medical counseling and services. ReShape Marketplace has one trademark related to the online retail store and ReShape Optimize has one trademark related to the multi-vitamins.
DBSN Device
As of December 31, 2022, we had 9 U.S. patents issued and 45 foreign patents issued. In addition, we have filed a trademark application for Bloc-Stim Neuromodulation. The USPTO Examiner is reviewing the application and provided the Company with a disclaimer being required for “Neuromodulation”, as this a standard requirement for words that are in the standard vernacular.
Sales and Distribution
We market directly to patients but sell the Lap-Band program to select qualified surgical centers throughout the U.S. and internationally having patients that would like to treat obesity and its comorbidities. The centers then perform the Lap-Band procedure and are most-commonly reimbursed by leading insurance providers in the U.S. and government health services in many areas outside the U.S. Alternatively, surgical centers can offer the Lap-Band as a cash-pay procedure. Our sales representatives are supported by field based experts who provide training, technical support, and other support services at various medical centers. Our sales representatives help implement consumer marketing programs and provide surgical centers and certified surgeons with educational patient materials.
In order to support our Lap-Band sales efforts, we have five regionally based team members to support the U.S. market. During the fourth quarter of 2021, we launched a national advertising campaign for our flagship product, the Lap-Band. This was the Company’s first mainstream mass-market advertising campaign in the U.S. The national television spots aired in outlets such as HGTV, TLC, Bravo, Oxygen and more, with print advertisements running in People Magazine, Good Housekeeping, Better Homes & Gardens, US Weekly and other select publications nationwide. These coordinated media efforts were intended to reach people struggling with maintaining a healthy weight and to educate them on the advantages and accessibility of the Lap-Band procedure compared to other treatment options, including diets and more aggressive gastric stapling procedures. Another goal of the campaign was to help people understand that the Lap-Band offers unique benefits for a variety of obese patients, including those with lower BMI and women who may become pregnant.
In August of 2022, we shifted away from national advertising campaign initiatives and focusing on digital marketing channels including search engine ads and social media channels. This shift in marketing is 100% aligned with the Company’s focus on expanding Lap-Band use while ensuring a sustainable (profitable) business. The shift to a more targeted and regionalized marketing program allows us to better support interested potential Lap-Band patients while also reducing the overall costs for lead generation programs. This strategy also aligns with our key surgeon Lap-Band programs across the U.S.; surgeons who participate in local marketing and educational initiatives in their communities.
During 2022, our international sales efforts were through a combination of agent and distributor sales channels, with a focus on top Lap-Band customers in Australia, the Middle East, Canada and select countries in Europe. In late 2022, we allocated additional resources to help ensure international sales improve in both volume and profitability.
Our Manufacturers and Suppliers
To date, all of the materials and components for our products, as well as any related outside services, are procured from qualified suppliers and contract manufacturers in accordance with our proprietary specifications. All of our key manufacturers and suppliers have experience working with commercial implantable device systems, are ISO certified and are regularly audited by various regulatory agencies including the FDA. Our key manufacturers and suppliers have a demonstrated record of compliance with international regulatory requirements. In July 2021 we announced that we had completed our Lap-Band manufacturing transition from Apollo Endosurgery, Inc. to a Massachusetts-based contract manufacturer.
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Given that we rely on third-party manufacturers and suppliers for the production of our products, our ability to increase production going forward will depend upon the experience, certification levels and large-scale production capabilities of our suppliers and manufacturers. Qualified suppliers and contract manufacturers have been and will continue to be selected to supply products on a commercial scale according to our proprietary specifications. Our FDA approval process requires us to name and obtain approval for the suppliers of key components of the Lap-Band System.
Many of our parts are custom designed and require custom tooling and, as a result, we may not be able to quickly qualify and establish additional or replacement suppliers for the components of our products. Any new approvals of vendors required by the FDA or other regulatory agencies in other international markets for our products as a result of the need to qualify or obtain alternate vendors for any of our components would delay our ability to sell and market our products and could have a material adverse effect on our business.
We believe that our current manufacturing and supply arrangements will be adequate to continue our ongoing commercial sales and our ongoing and planned clinical trials. In order to produce our products in the quantities we anticipate to meet future market demand, we will need our manufacturers and suppliers to increase, or scale up, manufacturing production and supply arrangements by a significant factor over the current level of production. There are technical challenges to scaling up manufacturing capacity and developing commercial-scale manufacturing facilities that may require the investment of substantial additional funds by our manufacturers and suppliers and hiring and retaining additional management and technical personnel who have the necessary experience. If our manufacturers or suppliers are unable to do so, we may not be able to meet the requirements to expand the launch of the product in the United States or launch the product internationally or to meet future demand, if at all. We may also represent only a small portion of our suppliers’ or manufacturers’ business and if they become capacity constrained, they may choose to allocate their available resources to other customers that represent a larger portion of their business. If we are unable to obtain a sufficient supply of our product, our revenue, business and financial prospects would be adversely affected.
Government Regulations
Our products and operations are subject to extensive and rigorous regulation by the FDA and other federal, state and local authorities, as well as foreign regulatory authorities. The FDA regulates, among other things, the research, development, testing, design, manufacturing, approval, labeling, storage, recordkeeping, advertising, promotion and marketing, distribution, post approval monitoring and reporting and import and export of medical devices in the United States to assure the safety and effectiveness of medical products for their intended use. The Federal Trade Commission also regulates the advertising of our products in the United States. Further, we are subject to laws directed at preventing fraud and abuse, which subject our sales and marketing, training and other practices to government scrutiny.
Regulatory system for medical devices in the United States
Unless an exemption applies, each new or significantly modified medical device we seek to commercially distribute in the United States will require either a premarket notification to the FDA requesting permission for commercial distribution under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or FFDCA, also referred to as a 510(k) clearance, or approval from the FDA of a premarket approval (“PMA”) application. Both the 510(k) clearance and PMA approval processes can be resource intensive, expensive, and lengthy, and require payment of significant user fees, unless an exemption is available.
Device Classification
Under the FFDCA, medical devices are classified into one of three classes—Class I, Class II or Class III—depending on the degree of risk associated with each medical device and the extent of control needed to provide reasonable assurances with respect to safety and effectiveness.
Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be reasonably assured by adherence to a set of FDA regulations, referred to as the General Controls for Medical Devices, which require compliance with the applicable portions of the Quality System Regulations, or QSR, facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and non-misleading labeling and promotional materials. Some Class I devices, also called Class I reserved devices, also require premarket clearance by the FDA through the 510(k) premarket notification process described below. Most Class I products are exempt from the premarket notification requirements.
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Class II devices are those that are subject to the General Controls, and special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, patient registries, FDA guidance documents and post-market surveillance. Most Class II devices are subject to premarket review and clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification process.
Class III devices include devices deemed by the FDA to pose the greatest risk such as life-supporting or life-sustaining devices, or implantable devices, in addition to those deemed novel and not substantially equivalent following the 510(k) process. The safety and effectiveness of Class III devices cannot be reasonably assured solely by the General Controls and Special Controls described above. Therefore, these devices are subject to the PMA application process, which is generally more costly and time consuming than the 510(k) process. Through the PMA application process, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA’s satisfaction. Accordingly, a PMA application typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical and clinical trial data, manufacturing information, labeling and financial disclosure information for the clinical investigators in device studies. The PMA application must provide valid scientific evidence that demonstrates to the FDA’s satisfaction a reasonable assurance of the safety and effectiveness of the device for its intended use.
The Investigational Device Process
In the United States, absent certain limited exceptions, human clinical trials intended to support medical device clearance or approval require an IDE application. Some types of studies considered to present “non-significant risk” are deemed to have an approved IDE once certain requirements are addressed, and IRB approval is obtained. If the device presents a “significant risk” to human health, as defined by the FDA, the sponsor must submit an IDE application to the FDA and obtain IDE approval prior to commencing the human clinical trials. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE application must be approved in advance by the FDA for a specified number of subjects. Generally, clinical trials for a significant risk device may begin once the IDE application is approved by the FDA and the study protocol and informed consent are approved by appropriate institutional review boards at the clinical trial sites. There can be no assurance that submission of an IDE will result in the ability to commence clinical trials, and although the FDA’s approval of an IDE allows clinical testing to go forward for a specified number of subjects, it does not bind the FDA to accept the results of the trial as sufficient to prove the product’s safety and efficacy, even if the trial meets its intended success criteria.
All clinical trials must be conducted in accordance with the FDA’s IDE regulations that govern investigational device labeling, prohibit promotion and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators. Clinical trials must further comply with the FDA’s good clinical practice regulations for institutional review board approval and for informed consent and other human subject protections. Required records and reports are subject to inspection by the FDA. The results of clinical testing may be unfavorable, or, even if the intended safety and efficacy success criteria are achieved, may not be considered sufficient for the FDA to grant marketing approval or clearance of a product.
The 510(k) Clearance Process
Under the 510(k) process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent,” as defined in the statute, to a legally marketed predicate device.
A predicate device is a legally marketed device that is not subject to premarket approval, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was previously found substantially equivalent through the 510(k) process. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data is sometimes required to support substantial equivalence.
After a 510(k) premarket notification is submitted, the FDA determines whether to accept it for substantive review. If it lacks necessary information for substantive review, the FDA will refuse to accept the 510(k) notification. If
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it is accepted for filing, the FDA begins a substantive review. By statute, the FDA is required to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer, and clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require further information, including clinical data, to make a determination regarding substantial equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device.
If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III, the device sponsor must then fulfill the much more rigorous premarketing requirements of the PMA approval process, or seek reclassification of the device through the de novo process. A manufacturer can also submit a petition for direct de novo review if the manufacturer is unable to identify an appropriate predicate device and the new device or new use of the device presents a moderate or low risk.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in its intended use, will require a new 510(k) clearance or, depending on the modification, could require a PMA application or de novo classification. The FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k) or a PMA in the first instance, but the FDA can review any such decision and disagree with a manufacturer’s determination. Many minor modifications are accomplished by a letter-to-file in which the manufacture documents the change in an internal letter-to-file. The letter-to-file is in lieu of submitting a new 510(k) to obtain clearance for such change. The FDA can always review these letters to file in an inspection. If the FDA disagrees with a manufacturer’s determination regarding whether a new premarket submission is required for the modification of an existing device, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or approval of a PMA application is obtained. In addition, in these circumstances, the FDA can impose significant regulatory fines or penalties for failure to submit the requisite PMA application(s).
The PMA Approval Process
Following receipt of a PMA application, the FDA conducts an administrative review to determine whether the application is sufficiently complete to permit a substantive review. If it is not, the agency will refuse to file the PMA. If it is, the FDA will accept the application for filing and begin the review. The FDA, by statute and by regulation, has 180 days to review a filed PMA application, although the review of an application more often occurs over a significantly longer period. During this review period, the FDA may request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the FDA. The FDA considers a PMA or PMA supplement to have been voluntarily withdrawn if an applicant fails to respond to an FDA request for information (e.g., major deficiency letter) within a total of 360 days. Before approving or denying a PMA, an FDA advisory committee may review the PMA at a public meeting and provide the FDA with the committee’s recommendation on whether the FDA should approve the submission, approve it with specific conditions, or not approve it. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.
Prior to approval of a PMA, the FDA may conduct inspections of the clinical trial data and clinical trial sites, as well as inspections of the manufacturing facility and processes. Overall, the FDA review of a PMA application generally takes between one and three years, but may take significantly longer. The FDA can delay, limit or deny approval of a PMA application for many reasons, including:
| ● | device may not be shown safe or effective to the FDA’s satisfaction; |
| ● | data from pre-clinical studies and/or clinical trials may be found unreliable or insufficient to support approval; |
| ● | the manufacturing process or facilities may not meet applicable requirements; and |
| ● | changes in FDA approval policies or adoption of new regulations may require additional data. |
If the FDA evaluation of a PMA is favorable, the FDA will issue either an approval letter, or an approvable letter, the latter of which usually contains several conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval letter authorizing commercial marketing of the device, subject to the conditions of approval and the limitations established in the approval letter. If the FDA’s evaluation of a PMA application or manufacturing facilities is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. The FDA also may determine that
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additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and data is submitted in an amendment to the PMA, or the PMA is withdrawn and resubmitted when the data are available. The PMA process can be expensive, uncertain and lengthy and several devices for which the FDA approval has been sought by other companies have never been approved by the FDA for marketing.
New PMA applications or PMA supplements are required for modification to the manufacturing process, equipment or facility, quality control procedures, sterilization, packaging, expiration date, labeling, device specifications, ingredients, materials or design of a device that has been approved through the PMA process. PMA supplements often require submission of the same type of information as an initial PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the approved PMA application and may or may not require as extensive technical or clinical data or the convening of an advisory panel, depending on the nature of the proposed change.
In approving a PMA application, as a condition of approval, the FDA may also require some form of post-approval study or post-market surveillance, whereby the applicant conducts a follow-up study or follows certain patient groups for several years and makes periodic reports to the FDA on the clinical status of those patients when necessary to protect the public health or to provide additional or longer-term safety and effectiveness data for the device. The FDA may also require post-market surveillance for certain devices cleared under a 510(k) notification, such as implants or life-supporting or life-sustaining devices used outside a device user facility. The FDA may also approve a PMA application with other post-approval conditions intended to ensure the safety and effectiveness of the device, such as, among other things, restrictions on labeling, promotion, sale, distribution and use. Our vBloc, Lap-Band System and Intragastric balloons, including the Obalon Balloon System, Obalon Navigation System and Dispenser are considered Class III medical devices. In order to support a PMA application, the FDA required the Company to conduct rigorous and expensive trials, one of which was a double-blinded, randomized, sham-controlled study. We will be required to file new PMA applications or PMA supplement applications for modifications to our PMA-approved Lap-Band System, Obalon Balloon System and Obalon Navigation System and Dispenser or any of their respective components, including modifications to our manufacturing processes, device labeling and device design, based on the findings of post-approval studies.
Pervasive and Continuing FDA Regulation
After the FDA permits a device to enter commercial distribution, numerous regulatory requirements continue to apply. These include:
| ● | The FDA’s QSR, which requires manufacturers, including third party manufacturers, to follow stringent design, testing, production, control, supplier/contractor selection, complaint handling, documentation and other quality assurance procedures during all aspects of the manufacturing process; |
| ● | labeling regulations, unique device identification requirements and FDA prohibitions against the promotion of products for uncleared, unapproved or off label uses; |
| ● | advertising and promotion requirements; |
| ● | restrictions on sale, distribution or use of a device; |
| ● | PMA annual reporting requirements; |
| ● | PMA approval of product modifications; |
| ● | PMA approval of product |
| ● | Medical device reporting, or MDR, regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur; |
| ● | medical device correction and removal reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health; |
| ● | recall requirements, including a mandatory recall if there is a reasonable probability that the device would cause serious adverse health consequences or death; |
| ● | an order of repair, replacement or refund; |
| ● | device tracking requirements; and |
| ● | post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device. |
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Since February 2017, the FDA has issued three separate letters to healthcare providers warning of serious adverse events, including deaths, which are specific to liquid-filled intragastric balloons. We are aware of the filing of additional reports of serious adverse events, including deaths, associated with liquid-filled balloons since the issuance of the FDA letters to healthcare providers. While the advisory letters were specific to liquid-filled intragastric balloons and not the Obalon gas-filled balloons, these letters could create negative perceptions of the entire gastric balloon category which may cause negative consequences for us including requiring additional warnings, precautions and/or contraindications in the labeling than originally required, delaying or denying approval of our future products, or possible review or withdrawal of our current approval. Since Obalon Therapeutics began selling in United States in January 2017—before the merger – Obalon Therapeutics has reported adverse events relating to patient injuries associated with use of the Obalon balloon in the FDA’s MAUDE database.
The FDA has broad post-market and regulatory enforcement powers. Medical device manufacturers are subject to unannounced inspections by the FDA and other state, local and foreign regulatory authorities to assess compliance with the QSR and other applicable regulations, and these inspections may include the manufacturing facilities of any suppliers.
Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:
| ● | warning letters, fines, injunctions, consent decrees and civil penalties; |
| ● | unanticipated expenditures, repair, replacement, refunds, recall or seizure of our products; |
| ● | operating restrictions, partial suspension or total shutdown of production; |
| ● | the FDA’s refusal of our requests for 510(k) clearance or premarket approval of new products, new intended uses or modifications to existing products; |
| ● | FDA’s refusal to issue certificates to foreign governments needed to export products for sale in other countries; |
| ● | withdrawing 510(k) clearance or premarket approvals that have already been granted; and |
| ● | criminal prosecution. |
Regulatory System for Medical Devices in Europe
The European Union (“EU”) consists of member states residing in the European Union and has a coordinated system for the authorization of medical devices. As of May 26, 2021, the European Union has adopted Regulation (EU) 2017/745 of the European Parliament and of the Council of 5 April 2017 on medical devices, amending Directive 2001/83/EC, Regulation (EC) No 178/2002 and Regulation (EC) No 1223/2009. The Medical Device Regulation 2017/745, or EU MDR repeals Directive 93/42/EEC, which concerns medical devices, and Directive 90/385/EEC, which concerns active implantable medical devices, as of 26 May 2021. The EU allows a transition period from Directive 93/42/EEC and Directive 90/385/EEC to Regulation (EU) 2017/745, that will end 26 May 2024.
The EU MDR aims to ensure the smooth functioning of the internal market as regards medical devices, taking as a base a high level of protection of health for patients and users, and considering the small- and medium-sized enterprises that are active in this sector. At the same time, this Regulation sets high standards of quality and safety for medical devices in order to meet common safety concerns as regards such products. Both objectives are being pursued simultaneously and are inseparably linked whilst one not being secondary to the other. As regards Article 114 of the Treaty on the Functioning of the European Union (TFEU), this Regulation harmonises the rules for the placing on the market and putting into service of medical devices and their accessories on the Union market thus allowing them to benefit from the principle of free movement of goods. As regards Article 168(4)(c) TFEU, this Regulation sets high standards of quality and safety for medical devices by ensuring, among other things, that data generated in clinical investigations are reliable and robust and that the safety of the subjects participating in a clinical investigation is protected.
The system of regulating medical devices operates by way of a certification for each medical device. Each certificated device is marked with CE mark which shows that the device has a Certificat de Conformité. There are national bodies known as Competent Authorities in each member state which oversee the implementation of the EUMDR within their jurisdiction. The means for achieving the requirements for CE mark varies according to the nature of the device. Devices are classified in accordance with their perceived risks, similarly to the U.S. system. The class of a product determines the requirements to be fulfilled before CE mark can be placed on a product, known as a conformity assessment. Conformity assessments for our products have carried out as required by the MDD. Each member state can appoint Notified Bodies within its jurisdiction. If a Notified Body of one member state has issued a Certificat de
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Conformité, the device can be sold throughout the European Union without further conformance tests being required in other member states.
Per MDD 93/42/EEC on Medical Devices, Annex II excluding Section 4, the Lap-Band System is considered a Class IIb device and few of the system’s components are considered Class IIa devices. The vBloc, was never commercialized in the EU. The Obalon Balloon System, when delivered with a cellulose-based capsule was considered a Class IIb product under MDD. Prior to the merger, Obalon Therapeutics’ management believed the Obalon Navigation System and the Obalon Touch Inflation Dispenser are Class I products not requiring Notified Body approval. Obalon Therapeutics’ Medical Device Marketing Authorization under the MDD expired on May 14, 2020. Obalon Therapeutics allowed the Obalon balloon CE-mark to expire and did not renew its agreement with its Notified Body. Prior to the June 16, 2021 merger, Obalon Therapeutics did not apply for a CE-mark for the Obalon Navigation System and Obalon Touch Inflation Dispenser.
Regulatory frameworks for medical devices in certain countries in Asia Pacific and the Middle East
Australia
ReShape Lifesciences is the legal manufacturer of the Lap-Band System and accessories under the Australian Register of Therapeutic Goods (ARTG), in Australia.
Middle East
Unlike Europe, while the Gulf Cooperation Council, or GCC, jurisdictions often work together to purchase certain medical products in a coordinated fashion for government hospitals, there is not a coordinated system for the authorization of medical devices. Most GCC jurisdictions require that the official registered distributor of a product be wholly owned by nationals of that particular GCC jurisdiction.
ReShape distributes the Lap-Band System and accessories in the Middle East through a distributor. Product is shipped to the Kingdom of Saudi Arabia (KSA) and the United Arab Emirates (UAE).
Obalon Therapeutics ceased distribution of the Obalon System, the Obalon Navigation System and the Obalon Touch Inflation Dispenser in the Middle East prior to the June 16, 2021, merger.
Kingdom of Saudi Arabia, or KSA
The most pertinent regulation is the Interim Regulation for Medical Devices, issued by the Saudi Food & Drug Authority, or SFDA, Board of Directors’ Decree number 1-8-1429 dated approximately December 27, 2008, and the implementing regulations of the same. The SFDA is an independent regulatory body that is responsible for the authorization of medical devices, and current guidelines are generally based on pre-existing approval in one of the five founding member nations of the Global Harmonization Task Force, or GHTF, which are Australia, Canada, United States, European Union and Japan. There are no overt requirements for the provision of safety and effectiveness data in the form of clinical trials or other studies, but these would likely come as a part of the approvals described above that are used as a basis to support approval within the KSA. The SFDA reserves its rights to require its own independent clinical trials as it deems necessary or appropriate. Regulatory authorization is required for all medical devices, regardless of device class. A potential exception to this requirement is for medical devices that were designed and constructed by local health care facility and staff for internal use. Similar to the United States, the SFDA requires post market surveillance to ensure safety and quality. This program is meant to be conducted by the Authorized Representative. With respect to the use of medical devices, it is the responsibility of the health care institution to inform the manufacturer and the SFDA of any adverse events associated with this use.
The SFDA has approved the Medical Device Market Authorization, or MDMA application and the listing of ReShape Lifesciences as the legal manufacturer of the Lap-Band System and accessories in KSA.
United Arab Emirates, or UAE
The most pertinent regulation is UAE Federal Law No. 4 of 1983 for the Pharmaceutical Profession and Institutions and to Medical Device Regulations. There are many similarities between the SFDA and the Registration and Drug Control Department that is run out of the Ministry of Health & Prevention of the UAE. Applications for
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registration of medical devices in the UAE are done with the UAE Ministry of Health Registration & Drug Control Department and must include data on effectiveness in addition to safety (a nod to the requirements of the FDA). The UAE body has its own device classification system that is most closely related to that used by the European Union, defined as class 1, low risk; class 2, medium risk but nonimplantable; class 3, medium risk but implantable; and class 4, high risk.
Brexit
The UK Medicines & Healthcare Products Regulatory Agency, or MHRA is responsible for regulating medical devices in Great Britain. The MHRA plans changes to the UK’s Medical Devices Regulations 2002 as part of a broader transition away from European Union legal and regulatory systems.
In addition, the Trade Deal between the UK and the EU generally provides for cooperation and exchange of information between the parties in the areas of product safety and compliance, including market surveillance, enforcement activities and measures, standardization related activities, exchanges of officials, and coordinated product recalls. As such, processes for compliance and reporting should reflect requirements from regulatory authorities.
CE Marks issued by EU-recognized notified bodies will continue to be valid in for medical devices placed on the Great Britain market – England, Scotland, and Wales until December 31, 2024. Until that date, MHRA accepts the CE Marking and requires registering active implantable medical devices, Class III medical devices, Class IIb implantable medical devices and IVD List A devices by May 1, 2021. After December 31, 2024, the UK Conformity Assessment (UKCA) marking will be mandatory. In Northern Island, CE Marking issued by EU-recognized notified bodies will continue to be valid until current CE cert under Medical Device Directive (MDD) expires, after which date, CE marking needs to be approved under EU Medical Device Regulation (EU MDR). ReShape Lifesciences is compliant with the registration requirements and is registered in England, Scotland, Wales, and Northern Ireland. Additionally, the EU no longer recognizes conformity assessment activities performed by UK notified bodies for medical devices placed on the market since January 1, 2021. Notified bodies must be located in a European Union member state, or territory where there is a mutual recognition agreement, or MRA; there is currently no such MRA. The new legislation may create an extra hurdle for manufacturers and thereby limit the availability and/or increase prices of our medical devices in the UK.
Our Products
The ReShape Lifesciences’ Lap-Band System, the Obalon Balloon System, Obalon Navigation system and Obalon Touch Inflation Dispenser, and their respective components are medical devices that required a PMA submission form and approval by the FDA for commercial use in the United States. ReShape Lifesciences’ vBloc neuromodulation system, which was approved by the FDA for treating obesity is no longer commercialized.
FDA approved the Lap-Band System in 2001. The Lap-Band System was approved for use in the U.S. for patients with a BMI greater than or equal to 40 or a BMI greater than or equal to 30 with one or more obesity-related comorbidity conditions.
The Lap-Band System was CE marked in 1997. The method of assessing conformity with applicable regulatory requirements varies depending on the class of the device, but for our Lap-Band System, the method involved a combination issuance of declaration of conformity by the manufacturer of the safety and performance of the device, and a third-party assessment by a Notified Body of the design of the device and of our quality system. A Notified Body is a private commercial entity that is designated by the national government of a member state as being competent to make independent judgments about whether a product complies with applicable regulatory requirements. The assessment included, among other things, a clinical evaluation of the conformity of the device with applicable regulatory requirements. We use BSI as the Notified Body for our CE marking approval process.
Continued compliance with CE marking requirements is enforced through periodic facility inspections by the Notified Body, which may be unannounced. Because we rely on contract manufacturing sites and service providers, these additional sites may also be subject to these Notified Body inspections.
The Obalon Balloon System was approved in January 2017 and the Obalon Navigation system and Obalon Touch Inflation Dispenser were approved on December 20, 2018. All of the above-listed devices were approved with post-approval conditions intended to ensure the safety and effectiveness of these devices. ReShape Lifesciences assumed and
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complies with all post market requirements for the Lap-Band System, the Obalon Navigation system, and Obalon Touch Inflation Dispenser.
Since the beginning of 2020, the COVID-19 pandemic has slowed most of the economy in the European Union. This resulted in many different challenges ranging from notified bodies that were no longer able to perform audits, to manufacturers that were forced to increase their production beyond their existing capabilities or forced to stop their production all together. The original date of application of Regulation (EU) 2017/745 on medical device (MDR) was May 26, 2020. Due to the COVID-19 pandemic, the date of application for MDR was postponed to May 26, 2021. The Company will continue to implement changes across our quality systems to become compliant with the new MDR.
Clinical Trials
Obalon Balloon SMART Pivotal Trial
Obalon published the results of their pivotal SMART trial. The Obalon Balloon System has demonstrated clinically meaningful weight loss with durable results. 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.
Obalon Balloon Post-Approval Study (PAS)
The PAS is a prospective, single arm, observational, sequentially enrolling, open label multi-center study. The Obalon PAS is a 1-year study that includes 6-month of Obalon Balloon therapy in conjunction of a weight loss behavior modification, or WLBM program and 6-months of continued WLBM program after balloon removal. The primary study objective is to assess the continued safety and performance of the Obalon Balloon System in commercial settings. FDA has completed their review of the Obalon final PAS Report stating that ReShape has fulfilled our post-approval study requirement.
Post-Approval Study - Obalon Navigation-Touch System (NTS)
To help assure the continued safety and effectiveness of the Obalon Navigation System, the FDA has required a post-approval study as a condition of approval under 21 CFR 814.82(a)(2). As part of PMA approval, Obalon management agreed with the FDA to conduct a post-approval prospective, observational, open-label, multi-center study designed to capture additional safety and effectiveness data of the Obalon balloon administration with NTS, prior to merger with ReShape LifeSciences. The study is a single cohort group that includes patients who commercially purchased the Obalon Balloon System at clinics and hospitals that use NTS and have consented to have their data collected to support this study. All activities related to post-administration management, weight loss and removal of the balloons are conducted in accordance with the commercial Obalon Balloon System device labeling and are not collected in this study; this study focuses on balloon administrations only. The study will evaluate approximately 4,000 balloon administrations in approximately 1,400 subjects at up to 40 clinical sites in the United States.
Patient enrollment for this study began in December 2019. On June 26, 2020, Obalon and the FDA had a call to discuss the impact of COVID-19 on the Company and cessation of commercial distribution of product since March 2020. Therefore, continued enrollment of the post-market study was put on hold and has been on hold since. The study enrolled 32 patients from one site as of March 9, 2020 before it was suspended. The other two participating sites have received IRB approvals but have not enrolled their first patient. ReShape Lifesciences will communicate with the FDA if commercial distribution of product resumes and coordinate resumption of this PAS.
Obalon Balloon System
Obalon Balloon favorable safety profile, In the pivotal SMART trial, only one of 336 (0.3%) patients that received the Obalon balloon experienced a serious adverse device event (SADE) and in data presented at the American
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Society for Metabolic and Bariatric Surgery Meeting from the first year of commercial experience, only two of 1,343 (0.14%) patients that received our Obalon balloon experienced a SADE. Historically, the reported rate of SADEs reported to Obalon in commercial use is consistent with that experienced in the pivotal SMART trial or the data from their first year of commercial experience.
In addition, data published and presented from Obalon’s commercial registry demonstrates greater weight loss in the commercial setting as compared to the pivotal clinical study used to support FDA approval. In May 2019, Obalon updated data from their 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.
Obalon Balloon improved patient tolerability and comfort. The Obalon balloon is inflated with a proprietary mix of gas. This creates a light, buoyant balloon that floats at the top of the stomach instead of sinking to the bottom of the stomach like a traditional liquid-filled intragastric balloon. Further, the Obalon Balloon System consists of three separate 250cc balloons placed individually over a three-month period to progressively add volume. We believe these design elements have the potential to improve patient comfort and tolerability of our Obalon balloon.
Obalon Balloon progressive weight loss with durable results. In the 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. In addition, patients in the Obalon treatment group showed, on average, progressive weight loss over the balloon treatment period, which we believe is attributable to the individual placement of three separate Obalon balloons over the treatment period. Subsequent data analysis at 12 months also showed that, on average, 89.5% of the weight loss was maintained six months after balloon removal. In May 2019, Obalon analyzed data from their commercial registry on 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.
Obalon Balloon simple and convenient placement. The Obalon balloon is placed without anesthesia or an endoscopy through a swallowable capsule that dissolves in the stomach and releases the balloon. These unique features allow patients the flexibility to receive the Obalon balloon discreetly in an outpatient setting. Placement typically occurs in less than fifteen minutes and can be scheduled in the morning before work, during a lunch break or in the evening. Treated patients can return promptly to their normal daily activities. The balloons are removed endoscopically under light, conscious sedation six months after the first balloon placement. Recently approved new products, the Obalon Navigation System and Obalon Touch Inflation Dispenser, are designed to further improve ease of use and convenience of placement.
Privacy and Security Laws
Medical device companies may be subject to U.S. federal and state and foreign health information privacy, security and data breach notification laws, which may govern the collection, use, disclosure and protection of health-related and other personal information. In the United States, the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”), and all regulations promulgated thereunder, collectively HIPAA, imposes privacy, security and breach reporting obligations with respect to individually identifiable health information upon ‘‘covered entities’’ (health plans, health care clearinghouses and certain health care providers), and their respective business associates, individuals or entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. Although we are not a covered entity, we may provide certain services that require the use or disclosure of PHI on behalf of physicians who are covered entities, and we therefore may be considered to be business associates under HIPAA. HIPAA imposes specified requirements relating to the privacy, security and transmission of individually identifiable health information. HIPAA mandates the reporting of certain breaches of health information to HHS, affected individuals and if the breach is large enough, the media. Entities that are found to be in violation of HIPAA as the result of a breach of unsecured protected health information or PHI, a complaint about privacy practices or an audit by HHS, may be subject to significant civil, criminal and administrative fines and penalties and/or additional reporting and oversight obligations if required to enter into a resolution agreement and corrective action plan with HHS to settle allegations of HIPAA non-compliance. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new
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authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions.
Even when HIPAA does not apply, according to the Federal Trade Commission or the FTC, failing to take appropriate steps to keep consumers’ personal information secure constitutes unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act, 15 U.S.C § 45(a). The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Individually identifiable health information is considered sensitive data that merits stronger safeguards. The FTC’s guidance for appropriately securing consumers’ personal information is similar to what is required by the HIPAA security regulations.
In addition, certain state and non-U.S. laws, such as the European Union General Data Protection Regulation, or GDPR, govern the privacy and security of health information in certain circumstances, some of which are more stringent than HIPAA and many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Further, ‘‘business associates,’’ defined as independent contractors or agents of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity, are also subject to certain HIPAA privacy and security standards. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties and private litigation. For example, California enacted legislation, the California Consumer Privacy Act or CCPA, which went into effect January 1, 2020. The CCPA, among other things, creates new data privacy obligations for covered companies and provides new privacy rights to California residents, including the right to opt out of certain disclosures of their information. The CCPA also creates a private right of action with statutory damages for certain data breaches, thereby potentially increasing risks associated with a data breach. Although the law includes limited exceptions, including for PHI maintained by a covered entity or business associate, it may regulate or impact our expected processing of personal information depending on the context. In Europe, the GDPR went into effect in May 2018 and introduces strict requirements for processing the personal data of European Union data subjects. Companies that must comply with the GDPR face increased compliance obligations and risk, including more robust regulatory enforcement of data protection requirements and potential fines for noncompliance of up to €20 million or 4% of the annual global revenues of the noncompliant company, whichever is greater. Moreover, the United Kingdom leaving the EU could also lead to further legislative and regulatory changes. It remains unclear how the United Kingdom data protection laws or regulations will develop in the medium to longer term and how data transfer to the United Kingdom from the EU will be regulated, especially following the United Kingdom’s departure from the EU on January 31, 2020 without a deal. However, the United Kingdom has transposed the GDPR into domestic law with the Data Protection Act 2018, which remains in force following the United Kingdom’s departure from the EU.
Anti-Kickback Statutes
The federal Anti-Kickback Statute prohibits persons from (among other things) knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce the referral of an individual, or the recommending, furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as Medicare or Medicaid.
Courts have interpreted the Anti-Kickback Statute quite broadly, holding that the statute will be violated if even one purpose of a payment – though not its sole or primary purpose – is to induce an act prohibited by the statute with a willful intent to act improperly. The statute prohibits many arrangements and practices that are otherwise lawful in businesses outside of the healthcare industry. Prosecutors may infer intent from the surrounding circumstances and, because courts have interpreted the statute to be violated if even one purpose of a payment is to induce the purchase of items or services paid for by federal healthcare programs, prosecutors have broad discretion in choosing arrangements to prosecute under the statute. There are statutory exceptions and regulatory “safe harbors” available to protect certain appropriately structured arrangements that otherwise would implicate the Anti-Kickback Statute. Those who structure their business arrangements to satisfy all of the criteria of a safe harbor are protected from liability under the statute.
Penalties for violation of the Anti-Kickback Statute are severe and may include, in addition to the fines and jail time described above, penalties imposed under the Civil Monetary Penalties Law, or the CMP Law, including exclusion from participation in Federal healthcare programs, civil monetary penalties for each improper act, and damages of up to three times the amount of remuneration at issue (regardless of whether some of the remuneration was for a lawful
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purpose). Because we do not anticipate that the Obalon Balloon System will be reimbursed by any federal healthcare program, we do not believe that we will be subject to the federal Anti-Kickback Statute.
Many states have adopted laws similar to the Anti-Kickback Statute, however, and some of these state prohibitions apply to arrangements involving healthcare items or services reimbursed by any source, and not only by Medicare, Medicaid or another federal healthcare program. These state laws do not always have the same exceptions or safe harbors of the federal Anti-Kickback Statute. The business may be subject to some of these laws.
Government officials have focused recent enforcement efforts on the marketing of healthcare services and products, among other activities, and have brought cases against companies, and certain individual sales, marketing and executive personnel, for allegedly offering unlawful inducements to potential or existing customers in an attempt to procure their business.
False Claims Laws
The federal False Claims Act imposes liability on any individual or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. The qui tam or “whistleblower” provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has violated the False Claims Act and to share in any monetary recovery. In recent years, the number of lawsuits brought against healthcare industry participants by private individuals has increased dramatically.
When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate instance of false claim. As part of any settlement, the government may ask the entity to enter into a corporate integrity agreement, which imposes certain compliance, certification and reporting obligations. There are many potential bases for liability under the False Claims Act. Liability arises, primarily, when an entity knowingly submits, or causes another to submit, a false claim for reimbursement to the federal government. The federal government has used the False Claims Act to assert liability on the basis of inadequate care, kickbacks and other improper referrals, and the provision of inaccurate reimbursement coding advice, in addition to the more predictable allegations as to misrepresentations with respect to the services rendered. In addition, companies have been sued under the False Claims Act in connection with the off-label promotion of products.
Various states have also enacted false claims laws that are analogous to the federal False Claims Act. Many of these state laws apply to claims submitted to any third-party payor and are not limited to claims submitted to a federal healthcare program.
Transparency Laws
The federal Physician Payment Sunshine Act, or the Sunshine Act, which was enacted as part of the Patient Protection and Affordable Care Act, or the PPACA, generally requires certain manufacturers of a drug, device, biologic or other medical supply that is covered by Medicare, Medicaid or the Children’s Health Insurance Program and applicable group purchasing organizations to report on an annual basis: (i) certain payments and other transfers of value given to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain other health care professionals beginning in 2022, and teaching hospitals and (ii) any ownership or investment interest that physicians, or their immediate family members, have in their company. The payments required to be reported include the cost of meals provided to a physician, travel reimbursements and other transfers of value, including those provided as part of contracted services such as speaker programs, advisory boards, consultation services and clinical trial services. Under the statute, the federal government makes reported information available to the public. Failure to comply with the reporting requirements can result in significant civil monetary penalties, with additional penalties for the knowing failure to report. Additionally, there are criminal penalties if an entity intentionally makes false statements in the reports.
There has been a recent trend of separate state regulation of payments and transfers of value by manufacturers of medical devices to healthcare professionals and entities, however, and some state transparency laws apply more broadly than does the federal Sunshine Act. Our business may be subject to some of these state laws.
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State Corporate Practice of Medicine, Fee-Splitting Prohibitions, and Licensure Requirements
Other regulatory oversight includes, but is not limited to, the corporate practice of medicine, fee-splitting prohibitions, and licensure and scope of practice limitations for physicians and other healthcare professionals. Some states have enacted laws and regulations limiting the extent to which physicians and certain other healthcare professionals may be employed by non-physicians or general business corporations, and the scope and provisions of corporate practice of medicines laws and regulations vary by state. These laws are intended to prevent interference in the medical decision-making process by anyone who is not a licensed physician. Violations may result in civil or criminal penalties. In addition, various state laws also generally prohibit the sharing or splitting professional fees with lay entities or persons. The specific restrictions with respect to enforcement of the corporate practice of medicine and fee-splitting laws varies from state to state. Violations of these laws could require us to restructure our operations and arrangements and may result in penalties or other adverse action.
Moreover, each state defines the scope of practice of physicians and other healthcare professionals through legislation and through their respective licensing boards, and we will need to comply with laws related to the physician supervision of services and scope of practice requirements. Activities that qualify as professional misconduct under state law may subject our personnel to sanctions or may even result in loss of their license and could, possibly, subject us to sanctions as well. Some state boards of medicine impose reciprocal discipline, that is, if a physician is disciplined for having committed professional misconduct in one state where he or she is licensed, another state where he or she is also licensed may impose the same discipline even though the conduct occurred in another state.
Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act, or FCPA, prohibits U.S. businesses and their representatives from offering to pay, paying, promising to pay or authorizing the payment of money or anything of value to a foreign official in order to influence any act or decision of the foreign official in his or her official capacity or to secure any other improper advantage in order to obtain or retain business. The FCPA also obligates companies whose securities are listed in the United States to comply with accounting provisions requiring us to maintain books and records, which in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation, including international subsidiaries, if any, and to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements. The scope of the FCPA includes interactions with certain healthcare professionals in many countries.
International Laws
In Europe, and throughout the world, other countries have enacted anti-bribery laws and/or regulations similar to the FCPA. Violations of any of these anti-bribery laws, or allegations of such violations, could have a negative impact on our business, results of operations and reputation.
There are also international privacy laws that impose restrictions on the access, use, and disclosure of health information. All of these laws may impact our business. Our failure to comply with these privacy laws or significant changes in the laws restricting our ability to obtain required patient information could significantly impact our business and our future business plans.
U.S. Healthcare Reform
Changes in healthcare policy could increase our costs and subject us to additional regulatory requirements that may interrupt commercialization of our products. By way of example, ACA substantially changed the way healthcare is financed by both governmental and private insurers, and significantly impacted the medical device industry.
There will continue to be proposals by legislators at both the federal and state levels, regulators and third-party payors to reduce costs while expanding individual healthcare benefits. Certain of these changes could impose additional limitations on the prices we will be able to charge and/or patients’ willingness to pay for our products. While in general it is too early to predict what effect, if any, ACA and its implementation, or any future healthcare reform legislation or policies will have on our business, current and future healthcare reform legislation and policies could have a material adverse effect on our business and financial condition.
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Employees
As of December 31, 2022, we had 40 employees, all of which were full-time. All of these employees are located in the U.S.
From time to time we also employ independent contractors, consultants and temporary employees to support our operations. None of our employees are subject to collective bargaining agreements. We have never experienced a work stoppage and believe that our relations with our employees are good.
Our Corporate Information
We were incorporated under the laws of Delaware on January 2, 2008. On June 15, 2021, we completed a merger with ReShape Lifesciences Inc. Pursuant to the Merger Agreement, a wholly owned subsidiary of Obalon with and into ReShape, with ReShape surviving the merger as a wholly owned subsidiary of Obalon. As a result of the merger, Obalon, the parent company, was renamed “ReShape Lifesciences Inc.” and ReShape was renamed ReShape Weightloss Inc. ReShape Lifesciences shares of common stock trade on the Nasdaq under the symbol RSLS.
We file reports and other information with the Securities and Exchange Commission (“SEC”) including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy or information statements. Those reports and statements as well as all amendments to those documents filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (1) are available at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549, (2) may be obtained by sending an electronic message to the SEC at publicinfo@sec.gov or by sending a fax to the SEC at 1-202-777-1027, (3) are available at the SEC’s internet site (http://www.sec.gov), which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC and (4) are available free of charge through our website as soon as reasonably practicable after electronic filing with, or furnishing to, the SEC.
Our principal executive offices are located at 1001 Calle Amanecer, San Clemente, California 92673, and our telephone number is (949) 429-6680. Our website addresses are www.reshapelifesciences.com and lapband.com. The information on, or that may be accessed through, our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered a part of this Annual Report on Form 10-K.
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ITEM 1A. RISK FACTORS
Summary of risk Factors
The following is a summary of the principal risks and uncertainties that could materially adversely affect our business, results of operations, financial condition, cash flows, prospects and/or the price of our outstanding securities, and make an investment in our securities speculative or risky. You should read this summary together with the more detailed description of each risk factor contained below.
Risks Related to Our Business and Industry
| ● | If we are unable to either substantially improve our operating results or obtain additional financing, we may be unable to continue as a going concern. |
| ● | Public health crises, such as COVID-19 pandemic, have had, and could in the future have a negative effect on our business. |
| ● | We may be unable to attract and retain management and other personnel we need to succeed. |
| ● | The shares of series C convertible preferred stock issued in connection with our acquisition of ReShape Medical have certain rights and preferences senior to our common stock, including a liquidation preference that is senior to our common stock. |
| ● | No Obalon directors, officers or employees continued with ReShape which could hinder the ability to transfer the Obalon technology, restart manufacturing operations and maintain FDA regulatory compliance for the Obalon Balloon System and negatively impact our results of operations. |
| ● | We are a medical device company with a limited history of operations and sales, and we cannot assure you that we will ever generate substantial revenue or be profitable. |
| ● | Previously, we recorded a non-cash indefinite-lived and definite-lived intangible assets impairment loss, which significantly impacted our results of operations, and we may be exposed to additional impairment losses that could be material. |
| ● | We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to compliance initiatives. |
| ● | We have identified material weaknesses in our internal control over financial reporting and any failure to maintain effective internal control over financial reporting, may have a material and adverse effect on our business, operating results, financial condition and prospects. |
| ● | We reached a determination to restate certain of our previously issued consolidated financial statements, which resulted in unanticipated costs and may affect investor confidence and raise reputational issues. |
| ● | The SEC Division of Enforcement has initiated an informal inquiry into our late filing notice related to our quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2022, which could result in an enforcement action that requires us to pay civil penalties and fines and/or sanctions against us or certain of our current and/or former directors and officers. |
| ● | General economic and political conditions could have a material adverse effect on our business. |
| ● | We hold our deposit within the U.S. banking system and may incur a loss of our uninsured deposits if there a closure or other event with our bank. |
| ● | We face significant uncertainty in the industry due to government healthcare reform. |
| ● | We are subject, directly or indirectly, to United States federal and state healthcare fraud and abuse and false claims laws and regulations. Prosecutions under such laws have increased in recent years and we may become subject to such litigation. If we are unable to, or have not fully complied with such laws, we could face substantial penalties. |
| ● | Failure to protect our information technology information technology infrastructure against cyber-based attacks, network security breaches, service interruptions or data corruption could materially disrupt our operations and adversely affect our business. |
| ● | We operate in a highly competitive industry that is subject to rapid change. If our competitors are able to develop and market products that are safer or more effective than our products, our commercial opportunities will be reduced or eliminated. |
| ● | Our ability to use net operating losses (“NOL”) carryforwards may be limited. |
| ● | Adverse developments affecting the financial services industry could adversely affect our current and projected business operations and our financial condition and results of operations. |
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Risks Associated with Development and Commercialization of the Lap-Band System, ReShapeCare, ReShape, Lap-Band 2.0 System, Obalon Balloon System, DBSN Device
| ● | Our efforts to increase revenue from our Lap-Band System, ReShapeCare, Lap-Band 2.0 System, Obalon Balloon System, and commercialize our DBSN device and expanded line of bariatric surgical accessories, including ReShape Calibration Tubes, may not succeed or may encounter delays which could significantly harm our ability to generate revenue. |
| ● | We may not be able to obtain required regulatory approvals for our DBSN device in a cost-effective manner or at all, which could adversely affect our business and operating results. |
| ● | We depend on clinical investigators and clinical sites to enroll patients in our clinical trials, and on other third parties to manage the trials and to perform related data collection and analysis, and, as a result, we may face costs and delays that are outside of our control. |
| ● | Modifications to the Lap-Band System and Lap-Band 2.0 may require additional approval from regulatory authorities, which may not be obtained or may delay our commercialization efforts. |
| ● | If we or our suppliers fail to comply with ongoing regulatory requirements, or if we experience unanticipated product problems, our Lap-Band system could be subject to restrictions or withdrawal from the market. |
| ● | We may be unable to manage our growth effectively. |
| ● | We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be able to obtain adequate product liability insurance. |
Risks Related to Intellectual Property
| ● | If we are unable to obtain or maintain intellectual property rights relating to our technology and neuroblocking therapy, the commercial value of our technology and any future products will be adversely affected, and our competitive position will be harmed. |
| ● | We may lose important patent rights if we do not timely pay required patent fees or annuities. |
| ● | Many of our competitors have significant resources and incentives to apply for and obtain intellectual property rights that could limit or prevent our ability to commercialize our current or future products in the United States or abroad. |
| ● | If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected. |
| ● | Intellectual property litigation is a common tactic in the medical device industry to gain competitive advantage. If we become subject to a lawsuit, we may be required to expend significant financial and other resources and our management’s attention may be diverted from our business. |
| ● | We are currently in a lawsuit, and may in the future become involved in lawsuits, to protect or enforce our intellectual property, which can be expensive and time consuming and could result in the diversion of significant resources. |
Risks Relating to Ownership of Our Common Stock
| ● | The trading price of our common stock has been volatile and is likely to be volatile in the future. |
| ● | Sales of a substantial number of shares of our common stock in the public market by existing stockholders, or the perception that they may occur, could cause our stock price to decline. |
| ● | We have a significant number of outstanding warrants, which may cause significant dilution to our stockholders, have a material adverse impact on the market price of our common stock and make it more difficult for us to raise funds through future equity offerings. |
| ● | If we fail to meet all applicable Nasdaq Capital Market requirements, Nasdaq could delist our common stock, which could adversely affect the market liquidity of our common stock and the market price of our common stock could decrease. |
| ● | You may experience future dilution as a result of future equity offerings. |
| ● | Our organizational documents and Delaware law make a takeover of our company more difficult, which may prevent certain changes in control and limit the market price of our common stock. |
| ● | We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our common stock. |
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risk factors
Risks Related to Our Business and Industry
If we are unable to either substantially improve our operating results or obtain additional financing, we may be unable to continue as a going concern.
We currently do not generate revenue sufficient to offset operating costs and anticipate such shortfalls to continue, partially due to the unpredictability of COVID-19, which has resulted and may continue to result in a slow-down of elective surgeries and restrictions in some locations, and supply chain disruptions. As of December 31, 2022, we had net working capital of approximately $2.4 million, primarily due to cash and cash equivalents and restricted cash of $4.0 million. Additionally, our anticipated expansion of our product portfolio and future products may not come to fruition. Our principal source of liquidity as of December 31, 2022 consisted of approximately $4.0 million of cash and cash equivalents and restricted cash and $2.2 million of accounts receivable. Based on our available cash resources, we may not have sufficient cash on hand to fund our current operations for more than 12 months from the date of filing this Form 10-K. This condition raises substantial doubt about our ability to continue as a going concern.
Public health crises, such as the COVID-19 pandemic, have had, and could in the future have, a negative effect on our business.
Pandemics or disease outbreaks, such as the COVID-19 pandemic, have created and may continue to create significant volatility, uncertainty and economic disruption in the markets we sell our products into and operate in and may negatively impact business and healthcare activity globally. In response to the COVID-19 pandemic, governments around the world have imposed measures designed to reduce the transmission of COVID-19. In particular, elective procedures, such as the Lap-Band procedure, were delayed or cancelled, there was a significant reduction in physician office visits, and hospitals postponed or canceled purchases as well as limited or eliminated services. While elective procedures have increased from the reduced levels during the height of the COVID-19 pandemic, the reduction in elective procedures has had, and we believe may continue to have, a negative impact on the sales of our products. The extent to which fear of exposure to or actual effects of COVID-19, new variants, disease outbreak, epidemic or a similar widespread health concern impacts our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence.
We may be unable to attract and retain management and other personnel we need to succeed.
Our success depends on the services of our senior management and other key employees. The loss of the services of one or more of our officers or key employees could hinder our sales and marketing efforts, or delay or prevent the commercialization of our Lap-Band System, ReShapeCare, ReShape Marketplace, Lap-Band 2.0, the Obalon Balloon System, and the development of our DBSN device. Our continued growth will require hiring a number of qualified clinical, scientific, commercial and administrative personnel. Accordingly, recruiting and retaining such personnel in the future will be critical to our success. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we fail to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our development and commercialization activities.
The shares of series C convertible preferred stock issued in connection with our acquisition of ReShape Medical have certain rights and preferences senior to our common stock, including a liquidation preference that is senior to our common stock.
There are currently 95,388 shares of our series C convertible preferred stock outstanding, which are convertible into a total of 10 shares of our common stock. We originally issued the shares of our series C convertible preferred stock in connection with our acquisition of ReShape Medical. The series C convertible preferred stock has a liquidation preference of $274.88 per share, or approximately $26.2 million in the aggregate. In general, the series C convertible preferred stock is entitled to receive dividends (on an as-if-converted-to-common stock basis) actually paid on shares of common stock when, as and if such dividends are paid on shares of common stock. No other dividends will be paid on shares of series C convertible preferred stock. Except in connection with the election of directors and limited protective provisions, the series C convertible preferred stock generally does not have voting rights. However, as long as any shares of series C convertible preferred stock remain outstanding, we cannot, without the affirmative vote of holders of a majority of the then-outstanding shares of series C convertible preferred stock, (a) alter or change adversely the powers,
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preferences or rights given to the series C convertible preferred stock (including by the designation, authorization, or issuance of any shares of preferred stock that purports to have equal rights with, or be senior in rights or preferences to, the series C convertible preferred stock), (b) alter or amend the series C convertible preferred stock certificate of designation, (c) amend our certificate of incorporation or other charter documents in any manner that adversely affects any rights of the holders of series C convertible preferred stock, (d) increase the number of authorized shares of series C convertible preferred stock, (e) except for stock dividends or distributions for which adjustments are to be made pursuant to the Series C Certificate of Designation, pay dividends on any shares of capital stock of the Company, or (f) enter into any agreement with respect to any of the foregoing.
No Obalon directors, officers or employees continued with the Company which could hinder the ability to transfer the Obalon technology, restart manufacturing operations and maintain FDA regulatory compliance for the Obalon Balloon System and negatively impact our results of operations.
Following the consummation of the merger, no directors, officers or employees of Obalon continued with ReShape. In order to restart manufacturing of the Obalon Balloon System, ReShape would have to hire and train new personnel to appropriately perform manufacturing operations that meet required performance specifications and maintain quality system and regulatory compliance related to the Obalon Balloon System without the knowledge and expertise of the Obalon management team, including completing a FDA-mandated post-approval study which was halted due to the effects of COVID-19. Obalon’s prior suppliers have not supplied Obalon since Obalon halted manufacturing and they may be unwilling or unable to supply ReShape on the prior terms or at all. Obalon had not manufactured or shipped products to customers since March 2020 and customers may not accept a relaunch of the Obalon Balloon System by ReShape.
We are a medical device company with a limited history of operations and sales, and we cannot assure you that we will ever generate substantial revenue or be profitable.
We are a medical device company with a limited operating history upon which you can evaluate our business. The success of our business will depend on our ability to generate increased sales and control costs, as well as our ability to obtain additional regulatory approvals needed to market new versions of our Lap-Band System, ReShapeCare, ReShape Marketplace, Obalon Balloon System, or regulatory approvals needed to market our DBSN device and any other products we may develop in the future, all of which we may be unable to do. If we are unable to successfully market our Lap-Band System for its indicated use, successfully launch ReShapeCare and ReShape Marketplace, re-introduce the Obalon Balloon System, or develop and commercialize the DBSN device, we may never become profitable and may have to cease operations as a result. Our lack of a significant operating history also limits your ability to make a comparative evaluation of us, our products and our prospects.
Previously, we recorded a non-cash indefinite-lived intangible and definite-lived assets impairment loss, which significantly impacted our results of operations, and we may be exposed to additional impairment losses that could be material.
We conduct our annual indefinite-lived intangible assets impairment analysis during the fourth quarter of each year or when circumstances suggest that an indicator for impairment may be present. Previously, we performed a qualitative impairment analysis of the in-process research and development (“IPR&D”). Due to delays in the clinical trials experienced, we revised its expectations of when revenues would commence for the ReShape Vest, thus reducing the projected near-term future net cash flows related to the ReShape Vest. During the quarter ended September 30, 2022, we stopped the clinical trials for the ReShape Vest and closed out the previous trials that occurred, as significant additional clinical work and cost would be required to achieve regulatory approval for the ReShape Vest. In addition, due to continued market decline and projected cash flows the company recorded an impairment of the developed technology related to the Lap-Band and Obalon Balloon System and our tradenames. As such, we determined the carrying value of the IPR&D and developed technology assets, and trademarks were impaired and recognized a non-cash impairment charge of approximately $18.7 million on the condensed consolidated balance sheet as of December 31, 2022. In the future, we may have additional impairments requiring us to record an impairment loss related to our remaining finite-lived intangible assets, which could also have a material adverse effect on our results of operations.
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We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to compliance initiatives.
As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as rules subsequently implemented by the SEC have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations result in increased legal and financial compliance costs and will make some activities more time-consuming and costly.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure. In particular, we are required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. We have incurred and continue to expect to incur significant expense and devote substantial management effort toward ensuring compliance with Section 404. Moreover, if we do not comply with the requirements of Section 404, or if we identify deficiencies in our internal controls that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources.
For example, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022, and determined that our internal control over financial reporting was not effective at a reasonable assurance level due to material weaknesses in our internal control over financial reporting. We had insufficient internal resources with appropriate accounting and finance knowledge and expertise to design, implement, document and operate effective internal controls around our financial reporting process. The insufficient internal resources resulted in a lack of review over our weighted average share calculation spreadsheet which included a formula error resulting in the inaccurate reporting of our earnings per share. We are currently implementing our remediation plan to address the material weaknesses identified above. Such measures include: hiring additional accounting personnel to ensure timely reporting of significant matters; designing and implementing controls to formalize roles and review responsibilities to align with our team's skills and experience and designing and implementing formalized controls; and designing and implementing formal processes, policies and procedures supporting our financial close process.
We have identified material weaknesses in our internal control over financial reporting and any failure to maintain effective internal control over financial reporting, may have a material and adverse effect on our business, operating results, financial condition and prospects.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022, and determined that our internal control over financial reporting was not effective at a reasonable assurance level due to material weaknesses in our internal control over financial reporting. We had insufficient internal resources with appropriate accounting and finance knowledge and expertise to design, implement, document and operate effective internal controls around our financial reporting process. We are currently implementing our remediation plan to address the material weaknesses identified above. Such measures include: hiring additional accounting personnel to ensure timely reporting of significant matters; designing and implementing controls to formalize roles and review responsibilities to align with our team's skills and experience and designing and implementing formalized controls; and designing and implementing formal processes, policies and procedures supporting our financial close process.
We reached a determination to restate certain of our previously issued consolidated financial statements, which resulted in unanticipated costs and may affect investor confidence and raise reputational issues.
As discussed in the Explanatory Note, in Note 2, Significant Accounting Policies and Restatement in this Form 10-K, we also reached a determination to restate our consolidated financial statements and related disclosures for the year ended December 31, 2021, and the unaudited consolidated information for the interim periods ended September 30, 2022, June 30, 2022, March 31, 2022, September 30, 2021, and June 30, 2021 following the identification of certain misstatements contained in those financial statements, which resulted in an understatement of impairment of goodwill by approximately $1.9 million. We have determined that it is appropriate to correct the misstatements in our previously issued financial statements. The restatement also included corrections for additional identified out-of-period and uncorrected misstatements in the impacted periods. As a result, we have incurred unanticipated costs for accounting and legal fees in connection with or related to the restatement, and have become subject to a number of additional risks and
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uncertainties, which may affect investor confidence in the accuracy of our financial disclosures and may raise reputational issues for our business.
The SEC Division of Enforcement has initiated an informal inquiry into our late filing notice related to our quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2022, which could result in an enforcement action that requires us to pay civil penalties and fines and/or sanctions against us or certain of our current and/or former directors and officers.
We received a letter from the SEC Division of Enforcement, dated January 11, 2023, informing us that it is conducting an informal inquiry regarding our potential violation of certain rules and regulations concerning late filing notifications on Form 12b-25 related to the late filing notice we filed with the SEC for our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2022. As part of the inquiry, the SEC has required that we voluntarily provide certain requested documents and information, which we are in the process of responding to. While the SEC letter specifically notes that it should be not be construed as an indication that any violations of law have occurred, or as an adverse reflection upon any person or security, it is possible that the SEC could conclude that enforcement action is appropriate, in which case we could be required to pay substantial civil penalties and fines and the SEC also could impose other sanctions against us or certain of our current and/or former directors and officers. Any of these events could have a material adverse effect on our business, financial condition or results of operations.
General economic and political conditions could have a material adverse effect on our business.
External factors can affect our financial condition. Such external factors include general domestic and global economic conditions, such as interest rates, tax law including tax rate changes, and factors affecting global economic stability, and the political environment regarding healthcare in general. We cannot predict to what extent the global economic conditions may negatively impact our business. For example, negative conditions in the credit and capital markets could impair our ability to access the financial markets for working capital and could negatively impact our ability to borrow.
We face significant uncertainty in the industry due to government healthcare reform.
In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. The Patient Protection and Affordable Care Act, as amended, (the “Affordable Care Act”) as well as any future healthcare reform legislation, may have a significant impact on our business. The impact of the Affordable Care Act on the health care industry is extensive and includes, among other things, the federal government assuming a larger role in the health care system, expanding healthcare coverage of United States citizens and mandating basic healthcare benefits.
Congress regularly considers legislation to replace or repeal elements or all of the Affordable Care Act. At this time, it is not clear whether the Affordable Care Act will be repealed in whole or in part, and, if it is repealed, whether it will be replaced in whole or in part by another plan and what impact those changes will have on coverage and reimbursement for healthcare items and services covered by plans that were authorized by the Affordable Care Act. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, and also indirectly affect the amounts that private payers are willing to pay. In addition, any healthcare reforms enacted in the future may, like the Affordable Care Act, be phased in over a number of years but, if enacted, could reduce our revenue, increase our costs, or require us to revise the ways in which we conduct business or put us at risk for loss of business. In addition, our results of operations, financial position and cash flows could be materially adversely affected by changes under the Affordable Care Act and changes under any federal or state legislation adopted in the future.
We are subject, directly or indirectly, to United States federal and state healthcare fraud and abuse and false claims laws and regulations. Prosecutions under such laws have increased in recent years and we may become subject to such litigation. If we are unable to, or have not fully complied with such laws, we could face substantial penalties.
Our operations are directly, or indirectly through customers, subject to various state and federal fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute and federal False Claims Act. These laws may impact, among other things, our sales, marketing and education programs.
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The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. The Anti-Kickback Statute is broad and, despite a series of narrow safe harbors, prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.
The federal False Claims Act prohibits persons from knowingly filing, or causing to be filed, a false claim to, or the knowing use of false statements to obtain payment from the federal government. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. The frequency of filing qui tam actions has increased significantly in recent years, causing greater numbers of medical device, pharmaceutical and healthcare companies to have to defend a False Claim Act action. When an entity is determined to have violated the federal False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Various states have also enacted laws modeled after the federal False Claims Act.
We are unable to predict whether we could be subject to actions under any of these laws, or the impact of such actions. If we are found to be in violation of any of the laws described above or other applicable state and federal fraud and abuse laws, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from government healthcare reimbursement programs and the curtailment or restructuring of our operations.
Failure to protect our information technology infrastructure against cyber-based attacks, network security breaches, service interruptions or data corruption could materially disrupt our operations and adversely affect our business.
The operation of our business depends on our information technology systems. We rely on our information technology systems to, among other things, effectively manage sales and marketing data, accounting and financial functions, inventory management, product development tasks, clinical data, customer service and technical support functions. Our information technology systems are vulnerable to damage or interruption from earthquakes, fires, floods and other natural disasters, terrorist attacks, power losses, computer system or data network failures, security breaches, data corruption, and cyber-based attacks. Cyber-based attacks can include computer viruses, computer denial-of-service attacks, phishing attacks, worms, and other malicious software programs or other attacks, covert introduction of malware to computers and networks, impersonation of authorized users, and efforts to discover and exploit any design flaws, bugs, security vulnerabilities, or security weaknesses, as well as intentional or unintentional acts by employees or other insiders with access privileges, intentional acts of vandalism by third parties and sabotage. In addition, federal, state, and international laws and regulations, such as the General Data Protection Regulation adopted by the European Union and EEA countries can expose us to enforcement actions and investigations by regulatory authorities, and potentially result in regulatory penalties and significant legal liability, if our information technology security efforts fail. In addition, a variety of our software systems are cloud-based data management applications, hosted by third-party service providers whose security and information technology systems are subject to similar risks.
We operate in a highly competitive industry that is subject to rapid change. If our competitors are able to develop and market products that are safer or more effective than our products, our commercial opportunities will be reduced or eliminated.
The health care industry is highly competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. The obesity treatment market in which we operate has grown significantly in recent years and is expected to continue to expand as technology continues to evolve and awareness of the need to treat the obesity epidemic grows. Although we are not aware of any competitors in the neuroblocking market, we face potential competition from pharmaceutical and surgical obesity treatments. Many of our competitors in the obesity treatment field have significantly greater financial resources and expertise in research and
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development, manufacturing, preclinical testing, clinical trials, obtaining regulatory approvals and marketing approved products than we do. Smaller or early-stage companies may also prove to be significant competitors, particularly if they pursue competing solutions through collaborative arrangements with large and established companies, such as Allergan, Boston Scientific, LivaNova PLC, Johnson & Johnson, Medtronic or St. Jude Medical. Our competitors may develop and patent processes or products earlier than us, obtain regulatory approvals for competing products more rapidly than we are able to and develop more effective, safer and less expensive products or technologies that would render our products non-competitive or obsolete.
Our ability to use net operating losses (“NOL”) carryforwards may be limited.
Our ability to use our federal and state NOL carryforwards to offset potential future taxable income is dependent upon our generation of future taxable income before the expiration dates of the NOL carryforwards, and we cannot predict with certainty when, or whether we will generate sufficient taxable income to use all of our NOL carryforwards. As of December 31, 2022, ReShape had U.S. federal net operating loss carryforwards of $207.9 million. Of the total U.S. federal net operating loss carryforwards at December 31, 2022, $6.3 million is subject to a 20 year carryover period and began expiring in 2022. Losses generated beginning in 2018 will carryover indefinitely. ReShape had state net operating loss carryforwards of $329.1 million at December 31, 2022, and had foreign net operating loss carryforwards of $0.2 million at December 31, 2022. Net operating loss carryforwards of ReShape are subject to review and possible adjustment by the taxing authorities. With certain exceptions (e.g. the net operating loss carryforwards), ReShape is no longer subject to U.S. federal, state or local examinations by tax authorities for years prior to 2016. There are no tax examinations currently in progress.
ReShape’s ability to utilize its net operating loss carryforwards, tax credits, and built-in items of deduction, including capitalized start-up costs and research and development costs, has been, and may continue to be substantially limited due to ownership changes. These ownership changes limit the amount of net operating loss carryforwards, credits and built-in items of deduction that can be utilized annually to offset future taxable income. In general, an ownership change, as defined in IRC Section 382, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups. Due to the valuation allowance against deferred tax assets at December 31, 2022, the net effect of any further limitation will have no impact on results of operations.
Adverse developments affecting the financial services industry could adversely affect our current and projected business operations and our financial condition and results of operations.
Substantially all of our cash and cash equivalents were held in accounts with Silicon Valley Bank (SVB) at the time it was closed by state regulators, and the Federal Deposit Insurance Corporation (FDIC) was appointed receiver for SVB, on March 10, 2023. The FDIC created a successor bridge bank for SVB and all deposits of SVB were transferred to the bridge bank under a systemic risk exception approved by the United States Department of the Treasury, the Federal Reserve and the FDIC. If financial institutions in which we hold funds for working capital and operating expenses were to fail, we cannot provide any assurances that such governmental agencies would take action to protect our uninsured deposits in a similar manner.
We subsequently moved approximately $7.0 million of our cash and cash equivalents to Bank of America. The balance held in these accounts exceeds the FDIC standard deposit insurance limit of $250,000. If a financial institution in which we hold such funds fails or is subject to significant adverse conditions in the financial or credit markets, we could be subject to a risk of loss of all or a portion of such uninsured funds or be subject to a delay in accessing all or a portion of such uninsured funds. Any such loss or lack of access to these funds could adversely impact our short-term liquidity and ability to meet our operating expense obligations.
In addition, widespread investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on acceptable terms or at all. Any decline in available funding or access to our cash and liquidity resources could, among other risks, adversely impact our ability to meet our operating expenses, financial obligations or fulfill our other obligations, result in breaches of our financial and/or contractual obligations or result in violations of federal or state wage and hour laws. Any of these impacts, or any other impacts resulting from the factors described
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above or other related or similar factors not described above, could have material adverse impacts on our liquidity and our current and/or projected business operations and financial condition and results of operations.
In addition, a vendor on which we are reliant could be adversely affected by any of the liquidity or other risks that are described above as factors that could result in material adverse impacts on us, including but not limited to delayed access or loss of access to uninsured deposits or loss of the ability to draw on existing credit facilities involving a troubled or failed financial institution. Any critical vendor bankruptcy or insolvency, or any breach or default by a critical vendor, or the loss of any significant vendor relationships, may have a material adverse impact on our business.
Risks Associated with Development and Commercialization of the Lap-Band System, ReShapeCare, Lap-Band 2.0 System, Obalon Balloon System, and the DBSN Device
Our efforts to increase revenue from our Lap-Band System, ReShapeCare, Lap-Band 2.0 System, and commercialize our DBSN device and expanded line of bariatric surgical accessories, including ReShape Calibration Tubes, may not succeed or may encounter delays which could significantly harm our ability to generate revenue.
Our ability to generate revenue will depend upon the sales of our Lap-Band System, expanded line of bariatric surgical accessories and ReShapeCare, and successful commercialization of our DBSN device (if approved for sale). Our efforts to commercialize these products may not succeed for a number of reasons, including:
| ● | we may not be able to obtain the regulatory approvals required for our DBSN device; |
| ● | we may not be able to produce the Obalon Balloon System cost-effectively; |
| ● | if we are able to produce the Obalon Balloon System, we may not be able to re-introduce the system into the marketplace; |
| ● | our products may not be accepted in the marketplace by physicians, patients and third-party payers; |
| ● | the price of our products, associated costs of the surgical procedure and treatment and the availability of sufficient third-party reimbursement for the system implantation and follow-up procedures; |
| ● | appropriate reimbursement and/or coding options may not exist to enable billing for the system implantation and follow-up procedures for our DBSN device; |
| ● | coverage policies for bariatric surgeries and procedures, including Lap-Band and balloons may be restricted in the future; |
| ● | we may not be able to sell our products at a price that allows us to meet the revenue targets necessary to generate enough revenue for profitability; |
| ● | the frequency and severity of any side effects of our products; |
| ● | physicians and potential patients may not be aware of the perceived effectiveness and sustainability of the results of our products; |
| ● | we, or the investigators of our products, may not be able to have information on the outcome of the trials published in medical journals; |
| ● | the availability and perceived advantages and disadvantages of alternative treatments, including pharmaceutical treatments; |
| ● | any rapid technological change may make our products obsolete; |
| ● | we may not be able to have our products manufactured in commercial quantities or at an acceptable cost; |
| ● | we may not have adequate financial or other resources to complete the development and commercialization of our products or to develop sales and marketing capabilities for our products; and |
| ● | we may be sued for infringement of intellectual property rights and could be enjoined from manufacturing or selling our products. |
Besides requiring physician adoption, market acceptance of our products will depend on successfully communicating the benefits of our products to three additional constituencies involved in deciding whether to treat a particular patient using our products: (1) the potential patients themselves; (2) institutions such as hospitals, where the procedure would be performed and opinion leaders in these institutions; and (3) third-party payers, such as private healthcare insurers and governmental payers, such as Medicare and Medicaid in the United States, which would ultimately bear most of the costs of the various providers and equipment involved in our Lap-Band System, ReShapeCare, Obalon Balloon System, and DBSN device (if approved for sale). Marketing to each of these constituencies requires a different marketing approach, and we must convince each of these groups of the efficacy and utility of our products to be successful.
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During the year ended December 31, 2022 and 2021, there was minimal revenue for ReShapeCare and ReShape Marketplace. There was no revenue or gross profit recorded for the DBSN device for the year ended December 31, 2022 and 2021 as this product is still in the research stage of development. There was also no revenue recorded for the Obalon line.
If our products, or any other therapy or products that we may develop for other gastrointestinal diseases and disorders that we may develop, do not achieve an adequate level of acceptance by the relevant constituencies, we may not generate significant product revenue and may not become profitable. This estimated timeline could be compressed or extended depending on many factors, including revenue growth from new product introductions, strategic investments not yet foreseen, and other risks and uncertainties due to the general business, economic, regulatory, market and financial conditions. Therefore, the plans cannot be deemed probable of being implemented. As a result, the Company’s plans do not alleviate substantial doubt about our ability to continue as a going concern.
We may not be able to obtain required regulatory approvals for our DBSN device in a cost-effective manner or at all, which could adversely affect our business and operating results.
The production and marketing of our DBSN device, and our ongoing research and development, preclinical testing and future potential clinical trial activities are subject to extensive regulation and review by numerous governmental authorities both in the United States and abroad. U.S. and foreign regulations applicable to medical devices are wide-ranging and govern, among other things, the development, testing, marketing and premarket review of new medical devices, in addition to regulating manufacturing practices, reporting, advertising, exporting, labeling and record keeping procedures. We are required to obtain regulatory approval before we can market our DBSN device in the United States and certain foreign countries. The regulatory process will require significant time, effort and expenditures to bring products to market, and it is possible that our DBSN device will not be approved for sale. Even if regulatory approval of our DBSN device is granted, it may not be granted within the timeframe that we expect, which could have an adverse effect on our operating results and financial condition. Even after our DBSN device is approved by the FDA, we may have ongoing responsibilities under FDA regulations, non-compliance of which could result in the subsequent withdrawal of such approvals, or such approvals could be withdrawn due to the occurrence of unforeseen problems following initial approval. We also are subject to medical device reporting regulations that require us to report to the FDA if any of our products causes or contributes to a death or serious injury or if a malfunction were it to occur might cause or contribute to a death or serious injury. Any failure to obtain regulatory approvals on a timely basis or the subsequent withdrawal of such approvals could prevent us from successfully marketing our products, which could adversely affect our business and operating results.
We depend on clinical investigators and clinical sites to enroll patients in our clinical trials, and on other third parties to manage the trials and to perform related data collection and analysis, and, as a result, we may face costs and delays that are outside of our control.
While we currently do not have any active clinical trials enrolling patients, we may in the future need to rely on clinical investigators and clinical sites to enroll patients in our clinical trials and other third parties to manage the trials and to perform related data collection and analysis. However, we may not be able to control the amount and timing of resources that clinical sites may devote to our clinical trials. If these clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials, ensure compliance by patients with clinical protocols or comply with regulatory requirements, we will be unable to complete these trials, which could prevent us from obtaining or maintaining regulatory approvals for our product. Our agreements with clinical investigators and clinical trial sites for clinical testing place substantial responsibilities on these parties and, if these parties fail to perform as expected, our trials could be delayed or terminated. If these clinical investigators, clinical sites or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated, or the clinical data may be rejected by the FDA, adversely affecting our ability to successfully commercialize our product.
Modifications to the Lap-Band and Lap-Band 2.0 system may require additional approval from regulatory authorities, which may not be obtained or may delay our commercialization efforts.
The FDA and our European Notified Body require medical device companies to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance; however, some of
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these regulatory authorities can review a company’s decision. Any modifications to an approved device that could significantly affect its safety or efficacy, or that would constitute a major change in its intended use could require additional clinical studies and separate regulatory applications. Product changes or revisions will require all the regulatory steps and associated risks discussed above possibly including testing, regulatory filings and clinical studies. We may not be able to obtain approval of supplemental regulatory approvals for product modifications, new indications for our product or new products. Delays in obtaining future clearances would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our commercialization efforts and future growth.
If we or our suppliers fail to comply with ongoing regulatory requirements, or if we experience unanticipated product problems, our Lap-Band system could be subject to restrictions or withdrawal from the market.
Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continual review and periodic inspections by our European Notified Body and the FDA and other regulatory bodies. In particular we and our manufacturers and suppliers are required to comply with ISO requirements, Good Manufacturing Practices, which for medical devices is called the Quality System Regulation (“QSR”), and other regulations which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any product for which we obtain marketing approval. The FDA enforces the QSR through inspections, which may be unannounced, and the CE system enforces its certification through inspections and audits as well. Our quality system has received certification of compliance to the requirements of ISO 13485:2016 and will have to continue to successfully complete such inspections to maintain regulatory approvals for sales outside of the United States. Failure by us or one of our manufacturers or suppliers to comply with statutes and regulations administered by the FDA, CE authorities and other regulatory bodies, or failure to adequately respond to any observations, could result in enforcement actions against us or our manufacturers or suppliers, including, restrictions on our product or manufacturing processes, withdrawal of the product from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties.
If any of these actions were to occur it would harm our reputation and cause our product sales to suffer. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with applicable regulatory requirements. If the FDA or any other regulatory body finds their compliance status to be unsatisfactory, our commercialization efforts could be delayed, which would harm our business and our results of operations.
Additionally, if the FDA determines that our promotional materials, training or other activities constitute promotion of an unapproved use, we could be subject to significant liability, the FDA could request that we cease, correct or modify our training or promotional materials or subject us to regulatory enforcement actions. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our training or other promotional materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement.
We are subject to medical device reporting regulations that require us to report to the FDA, Competent Authorities or other governmental authorities in other countries if our products cause or contribute to a death or serious injury or malfunction in a way that would be reasonably likely to contribute to death or serious injury if the malfunction were to recur. The FDA and similar governmental authorities in other countries have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacturing. A government mandated, or voluntary, recall by us could occur as a result of component failures, manufacturing errors or design defects, including defects in labeling. Any recall would divert managerial and financial resources and could harm our reputation with customers. There can be no assurance that there will not be product recalls in the future or that such recalls would not have a material adverse effect on our business. Once the product is approved and implanted in a large number of patients, infrequently occurring adverse events may appear that were not observed in the clinical trials. This could cause health authorities in countries where the product is available to take regulatory action, including marketing suspension and recall.
For example, on January 18, 2023, we received a letter from the FDA requesting additional information regarding Medical Device Reports submitted in 2021 related adverse events associated with a Lap-Band device and pregnancy. The FDA’s letter indicates a concern for an increased risk for Lap-Band complications in pregnant patients and requests that we provide, among other information, any actions planned or implemented which might reduce the likelihood of
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such events, which we are in the process of responding to. We believe there is robust peer-reviewed published data that supports our belief that concerns raised by the FDA are anomalies and rare occurrences. For example, a June 2022 consensus statement on laparoscopic adjustable gastric band (LAGB) management, which includes the Lap-Band, by the ASMBS found that (i) a tailored approach to LAGB management during pregnancy allows patients and providers to monitor weight gain, nutritional adequacy, and fetal growth for a healthy pregnancy outcome and (ii) evidence supports LAGB placement as safe and well tolerated during pregnancy with close LAGB monitoring. While improbable, if there are additional, or more serious, adverse events for pregnant Lap-Band patients, or if the FDA issues a warning regarding, or restricts the use of, the Lap-Band with pregnant patients, or patients who may become pregnant, our business could be harmed. One of the goals of our direct-to-consumer marketing campaign is to help people understand that the Lap-Band offers unique benefits for a variety of obese patients, including patients who may become pregnant. If there is a perception that the Lap-Band is not safe for pregnant patients, it could harm our reputation and cause our Lap-Band sales to suffer.
We may be unable to manage our growth effectively.
Our business strategy entails significant future growth. For example, we will have to expand existing operations in order to increase revenue from our Lap-Band System and ReShapeCare, re-introduce the Obalon Balloon System, and develop our DBSN device, conduct additional clinical trials, increase our contract manufacturing capabilities, hire and train new personnel to handle the marketing and sales of our product, assist patients and healthcare providers in obtaining reimbursement for the use of our product and create and develop new applications for our technology. This growth may place significant strain on our management and financial and operational resources. Successful growth is also dependent upon our ability to implement appropriate financial and management controls, systems and procedures. Our ability to effectively manage growth depends on our success in attracting and retaining highly qualified personnel, for which the competition may be intense. If we fail to manage these challenges effectively, our business could be harmed.
We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be able to obtain adequate product liability insurance.
Our business exposes us to a risk of product liability claims that is inherent in the testing, manufacturing and marketing of medical devices. The medical device industry has historically been subject to extensive litigation over product liability claims. We have previously reported adverse events associated with the Lap-Band system, including as related to pregnant patients, and may be subject to product liability claims if our products cause, or appear to have caused, an injury. Claims may be made by consumers, healthcare providers, third-party strategic collaborators or others selling our products.
We have product liability insurance, which covers the use of our products in our clinical trials and any commercial sales, in an amount we believe is appropriate. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, the coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost and on acceptable terms for an adequate coverage amount, or otherwise to protect against potential product liability claims, we could be exposed to significant liabilities, which may harm our business. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business, financial condition and results of operations. These liabilities could prevent or interfere with our product commercialization efforts. Defending a suit, regardless of merit, could be costly, could divert management attention and might result in adverse publicity, which could result in the withdrawal of, or inability to recruit, clinical trial volunteers or result in reduced acceptance of our products in the market.
We may be subject to product liability claims even if it appears that the claimed injury is due to the actions of others. For example, we rely on the expertise of surgeons and other associated medical personnel to perform the medical procedure to implant and remove our products and to perform the related therapy. If these medical personnel are not properly trained or are negligent, the therapeutic effect of our products may be diminished or the patient may suffer critical injury, which may subject us to liability. In addition, an injury that is caused by the negligence of one of our suppliers in supplying us with a defective component that injures a patient could be the basis for a claim against us. A product liability claim, regardless of its merit or eventual outcome, could result in decreased demand for our products; injury to our reputation; diversion of management’s attention; withdrawal of clinical trial participants; significant costs
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of related litigation; substantial monetary awards to patients; product recalls or market withdrawals; loss of revenue; and the inability to commercialize our products under development.
Risks Related to Intellectual Property
If we are unable to obtain or maintain intellectual property rights relating to our technology and neuroblocking therapy, the commercial value of our technology and any future products will be adversely affected and our competitive position will be harmed.
Our commercial success depends in part on our ability to obtain protection in the United States and other countries for our Lap-Band System, ReShapeCare, Obalon Balloon System, and DBSN device by establishing and maintaining intellectual property rights relating to or incorporated into our technology and products. We own numerous U.S. and foreign patents and have numerous patent applications pending, most of which pertain to treating gastrointestinal disorders and the treatment of obesity. We have also received or applied for additional patents outside the United States. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will provide us any competitive advantage. We expect to incur substantial costs in obtaining patents and, if necessary, defending our proprietary rights. The patent positions of medical device companies, including ours, can be highly uncertain and involve complex and evolving legal and factual questions. We do not know whether we will obtain the patent protection we seek, or that the protection we do obtain will be found valid and enforceable if challenged. If we fail to obtain adequate protection of our intellectual property, or if any protection we obtain is reduced or eliminated, others could use our intellectual property without compensating us, resulting in harm to our business. We may also determine that it is in our best interests to voluntarily challenge a third-party’s products or patents in litigation or administrative proceedings, including patent interferences, re-examinations or under more recently promulgated Inter Partes Review proceedings, depending on when the patent application was filed. In the event that we seek to enforce any of our owned or exclusively licensed patents against an infringing party, it is likely that the party defending the claim will seek to invalidate the patents we assert, which, if successful could result in the loss of the entire patent or the relevant portion of our patent, which would not be limited to any particular party. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Even if we were to prevail in any litigation, we cannot assure you that we can obtain an injunction that prevents our competitors from practicing our patented technology. Our competitors may independently develop similar or alternative technologies or products without infringing any of our patent or other intellectual property rights, or may design around our proprietary technologies.
We cannot assure you that we will obtain any patent protection that we seek, that any protection we do obtain will be found valid and enforceable if challenged or that it will confer any significant commercial advantage. U.S. patents and patent applications may also be subject to interference proceedings and U.S. patents may be subject to re-examination proceedings in the U.S. Patent and Trademark Office (“USPTO”), or under more recently promulgated Inter Partes Review proceedings, depending on when the patent application was filed, and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent offices, which proceedings could result in either loss of the patent or denial of the patent application, or loss or reduction in the scope of one or more of the claims of, the patent or patent application. In addition, such interference, re-examination and opposition proceedings may be costly. Moreover, the U.S. patent laws have recently changed with the adoption of the America Invents Act (“AIA”), possibly making it easier to challenge patents. Some of our technology was, and continues to be, developed in conjunction with third parties, and thus there is a risk that such third parties may claim rights in our intellectual property. Thus, any patents that we own or license from others may provide limited or no protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. If issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology.
We may lose important patents or patent rights if we do not timely pay required patent fees or annuities.
We have, from time to time, experienced delays in the payment of required patent fees or annuities. Non-payment or delay in payment of patent fees or annuities, whether intentional or unintentional, may result in loss of patents or patent rights important to our business. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value
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of the patent. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States, particularly in the field of medical products and procedures.
Many of our competitors have significant resources and incentives to apply for and obtain intellectual property rights that could limit or prevent our ability to commercialize our current or future products in the United States or abroad.
Many of our competitors who have significant resources and have made substantial investments in competing technologies may seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make, use or sell our products either in the U.S. or in international markets. Our current or future U.S. or foreign patents may be challenged, circumvented by competitors or others or may be found to be invalid, unenforceable or insufficient. In most cases in the United States patent applications are published 18 months after filing the application, or corresponding applications are published in other countries, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first to make the inventions covered by each of our pending patent applications, or that we were the first to file patent applications for such inventions.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.
In addition to patented technology, we rely on our unpatented proprietary technology, trade secrets, processes and know-how. We generally seek to protect this information by confidentiality agreements with our employees, consultants, scientific advisors and third parties. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.
Intellectual property litigation is a common tactic in the medical device industry to gain competitive advantage. If we become subject to a lawsuit, we may be required to expend significant financial and other resources and our management’s attention may be diverted from our business.
There has been a history of frequent and extensive litigation regarding patent and other intellectual property rights in the medical device industry, and companies in the medical device industry have employed intellectual property litigation to gain a competitive advantage. Accordingly, we may become subject to patent infringement claims or litigation in a court of law, or interference proceedings declared by the USPTO to determine the priority of inventions or an opposition to a patent grant in a foreign jurisdiction. We may also become subject to claims or litigation seeking payment of royalties based on sales of our product in connection with licensing or similar joint development arrangements with third parties or in connection with claims of patent infringement.
The defense and prosecution of intellectual property suits, USPTO interference proceedings, reexamination proceedings, or under more recently promulgated Inter Partes Review proceedings, depending on when the patent application was filed, or opposition proceedings and related legal and administrative proceedings, are both costly and time consuming and could result in substantial uncertainty to us. Litigation or regulatory proceedings may also be necessary to enforce patent or other intellectual property rights of ours or to determine the scope and validity of other parties’ proprietary rights. Any litigation, opposition or interference proceedings, with or without merit, may result in substantial expense to us, cause significant strain on our financial resources, divert the attention of our technical and management personnel and harm our reputation. We may not have the financial resources to defend our patents from infringement or claims of invalidity. An adverse determination in any litigation could subject us to significant liabilities to third parties, require us to seek licenses from or pay royalties to third parties or prevent us from manufacturing, selling or using our proposed products, any of which could have a material adverse effect on our business and prospects.
Our Lap-Band System, ReShapeCare, Obalon Balloon System or DBSN device may infringe or be claimed to infringe patents that we do not own or license, including patents that may issue in the future based on patent applications of which we are currently aware, as well as applications of which we are unaware. For example, we are aware of other companies that are investigating neurostimulation, including neuroblocking, and of patents and published patent applications held by companies in those fields. While we believe that none of such patents and patent applications are applicable to our products and technologies under development, third parties who own or control these patents and patent applications in the United States and abroad could bring claims against us that would cause us to incur substantial expenses and, if such claims are successfully asserted against us, they could cause us to pay substantial damages, could
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result in an injunction preventing us from selling, manufacturing or using our proposed products and would divert management’s attention. Because patent applications in many countries such as the United States are maintained under conditions of confidentiality and can take many years to issue, there may be applications now pending of which we are unaware, and which may later result in issued patents that our products infringe. If a patent infringement suit were brought against us, we could be forced to stop our ongoing or planned clinical trials, or delay or abandon commercialization of the product that is subject of the suit.
As a result of patent infringement claims, or to avoid potential claims, we may choose or be required to seek a license from a third-party and be required to pay license fees or royalties, or both. A license may not be available at all or on commercially reasonable terms, and we may not be able to redesign our products to avoid infringement. Modification of our products or development of new products could require us to conduct additional clinical trials and to revise our filings with the FDA and other regulatory bodies, which would be time-consuming and expensive. Even if we were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. This could harm our business significantly.
We are currently in a lawsuit, and may in the future become involved in lawsuits, to protect or enforce our intellectual property, which can be expensive and time consuming and could result in the diversion of significant resources.
On March 9, 2023, we filed a patent infringement complaint against Allurion Technologies, Inc. in the U.S. District Court for the District of Delaware. The complaint alleges that Allurion is infringing at least two claims of our U.S. Patent No. 10,463,520, which is related to our Obalon balloon system, by making the Allurion Gastric Balloon system in the U.S. for exportation and/or sales from the U.S and/or for potential sales in the U.S. relating to Allurion’s application to the FDA to sell the Allurion Gastric Balloon in the U.S. The complaint seeks, among other relief, damages for Allurion’s alleged infringement of the ‘520 patent, in an amount not less than a reasonable royalty. This matter is in its early stages and we are unable to predict its outcome at this time. We may in the future seek to enforce our patents or other proprietary rights against other potential infringements.
Adverse proceedings such as litigation or challenges to the validity of our patents can be expensive, time consuming and may divert the efforts of our technical and managerial personnel, which could in turn harm our business, whether or not we receive a determination favorable to us. In addition, in an infringement or other adverse proceeding, a court may decide that the patent we seek to enforce is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that the patent in question does not cover the technology in question. An adverse result in any litigation or proceeding could place one or more of our patents at risk of being invalidated, interpreted narrowly or found unenforceable. Some of our competitors may be able to devote significantly more resources to intellectual property litigation, and may have significantly broader patent portfolios to assert against us, if we assert our rights against them.
Risks Relating to Ownership of Our Common Stock
The trading price of our common stock has been volatile and is likely to be volatile in the future.
The trading price of our common stock has been highly volatile. The market price for our common stock will be affected by a number of factors, including:
| • | the denial or delay of regulatory clearances or approvals of our product or receipt of regulatory approval of competing products; |
| • | our ability to accomplish clinical, regulatory and other product development milestones and to do so in accordance with the timing estimates we have publicly announced; |
| • | changes in policies affecting third-party coverage and reimbursement in the United States and other countries; |
| • | changes in government regulations and standards affecting the medical device industry and our product; |
| • | ability of our products to achieve market success; |
| • | the performance of third-party contract manufacturers and component suppliers; |
| • | our ability to develop sales and marketing capabilities; |
| • | actual or anticipated variations in our results of operations or those of our competitors; |
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| • | announcements of new products, technological innovations or product advancements by us or our competitors; |
| • | developments with respect to patents and other intellectual property rights; |
| • | sales of common stock or other securities by us or our stockholders in the future; |
| • | additions or departures of key scientific or management personnel; |
| • | disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; |
| • | the trading volume of our common stock; |
| • | changes in earnings estimates or recommendations by securities analysts, failure to obtain or maintain analyst coverage of our common stock or our failure to achieve analyst earnings estimates; |
| • | public statements by analysts or clinicians regarding their perceptions of our clinical results or the effectiveness of our products; |
| • | decreases in market valuations of medical device companies; and |
| • | general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors. |
The stock prices of many companies in the medical device industry have experienced wide fluctuations that have often been unrelated to the operating performance of these companies. Following periods of volatility in the market price of a company’s securities, securities class action litigation often has been initiated against a company. If class action litigation is initiated against us, we may incur substantial costs and our management’s attention may be diverted from our operations, which could significantly harm our business.
Sales of a substantial number of shares of our common stock in the public market by existing stockholders, or the perception that they may occur, could cause our stock price to decline.
Sales of substantial amounts of our common stock by us or by our stockholders, announcements of the proposed sales of substantial amounts of our common stock or the perception that substantial sales may be made, could cause the market price of our common stock to decline. We may issue additional shares of our common stock in follow-on offerings to raise additional capital, upon the exercise of options or warrants, or in connection with acquisitions or corporate alliances. We also plan to issue additional shares to our employees, directors or consultants in connection with their services to us. All of the currently outstanding shares of our common stock are freely tradable under federal and state securities laws, except for shares held by our directors, officers and certain greater than five percent stockholders, which may be subject to holding period, volume and other limitations under Rule 144. Due to these factors, sales of a substantial number of shares of our common stock in the public market could occur at any time and could reduce the market price of our common stock.
We have a significant number of outstanding warrants, which may cause significant dilution to our stockholders, have a material adverse impact on the market price of our common stock and make it more difficult for us to raise funds through future equity offerings.
As of December 31, 2022, we had outstanding 519,219 shares of common stock. In addition, we had outstanding warrants to acquire 193,476 shares of common stock. Subsequent to year-end we issued additional warrants in connection with the public offering in February 2023, of which 352,500 warrants are outstanding, that include an “alternative cashless exercise” pursuant to which the holders would receive an aggregate number of shares of common stock equal to product of (x) the aggregate number of shares of common stock that would be issuable upon a cash exercise and (y) 0.50. The issuance of shares of common stock upon the exercise of warrants would dilute the percentage ownership interest of all stockholders, might dilute the book value per share of our common stock and would increase the number of our publicly traded shares, which could depress the market price of our common stock.
In addition to the dilutive effects described above, the perceived risk of dilution as a result of the significant number of outstanding warrants may cause our common stockholders to be more inclined to sell their shares, which would contribute to a downward movement in the price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our common stock price could encourage investors to engage in short sales of our common stock, which could further contribute to price declines in our common stock. The fact that our stockholders and warrant holders can sell substantial amounts of our common stock in the public market, whether or not sales have occurred or are occurring, could make it more difficult for us to raise additional funds through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate, or at all.
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If we fail to meet all applicable Nasdaq Capital Market requirements, Nasdaq could delist our common stock, which could adversely affect the market liquidity of our common stock and the market price of our common stock could decrease.
Nasdaq monitors our ongoing compliance with its minimum listing requirements and if we fail to meet those requirements and cannot cure such failure in the prescribed period of time, our common stock could be subject to delisting from the Nasdaq market. In the event that our common stock is delisted from the Nasdaq Capital Market and is not eligible for quotation or listing on another market or exchange, trading of our common stock could be conducted only in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further. Also, it may be difficult for us to raise additional capital if we are not listed on a major exchange.
For example, on July 19, 2022, we received a written notice from The Nasdaq Stock Market indicating that we were not in compliance with the $1.00 minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on The Nasdaq Capital Market. The notice provided that we have until January 16, 2023 to regain compliance. In order to regain compliance with the bid price requirement, we effected a 1-for-50 reverse stock split of our issued and outstanding common stock on December 23, 2022. On January 17, 2023, Nasdaq provided us with written confirmation that we have regained compliance with Listing Rule 5550(a)(2) and the matter is now closed.
You may experience future dilution as a result of future equity offerings.
In order to raise additional capital for general corporate purposes, in the future we may offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock at prices that may be lower than the current price per share of our common stock. In addition, investors purchasing shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower than the price per share paid by investors in prior offerings.
Our organizational documents and Delaware law make a takeover of our company more difficult, which may prevent certain changes in control and limit the market price of our common stock.
Our certificate of incorporation and bylaws and Section 203 of the Delaware General Corporation Law contain provisions that may have the effect of deterring or delaying attempts by our stockholders to remove or replace management, engage in proxy contests and effect changes in control. These provisions include:
| ● | the ability of our board of directors to create and issue preferred stock without stockholder approval, which could be used to implement anti-takeover devices; |
| ● | the authority for our board of directors to issue without stockholder approval up to the number of shares of common stock authorized in our certificate of incorporation, that, if issued, would dilute the ownership of our stockholders; |
| ● | the advance notice requirement for director nominations or for proposals that can be acted upon at stockholder meetings; |
| ● | a classified and staggered board of directors, which may make it more difficult for a person who acquires control of a majority of our outstanding voting stock to replace all or a majority of our directors; |
| ● | the prohibition on actions by written consent of our stockholders; |
| ● | the limitation on who may call a special meeting of stockholders; |
| ● | the prohibition on stockholders accumulating their votes for the election of directors; and |
| ● | the ability of stockholders to amend our bylaws only upon receiving a majority of the votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class. |
In addition, as a Delaware corporation, we are subject to Delaware law, including Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder unless certain specific requirements are met as set forth in Section 203. These provisions, alone
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or together, could have the effect of deterring or delaying changes in incumbent management, proxy contests or changes in control.
These provisions also could discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. Some provisions in our certificate of incorporation and bylaws may deter third parties from acquiring us, which may limit the market price of our common stock.
We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our common stock.
We have never paid dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future. The payment of dividends on our common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
We lease approximately 14,479 square feet of office/warehouse space in San Clemente, California under an operating lease that expires June 30, 2023. On March 13, 2023 we entered into a lease for approximately 5,038 square feet of office/warehouse space at 18 Technology Drive, Suite 110, Irvine, California 92618 and intend to relocate our principal executive offices from our current San Clemente, California location to the Irvine, California location. The Irvine California lease has a term of 36 months commencing on May 1, 2023.
ITEM 3. LEGAL PROCEEDINGS
On August 6, 2021, Cowen and Company, LLC (“Cowen”) 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 alleged 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 sought reimbursement of Cowen’s attorneys’ fees and interest in connection with its claim. On December 6, 2022, the Court granted Cowen’s motion for summary judgment and directed ReShape to pay Cowen the principal amount of $1.35 million, plus interest at the statutory rate of 9% per annum from June 16, 2021, and to reimburse Cowen’s attorneys’ fees.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock trades on the Nasdaq under the symbol “RSLS”.
Number of Stockholders
As of April 14, 2023, there were approximately 33 holders of record of our common stock.
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Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this Item regarding equity compensation plans is incorporated by reference to the information set forth in Part III, Item 12 of this Annual Report on Form 10-K.
Unregistered Sales of Equity Securities
None, except as previously disclosed.
Uses of Proceeds from Sale of Registered Securities
None.
Dividend Policy
We have never paid cash dividends on our common stock. The board of directors presently intends to retain all earnings for use in our business and does not anticipate paying cash dividends in the foreseeable future. We do not have a dividend reinvestment plan or a direct stock purchase plan.
Issuer Purchases of Equity Securities
None.
ITEM 6. [RESERVED]
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-K are forward-looking statements that involve risks and uncertainties. The factors listed in Item 1A “Risk Factors,” as well as any cautionary language in this Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from those projected. Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this report.
Overview
We are the premier global weight-loss solutions company, offering an integrated portfolio of proven products and services that manage and treat obesity and associated metabolic disease. Our primary operations are in the following geographical areas: United States, Australia and certain European and Middle Eastern countries. Our current portfolio includes the Lap-Band Adjustable Gastric Banding System, the ReShapeCare virtual health coaching program, the ReShape Marketplace, the Obalon Balloon System, 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 Obalon Balloon System, and 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.
Restatement of Previously Issued Financial Statements
The accompanying Management’s Discussion and Analysis of Financial Overview and Results of Operations gives effect to the restatement of the Company’s previously reported consolidated financial statements for the year ended December 31, 2021.
The Company has restated the consolidated financial statements for the year ended December 31, 2021. This restatement related to the Company incorrectly capitalizing a D&O tail insurance policy and other immaterial out of period corrections for stock based compensation expense, legal accruals and tax valuation allowances related to the impairment of certain assets.
For additional information and a detailed discussion of the restatement, see Note 2 in the notes to our consolidated financial statements included in this Annual Report on Form 10-K. Restatement adjustments have also been made to the previously reported unaudited consolidated financial statements for the interim periods ended September 30, 2022, June 30, 2022, March 31, 2022, September 30, 2021, and June 30, 2021. For additional information related to the interim period restatements, see Note 2 and Note 3 in the notes or our consolidated financial statements included in the Annual Report on Form 10-K.
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.
On March 13, 2023 we entered into a lease for approximately 5,038 square feet of office/warehouse space at 18 Technology Drive, Suite 110, Irvine, California 92618 and intend to relocate our principal executive offices from our current San Clemente, California location to the Irvine, California location. The Irvine California lease has a term of 36 months commencing on May 1, 2023.
On September 16, 2022, the Company was awarded $300 thousand, Small Business Innovation Research grant for the development of ReShape’s Diabetes Bloc-Stim Neuromodulation device. This device utilizes its proprietary vagus nerve block (vBloc) technology platform, combined with vagus nerve stimulation, for the treatment of Type 2 diabetes and metabolic disorders. Specifically, the grant will fund development of the device for the treatment hypoglycemia.
On July 27, 2022, the Company announced that its Board of Directors has appointed Paul F. Hickey as President and Chief Executive Officer and a member of the Board of Directors, effective August 15, 2022. Mr. Hickey succeeds
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Bart Bandy, who has separated from the Company to pursue other opportunities. Thomas Stankovich, Chief Financial Officer of the Company, served as Interim President and Chief Executive Officer until Mr. Hickey joined the Company. Dan W. Gladney, current Chair of the Board of Directors, assumed a more active role as Executive Chair, supporting Mr. Hickey and the Company on strategic matters.
On February 8, 2023, the Company closed a public offering of 1,275,000 units, with each consisting of one share of its common stock, or one pre-funded warrant to purchase one share of its common stock, and one warrant to purchase one-half shares of its common stock. Each unit was sold at public offering price of $8.00. The warrants in the units are immediately exercisable at a price of $8.00 per share (or pursuant to the “alternative cashless exercise” provision described above) and expire five years from the date of issuance. Gross proceeds, before deducting underwriting discounts and commissions and estimated offering expenses, are approximately $10.2 million.
Financial Overview
Results of Operations
The following table sets forth certain data from our operating results from the years ended December 31, 2022 and 2021, expressed as percentages of net revenue (in thousands):
Year Ended December 31, | |||||||||||
2022 | 2021 | ||||||||||
As Restated | |||||||||||
Revenue | $ | 11,240 | 100.0 | % | $ | 13,600 | 100.0 | % | |||
Cost of revenue | 4,438 | 39.5 | % | 5,252 | 38.6 | % | |||||
Gross profit | 6,802 | 60.5 | % | 8,348 | 61.4 | % | |||||
Operating expenses: | |||||||||||
Sales and marketing | 14,093 | 125.4 | % | 8,893 | 65.4 | % | |||||
General and administrative | 17,250 | 153.5 | % | 24,319 | 178.8 | % | |||||
Research and development | 2,537 | 22.6 | % | 2,369 | 17.4 | % | |||||
Impairment of intangible assets and goodwill | 18,744 | 166.8 | % | 30,649 | 225.4 | % | |||||
Loss on disposal of assets, net | 529 | 4.7 | % | — | — | % | |||||
Total operating expenses | 53,153 | 473.0 | % | 66,230 | 487.0 | % | |||||
Operating loss | (46,351) | (412.4) | % | (57,882) | (425.6) | % | |||||
Other expense (income), net: | |||||||||||
Interest expense, net | 113 | 1.0 | % | 832 | 6.1 | % | |||||
Warrant expense | — | — | % | 2,813 | 20.7 | % | |||||
Loss on extinguishment of debt, net | — | — | % | 2,061 | 15.2 | % | |||||
Loss (gain) on foreign currency exchange, net | 141 | 1.3 | % | (168) | (1.2) | % | |||||
Other | (11) | (0.1) | % | — | — | % | |||||
Loss before income tax provision | (46,594) | (414.6) | % | (63,420) | (466.3) | % | |||||
Income tax benefit | (380) | (3.4) | % | (274) | (2.0) | % | |||||
Net loss | $ | (46,214) | (411.3) | % | $ | (63,146) | (464.3) | % | |||
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 this Form 10-K 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
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should consider non-GAAP financial measures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, the non-GAAP financial measures presented by the Company may be different from similarly named non-GAAP financial measures used by other companies.
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. Therefore, investors should consider non-GAAP financial measures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, the non-GAAP financial measures presented by the Company may be different from similarly named non-GAAP financial measures used by other companies.
The following table contains a reconciliation of GAAP net loss to non-GAAP net loss attributable to common stockholders for the years ended December 31, 2022 and 2021 (in thousands).
Year Ended December 31, | |||||
2022 | 2021 | ||||
As Restated | |||||
GAAP net loss | $ | (46,214) | $ | (63,146) | |
Adjustments: | |||||
Interest expense, net | 113 | 832 | |||
Income tax benefit | (380) | (274) | |||
Depreciation and amortization | 2,153 | 1,971 | |||
Stock-based compensation expense | 2,087 | 12,227 | |||
Impairment of intangible assets and goodwill | 18,744 | 30,649 | |||
Loss on disposal of assets, net | 529 | — | |||
Loss on extinguishment of debt, net | — | 2,061 | |||
Warrant expense | — | 2,813 | |||
Professional fees incurred in connection with the Obalon merger | — | 2,277 | |||
Non-GAAP loss | $ | (22,968) | $ | (10,590) | |
Comparison of Results of Operations
Revenue. The following table summarizes our net revenue by geographic location based on the location of customers for the years ended December 31, 2022 and 2021, as well as the percentage by location of total revenue and the amount of change and percentage of change (dollars in thousands):
Year Ended December 31, | Amount | Percentage | |||||||||||||||
2022 | 2021 | Change | Change | ||||||||||||||
United States | $ | 9,230 | 82.2 | % | $ | 10,297 | 75.7 | % | $ | (1,067) | (10.4) | % | |||||
Australia | 688 | 6.1 | % | 1,039 | 7.6 | % | (351) | (33.8) | % | ||||||||
Europe | 1,252 | 11.1 | % | 2,127 | 15.7 | % | (875) | (41.1) | % | ||||||||
Rest of world | 70 | 0.6 | % | 137 | 1.0 | % | (67) | (48.9) | % | ||||||||
Total revenue | $ | 11,240 | 100.0 | % | $ | 13,600 | 100.0 | % | $ | (2,360) | (17.4) | % | |||||
Revenue totaled $11.2 million for the year ended December 31, 2022, which represents a contraction of 17.4%, or $2.4 million compared to the same period in 2021. The primary reason for the decrease, is due to the emergence in late 2021 of the fast-spreading omicron variants 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, as the omicron variant began to subside. This resulted in a significant impact within the United States and throughout Europe.
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Cost of Revenue and Gross Profit: The following table summarizes our cost of goods sold and gross profit for the years ended December 31, 2022 and 2021, as well as percentage of total revenue and the amount of change and percentage of change (dollars in thousands):
Year Ended December 31, | Amount | Percentage | |||||||||||||||
2022 | 2021 | Change | Change | ||||||||||||||
Revenue | $ | 11,240 | 100.0 | % | $ | 13,600 | 100.0 | % | $ | (2,360) | (17.4) | % | |||||
Cost of revenue | 4,438 | 39.5 | % | 5,252 | 38.6 | % | (814) | (15.5) | % | ||||||||
Gross profit | $ | 6,802 | 60.5 | % | $ | 8,348 | 61.4 | % | $ | (1,546) | (18.5) | % | |||||
Gross profit. Gross profit for the year ended December 31, 2022, was $6.8 million, compared to $8.3 million for the year ended December 31, 2021, a decrease of $1.5 million or 18.5%. Gross profit as a percentage of revenue for the year ended December 31, 2022, was 60.5% compared to 61.4% for the same period in 2021. The decrease in gross profit margin is primarily due to a decrease in sales, as revenue decrease by 17.4%, with the largest decrease of revenue in the United States, which has a higher margin than international.
Operating Expenses: The following table summarizes our operating expenses for the years ended December 31, 2022 and 2021, as well as the percentage of total revenue, and the amount of changes and percentage of change (dollars in thousands):
Year Ended December 31, | Amount | Percentage | |||||||||||||||
2022 | 2021 | Change | Change | ||||||||||||||
As Restated | |||||||||||||||||
Sales and marketing | $ | 14,093 | 125.4 | % | $ | 8,893 | 65.4 | % | $ | 5,200 | 58.5 | % | |||||
General and administrative | 17,250 | 153.5 | % | 24,319 | 178.8 | % | (7,069) | (29.1) | % | ||||||||
Research and development | 2,537 | 22.6 | % | 2,369 | 17.4 | % | 168 | 7.1 | % | ||||||||
Impairment of intangible assets and goodwill | 18,744 | 166.8 | % | 30,649 | 225.4 | % | (11,905) | (38.8) | % | ||||||||
Loss on disposal of assets, net | 529 | 4.7 | % | — | — | % | 529 | 100.0 | % | ||||||||
Total operating expenses | $ | 53,153 | 473.0 | % | $ | 66,230 | 487.0 | % | $ | (13,077) | (19.7) | % | |||||
Sales and Marketing Expense. Sales and marketing expenses for the year ended December 31, 2022, increased by $5.2 million, or 58.5%, to $14.1 million, compared to $8.9 million for the year ended December 31, 2021. The increase is primarily due to an increase in advertising and marketing costs of $3.9 million, as the Company launched its direct to consumer campaign during the fourth quarter of 2021 and expanded this campaign during the first half of 2022. In addition, we had an increase in payroll related and travel expenses of $1.3 million, as we continue to strengthen our commercial organization and have hired a Senior VP of Commercial Operations, as well as additional sales personnel. There was an increase in consulting and professional services of $0.9 million, as we are working on developing the ReShapeCare platform. This was offset by a decrease of stock based compensation expense of $0.6 million, as during the third quarter of 2021, the Company issued both RSUs and stock options that contained a look back provision and a decrease in commissions of $0.3 million due to a reduction in sales.
General and Administrative Expense. General and administrative expenses for the year ended December 31, 2022, decreased by $7.1 million, or 28.5%, to $17.4 million, compared to $24.3 million for the year ended December 31, 2021. The decrease is primarily due to a decrease of $8.7 million in stock-based compensation expense, as during the third quarter of 2021, the Company issued both RSUs and stock options containing a look back provision. In addition, there was a reduction in audit, consulting and professional fees of $1.6 million, as we had higher costs during 2021 due to the merger with Obalon. This was offset by an increase of legal expense of $2.6 million, primarily related to recording litigation settlements of $2.7 million during 2022. Additionally, there was an increase in payroll related costs of $0.5 million due to personnel changes and an increase in rent of $0.1 million due to the additional facility and extending the corporate lease.
Research and Development Expense. Research and development expenses for the year ended December 31, 2022 increased by $0.2 million, or 7.3% to $2.5 million, compared to $2.3 million for the year ended December 31, 2021 primarily due to an increase in consulting and professional services related to the development of ReShape’s Diabetes Bloc-Stim Neuromodulation device and payroll related expenditures.
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Loss on Impairment of Intangible Assets and Goodwill. The Company incurred multiple impairments charges totaling $18.7 million for the year ended December 31, 2022. The Company recorded an impairment charge of $7.4 million of in-process IPR&D and trademarks related to the ReShape Vest due to the Company no longer continuing with clinical trials. In addition, due to a reduction in our market capitalization at year end the Company impaired the developed technology and trademarks for both the Lap-Band and Obalon Balloon of $8.9 million and $2.4 million, respectively, due to reduced projected near-term future net cash flows related to the Lap-Band and no near-term revenue for the Obalon Balloon.
The Company incurred two impairment charges totaling $30.7 million during the year ended December 31, 2021. The Company recorded a goodwill impairment charge of $23.5 million due to a reduction in our market capitalization at year end. In addition, an impairment charge of $7.2 million was recorded, due to a reduction in our market capitalization coupled with the effects of the delays in the ReShape Vest clinical trials from the COVID-19 pandemic thus reducing the near-term future net cash flows.
Loss on Disposal of Assets, net. During the year ended December 31, 2022, the Company disposed of $0.5 million, primarily of assets that were acquired from the merger with Obalon.
Net Interest Expense. Net interest expense for the year ended December 31, 2022, of $0.1 million primarily relates to interest accrued regarding a litigation ruling. Net interest expense for the year ended December 31, 2021, of $0.8 million primarily relates to the debt that was extinguished during the second quarter of 2021.
Warrant Expense. Warrant expense was $2.8 million for the year ended December 31, 2021. The warrant expense relates to the issuance of warrants and common stock in connection with the exchange agreement entered with an investor that held Obalon warrants and exercised the fundamental transaction provision of their warrants.
Loss on Extinguishment of Debt, net. Loss on extinguishment of debt, net for the year ended December 31, 2021, was $2.1 million, which consisted of losses of $3.0 million related to the fair value of the warrants issued in connection with the January 19, 2021, credit agreement amendments and $0.1 million related to the early payment of the debt. These losses were offset by a $1.0 million gain on the full extinguishment of our PPP loan, as we received official confirmation of forgiveness on March 1, 2021.
Income Tax Benefit. Income tax benefit was $0.4 million for the year ended December 31, 2022, compared to a benefit of $0.3 million for the year ended December 31, 2021.
Liquidity and Capital Resources
We have financed our operations to date principally through the sale of equity securities and debt financings. During the years ended December 31, 2022 and 2021, we received proceeds of $3.1 million and $45.6 million, respectively, from securities sales and exercises of warrants by an institutional investor, and $1.0 million during 2021, from the credit agreement with an institutional investor. As of December 31, 2022, we had $3.9 million of cash and cash equivalents, and $100 thousand of restricted cash.
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The following table summarizes our change in cash and cash equivalents (in thousands):
Year Ended | ||||||
December 31, | ||||||
2022 |
| 2021 | ||||
As Restated | ||||||
Net cash used in operating activities | $ | (21,902) | $ | (15,375) | ||
Net cash (used in) provided by investing activates | (92) | 1,855 | ||||
Net cash provided by financing activities |
| 3,130 |
| 33,299 | ||
Effect of exchange rate changes | 4 | 29 | ||||
Net change in cash and cash equivalents and restricted cash | $ | (18,860) | $ | 19,808 | ||
Net Cash Used in Operating Activities
Net cash used in operating activities was $21.9 million and $15.4 million for the years ended December 31, 2022 and 2021, respectively. For the year ended December 31, 2022, net cash used in operating activities was primarily the result of our net loss of $46.2 million, partially offset by non-cash adjustments of loss on impairment of intangible assets of $18.7 million, stock-based compensation expense of $2.1 million, amortization of intangible assets of $1.8 million, loss on disposal of assets of $0.5 million, provision for excess and obsolete inventory of $0.6 million, depreciation expense of $0.3 million, offset by non-cash reductions of expense for deferred taxes of $0.4 million. We show a negative cash impact to inventory of $1.2 million and warranty liability of $0.4 million. This was offset by a positive impact to accounts receivable of $0.7 million, prepaid expenses of $1.1 million and accounts payable and accrued liabilities of $0.5 million.
Net cash used in operating activities for the year ended December 31, 2021, was primarily the result of our net loss of $63.1 million, partially offset by non-cash adjustments for loss on impairment of intangible assets and goodwill of $30.7 million, stock-based compensation expense of $12.2 million, amortization of intangible assets of $1.7 million, net loss on extinguishment of debt of $2.1 million, warrant expense of $2.8 million and amortization of debt discount of $0.5 million, offset by non-cash reductions of expense for deferred taxes of $0.2 million. We show a negative cash impact to accounts receivable of $0.3 million, due primarily to an increase in sales, a negative cash impact from increased prepaids of $0.1 million and warranty liability of $0.7 million, and a cash outflow for accounts payable and accruals of $1.3 million as the Company paid down its vendors and liabilities with the funds received from the June 2021 equity raise.
Net Cash Used in Investing Activities
Net cash used in investing activities for the year ended December 31, 2022, was $0.1 million, primarily related to tooling equipment.
Net cash provided by investing activities for the year ended December 31, 2021, was $1.9 million, which was comprised of $5.2 million of cash received in connection with the merger with Obalon, offset by $3.0 million for the final payment for our acquisition of the Lap-Band product line, as well as $0.3 million of capital expenditures primarily related to the completion of moving manufacturing from Costa Rica to the United States.
Net Cash Provided by Financing
Net cash provided by financing activities was $3.1 million for the year ended December 31, 2022, primarily due to proceeds of $2.5 million received from the exercises of warrants from an institutional investor and $0.6 million of securities sold to an institutional investor.
Net cash provided by financing activities was $33.3 million for the year ended December 31, 2021, primarily due to proceeds of $45.6 million received from the exercises of warrants from institutional investors, $1.0 million received from the credit agreement with an institutional investor, and $0.4 million in proceeds received from stock option exercises, offset by the early payment of $10.5 million to pay off the credit agreement and $3.2 million for financing costs.
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Operating Capital and Capital Expenditure Requirements
The Company currently does not generate revenue sufficient to offset operating costs and anticipates such shortfalls to continue partially due to the unpredictability of COVID-19, which may result in a slow-down of elective surgeries and restrictions in some locations and supply chain disruptions. The Company’s anticipated operations include plans to (i) grow sales and operations of the Company with the Lap-Band product line both domestically and internationally as well as to obtain cost savings synergies, (ii) introduce to the market place ReShapeCare and ReShape Marketplace as an extension, (iii) ramp up a focused approach of marketing to increase brand recognition, create customer awareness and increase the patient demand, (iv) continue development of the DBSN device, (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, including Lap-Band 2.0 and the 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.
Because of the numerous risks and uncertainties associated with the development of medical devices, such as our 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 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 Diabetes Bloc-Stim Neuromodulation, and any products that we may develop; |
| ● | the rate of market acceptance of our 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, 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 Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and
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assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ materially from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 4 to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results.
Intangible Assets and Long-Lived Assets
We acquire intangible assets in connection with business combinations and asset purchases. The acquired intangible assets are recorded at fair value, which is determined based on a discounted cash flow analysis. The determination of fair value requires significant estimates, including, but not limited to, the amount and timing of projected future cash flows, the discount rate used to discount those cash flows, the assessment of the asset's life cycle, including the timing and expected costs to complete in-process projects, and the consideration of legal, technical, regulatory, economic, and competitive risks.
Developed technology acquired in business combinations is reviewed for impairment annually, or whenever an event occurs or circumstances change that would indicate the carrying amount may be impaired. Additionally, management reviews the carrying amounts of other intangible and long-lived assets whenever events or circumstances indicate that the carrying amounts of an asset may not be recoverable. The impairment reviews require significant estimates about fair value, including estimation of future cash flows, selection of an appropriate discount rate, and estimates of long-term growth rates.
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.
Stock-based Compensation
We measure and recognize compensation expenses for all stock-based awards based on estimated fair values. Stock-based awards consist of stock options and restricted stock units. The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. The Black-Scholes models require various highly judgmental assumptions, including stock price volatility, risk-free interest rate, and expected option term. Stock-based compensation expense is recorded net of estimated forfeitures.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance for deferred income tax assets is recorded when it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The Company’s policy is to classify interest and penalties related to income taxes as income tax expense in the consolidated statements of operations.
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Recent Accounting Pronouncements
See Note 4 to the Consolidated Financial Statements, for a discussion of new accounting standards that have been adopted and those not yet adopted.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
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Report of Independent Registered Public Accounting Firms (RSM US LLP, PCAOB ID | 55 |
Report of Independent Registered Public Accounting Firms (BDO USA, LLP, PCAOB ID 243) | |
Financial Statements | |
56 | |
57 | |
58 | |
59 | |
60 | |
61 |
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of ReShape Lifesciences Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of ReShape Lifesciences Inc. and subsidiaries (the Company) as of December 31, 2022, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt About the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 5 to the financial statements, the Company has suffered recurring losses and negative cash flows. The Company currently does not generate revenue sufficient to offset operating costs and anticipates such shortfalls to continue. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters also are described in Note 5. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Going Concern
As described in Note 5 to the consolidated financial statements, the Company disclosed certain adverse conditions that raises substantial doubt about the Company’s ability to continue as a going concern for a period of at least one year from the date of issuance of the consolidated financial statements. The Company further disclosed certain plans identified by management, which involve the use of significant judgment, planned to mitigate the conditions that raise substantial doubt about the Company’s ability to continue as a going concern.
We identified the Company’s assessment of its liquidity and management’s plans to continue as a going concern as a critical audit matter because of the significant assumptions management made in determining the reasonableness of management’s cash flow forecast for a period of one year from the date of issuance of the consolidated financial statements. Auditing management’s assumptions involved a high degree of auditor judgment and an increase in audit effort.
Our audit procedures related to the cash flow forecast included the following, among others:
| ● | We obtained management’s going concern assessment and evaluated the reasonableness of both the likelihood that management could implement its plans and how the implementation of those plans impacted the identified adverse conditions. |
| ● | We evaluated the reasonableness of management’s cash flow forecast by performing the following procedures, among others: |
| o | We tested subsequent event activity including cash received in connection with the offering completed subsequent to December 31, 2022, but prior to the issuance of the financial statements. |
| o | We evaluated the reasonableness of forecasted revenues and gross profits assumptions by comparing to budgets provided to the board of directors, to historical results, to recent trends and industry forecasts and to projections used in other audit areas. |
We evaluated the reasonableness of the forecasted nature, amount and timing of operating expenditure reductions by review of management’s identification of non-recurring expenses and by comparing budgeted amounts to historical results, trends over recent history, and subsequent actual results during 2023.
| o | We evaluated whether the estimates of future revenues and expenses were consistent with evidence obtained in other areas of the audit. |
| ● | We evaluated the adequacy of the disclosures included in the financial statements regarding management’s plan. |
Long-Lived Asset Impairment
As described in Notes 7, 8 and 9 to the consolidated financial statements, the Company’s net consolidated property and equipment and intangible assets balances were $0.7 million and $0.26 million, respectively, at December 31, 2022 and during the year ended December 31, 2022, the Company recorded impairment charges for long-lived assets of $11.8 million. As further described in Note 4 to the financial statements, the Company assesses the potential impairment of long-lived assets, principally property and equipment and finite-lived intangible assets, whenever events or changes in circumstances indicate that the carrying value of the asset group may not be fully recoverable. If an indicator of impairment exists for any of its asset groups, an estimate of undiscounted future cash flows, over the life of the primary asset for each asset group is compared to that long-lived asset group's carrying value. If the carrying value of the asset group is greater than the estimated future undiscounted cash flow, the Company then determines the fair value of the assets, and if an asset is determined to be impaired, the impairment loss is measured by the excess of the carrying amount of the asset over its fair value. When estimating the undiscounted future cash flows and the fair value of assets the Company makes significant assumptions, including the revenues projections, cash flow projections, discount rates and royalty rates for definite-lived intangible assets.
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We identified the impairment of long-lived assets as a critical audit matter due to the significant judgments made by the Company in determining the undiscounted future cash flows and the determination of fair value of assets. Auditing management’s judgments regarding estimated future cash flows and the fair value of assets involved a high degree of auditor judgment and increased audit effort, including the use of valuation specialists.
Our audit procedures related to the impairment of long-lived assets included the following:
| ● | We evaluated the reasonableness of management’s assumptions of revenue growth rates and operating margins by comparing management’s prior forecast to historical results, comparing the projections for consistency to the Company’s strategic plans and initiatives and comparing the projections to industry forecasts. |
| ● | We evaluated the reasonableness of the overall asset group valuation by comparing the Company’s valuation to the publicly available market capitalization data for the Company and the valuation indications based on the subsequent equity raise. |
| ● | We evaluated whether the estimates of revenue growth rates and cash flows were consistent with evidence obtained in other areas of the audit. |
/s/
We have served as the Company's auditor since 2022.
April 17, 2023
54
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
ReShape Lifesciences, Inc.
San Clemente, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of ReShape Lifesciences, Inc. (the “Company”) as of December 31, 2021, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Restatement to Correct 2021 Misstatements
As discussed in Note 2 to the consolidated financial statements, the 2021 financial statements have been restated to correct misstatements.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company’s auditor from 2019 to 2022
Costa Mesa, California
April 8, 2022, except for the effect of the one-for-fifty reverse stock split discussed in Note 4 as to which the date isJanuary 12, 2023 and the impact of the restatement discussed in Note 2 as to which the date is April 17, 2023.
55
RESHAPE LIFESCIENCES INC.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
December 31, | December 31, | |||||
| 2022 |
| 2021 | |||
As Restated | ||||||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | |
| $ | | |
Restricted cash | | | ||||
Accounts and other receivables (net of allowance for doubtful accounts of $ |
| |
|
| | |
Inventory |
| |
|
| | |
Prepaid expenses and other current assets |
| |
|
| | |
Total current assets |
| |
|
| | |
Property and equipment, net |
| |
|
| | |
Operating lease right-of-use assets | | | ||||
Deferred tax asset, net | | — | ||||
Other intangible assets, net | | | ||||
Other assets |
| |
|
| | |
Total assets | $ | |
| $ | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable | $ | |
| $ | | |
Accrued and other liabilities |
| |
|
| | |
Warranty liability, current | | | ||||
Operating lease liabilities, current | | | ||||
Total current liabilities |
| |
|
| | |
Warranty liability, noncurrent | — | | ||||
Deferred tax liability, net | | |||||
Total liabilities | |
| | |||
Commitments and contingencies (Note 13) | ||||||
Stockholders’ equity: | ||||||
Preferred stock, | ||||||
Series C convertible preferred stock, $ | ||||||
Common stock, $ |
| |
|
| ||
Additional paid-in capital |
| |
|
| | |
Accumulated deficit |
| ( |
|
| ( | |
Accumulated other comprehensive loss | ( | ( | ||||
Total stockholders’ equity |
| |
|
| | |
Total liabilities and stockholders’ equity | $ | |
| $ | | |
See accompanying notes to consolidated financial statements.
56
RESHAPE LIFESCIENCES INC.
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
Year Ended December 31, | |||||||
2022 |
| 2021 | |||||
As Restated | |||||||
Revenue | $ | | $ | | |||
Cost of revenue |
| |
| | |||
Gross profit |
| |
| | |||
Operating expenses: | |||||||
Sales and marketing |
| |
| | |||
General and administrative | | | |||||
Research and development |
| |
| | |||
Impairment of intangible assets and goodwill | | | |||||
Loss on disposal of assets, net | | — | |||||
Total operating expenses | | | |||||
Operating loss | ( | ( | |||||
Other expense (income), net: | |||||||
Interest expense, net |
| |
| | |||
Warrant expense |
| — |
| | |||
Loss on extinguishment of debt, net | — | | |||||
Loss (Gain) on foreign currency exchange, net | | ( | |||||
Other | ( | — | |||||
Loss before income tax provision | ( | ( | |||||
Income tax benefit | ( | ( | |||||
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 consolidated financial statements.
57
RESHAPE LIFESCIENCES INC.
Consolidated Statements of Comprehensive Loss
(in thousands)
Year Ended December 31, | ||||||
2022 |
| 2021 | ||||
As Restated | ||||||
Net loss | $ | ( | $ | ( | ||
Foreign currency translation adjustments | | | ||||
Other comprehensive income, net of tax | | | ||||
Comprehensive loss | $ | ( | $ | ( | ||
See accompanying notes to consolidated financial statements.
58
RESHAPE LIFESCIENCES INC.
Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
Series B Convertible | Series C Convertible | Series D Mirroring | Additional | Accumulated Other | Total | |||||||||||||||||||||||||||
Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Income (Loss) |
| Equity | |||||||||
Balance December 31, 2020 | | $ | — | | $ | | — | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||||||
Net loss (As Restated) | — | — | — | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | — | — | — | — | | | ||||||||||||||||||||
Issuance of common stock pursuant to reverse acquisition | ( | — | — | ( | — | — | | — | | — | — | | ||||||||||||||||||||
Stock-based compensation expense, net (As Restated) | — | — | — | — | — | — | — | — | | — | — | | ||||||||||||||||||||
Stock options exercised | — | — | — | — | — | — | | — | | — | — | | ||||||||||||||||||||
Issuance of stock from RSUs | — | — | — | — | — | — | | — | — | — | — | — | ||||||||||||||||||||
Issuance of warrants | — | — | — | — | — | — | — | — | | — | — | | ||||||||||||||||||||
Institutional exercise of warrants | — | — | — | — | — | — | | — | | — | — | | ||||||||||||||||||||
Warrant liability reclassified to equity | — | — | — | — | — | — | — | — | | — | — | | ||||||||||||||||||||
Restricted shares issued for consulting services | — | — | — | — | — | — | | — | | — | — | | ||||||||||||||||||||
Balance December 31, 2021 (As Restated) | — | $ | — | | $ | — | — | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||||||
Net loss | — | — | — | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | — | — | — | — | | | ||||||||||||||||||||
Series D Mirroring preferred stock issued | — | — | — | — | | — | — | — | — | — | — | — | ||||||||||||||||||||
Series D Mirroring preferred stock canceled | — | — | — | — | ( | — | — | — | — | — | — | — | ||||||||||||||||||||
Stock-based compensation expense, net | — | — | — | — | — | — | — | — | | — | — | | ||||||||||||||||||||
Cancellation of common stock | — | — | — | — | — | — | ( | — | — | — | — | — | ||||||||||||||||||||
Common stock purchased | — | — | — | — | — | — | | — | | — | — | | ||||||||||||||||||||
Issuance of stock from RSUs | — | — | — | — | | — | — | — | — | — | ||||||||||||||||||||||
Issuance of stock for bonuses | — | — | — | — | — | — | | — | | | ||||||||||||||||||||||
Institutional exercise of warrants | — | — | — | — | — | — | | | | — | — | | ||||||||||||||||||||
Balance December 31, 2022 | — | $ | — | | $ | — | — | $ | — | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||||||
See accompanying notes to consolidated financial statements.
59
RESHAPE LIFESCIENCES INC.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31, | ||||||
2022 | 2021 | |||||
Cash flows from operating activities: |
| As Restated | ||||
Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||
Depreciation expense |
| |
| | ||
Amortization of intangible assets | | | ||||
Noncash interest expense | — | | ||||
Impairment of intangible assets | | | ||||
Loss on extinguishment of debt, net | — | | ||||
Loss on disposal of assets, net | | — | ||||
Stock-based compensation | | | ||||
Bad debt expense | ( | | ||||
Provision for inventory excess and obsolescence | | | ||||
Deferred income tax | ( | ( | ||||
Warrant expense | — | | ||||
Amortization of debt discount and deferred debt issuance costs | — | | ||||
Other noncash items | ( | — | ||||
Change in operating assets and liabilities, net of business combination: |
|
| ||||
Accounts and other receivables |
| |
| ( | ||
Inventory |
| ( |
| ( | ||
Prepaid expenses and other current assets |
| |
| ( | ||
Accounts payable and accrued liabilities | | ( | ||||
Warranty liability |
| ( |
| ( | ||
Net cash used in operating activities | ( | ( | ||||
Cash flows from investing activities: | ||||||
Capital expenditures | ( | ( | ||||
Acquisition of Lap-Band product line assets | — | ( | ||||
Proceeds from acquisition | — | | ||||
Proceeds from sale of capital assets | | — | ||||
Cash (used in) provided by investing activities: | ( | | ||||
Cash flows from financing activities: | ||||||
Payments of financing costs | — | ( | ||||
Proceeds from sale and issuance of securities | | — | ||||
Proceeds from warrants exercised | | | ||||
Proceeds from stock options exercised | — | | ||||
Proceeds from credit agreement | — | | ||||
Payment of credit agreement | — | ( | ||||
Net cash provided by financing activities | | | ||||
Effect of currency exchange rate changes on cash and cash equivalents |
| |
| | ||
Net (decrease) increase 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 | $ | | $ | | ||
Cash paid for interest | — | | ||||
Noncash investing and financing activities: | ||||||
Capital expenditures accruals | $ | | $ | | ||
Purchase price, net of cash received | — | | ||||
Fair value of warrants included as a component of loss on extinguishment of debt | — | | ||||
Fair value of common stock and warrants issued related to the fundamental transaction exchange | — | | ||||
Fair value of common stock issued for professional services | — | | ||||
See accompanying notes to consolidated financial statements.
60
ReShape Lifesciences Inc.
Notes to Consolidated Financial Statements
(1) | Description of the Business and Risks and Uncertainties |
Description of Business
We were incorporated under the laws of Delaware on January 2, 2008. On June 15, 2021, we completed a merger with ReShape Lifesciences Inc. Pursuant to the Merger Agreement, a wholly owned subsidiary of Obalon merged with and into ReShape, with ReShape surviving the merger as a wholly owned subsidiary of Obalon. As a result of the merger, Obalon, the parent company, was renamed “ReShape Lifesciences Inc.” and ReShape was named ReShape Weightloss Inc. ReShape Lifesciences’ shares of common stock trade on the Nasdaq under the symbol RSLS.
ReShape Medical (formerly ReShape Lifesciences Inc.) was incorporated in the state of Minnesota in December 2002 and reincorporated in the state of Delaware in July 2004. In 2017, the Company changed its name from EnteroMedics Inc. to ReShape Lifesciences Inc.
The Company is headquartered in San Clemente, California. The Company is a developer of minimally invasive medical devices that advance bariatric surgery to treat obesity and metabolic diseases. The Company’s current portfolio consists of the Lap-Band® Adjustable Gastric Banding System, ReShapeCareTM virtual health coaching program, ReShape Market Place, including ReShape OptimizeTM a supplemental multivitamin, the Obalon Balloon System, the first and only swallowable gas filled balloon system, and the Diabetes Bloc-Stim Neuromodulation, a technology under development as a new treatment for type 2 diabetes mellitus. The Company sells the Lap-Band worldwide and is managed in the following geographical regions: United States, Australia, Europe and the rest of world. Refer to Note 15 for additional information about operating segments.
Risks and Uncertainties
The Company continues to devote significant resources to developing its product technology, commercialization activities and raising capital. These activities are subject to significant risks and uncertainties, including the ability to obtain additional financing, and there can be no assurance that the Company will be successful in obtaining additional financing on favorable terms, or at all. If adequate funds are not available, the Company may have to further reduce its cost structure until financing is obtained and/or delay development, or commercialization of products, or license to third parties the rights to commercialize products, or technologies that the Company would otherwise seek to commercialize. Refer to Note 5 for additional information about the Company’s liquidity, going concern and management’s plans.
The medical device industry is characterized by frequent and extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often difficult to predict, and the outcome may be uncertain until the court has entered final judgment and all appeals are exhausted. The Company’s competitors may assert that its products or the use of the Company’s products are covered by U.S. or foreign patents held by them. Refer to Note 18 for additional information about contingencies and litigation matters.
(2) | 2021 Restatement and Other Corrections of Previously Issued Consolidated Financial Statements |
Management identified the following misstatements that required restatement of our previously issued 2021 financial statements as follows:
| a. | A D&O tail policy of $ |
61
| resulted in an overstatement of general and administrative expenses of approximately $ |
| b. | The Company identified certain valuation-related errors in the determination of grant date fair values related to stock options issued during the third quarter of 2021. This resulted in a reduction of stock based compensation expenses of $ |
| c. | The Company did not appropriately establish a reserve for uncertain tax positions and did not appropriately record deferred tax valuation allowances to assets written off during the year ended December 31, 2021 and the corresponding $ |
| d. | The Company recorded legal accruals for potential loss contingencies of approximately $ |
| e. | As previously identified, the Company had an error in the computation of the weighted average shares used to compute basic and diluted net loss per share, refer to the statement of operations tables below. |
The following tables summarize the effects of the restatements on each financial statement line item as of the dates and for the periods indicated. The share and per share information has been adjusted for the reverse stock splits, for further details see Note 4 below. The effects of the restatement are incorporated within Notes 2, 3, 6, 8, 9, 12, 16 and 17.
Consolidated Balance Sheet as of December 31, 2021
As Previously | |||||||||
Reported | Adjustments | As Restated | |||||||
Prepaid expenses and other current assets | $ | | $ | ( | $ | | |||
Total current assets |
| | ( |
| | ||||
Other assets | | ( | | ||||||
Total assets | | ( | | ||||||
Accrued and other liabilities | | | | ||||||
Total current liabilities | | | | ||||||
Deferred income taxes | | ( | | ||||||
Total liabilities | | | | ||||||
Additional paid-in capital | | ( | | ||||||
Accumulated deficit | ( | ( | ( | ||||||
Total stockholders’ equity | | ( | | ||||||
Total liabilities and stockholders’ equity | | ( | | ||||||
Consolidated Statement of Operations for the year ended December 31, 2021
Year Ended December 31, 2021 | |||||||||
As Previously | |||||||||
Stated | Adjustments | As Restated | |||||||
Sales and marketing | $ | | $ | ( | $ | | |||
General and administrative | | ( | | ||||||
Research and development | |
| ( |
| | ||||
Loss on impairment of intangible asset and goodwill | | | | ||||||
Total operating expenses | |
| |
| | ||||
Operating loss | ( |
| ( |
| ( | ||||
Loss before income tax provision | ( | ( | ( | ||||||
Income tax benefit | ( | ( | ( | ||||||
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 | |
| ( |
| | ||||
62
Consolidated Statement of Other Comprehensive Income for the year ended December 31, 2021
Year Ended December 31, 2021 | |||||||||
As Previously | |||||||||
Stated | Adjustments | As Restated | |||||||
Net loss | $ | ( | $ | ( | $ | ( | |||
Comprehensive loss | ( | ( | ( | ||||||
Consolidated Statement of Stockholders’ Equity for the year ended December 31, 2021
APIC | Accumulated Deficit | Total Equity | |||||||||||||||||||||||||
As Previously | As Previously | As Previously | |||||||||||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||||||||
Balance December 31, 2020 | $ | | $ | — | $ | | $ | ( | $ | — | $ | ( | $ | | $ | — | $ | | |||||||||
Net loss | — | — | — | ( | ( | ( | ( | ( | ( | ||||||||||||||||||
Stock-based compensation expense, net | | ( | | — | — | — | | ( | | ||||||||||||||||||
Balance December 31, 2021 | | ( | | ( | ( | ( | | ( | | ||||||||||||||||||
Consolidated Statement of Cash Flow for the year ended December 31, 2021
Year Ended December 31, 2021 | |||||||||
As Previously | |||||||||
Reported | Adjustment | As Restated | |||||||
Cash flows from operating activities: |
| ||||||||
Net loss | $ | ( | $ | ( | $ | ( | |||
Loss on impairment of intangible assets and goodwill | | | | ||||||
Stock-based compensation | | ( | | ||||||
Deferred income tax benefit | ( | ( | ( | ||||||
Prepaid expenses and other current assets | ( | |
| ( | |||||
Accounts payable and accrued liabilities | ( | | ( | ||||||
Other | | ( |
| — | |||||
Restatement of Previously Issued Condensed Consolidated Financial Statements (Unaudited)
As a result of the misstatements noted above, we have restated our previously reported unaudited consolidated balance sheets as of June 30, 2021 and September 30, 2021. We have also restated the unaudited consolidated statement of operations for the three months ended March 31, 2021, the three and six months ended June 30, 2021, and the three and nine months ended September 30, 2021, and the unaudited statement of cash flow for the three and six months ended June 30, 2021 and the nine months ended September 30, 2021.
The following tables present the impact of the restatements, to the applicable line items in the unaudited consolidated balance sheets, unaudited consolidated statement of operations, and unaudited statements of cash flow to the Company’s previously reported consolidated financial statements for the above mentioned periods.
Condensed Consolidated Balance Sheet as of June 30, 2021
June 30, 2021 | |||||||||
As Previously | |||||||||
Reported | Adjustments | As Restated | |||||||
Prepaid expenses and other current assets | $ | | $ | ( | $ | | |||
Total current assets |
| | ( |
| | ||||
Goodwill | | | | ||||||
Other assets |
| | ( |
| | ||||
Total assets | | | | ||||||
Accumulated deficit | ( | | ( | ||||||
Total stockholders’ equity | | | | ||||||
Total liabilities and stockholders’ equity | | | | ||||||
63
Condensed Consolidated Balance Sheet as of September 30, 2021
September 30, 2021 | |||||||||
As Previously | |||||||||
Reported | Adjustments | As Restated | |||||||
Prepaid expenses and other current assets | $ | | $ | ( | $ | | |||
Total current assets | | ( | | ||||||
Goodwill | | | | ||||||
Other assets | | ( | | ||||||
Total assets | | | | ||||||
Additional paid-in capital | | ( | | ||||||
Accumulated deficit | ( | | ( | ||||||
Total stockholders’ equity | | | | ||||||
Total liabilities and stockholders’ equity | | | | ||||||
Condensed Consolidated Statement of Operations for the three months ended March 31, 2021
As Previously | |||||||||
Reported | Adjustment | As Revised | |||||||
Net loss per share - basic and diluted | ( | | ( | ||||||
Shares used to compute basic and diluted net loss per share | | | | ||||||
Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2021
Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 | |||||||||||||||||
As Previously | As Previously | |||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||
General and administrative | $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||
Total operating expenses | |
| ( |
| | |
| ( |
| | ||||||||
Operating loss | ( |
| |
| ( | ( |
| |
| ( | ||||||||
Loss before income tax provision | ( | | ( | ( | | ( | ||||||||||||
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 | |
| ( |
| | |
| ( |
| | ||||||||
Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2021
Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | |||||||||||||||||
As Previously | As Previously | |||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||
Sales and marketing | $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||
General and administrative | | ( | | | ( | | ||||||||||||
Research and development | |
| ( |
| | |
| ( |
| | ||||||||
Total operating expenses | |
| ( |
| | |
| ( |
| | ||||||||
Operating loss | ( |
| |
| ( | ( |
| |
| ( | ||||||||
Loss before income tax provision | ( | | ( | ( | | ( | ||||||||||||
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 | |
| |
| | |
| ( |
| | ||||||||
64
Condensed Consolidated Statement of Other Comprehensive Loss for the three and six months ended June 30, 2021
Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 | |||||||||||||||||
As Previously | As Previously | |||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||
Net loss | $ | ( | $ | | $ | ( | $ | ( | $ | | $ | ( | ||||||
Comprehensive loss | ( | | ( | ( | | ( | ||||||||||||
Condensed Consolidated Statement of Other Comprehensive Loss for the three and nine months ended September 30, 2021
Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | |||||||||||||||||
As Previously | As Previously | |||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||
Net loss | $ | ( | $ | | $ | ( | $ | ( | $ | | $ | ( | ||||||
Comprehensive loss | ( | | ( | ( | | ( | ||||||||||||
Condensed Consolidated Statement of Stockholders’ Equity for the three months ended June 30, 2021
Additional Paid-In Capital | Accumulated Deficit | Total Equity | |||||||||||||||||||||||||
As Previously | As Previously | As Previously | |||||||||||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||||||||
Balance March 31, 2021 | $ | | $ | — | $ | | $ | ( | $ | — | $ | ( | $ | | $ | — | $ | | |||||||||
Net loss | — | — | — | ( | | ( | ( | | ( | ||||||||||||||||||
Balance June 30, 2021 | | — | | ( | | ( | | | | ||||||||||||||||||
Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2021
Additional Paid-In Capital | Accumulated Deficit | Total Equity | |||||||||||||||||||||||||
As Previously | As Previously | As Previously | |||||||||||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||||||||
Balance December 31, 2020 | $ | | $ | — | $ | | $ | ( | $ | — | $ | ( | $ | | $ | — | $ | | |||||||||
Net loss | — | — | — | ( | | ( | ( | | ( | ||||||||||||||||||
Balance June 30, 2021 | | — | | ( | | ( | | | | ||||||||||||||||||
Condensed Consolidated Statement of Stockholders’ Equity for the three months ended September 30, 2021
Additional Paid-In Capital | Accumulated Deficit | Total Equity | |||||||||||||||||||||||||
As Previously | As Previously | As Previously | |||||||||||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||||||||
Balance June 30, 2021 | $ | | $ | — | $ | | $ | ( | $ | | $ | ( | $ | | $ | | $ | | |||||||||
Net loss | — | — | — | ( | | ( | ( | | ( | ||||||||||||||||||
Stock-based compensation expense, net | | ( | | — | — | — | | ( | | ||||||||||||||||||
Balance September 30, 2021 | | ( | | ( | | ( | | | | ||||||||||||||||||
Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2021
Additional Paid-In Capital | Accumulated Deficit | Total Equity | |||||||||||||||||||||||||
As Previously | As Previously | As Previously | |||||||||||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||||||||
Balance December 31, 2020 | $ | | $ | — | $ | | $ | ( | $ | — | $ | ( | $ | | $ | — | $ | | |||||||||
Net loss | — | — | — | ( | | ( | ( | | ( | ||||||||||||||||||
Stock-based compensation expense, net | | ( | | — | — | — | | ( | | ||||||||||||||||||
Balance September 30, 2021 | | ( | | ( | | ( | | | | ||||||||||||||||||
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Condensed Consolidated Statement of Cash Flow for the six months ended June 30, 2021
Six Months Ended June 30, 2021 | |||||||||
As Previously | |||||||||
Reported | Adjustment | As Restated | |||||||
Cash flows from operating activities: |
| ||||||||
Net loss | $ | ( | $ | | $ | ( | |||
Prepaid expenses and other current assets | ( | |
| | |||||
Other | | ( |
| — | |||||
Condensed Consolidated Statement of Cash Flow for the nine months ended September 30, 2021
Nine Months Ended September 30, 2021 | |||||||||
As Previously | |||||||||
Reported | Adjustment | As Restated | |||||||
Cash flows from operating activities: |
| ||||||||
Net loss | $ | ( | $ | | $ | ( | |||
Stock-based compensation | | ( | | ||||||
Prepaid expenses and other current assets | ( | |
| ( | |||||
Other | | ( |
| — | |||||
(3) | 2022 Restatement and Other Corrections of Previously Issued Condensed Consolidated Financial Statements (Unaudited) |
As a result of the misstatements noted in Note 2, we have restated our previously reported unaudited consolidated balance sheets as of March 31, 2022, June 30, 2022 and September 30, 2022. We have also restated the unaudited consolidated statement of operations for the three months ended March 31, 2022, the three and six months ended June 30, 2022, and the three and nine months ended September 30, 2022, and the unaudited statement of cash flow for the three months ended March 31, 2022, six months ended June 30, 2022 and the nine months ended September 30, 2022. In addition to this, management identified an additional impairment of intangibles of $
Condensed Consolidated Balance Sheet as of March 31, 2022
March 31, 2022 | |||||||||
As Previously | |||||||||
Reported | Adjustments | As Restated | |||||||
Prepaid expenses and other current assets | $ | | $ | ( | $ | | |||
Total current assets | | ( | | ||||||
Other assets | | ( | | ||||||
Total assets | | ( | | ||||||
Accrued and other liabilities | | | | ||||||
Total current liabilities | | | | ||||||
Total liabilities | | | | ||||||
Additional paid-in capital | | ( | | ||||||
Accumulated deficit | ( | ( | ( | ||||||
Total stockholders’ equity | | ( | | ||||||
Total liabilities and stockholders’ equity | | ( | | ||||||
66
Condensed Consolidated Balance Sheet as of June 30, 2022
June 30, 2022 | |||||||||
As Previously | |||||||||
Reported | Adjustments | As Restated | |||||||
Prepaid expenses and other current assets | $ | | $ | ( | $ | | |||
Total current assets | | ( | | ||||||
Other assets | | ( | | ||||||
Total assets | | ( | | ||||||
Accrued and other liabilities | | | | ||||||
Total current liabilities | | | | ||||||
Total liabilities | | | | ||||||
Additional paid-in capital | | ( | | ||||||
Accumulated deficit | ( | ( | ( | ||||||
Total stockholders’ equity | | ( | | ||||||
Total liabilities and stockholders’ equity | | ( | | ||||||
Condensed Consolidated Balance Sheet as of September 30, 2022
September 30, 2022 | |||||||||
As Previously | |||||||||
Reported | Adjustments | As Restated | |||||||
Prepaid expenses and other current assets | $ | | $ | ( | $ | | |||
Total current assets | | ( | | ||||||
Other intangible assets, net | | ( | | ||||||
Other assets | | ( | | ||||||
Total assets | | ( | | ||||||
Accrued and other liabilities | | | | ||||||
Total current liabilities | | | | ||||||
Total liabilities | | | | ||||||
Additional paid-in capital | | ( | | ||||||
Accumulated deficit | ( | ( | ( | ||||||
Total stockholders’ equity | | ( | | ||||||
Total liabilities and stockholders’ equity | | ( | | ||||||
Condensed Consolidated Statement of Operations for the three months ended March 31, 2022
Three Months Ended March 31, 2022 | |||||||||
As Previously | |||||||||
Stated | Adjustments | As Restated | |||||||
Sales and marketing | $ | | $ | ( | $ | | |||
General and administrative | | ( | | ||||||
Research and development | |
| ( |
| | ||||
Total operating expenses | |
| ( |
| | ||||
Operating loss | ( |
| |
| ( | ||||
Loss before income tax provision | ( | | ( | ||||||
Income tax benefit | ( | | | ||||||
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 | |
| |
| | ||||
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Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2022
Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |||||||||||||||||
As Previously | As Previously | |||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||
Sales and marketing | $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||
General and administrative | | $ | ( | | | ( | | |||||||||||
Research and development | |
| ( |
| | |
| ( |
| | ||||||||
Total operating expenses | |
| ( |
| | |
| ( |
| | ||||||||
Operating loss | ( |
| |
| ( | ( |
| |
| ( | ||||||||
Loss before income tax provision | ( | | ( | ( | | ( | ||||||||||||
Income tax benefit | | — | | ( | | | ||||||||||||
Net loss | ( | | ( | ( | | ( | ||||||||||||
Net loss per share - basic and diluted: | ||||||||||||||||||
Net loss per share - basic and diluted | ( | | ( | ( | | ( | ||||||||||||
Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2022
Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | |||||||||||||||||
As Previously | As Previously | |||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||
Sales and marketing | $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||
General and administrative | | ( | | | ( | | ||||||||||||
Research and development | |
| ( |
| | |
| ( |
| | ||||||||
Loss on impairment of intangible assets | | | | | | | ||||||||||||
Total operating expenses | |
| |
| | |
| ( |
| | ||||||||
Operating loss | ( |
| ( |
| ( | ( |
| |
| ( | ||||||||
Loss before income tax provision | ( | ( | ( | ( | | ( | ||||||||||||
Income tax benefit | ( | — | ( | ( | | ( | ||||||||||||
Net loss | ( | ( | ( | ( | ( | ( | ||||||||||||
Net loss per share - basic and diluted: | ||||||||||||||||||
Net loss per share - basic and diluted | ( | ( | ( | ( | ( | ( | ||||||||||||
Condensed Consolidated Statement of Other Comprehensive loss for the three months ended March 31, 2022
Three Months Ended March 31, 2022 | |||||||||
As Previously | |||||||||
Stated | Adjustments | As Restated | |||||||
Net loss | $ | ( | $ | | $ | ( | |||
Comprehensive loss | ( | | ( | ||||||
Condensed Consolidated Statement of Other Comprehensive Loss for the three and six months ended June 30, 2022
Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |||||||||||||||||
As Previously | As Previously | |||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||
Net loss | $ | ( | $ | | $ | ( | $ | ( | $ | | $ | ( | ||||||
Comprehensive loss | ( | | ( | ( | | ( | ||||||||||||
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Condensed Consolidated Statement of Other Comprehensive Loss for the three and nine months ending September 30, 2022
Three Months Ended September 30, 2022 | Nine Months Ended September 30, 2022 | |||||||||||||||||
As Previously | As Previously | |||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
Comprehensive loss | ( | ( | ( | ( | ( | ( | ||||||||||||
Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2022
Additional Paid-In Capital | Accumulated Deficit | Total Equity | |||||||||||||||||||||||||
As Previously | As Previously | As Previously | |||||||||||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||||||||
Balance December 31, 2021 | $ | | $ | ( | $ | | $ | ( | $ | ( | $ | ( | $ | | $ | ( | $ | | |||||||||
Net loss | — | — | — | ( | | ( | ( | | ( | ||||||||||||||||||
Stock-based compensation expense, net | | ( | | — | — | — | | ( | | ||||||||||||||||||
Balance March 31, 2022 | | ( | | ( | ( | ( | | ( | | ||||||||||||||||||
Condensed Consolidated Statement of Stockholders’ Equity for the three months ended June 30, 2022
Additional Paid-In Capital | Accumulated Deficit | Total Equity | |||||||||||||||||||||||||
As Previously | As Previously | As Previously | |||||||||||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||||||||
Balance March 31, 2022 | $ | | $ | ( | $ | | $ | ( | $ | ( | $ | ( | $ | | $ | ( | $ | | |||||||||
Net loss | — | ( | | ( | ( | | ( | ||||||||||||||||||||
Stock-based compensation expense, net | | ( | | — | — | — | | ( | | ||||||||||||||||||
Balance June 30, 2022 | | ( | | ( | ( | ( | | ( | | ||||||||||||||||||
Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2022
Additional Paid-In Capital | Accumulated Deficit | Total Equity | |||||||||||||||||||||||||
As Previously | As Previously | As Previously | |||||||||||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||||||||
Balance December 31, 2021 | $ | | $ | ( | $ | | $ | ( | $ | ( | $ | ( | $ | | $ | ( | $ | | |||||||||
Net loss | — | — | — | ( | | ( | ( | | ( | ||||||||||||||||||
Stock-based compensation expense, net | | ( | | — | — | — | | ( | | ||||||||||||||||||
Balance June 30, 2022 | | ( | | ( | ( | ( | | ( | | ||||||||||||||||||
Condensed Consolidated Statement of Stockholders’ Equity for the three months ended September 30, 2022
Additional Paid-In Capital | Accumulated Deficit | Total Equity | |||||||||||||||||||||||||
As Previously | As Previously | As Previously | |||||||||||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||||||||
Balance June 30, 2022 | $ | | $ | ( | $ | | $ | ( | $ | ( | $ | ( | $ | | $ | ( | $ | | |||||||||
Net loss | — | — | — | ( | ( | ( | ( | ( | ( | ||||||||||||||||||
Stock-based compensation expense, net | | ( | | — | — | — | | ( | | ||||||||||||||||||
Balance September 30, 2022 | | ( | | ( | ( | ( | | ( | | ||||||||||||||||||
Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2022
Additional Paid-In Capital | Accumulated Deficit | Total Equity | |||||||||||||||||||||||||
As Previously | As Previously | As Previously | |||||||||||||||||||||||||
Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | Stated | Adjustments | As Restated | |||||||||||||||||||
Balance December 31, 2021 | $ | | $ | ( | $ | | $ | ( | $ | ( | $ | ( | $ | | $ | ( | $ | | |||||||||
Net loss | — | — | — | ( | ( | ( | ( | ( | ( | ||||||||||||||||||
Stock-based compensation expense, net | | ( | | — | — | — | | ( | | ||||||||||||||||||
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Balance September 30, 2022 | | ( | | ( | ( | ( | | ( | |
Condensed Consolidated Statement of Cash Flow for the three months ended March 30, 2022
Three Months Ended March 31, 2022 | |||||||||
As Previously | |||||||||
Reported | Adjustment | As Restated | |||||||
Cash flows from operating activities: |
| ||||||||
Net loss | $ | ( | $ | | $ | ( | |||
Stock-based compensation | | ( | | ||||||
Deferred income tax benefit | ( | | — | ||||||
Accounts payable and accrued liabilities | | ( | | ||||||
Other | | ( |
| — | |||||
Condensed Consolidated Statement of Cash Flow for the six months ended June 30, 2022
Six Months Ended June 30, 2022 | |||||||||
As Previously | |||||||||
Reported | Adjustment | As Restated | |||||||
Cash flows from operating activities: |
| ||||||||
Net loss | $ | ( | $ | | $ | ( | |||
Stock-based compensation | | ( | | ||||||
Deferred income tax benefit | ( | | — | ||||||
Accounts payable and accrued liabilities | | ( | | ||||||
Other | | ( |
| — | |||||
Condensed Consolidated Statement of Cash Flow for the nine months Ended September 30, 2022
Nine Months Ended September 30, 2022 | |||||||||
As Previously | |||||||||
Reported | Adjustment | As Restated | |||||||
Cash flows from operating activities: |
| ||||||||
Net loss | $ | ( | $ | ( | $ | ( | |||
Loss on impairment of intangible assets and goodwill | | | | ||||||
Stock-based compensation | | ( | | ||||||
Deferred income tax benefit | ( | | ( | ||||||
Accounts payable and accrued liabilities | | ( | ( | ||||||
Other | | ( |
| — | |||||
(4) | Summary of Significant Accounting Policies |
Basis of Presentation
The Company has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Reverse Stock Splits
On December 23, 2022, at the commencement of trading, the Company effected a -for-50 reverse stock split. Accordingly, all share and per share amounts for the periods 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.
On June 15, 2021, and immediately prior to the closing of the merger, the Company effected a -for-3 reverse stock split. Accordingly, all share and per share amounts for the periods 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
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Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
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 on June 15, 2021, with Obalon, 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, for further details see Note 12.
Cash and Cash Equivalents
The Company considers highly liquid investments generally with maturities of 90 days or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. The Company’s cash equivalents are primarily in money market funds and certificates of deposit. The Company deposits its cash and cash equivalents in high-quality credit institutions.
Restricted Cash
Restricted cash represents $
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the consolidated balance sheets to the same total reported in the consolidated statements of cash flows (in thousands):
December 31, | December 31, | |||||
2022 |
| 2021 | ||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash | | | ||||
Total cash, cash equivalents, and restricted cash in the consolidated statement of cash flows | $ | | $ | | ||
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Accounts Receivable
The majority of the Company’s accounts receivable arise from direct product sales and sales of products under consignment arrangements, and have payment terms that generally require payment within to
At December 31, 2022, the Company had
Inventory
The Company accounts for inventory at the lower of cost or net realizable value, where net realizable value is based on market prices less costs to sell. The Company establishes inventory reserves for obsolescence based upon specific identification of expired or unusable units with a corresponding provision included in cost of revenue. The allowance for excess and slow-moving inventory was $
Property and Equipment, Net
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over their estimated useful lives of to
Goodwill and Other 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.
Indefinite-lived intangible assets relate to in-process research and development ("IPR&D") acquired in business combinations. The estimated fair values of IPR&D 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.
Finite-lived intangible assets primarily consist of developed technology and trademarks/tradenames and are being amortized on a straight-line basis over their estimated useful lives. See Note 8 for additional information.
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 group 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. The Company recorded an impairment to developed technology and IPR&D intangible assets for the year ended December 31, 2022, and recorded an impairment to goodwill and IPR&D for the year ended December 31, 2021, for further details see Note 8 and Note 9.
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Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance for deferred income tax assets is recorded when it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The Company’s policy is to classify interest and penalties related to income taxes as income tax expense in the consolidated statements of operations.
Foreign Currency
When the local currency of the Company's foreign subsidiaries is the functional currency, all assets and liabilities are translated into United States dollars at the rate of exchange in effect at the balance sheet date. Income and expense items are translated at the weighted-average exchange rate prevailing during the period. The effects of foreign currency translation adjustments for these subsidiaries are deferred and reported in stockholders’ equity as a component of Accumulated Other Comprehensive Loss. The effects of foreign currency transactions denominated in a currency other than an entity's functional currency are included in Gain on foreign currency exchange in the Consolidated Statements of Operations. The Company does not hedge foreign currency translation risk in the net assets and income it reports from these sources.
Revenue Recognition
The Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods or services to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Product sales consist of a single performance obligation that the Company satisfies at a point in time. The Company recognizes product revenue when the following events have occurred: (a) the Company has transferred physical possession of the products, (b) the Company has a present right to payment, (c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products.
For the Company’s Lap-Band product, these criteria are met under the agreements with most customers upon product shipment. This includes sales to distributors, who sell the products to their customers, take title to the products and assume all risks of ownership at the time of shipment. Distributors are obligated to pay within specified terms regardless of when, if ever, they sell the products.
Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis. Accordingly, such amounts are excluded from revenues. Amounts billed to customers related to shipping and handling are included in revenues. Shipping and handling costs related to revenue producing activities are included in cost of sales.
Variable Consideration
The Company records revenue from customers in an amount that reflects the transaction price it expects to be entitled to after transferring control of the goods. Customers and distributors of the Lap-Band product generally have the right to return or exchange products purchased for up to
Certain Lap-Band customers may receive volume rebates or discounts. Discounts are treated as a reduction in sales price and therefore corresponding revenue at the point of sale. Any volume rebates offered would be estimated and reserved as a reduction in revenue.
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Warranty
The Company generally provides warranties against defects in materials and workmanship, and provides replacements at no charge to the customer, as long as the customer has notified the Company within
For the vBloc product line, the Company has a warranty on all implantable parts. vBloc sales began in 2015 and ended in 2018, so this warranty period will go through 2023.
Advertising Cost
Advertising costs are expensed as incurred and totaled $
Stock-Based Compensation
The Company applies ASC 718 Compensation — Stock Compensation and accordingly records compensation expense for stock options over the vesting or service period using the fair value on the date of grant, as calculated by the Company using the Black-Scholes model. The Company’s stock-based compensation plans are more fully described in Note 16.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period, including the pre-funded warrants, see Note 13, that were reclassified from warrant liability to equity as a result of the reverse stock split. Diluted net loss per share is based on the weighted-average common shares outstanding during the period plus dilutive potential common shares calculated using the treasury stock method. Such potentially dilutive shares are excluded when the effect would be to reduce a net loss per share. For purposes of basic and diluted per share computations, loss from continuing operations and net loss are reduced by the down round adjustments for convertible preferred stock and warrants.
The following table sets forth the potential shares of common stock that are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive as of the end of each period presented:
December 31, | ||||
| 2022 |
| 2021 | |
Stock options |
| |
| |
Unvested restricted stock units | | | ||
Convertible preferred stock | | | ||
Warrants |
| |
| |
Concentration of Credit Risk, Interest Rate Risk and Foreign Currency Exchange Rate
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash and trade accounts receivable. Cash and cash equivalents are primarily deposited in demand and money market accounts. At times, such deposits may be in excess of insured limits. Investments in money market funds are not considered to be bank deposits and are not insured or guaranteed by the federal deposit insurance company or other government agency. These money market funds seek to preserve the value of the investment at $
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Substantially all of the Company’s revenue is denominated in U.S. dollars. Only a small portion of revenue and expenses are denominated in foreign currencies, principally the Australian dollar and Euro for 2022 and 2021. The Company has not entered into any hedging contracts. Future fluctuations in the value of the U.S. dollar may affect the price competitiveness of the Company’s products outside the U.S.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (referred to as an “exit price”). Fair value of an asset or liability considers assumptions that market participants would use in pricing the asset or liability, including consideration of non-performance risk.
Assets and liabilities are categorized into a three-level fair value hierarchy based on valuation inputs used to determine fair value.
Level 1 inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 inputs are observable, either directly or indirectly.
Level 3 inputs are unobservable due to little or no corroborating market data.
The carrying amounts of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and certain accrued and other liabilities approximate fair value due to their short-term maturities. Refer to Note 9 regarding the impairment of developed technology, goodwill and IPR&D, Note 10 regarding the fair value of debt instruments and Note 14 regarding fair value measurements and inputs of warrants.
Recent Accounting Pronouncements
New accounting standards adopted by the Company in 2021 are discussed below or in the related notes, where appropriate.
In May 2021, the FASB issued Accounting Standards Update (“ASU”) No. 2021-04, Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging Contracts in Entity’s Own Equity (Subtopic 815-40). This update provides guidance to clarify and reduce diversity in an accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that is not within the scope of another Topic. An entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as an exchange of the original instrument for a new instrument. This update additionally provides further guidance on measuring the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration. This guidance is effective for the fiscal years and interim periods within those years beginning after December 15, 2021. Early adoption is permitted, including adoption in an interim period. The Company adopted this guidance early and the adoption did not have a material impact on the Company’s consolidated financial statements.
In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes: ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance eliminates certain exceptions to the general approach to the income tax accounting model and adds new guidance to reduce the complexity in accounting for income taxes. The adoption of this guidance on January 1, 2021, did not have a material impact on the Company’s consolidated financial statements.
New accounting standards not yet adopted are discussed below.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is intended to provide financial statement users with more useful information about expected credit losses on financial assets held by a reporting entity at each reporting date. In May 2019, the FASB issued ASU No. 2019-05, which amended the new standard by providing targeted transition relief. The
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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 2019-11, which amended the new standard by providing additional clarification. This guidance is effective for the fiscal years and interim periods within those years beginning after December 15, 2022. The Company is currently evaluating the impact the guidance will have on its consolidated financial statements.
Various other accounting standards and interpretations have been issued during 2022 effective dates and effective dates subsequent to December 31, 2021. The Company has evaluated the recently issued accounting pronouncements that are currently effective or will be effective in 2022 and believe that none of them have had or will have a material effect on the Company’s financial position, results of operations or cash flows.
(5) | Liquidity and Management’s Plans |
The Company currently does not generate revenue sufficient to offset operating costs and anticipates such shortfalls to continue, partially due to the unpredictability of COVID-19, which has resulted and may continue to result in a slow-down of elective surgeries and restrictions in some locations, and supply chain disruptions. As of December 31, 2022, the Company had net working capital of approximately $
The Company’s anticipated operations include plans to (i) grow sales and operations of the Company with the Lap-Band product line both domestically and internationally as well as to obtain cost savings synergies, (ii) introduce to the market place ReShapeCare and ReShape Marketplace as an extension, (iii) marketing efforts to increase brand recognition, create customer awareness and increase the patient demand, (iv) continue development of the DBSN device, (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, including Lap-Band 2.0. The Company believes that it has the flexibility to manage the growth of its expenditures and operations depending on the amount of available cash flows, which could include reducing expenditures for marketing, clinical and product development activities.
The Company has incurred significant net losses and negative cash flows from operations since inception, and as a result has an accumulated deficit of approximately $
The Company may be required to raise additional capital, however, there can be no assurance as to whether additional financing will be available on terms acceptable to the Company, if at all. If sufficient funds on acceptable terms are not available when needed, it would have a negative impact on the Company’s financial condition and could force the Company to delay, limit, reduce, or terminate product development or future commercialization efforts or grant rights to develop and market product candidates or testing products that the Company would otherwise plan to develop.
Therefore, the plans cannot be deemed probable of being implemented. As a result, the Company’s plans do not alleviate substantial doubt about our ability to continue as a going concern.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above.
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COVID-19 and Supply Chain Disruptions Risk and Uncertainties
The impact of the COVID-19 outbreak has subsided substantially in the U.S. but continues to result in reduced activity levels outside of the U.S., such as continued restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes or places of business.
In response to the global supply chain instability and inflationary cost increases, we continue to take action to minimize, as much as possible, any potential adverse impacts by working closely with our suppliers to closely monitor the availability of raw materials, lead times, and freight carrier availability. We expect global supply chain instability will continue to have an impact on our business, but to date that has not been significant to our financial performance. The consequences of global supply chain instability, inflationary cost increases and the pandemic, and their adverse impact to the global economy, continue to evolve. Accordingly, the significance of the future impact to our business and financial.
(6) | Supplemental Balance Sheet Information (As Restated) |
Inventory
December 31, | December 31, | |||||
2022 |
| 2021 | ||||
Raw materials | $ | | $ | | ||
Sub-assemblies | | | ||||
Finished goods |
| |
| | ||
Total inventory | $ | | $ | | ||
Prepaid expenses and other current assets:
December 31, | December 31, | |||||
2022 |
| 2021 | ||||
As Restated | ||||||
Prepaid insurance | $ | | $ | | ||
Prepaid advertising and marketing | | | ||||
Other current assets | | | ||||
Total prepaid expenses and other current assets | $ | | $ | | ||
Accrued and other liabilities:
December 31, | December 31, | |||||
2022 |
| 2021 | ||||
As Restated | ||||||
Payroll and benefits | $ | | $ | | ||
Accrued legal settlements | | | ||||
Customer deposits | | | ||||
Taxes | | | ||||
Accrued insurance premium | — | | ||||
Accrued professional | | | ||||
Other liabilities |
| |
| | ||
Total accrued and other liabilities | $ | | $ | | ||
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(7) | Property and Equipment |
Property and equipment consist of the following:
December 31, | ||||||
| 2022 |
| 2021 | |||
Machinery and equipment | $ | | $ | | ||
Furniture and equipment | | | ||||
Computer hardware and software |
| |
| | ||
Tooling and molds | | | ||||
Leasehold improvements | | | ||||
Construction in progress |
| |
| | ||
| |
| | |||
Less accumulated depreciation and amortization |
| ( |
| ( | ||
Property and equipment, net | $ | | $ | | ||
Depreciation expense for the years ended December 31, 2022 and 2021, was approximately $
(8) | Goodwill and Intangible Assets (As Restated) |
The consolidated intangible assets consist of the following:
December 31, 2022 | |||||||||||
| Weighted Average Useful Life (years) |
| Gross Carrying Amount |
| Accumulated Amortization |
| Net Book Value | ||||
Finite-lived intangible assets: | |||||||||||
Developed technology | $ | $ | ( | $ | |||||||
Trademarks/Tradenames | ( | ||||||||||
Total | $ | $ | ( | $ | |||||||
December 31, 2021 | |||||||||||
| Weighted Average Useful Life (years) |
| Gross Carrying Amount |
| Accumulated Amortization |
| Net Book Value | ||||
Finite-lived intangible assets: | |||||||||||
Developed technology | $ | $ | ( | $ | |||||||
Trademarks/Tradenames | ( | ||||||||||
Covenant not to compete |
|
| ( |
| — | ||||||
( | |||||||||||
Indefinite-lived intangible assets: | |||||||||||
In-process research and development | indefinite | — | |||||||||
Total | $ | $ | ( | $ | |||||||
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The gross amount and accumulated impairment loss of indefinite-lived intangible assets are as follows (in thousands):
December 31, | ||||||
2022 | 2021 | |||||
Gross amount | $ | | $ | | ||
Accumulated impairment loss | ( | ( | ||||
Indefinite-lived intangible assets, net | $ | — | $ | | ||
Amortization expense for the years ended December 31, 2022 and 2021, was approximately $
Estimated amortization expense for each of the years ending December 31 is as follows:
Year ending December 31, |
|
| |
2023 | $ | | |
2024 | | ||
2025 | | ||
2026 | | ||
2027 | | ||
Thereafter | | ||
$ | |
In connection with the merger with Obalon, ReShape recorded $
(9) | Impairment of Intangible Assets and Goodwill (As Restated) |
As of December 31, 2022, the Company determined a triggering event occurred due to the decline in the Company’s market capitalization, and as such, the Company performed an impairment analysis of the long-lived assets. It was determined the developed technology related to the Obalon Balloon was fully impaired, as the Company has not been able to start up production or find a partner to manufacture the Obalon Balloon system. Based on this the Company has no current projections for revenues related to the Obalon Balloon and has fully impaired the asset of approximately $
The Company also determined a triggering event occurred, as the Company elected to stop the clinical trials for the ReShape Vest and was closing out the previous trial that occurred, as significant additional clinical work and cost would be required to achieve regulatory approval. Additionally, the Company currently does not plan to pursue the development of the ReShape Vest. As such, the Company determined the carrying value of the IPR&D asset and related trademarks were impaired and recognized non-cash impairment charge of approximately $
As of December 31, 2021, the Company determined a triggering event occurred due to the decline in the Company’s market capitalization, coupled with the delayed effects of the COVID-19 pandemic, and as such, the Company performed an impairment analysis of IPR&D. Due to continued delays in the clinical trials experienced during the COVID-19 restrictions, the Company revised its expectations of when revenues would commence for the ReShape Vest, thus reducing the near-term future net cash flows related to the ReShape Vest. As a result, the Company performed a quantitative impairment analysis and recorded a one-time nonrecurring of $
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As of December 31, 2021, the Company determined due to a decrease in market capitalization, that it is more likely than not that the fair value of net assets are below their carrying amounts and, therefore, the Company performed a goodwill impairment test. The Company estimated the fair value of the goodwill using a combination of the income and market approach, and then the carrying amount including the goodwill to the fair value. Since the fair value was less than the carrying amount, we calculated the goodwill impairment as the difference between the fair value and carrying value. As the difference was greater than the carrying amount of the goodwill the Company impaired the entire balance of $
(10) | 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, the PPP Loan has been forgiven in full including all interest incurred.
Under the provisions of the CARES Act, the Company is eligible for a refundable employee retention credit subject to certain criteria. The Company recognized a $
Credit Agreement
On January 19, 2021, the Company and the Lender entered into an amendment to the credit agreement 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 14. The Company used some of the proceeds from this transaction to pay off the $
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(11) | Leases |
The Company had noncancelable operating leases for office and warehouse space in San Clemente and Carlsbad, California, as well as and noncancelable operating leases for certain office equipment that expire at various dates through 2022. On March 13, 2023 we entered into a lease for approximately
The Company does not have any short-term leases or financing lease arrangements and the effects of any lease modifications have not been material. Certain of the Company’s equipment leases include variable lease payments that are adjusted periodically based on actual usage. Lease and non-lease components are accounted for separately.
The Company determines the lease term as the noncancelable period of the lease, and may include options to extend or terminated the lease when reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less are not recognized on the balance sheet. The Company uses its incremental borrowing rate based on the information available at lease commencement in determining the present value of unpaid lease payments. Right-of-use assets also include any lease payments made at or before lease commencement and any initial direct costs incurred, and exclude any lease incentives received.
Operating lease costs for the years ended December 31, 2022 and 2021, were $
Supplemental information related to operating leases is as follows:
December 31, | December 31, | |||||
Balance Sheet information | 2022 | 2021 | ||||
Operating lease ROU assets | $ | | $ | | ||
Operating lease liabilities, current portion | $ | | $ | | ||
Total operating lease liabilities | $ | | $ | | ||
Cash flow information for the year ended December 31, | 2022 | 2021 | ||||
Cash paid for amounts included in the measurement of operating leases liabilities | $ | | $ | | ||
Maturities of operating lease liabilities at December 31, 2022 were as follows:
2023 | | |||
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 | % |
(12) | Acquisition (As Restated) |
On June 15, 2021, the Company completed the merger with Obalon, which was treated as a reverse acquisition for accounting purposes, for an aggregate purchase price of $
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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. Acquisition related costs of $
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 preliminary 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:
(As Restated) | |||
Current assets | $ | | |
Property and equipment, net | | ||
Right-of-use assets | | ||
Goodwill | | ||
Developed technology | | ||
Liabilities assumed | ( | ||
Total purchase price | | ||
Less: cash acquired | ( | ||
Total purchase price, net of cash acquired | $ | | |
As part of the merger, the Company assumed warrants agreements previously entered into by Obalon that contained a fundamental transaction provision that provide the holders a cash payment based on a Black-Scholes valuation of the warrants. This clause was valid for 30 days subsequent to the date of the transaction. The merger was considered a fundamental transaction provision that allowed the holder to redeem the warrants for cash. The Company performed a preliminary valuation of these warrants and recorded a liability at the time of the merger of $
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
Obalon’s results of operations have been included in our financial statements for the periods subsequent to the consummation of the Merger on June 15, 2021. Obalon contributed
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Pro Forma Results of Operation (Unaudited)
The following table summarizes the results of operations of the above mentioned acquisition from their respective dates of acquisition included in our consolidated results of operations and the unaudited pro forma results of operations of the combined entity had the date of acquisition been January 1, 2021:
Revenue | Net Loss | |||||
(As Restated) | (Unaudited) | (Unaudited) | ||||
Combined entity: Supplemental pro forma from January 1, 2021 to December 31, 2021 | $ | | $ | ( | ||
The information present above is for illustrative purpose only and is not necessarily indicative or results that would have been achieved if the acquisitions had occurred as of the beginning of our 2021 reporting period.
(13) | Equity |
The Company may issue preferred stock, common stock, or both, in connection with underwritten public offerings, registered direct offerings, private placements or business acquisitions. Such issuances of equity typically include the issuance or sale of warrants to purchase common stock. Certain issuances of convertible preferred stock and warrants may contain anti-dilutive features apart from customary adjustments for splits and reverse splits of common stock (collectively, “down round features”). When a series of convertible preferred stock contains this non-standard down round feature, the Company is required to adjust the conversion price in the event of future stock sales at a lower unit price. When warrants issued in connection with an equity transaction contain, or are amended to contain, this non-standard down round feature, the Company is required to adjust the exercise price upon the issuance of any shares of common stock or securities convertible into shares of common stock below the then-existing exercise price and evaluate and account for the value attributable to the reduced warrant exercise price. In the event down round adjustments are triggered, the values attributable to the adjustment to the convertible preferred stock conversion price and warrant exercise price are recorded as an increase to additional paid-in capital and increase to accumulated deficit.
All series of the Company’s convertible preferred stock are classified in stockholders’ equity, including those with the down round feature, when applicable to the equity transaction.
Warrants to purchase common stock are classified in stockholders’ equity, including those issued with the down round feature, as they are both indexed to the Company’s own stock and meet the scope exception in ASC 815 “Derivatives and Hedging.”
The Company had the following equity transactions during the years ended December 31, 2022 and 2021:
November 2022 Sale of Common Stock
On November 8, 2022, the Company entered into a securities purchase agreement with an existing accredited investor, to issue and sell
In connection with the offering, the Company also entered into a warrant amendment agreement with the investor. Under the warrant amendment agreement, the Company agreed to amend certain existing warrants to purchase up to
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June 2022 Exercises of Warrants for Common Stock
On June 16, 2022, the Company entered into a warrant exercise agreement with an existing accredited investor to exercise certain outstanding warrants to purchase up to an aggregate of
The gross proceeds to the Company from the exercise was approximately $
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
July 2021 Exchange of Warrants for Common Stock
On July 16, 2021, the Company entered into an exchange agreement (the “Exchange Agreement”) with existing 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 Therapeutics, Inc. and ReShape Lifesciences Inc. 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 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 $
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approximately $
On June 18, 2021, the Company issued
Common Stock Issued Related to Stock Awards and Options
Restricted Stock Units
The Company issued restricted stock units (“RSUs”) to certain members of the management and Board of Directors. During the year ended December 31, 2022, the Company issued
During the year ended December 31, 2021, the Company issued
Exercise of Stock Options
There were
On September 15, 2021, the Company issued
On July 13, 2021, the Company issued
On June 18, 2021, the Company issued
Series C Convertible Preferred Stock
The Series C convertible stock has a liquidation preference of $
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(14) | Warrants |
The Company’s grants of warrants to purchase common stock are primarily in connection with equity and debt financings. See Note 13 for additional information about equity financings and the related issuance of warrants. Warrant activity was as follows:
| ||||
Shares | ||||
Balance December 31, 2020 |
| | ||
Obtained due to merger | | (1) | ||
Issued |
| |
| (2) |
Exercised |
| ( |
| (3) |
Cancelled |
| — |
| |
Balance December 31, 2021 | | |||
Issued | | (4) | ||
Exercised | ( |
| (5) | |
Cancelled | ( |
| ||
Balance December 31, 2022 | | |||
| (1) | Obalon’s warrants outstanding at the time of the merger with the -for-3 reverse stock split adjustment. In addition, this amount includes, |
| (2) | Warrants issued in 2021 includes |
| (3) | Warrants exercised in 2021 includes |
| (4) | Warrants issued in 2022 includes |
| (5) | Warrants exercised in 2022 includes |
Warrant Assumptions – 2022 Warrants Issued
The following table provides the assumptions used to calculate the fair value of the new warrants issued during 2022, using a Black-Scholes model:
Warrants | Strike Price | Volatility | Remaining Life | Risk Free Rate | |||||||||
Reload warrants - June 2022 | | $ | | % | % | ||||||||
Reload warrants - November 2022 | | $ | | % | % | ||||||||
Representative's warrants | | $ | | % | % | ||||||||
Pre-funded warrants | | $ | | % | % |
Warrant Assumptions – 2021 Warrants Issued
The following table provides the assumptions used to calculate the fair value of the Series G warrants issued during 2021, using a Black-Scholes model:
Warrants | Strike Price | Volatility | Remaining Life | Risk Free Rate | |||||||||
January 19, 2021 | | $ | | % | % | ||||||||
June 28, 2021 | | $ | | % | % | ||||||||
July 16, 2021 | | $ | | % | % |
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(15) | Revenue Disaggregation and Operating Segments |
The following table presents the Company’s revenue disaggregated by geography:
Year Ended | ||||||
December 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 Rest of World (primarily in the Middle East). All regions sell the Lap-Band product line, which consisted of nearly all our revenue and gross profit for the years ended December 31, 2022 and 2021. During the second half of 2020 the Company launched ReShapeCare, which had minimal revenue for the years ended December 31, 2022 and 2021. The Company anticipates generating more ReShapeCare revenue during 2022. There was
The Company has
(16) | Stock-based Compensation(As Restated) |
The ReShape Lifesciences Inc. 2022 Equity Incentive Plan (the “Plan”) became effective December 14, 2022, and provides for the grant of stock options or other stock-based awards to employees, officers, non-employee directors and outside consultants of the Company. The maximum number of shares of common stock that will be available for issuance under this Plan was originally
The Plan is administered by the committee, which determines the types of awards to be granted, including the number of shares subject to the awards, the exercise price and the vesting schedule. Options granted under the Plan expire no later than
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Stock Options
A summary of the status of the Company’s stock options 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, 2020 | | $ | | $ | — | |||||
Vested options obtained due to merger | | | ||||||||
Options granted | | | ||||||||
Options exercised | ( | | ||||||||
Options cancelled | ( | | ||||||||
Outstanding at December 31, 2021 |
| | | $ | — | |||||
Options granted |
| | | |||||||
Options exercised |
| — | — | |||||||
Options cancelled |
| ( | | |||||||
Outstanding at December 31, 2022 |
| | | $ | — | |||||
Exercisable at December 31, 2022 | | | — | |||||||
Vested and expected to vest at December 31, 2022 | | | — | |||||||
As of December 31, 2022, stock options under the Plan that were , and vested, and expected to vest, had
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.
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.
The Company’s weighted average assumptions used to estimate fair value of stock options granted were as follows:
Year Ended December 31, | ||||
2022 | 2021 | |||
As Restated | ||||
Risk-free interest rate |
| |||
Expected term (in years) | ||||
Expected dividend yield | ||||
Expected volatility | ||||
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Restricted Stock Units
A summary of the Company’s unvested RSUs award activity for the year ended December 31, 2022, were as follows:
Weighted | |||||
Average | |||||
| Grant Date | ||||
Shares | Fair Value | ||||
Unvested RSUs at December 31, 2020 | — | $ | — | ||
Granted | | | |||
Vested | ( | | |||
Cancelled/Forfeited | — | — | |||
Unvested RSUs at December 31, 2021 |
| | | ||
Granted |
| | | ||
Vested (1) |
| ( | | ||
Cancelled/Forfeited |
| ( | | ||
Non-vested RSUs at September 30, 2022 |
| | | ||
| (1) | At December 31, 2022, there were |
The fair value of each RSU is the closing 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 RSUs at December 31, 2022 was $
Compensation expense related to stock options was recognized as follows:
Year Ended | ||||||
December 31, | ||||||
2022 | 2021 | |||||
As Restated | ||||||
Sales and marketing | $ | | $ | | ||
General and administrative | | | ||||
Research and development | | | ||||
Total stock-based compensation expense | $ | | $ | | ||
(17) | Income Taxes (As Restated) |
Income tax expense (benefit) consists of the following:
Year ended December 31, | ||||||
| 2022 |
| 2021 | |||
Deferred: | As Restated | |||||
Federal | $ | ( | $ | ( | ||
State | ( | ( | ||||
Foreign | ( | — | ||||
Deferred income tax benefit | ( | ( | ||||
Current: | ||||||
Federal | | — | ||||
State | | | ||||
Foreign | | ( | ||||
Total income tax benefit, net | $ | ( | $ | ( | ||
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A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:
Year ended December 31, |
| ||||||
| 2022 |
| 2021 | ||||
As Restated | |||||||
Income tax benefit at U.S. federal statutory rate |
| | % | | % | ||
State income tax benefit, net of federal benefit | | % | | % | |||
Stock warrant valuation | — | % | ( | % | |||
Goodwill impairment | — | % | ( | % | |||
Stock-based compensation | — | % | ( | % | |||
Other permanent differences |
| ( | % | ( | % | ||
Change in state tax rate | | % | ( | % | |||
Foreign rate differential | ( | % | — | % | |||
Net operating loss true up | — | % | | % | |||
Other adjustments | | % | | % | |||
Change in valuation allowance |
| ( | % | | % | ||
Effective income tax rate |
| | % | | % | ||
A reconciliation of the beginning and ending amount of uncertain tax positions are as follows:
2022 | 2021 | |||||
As Restated | ||||||
Uncertain gross tax positions, January 1 | $ | | $ | — | ||
Current year tax positions | — | — | ||||
Increase in prior year tax positions | — | | ||||
Settlements | — | |||||
Lapse of statute of limitations | — | — | ||||
Uncertain gross tax positions, December 31 | $ | | $ | | ||
The components of deferred tax assets and liabilities are as follows:
| December 31, | |||||
2022 |
| 2021 | ||||
Deferred tax assets: |
|
|
| As Restated | ||
Start-up costs | $ | | $ | | ||
Capitalized research and development costs |
| |
| | ||
Reserves and accruals |
| |
| | ||
Property and equipment | — | — | ||||
Intangible assets | | — | ||||
Research and development credit |
| |
| | ||
Lease liability | | | ||||
Net operating loss carryforwards | | | ||||
State and local taxes | | | ||||
Total gross deferred tax assets |
| |
| | ||
Valuation allowance |
| ( |
| ( | ||
Deferred tax assets, net of valuation allowance | | | ||||
Property and equipment | ( | ( | ||||
Intangible assets | — | ( | ||||
Operating lease right-of-use assets | ( | ( | ||||
Total gross deferred tax liabilities | ( | ( | ||||
Deferred income taxes, net | $ | | $ | ( | ||
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Based on the level of historical losses and projections of losses in future periods, the Company provided a
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valuation allowance at both December 31, 2022 and 2021. The remaining net deferred tax asset at December 31, 2022 is the remaining balance of the Netherlands net operating loss. A valuation allowance is not applicable to this entity, as they historically produce income and utilize their net operating loss carryforward. The deferred tax liability at December 31, 2021 is the result of the deferred tax liability associated with the indefinite-lived intangible asset less the deferred tax asset associated with U.S. federal net operating loss that do not expire. In 2022, the indefinite-lived intangible asset became fully impaired. The Company has a policy that NOL’s are shown gross with valuation allowances with respect to IRC 382 limitations.
As of December 31, 2022 and 2021, the Company had U.S. federal net operating loss carryforwards of $
The Company’s ability to utilize its net operating loss carryforwards, tax credits, and built-in items of deduction, including capitalized start-up costs and research and development costs, has been, and may continue to be substantially limited due to ownership changes. These ownership changes limit the amount of net operating loss carryforwards, credits and built-in items of deduction that can be utilized annually to offset future taxable income. In general, an ownership change, as defined in IRC Section 382, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than
The Company has adopted accounting standards which prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company had
The Inflation Reduction Act (IRA) was enacted on August 16, 2022 and includes a new corporate alternative minimum tax based on book income, an excise tax on stock buybacks, and other items such as tax incentives for energy and climate initiatives. There is no impact to the Company at this time, however this may change depending on each year’s differing facts and activities. The Company will continue to monitor this over time.
(18) | Commitments and Contingencies |
Employee Arrangements and Other Compensation
Certain members of management are entitled to severance benefits payable upon termination following a change in control, which would approximate $
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Purchase Commitments
The Company generally purchases its products and accessories from a limited group of third-party suppliers through purchase orders. The Company had $
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
The Company is not aware of any pending or threatened litigation against it that could have a material adverse effect on the Company’s business, operating results or financial condition, other than what was disclosed above. The medical device industry in which the Company operates is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices. As a result the Company may be involved in various legal proceedings from time to time.
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 could have a material adverse effect on the Company’s business, operating results or financial condition.
(19) | Subsequent Events |
The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The Company evaluated all subsequent events and determined that there are no material recognized or unrecognized subsequent events requiring disclosure, except as described below.
On March 13, 2023 we entered into a lease for approximately
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location to the Irvine, California location. The Irvine California lease has a term of
Silicon Valley Bank (SVB) was closed on March 10, 2023, by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect depositors, the FDIC transferred all the deposits and substantially all of the assets of SVB to Silicon Valley Bridge Bank, N.A., a newly formed bridge bank that will be operated by the FDIC as it markets the institution to potential bidders. On March 12, 2023, the Department of the Treasury, Federal Reserve, and FDIC (collectively, the Agencies) announced that they were invoking the Systemic Risk Exception to the Federal Deposit Insurance Act to permit the FDIC to take action to fully protect all depositors of SVB, regardless of their deposit insurance coverage. In addition, the Agencies also announced that SVB depositors would have access to all their money starting March 13, 2023.
On March 10, 2023, the Company held approximately $
On February 8, 2023, the Company closed a public offering of
Gross proceeds, before deducting underwriting discounts and commissions and estimated offering expenses, are approximately $
The Company also granted the underwriters an option to purchase an additional
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. An internal control material weakness is a significant deficiency, or aggregation of deficiencies, that does not reduce to a relatively low level the risk that material misstatements in financial statements will be prevented or detected on a timely basis by employees in the normal course of their work. An internal control significant deficiency, or aggregation of deficiencies, is one that could result in a misstatement of the financial statements that is more than inconsequential. In making its assessment of internal control over financial reporting management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022, and determined that our internal control over financial reporting was not effective at a reasonable assurance level due to the following material weakness in our internal control over financial reporting:
Control Environment: We had insufficient internal resources with appropriate accounting and finance knowledge and expertise to design, implement, document and operate effective internal controls around our financial reporting process. The insufficient internal resources resulted in misstatements of our revenue recognition, stock based compensation, weighted average share calculation, disclosures of income taxes and expense cut off at period end.
Purchase Accounting: The Company did not design and maintain effective management review controls at a sufficient level of precision over the accounting for transactions related to the prepaid D&O insurance policy purchased in connection with the merger transaction in June 2021. This material weakness resulted in certain material corrections to the financial statements and in the restatement of the Company’s financial statements for the annual and interim consolidated financial statements for the year ended December 31, 2021, and the interim consolidated financial statements in the quarters in the year ended December 31, 2022.
Income Taxes: The Company did not design and maintain effective management review controls at a sufficient level of precision over the accounting for income taxes.
Journal entry access and review: The Company did not have effective processes to ensure that all journal entries were properly approved prior to being posted to the general ledger. Furthermore, a segregation of duties conflict is present as certain individuals have the ability to both prepare and post journal entries to the general ledger.
Information technology access and change management: A segregation of duties conflict is present as access and approval rights to the Company’s information technology systems are not reviewed on a timely basis. Furthermore, certain individuals have the ability to develop and deploy changes to production which could create a segregation of duties risk.
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We are currently implementing our remediation plan to address the material weaknesses identified above. Such measures include:
| ● | Hiring additional accounting personnel to ensure timely reporting of significant matters. |
| ● | Designing and implementing controls to formalize roles and review responsibilities to align with our team's skills and experience and designing and implementing formalized controls. |
| ● | Designing and implementing formal processes, policies and procedures supporting our financial close process. |
| ● | Design a formal review of a monthly journal entry report to ensure journal entries are appropriately approved within a timely manner. |
Management’s Report on Internal Control Over Financial Reporting
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control–Integrated Framework (2013) issued by the Committee of sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, the Company’s management concluded that its internal control over financial reporting was not effective as of December 31, 2022.Changes in Internal Control Over Financial Reporting
No changes in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have been detected.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers
The following table sets forth information regarding our executive officers, including their ages, as of December 31, 2022:
Name |
| Age |
| Position |
Paul Hickey | 58 | President and Chief Executive Officer, Director | ||
Thomas Stankovich |
| 62 |
| Chief Financial Officer |
Paul Hickey has served as our President and Chief Executive Officer and as one of our directors since August 15, 2022. Mr. Hickey was previously the President and Chief Executive Officer of Altimate Medical Holdings, Inc., which designs and manufactures rehabilitation medical equipment including its EasyStand brand, from February 2020 to August 2022. Previously, from 2018 to 2020, he served as the President and Chief Executive Officer of Vertebral Technologies, Inc., a medical device company focused on implantable spinal devices. Prior to that, from 2016 to 2017, Mr. Hickey was Senior Vice President of Marketing and Reimbursement for EnteroMedics (now ReShape Lifesciences). Earlier in his career, he consulted for a variety of commercialized medical device companies and held positions of increasing responsibility at Zimmer Biomet. For the past four years, Mr. Hickey has served on the Board of Directors at Excelen Center for Bone and Joint Research and Education. Mr. Hickey earned a Bachelor’s degree from the University of Michigan and a Master’s from Washington University in Saint Louis.
Areas of Relevant Experience: Mr. Hickey’s significant experience leading medical device companies, including in his position as President and Chief Executive Officer of our company, makes him well-suited to serve as a member of the Board of Directors.
Thomas Stankovich has served as our Chief Financial Officer since October 2019. Mr. Stankovich has over 25 years of executive leadership experience as the CFO for multiple public and private healthcare companies. Prior to joining us, Mr. Stankovich spent the past nine years as the Global Senior Vice President and CFO of MP Biomedicals, a life sciences and molecular biology-diagnostics company. At MP Biomedicals he was responsible for financial planning and reporting, operations and strategy development along with the acquisition and integration of two international companies. Prior to MP Biomedicals, Mr. Stankovich served as CFO at Response Genetics where he successfully led the company through their initial public offering. Additionally, he served as CFO for Cobalis Corporation and Ribapharm, where he also led the company through their initial public offering, which at the time became the second largest ever IPO in the biotechnology sector. Mr. Stankovich also held CFO positions at ICN International which later changed names to Valeant Pharmaceuticals.
Board of Directors
CLASS I DIRECTORS — Continuing in office until the 2023 Annual Meeting
Dan Gladney, age 70, has served as one of our directors since November 2015, as Chairman of our Board of Directors since October 2016 and as Executive Chair since July 2022. Mr. Gladney served as our President and Chief Executive Officer from November 2015 until March 2019. Prior to joining us, Mr. Gladney served as Chairman and Chief Executive Officer of Lanx, Inc., a medical device company focused on developing and commercializing innovative devices for spinal surgery. Prior to his time at Lanx, Inc., Mr. Gladney was a Healthcare Operating Partner at Norwest Equity Partners (NEP) from 2008 until 2010, where he was responsible for strategic planning, business growth and corporate governance for NEP portfolio companies and executing new investment opportunities for the firm. Prior to joining NEP, Mr. Gladney served as President and Chief Executive Officer of several medical device companies including Heart Leaflet Technologies and ACIST Medical Systems, both of which were acquired by The Bracco Group. He also served as Chairman, Chief Executive Officer and President of Compex Technologies, a publicly traded orthopedic and health and wellness electro therapy company, from 2002 until 2006. Mr. Gladney currently serves on the board of directors of Aria CV, Inc. and has been a member of a number of other private and public company boards. After the sale of Lanx, he acted as a private investor and small business consultant.
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Areas of Relevant Experience: Mr. Gladney’s significant experience leading medical device companies, as well as his position as former President and Chief Executive Officer of ReShape Lifesciences and his experience with commercialization of medical device companies makes him well-suited to serve as a member of the Board of Directors.
Lori McDougal, age 61, has served as one of our directors since July 2015. Ms. McDougal has served in an executive capacity in the healthcare industry for more than eighteen years. She served as an Executive Vice President at Optum, Inc., a part of UnitedHealth Group, Inc., from 2013 until 2014. Prior to her time at Optum, she served as Chief Executive Officer of UnitedHealth Group’s subsidiary UnitedHealth Military & Veterans Services, LLC from 2008 until 2013, and previously served as the Chief Operating Officer of UnitedHealth Military & Veterans Services from 2007 until 2008. Before joining UnitedHealth Military & Veterans Services, she served as a Vice President of UnitedHealthcare Medicare & Retirement starting in 2002. Additionally, she served as President of UnitedHealth International from 1998 until 2002 and Vice President of OptumInsight from 1996 to 1998.
Areas of Relevant Experience: Ms. McDougal’s significant executive leadership experience and her experience working with private and government insurers, both domestic and foreign, make her well-suited to serve as a member of the Board of Directors.
CLASS II DIRECTORS — Continuing in office until the 2024 Annual Meeting
Gary Blackford, age 65, has served as one of our directors since August 2016. From 2002 until February 2015, Mr. Blackford was the Chairman of the Board and Chief Executive Officer of Universal Hospital Services, Inc. (NYSE: UHS), a leading nationwide provider of medical technology outsourcing and services to the health care industry. Mr. Blackford was the Chief Executive Officer of Curative Health Services, Inc., a specialty pharmacy and health services company, from 2001 to 2002. He was also the Chief Executive Officer of ShopforSchool, Inc., an online retailer, from 1999 to 2001. Mr. Blackford has also been a director of Avanos Medical, Inc. (NYSE: AVNS) since 2014 (and Chairman since 2020), Children’s Hospitals and Clinics of Minnesota since 2017 (and Chairman since 2020), and Lifespace Communities, Inc., a not-for-profit organization, since February 2022. He was a director of Wright Medical Group, N.V. (NASDAQ: WMGI) from 2008 to 2020 and PipelineRX, Inc. from 2016 to 2020.
Areas of Relevant Experience: Mr. Blackford’s executive leadership and director experience in health care services, health benefits, medical devices, medical equipment and medical technology makes him well- suited to serve as a member of the Board of Directors.
Arda Minocherhomjee, age 69, has served as one of our directors since August 2018. Mr. Minocherhomjee is a Managing Partner of Chicago Growth Partners, which he founded in 2004. Previously, Dr. Minocherhomjee was a Managing Director at William Blair Capital Partners and, as head of the firm’s Healthcare Research Group, covered multiple sectors, including drugs/drug delivery, medical devices and selected healthcare services. Mr. Minocherhomjee received a M.S. (Pharmacology) from the University of Toronto and a Ph.D. and a MBA from the University of British Columbia.
Areas of Relevant Experience: Mr. Minocherhomjee’s significant experience in financial research and analysis, including financing activities, with a focus in the healthcare and medical device sectors, makes him well-suited to serve as a member of the Board of Directors.
CLASS III DIRECTOR — Continuing in Office until the 2025 Annual Meeting
Mr. Hickey is a Class III director with a term continuing until the 2025 annual meeting of stockholders.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires our directors and officers and all persons who beneficially own more than 10% of the outstanding shares of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. Based solely on a review of Section 16 reports filed electronically with the SEC and written representations from certain reporting persons, we believe that all forms required to be filed by such persons under Section 16(a) were filed on a timely basis, with the exception of the following:
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| ● | Bart Bandy, our former President and Chief Executive Officer, made six late Form 4 filings related to one transaction on each of January 4, 2022, April 1, 2022, May 5, 2022, July 1, 2022, and August 5, 2022, and two transactions on June 1, 2022. |
| ● | Paul Hickey, our President and Chief Executive Officer, made one late Form 3 filing on August 26, 2022. |
| ● | Thomas Stankovich, our Chief Financial Officer, made nine late Form 4 filings related to one transaction on each of January 4, 2022, April 1, 2022, May 5, 2022, June 1, 2022, July 1, 2022, August 5, 2022, and September 6, 2022, two transactions on November 4, 2022, and four transactions on November 17, 2022. |
Audit Committee
The Audit Committee is responsible for assisting the Board in monitoring the quality and integrity of our consolidated financial statements, our internal controls, our compliance with legal and regulatory requirements and the qualifications, performance and independence of our independent auditor. The Audit Committee has sole authority to retain and terminate the independent auditor and is directly responsible for the compensation and oversight of the work of the independent auditor. The Audit Committee reviews and discusses with management and the independent auditor the annual audited and quarterly consolidated financial statements (including the disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this prospectus), reviews the integrity of the financial reporting processes, both internal and external, reviews the qualifications, performance and independence of the independent auditor, oversees the Company’s compliance with legal and regulatory requirements with respect to financial matters, and prepares the Audit Committee Report included in the proxy statement in accordance with the rules and regulations of the SEC. All of the Audit Committee members meet the existing independence and experience requirements of the Nasdaq Stock Market and the SEC. Our Board of Directors has determined that each of Lori McDougal and Arda Minocherhomjee is a financial expert under the rules of the SEC. Mr. Minocherhomjee replaced Ms. McDougal as the Chair of the Audit Committee effective immediately after the filing of our quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2022. The Audit Committee held seven meetings in 2022. During each of the meetings, the Audit Committee met in private session with our independent auditor and alone in executive session without members of management present.
Director Nomination Process
During the fourth quarter of 2022, we made no material changes to the procedures by which stockholders may recommend nominees to the Board.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics, which applies to all directors and employees, including executive officers, including, without limitation, our principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. A copy of this code of business conduct and ethics is available on our website at www.reshapelifesciences.com (under “Investors,” “Corporate Governance”) and we intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any waivers from or amendments to any provision of the code of business conduct and ethics by disclosing such information on the same website.
In addition, we intend to promptly disclose (1) the nature of any amendment to our code of business conduct and ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and (2) the nature of any waiver, including an implicit waiver, from a provision of our code of business conduct and ethics that is granted to one of these specified officers, the name of such person who is granted the waiver and the date of the waiver on our website in the future.
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ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is hereby incorporated by reference to the sections of our Proxy Statement entitled “Director Compensation,” “Executive Compensation,”
Executive Compensation
Summary Compensation Table
The following table sets forth information regarding compensation earned by our named executive officers during our fiscal years ended December 31, 2022 and 2021.
Summary Compensation Table
Non- equity Incentive Plan Compensation ($) | ||||||||||||||||||||
Stock Awards ($) | All Other Compensation ($) | |||||||||||||||||||
Name and | Bonus ($) |
| ||||||||||||||||||
Principal Position |
| Year |
| Salary ($) |
|
|
|
|
| Total ($) | ||||||||||
Paul F. Hickey(1) | 2022 | 133,078 | 25,000 | — | — | — | 158,078 | |||||||||||||
President and Chief Executive Officer | ||||||||||||||||||||
Bart Bandy(2) |
| 2022 | 346,537 | — | — | — | — | 346,537 | ||||||||||||
Former President and Chief Executive Officer |
| 2021 | 430,500 | 350,000(3) | 5,170,986(5) | 317,200(7) | — | 6,268,686 | ||||||||||||
Thomas Stankovich | 2022 | 330,000 | 77,338(6) | — | — | 148,500(4) | 555,838 | |||||||||||||
Chief Financial Officer | 2021 | 325,000 | 250,000(3) | 1,625,164(5) | 94,579(7) | — | 2,294,743 | |||||||||||||
| (1) | Mr. Hickey joined the Company on August 15, 2022. His $25,000 bonus was a sign-on bonus under his employment agreement. |
| (2) | Mr. Bandy separated from the Company on July 27, 2022. |
| (3) | Consists of the one-time cash bonus awarded to Mr. Bandy and Mr. Stankovich in July 2021 in special recognition of their extraordinary efforts and accomplishments for and on behalf of the Company during 2021, including their roles in completing the Company’s merger with Obalon Therapeutics and corresponding listing on The Nasdaq Capital Market and the Company’s subsequent $46 million financing. |
| (4) | Consists of a one-time cash bonus awarded to Mr. Stankovich under a retention bonus agreement pursuant to which the Company agreed to pay Mr. Stankovich 100% of his target 2022 cash bonus, regardless of actual performance, if Mr. Stankovich remained employed by the Company until at least December 31, 2022. |
| (5) | Consists of restricted stock units granted to Mr. Bandy and Mr. Stankovich in July 2021, the amounts represent the fair value of restricted stock units granted during the year. The award is calculated on the date of grant in accordance with Financial Accounting Standards. |
| (6) | Consists of the payout under the Company’s Management Incentive Plan for 2021 which was paid out as a stock bonus in November 2022. |
| (7) | Consists of the payout under the Company’s Management Incentive Plan for 2020 which was paid out as a cash bonus in August 2021. |
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2021 Bonuses
In July 2021, the Company paid a special one-time cash bonus of $350,000 to Mr. Bandy and $250,000 to Mr. Stankovich in special recognition of their extraordinary efforts and accomplishments for and on behalf of the Company during 2021, including their roles in completing the Company’s merger with Obalon Therapeutics and corresponding listing on The Nasdaq Capital Market and the Company’s subsequent $46 million financing.
2021 Restricted Stock Unit Grants
In July 2021, the Compensation Committee granted each of Mr. Bandy and Mr. Stankovich two sets of restricted stock units. The first grant was made pursuant to their employment agreements, under which each of Mr. Bandy and Mr. Stankovich were offered an equity grant in connection with their employment commencement, which would vest 25% on the one-year anniversary of their employment start date and monthly thereafter for 36 months. The restricted stock unit grant to Mr. Bandy covered 19,202 shares of common stock, of which 10,802 vested on the date of grant and the remainder were to vest monthly for 21 months, based on his employment start date of April 1, 2019. The restricted stock unit grant to Mr. Stankovich covered 5,648 shares of common stock, of which 2,471 vested on the date of grant and the remainder were to vest monthly for 27 months, based on his employment start date of October 29, 2019. The second set of restricted stock unit grants were made as part of an ongoing equity grant program for the executive leadership employees, which grants were to vest in 36 equal monthly installments following the grant date. Mr. Bandy and Mr. Stankovich were granted restricted stock units covering 4,519 and 1,808 shares of common stock, respectively.
2021 Base Salary and Target Bonus Increases
In July 2021, the Compensation Committee approved a base salary increase for Mr. Bandy from $390,000 to $445,000 and for Mr. Stankovich from $300,000 to $330,000 and a target bonus increase for Mr. Bandy from 50% to 65% of base salary and for Mr. Stankovich from 30% to 45% of base salary.
Employment Agreement and Separation Agreement with Bart Bandy
On August 26, 2019, we entered into an employment agreement with Mr. Bandy, our former President and Chief Executive Officer. Pursuant to the agreement, Mr. Bandy was entitled to a base salary of $390,000, or a higher annual rate if approved by the Board of Directors, and to cash and equity awards pursuant to our incentive compensation plan, contingent on Mr. Bandy meeting certain annual objectives determined by the Compensation Committee. The agreement established that Mr. Bandy was eligible for an annual incentive compensation of up to 50% of his base salary for that year. Mr. Bandy’s executive employment agreement also provided for the receipt of certain benefits upon the occurrence of particular termination events or a change in control. In connection with Mr. Bandy’s departure from the Company in July 2022, the Company and Mr. Bandy entered into a separation agreement and general release pursuant to which the Company agreed to provide Mr. Bandy certain severance benefits, as provided in his employment agreement, including severance pay equal to 18 months of base salary payable as salary continuation payments. All of Mr. Bandy’s unvested RSUs as of the separation date were terminated and forfeited.
Employment Agreement with Thomas Stankovich
On October 29, 2019, we entered into an employment agreement with Mr. Stankovich, our Chief Financial Officer. The agreement has an initial term of one year and automatically renews for successive one year terms unless either party delivers written notice 90 days prior to the expiration of the current term or unless it is earlier terminated. Pursuant to the agreement, Mr. Stankovich is entitled to a base salary of $300,000, or a higher annual rate if approved by the Board of Directors, and to cash and equity awards pursuant to our incentive compensation plan, contingent on Mr. Stankovich meeting certain annual objectives determined by the Compensation Committee. The agreement establishes that Mr. Stankovich is eligible for an annual incentive compensation of up to 30% of his base salary for that year. Mr.
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Stankovich’s employment agreement also provides for the receipt of certain benefits upon the occurrence of particular termination events or a change in control.
Employment Offer Letter and Employment Agreement with Paul Hickey
On July 25, 2022, we entered into an employment offer letter with Mr. Hickey, our President and Chief Executive Officer, pursuant to which Mr. Hickey will receive an annual base salary of $400,000 and a potential annual bonus of up to 50% of his annual base salary, which bonus for the 2022 calendar year will be prorated based on the portion of the year he is actually employed. Additionally, the offer letter provided that Mr. Hickey would be granted a stock option under the Company’s equity incentive plan to purchase a number of shares of the Company’s common stock equal to 4% of the Company’s outstanding common stock, on a fully-diluted basis, as of the date of the offer letter. The options will have a 10-year term and a per share exercise price equal to the closing market price of the Company’s common stock on the grant date. The options will vest with respect to 25% of the shares of common stock purchasable thereunder on the one-year anniversary of the grant date and monthly thereafter for 36 months, conditioned upon Mr. Hickey’s continued employment with the Company from the grant date until the respective vesting date. As soon as reasonably practicable following the first offering of common stock or securities convertible into common stock for purposes of financing the Company after Mr. Hickey’s start date, Mr. Hickey will be granted an additional stock option or other equity award in an amount that maintains his fully diluted ownership percentage at 4%. The offer letter contains severance provisions which provide that in the event Mr. Hickey’s employment is terminated by the Company without cause or Mr. Hickey resigns for good reason, he will be entitled to receive a severance payment equal to 12 months base salary payable as salary continuation payments. To be eligible to receive these payments, Mr. Hickey will be required to execute and not revoke a release of claims. On November 1, 2022, we entered into an employment agreement with Mr. Hickey that memorialized the terms of his employment offer letter.
Management Incentive Plan
Our Management Incentive Plan is designed to provide executive officers with annual incentive compensation based on the achievement of certain pre-established performance objectives. By utilizing a combination of objective and subjective performance factors critical to our success, this program incentivizes our executive officers to achieve results that benefit them and the Company.
At the beginning of each year, the Compensation Committee approves, subject to review by the Board of Directors, new corporate objectives for the Management Incentive Plan. The objectives are established and measured on an annual basis to better align personal objectives with the direction and objectives of the Company. When these objectives are established and approved, each objective, and, if applicable, the subparts to each objective, is weighted and assigned a percentage value relative to the corporate objectives taken as a whole. At that time, the Compensation Committee also establishes the maximum bonus amount for each of our executive officers, based on a set percentage of each executive officer’s base salary, that the corporate objectives are worth. The Compensation Committee may modify or re-weight the objectives during the course of the fiscal year, if necessary, to reflect changes in our business plan.
Long-Term Incentives
Our Second Amended and Restated 2003 Stock Incentive Plan allowed us and our 2022 Equity Incentive Plan, if approved by our stockholders, will allow us the opportunity to grant stock options, restricted stock and other equity-based awards. In general, we view equity awards as incentives for future performance and not as compensation for past accomplishments. We also believe that equity awards reward continued employment by an executive officer, with an associated benefit to us of employee continuity and retention. The exercise price of stock options awarded by the Compensation Committee has been and will continue to be the closing sales price of our common stock on the date of grant.
The Compensation Committee and the Board of Directors do not grant equity awards according to a prescribed formula or target, although they review equity data from comparable companies to inform their decisions. In determining the number of equity awards granted to executive officers, individual responsibilities and experience, as well as contributions and achievements are considered, and, in appropriate circumstances, the Compensation Committee considers the recommendations of the Chief Executive Officer. The objectives utilized to assess individual contributions and achievements vary depending on the individual executive, but relate generally to strategic factors such as clinical
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and regulatory progress, commercialization, research and development, continued establishment of intellectual property and implementation of appropriate financing strategies. While the Chief Executive Officer may provide recommendations to the Compensation Committee regarding the number of equity awards granted to other executive officers from time to time, he does not make a recommendation as to his equity awards.
Outstanding Equity Awards at Fiscal Year-End
The following table summarizes the outstanding equity award holdings held by our named executive officers at December 31, 2022.
Stock Awards | |||||
Name |
| Number of shares | Market value of shares | ||
Paul Hickey | — | — | |||
Bart Bandy | — | — | |||
Thomas Stankovich | 2,131 | 14,363 | |||
| (1) | Consists of unvested restricted stock units that were granted in July 2021. |
| (2) | Based upon the closing price of our common stock on December 30, 2022 (the last business day of fiscal 2022) of $6.74. |
Director Compensation
Compensation for our directors is designed to result in compensation that is competitive with that provided by comparably-sized, publicly-traded, medical device companies. For 2022 (i) each non-employee director received an annual retainer of $35,000 for serving on the Board, (ii) each non-employee director who served on the Audit Committee, the Compensation Committee or the Nominating and Governance Committee, other than the chairperson of each of the committees, received an additional annual retainer of $8,000, $5,000 and $4,500, respectively, (iii) each of the chairpersons of the Audit Committee, the Compensation Committee and the Nominating and Governance Committee received an additional annual retainer of $17,500, $10,000 and $9,000, respectively, and (iv) our Lead Director received a $15,000 annual retainer in that role.
We reimburse all of our non-employee directors for reasonable travel and other expenses incurred in attending Board and committee meetings. Directors who also serve as employees of the Company receive no additional compensation for serving as a director. Mr. Hickey is the only director who is also an employee of the Company.
In July 2022, the Board appointed Dan Gladney, who was previously the Chair of the Board of Directors, as Executive Chair. In his role as Executive Chair, Mr. Gladney will take a more active role supporting Mr. Hickey and the Company on strategic matters. Mr. Gladney’s annual cash compensation for his service as the Executive Chair will be $90,000, which will replace his compensation as Chair of the Board, and is in addition to the $35,000 annual retainer paid to all Board members. Therefore Mr. Gladney’s total annual cash compensation for his service on the Board and as Executive Chair will be $125,000, excluding any amounts paid for his current service on the Nominating and Governance Committee or any other committee of the Board to which he may be appointed.
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The following table shows the compensation of the non-employee members of our Board during fiscal year 2022:
Director Compensation in 2022
Fees Earned or Paid in Cash ($)(2) | Total ($) | |
Name(1) | ||
Dan Gladney | 95,261 | 95,261 |
Gary Blackford | 77,000 | 77,000 |
Lori McDougal | 57,500 | 57,500 |
Arda Minocherhomjee | 52,500 | 52,500 |
| (1) | Paul Hickey, our current President and Chief Executive Officer, and Bart Bandy, who served as President and Chief Executive Officer and a director of the Company until July 2022, are not included in this table because they were employees of the Company during 2022 and thus received no compensation for their services as a director. The compensation that Mr. Hickey and Mr. Bandy received as an employee of the Company is shown in the “Summary Compensation Table.” |
| (2) | The amounts in this column include the annual Board of Director and committee retainer amounts for 2022 described above under the heading “Director Compensation.” |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management
The following table shows the beneficial ownership of our common stock by each person or group who beneficially owned 5% or more of our common stock, each of our directors, each of the executive officers named in the Summary Compensation Table in this proxy statement and our directors and executive officers as a group, as of December 31, 2022. Percentage ownership calculations for beneficial ownership are based on 519,198 shares outstanding as of December 31, 2022. However, for purposes of computing the percentage of outstanding shares of common stock held by each person or group of persons named above, any shares which that person or persons has or have the right to acquire within 60 days following December 31, 2022 is deemed to be outstanding for that person’s calculation, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The information regarding the beneficial owners of more than 5% of our common stock is based upon information supplied to us by our directors, officers and principal stockholders or on Schedules 13D or 13G filed with the Securities and Exchange Commission (“SEC”). Unless otherwise noted, the directors and executive officers listed in the table have sole voting and investment power with respect to the shares of common stock owned by them and their address is c/o ReShape Lifesciences Inc., 1001 Calle Amanecer, San Clemente, California 92673.
Title of Class | Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class | |||
Common Stock | Directors and Executive Officers | |||||
Paul Hickey | — | * | ||||
Thomas Stankovich(1) | 6,509 | 1.4% | ||||
Dan Gladney | 840 | * | ||||
Gary Blackford | — | * | ||||
Arda Minocherhomjee | — | * | ||||
Lori McDougal | — | * | ||||
Bart Bandy(2) | 8,850 | 1.8% | ||||
All directors and executive officers as a group (6 persons) | 7,349 | 1.6% |
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* | The percentage of shares of common stock beneficially owned does not exceed one percent of the outstanding shares of common stock. |
| (1) | Includes 507 shares subject to restricted stock units that will vest within 60 days of December 27, 2022. |
| (2) | Mr. Bandy separated from the Company in July 2022. Therefore, his shares are not included in the calculation of the shares held by the directors and executive officers as a group. |
Securities Authorized for Issuance under Equity Compensation Plans
The table below provides information about our common stock that may be issued under our equity compensation plans as of December 31, 2022.
Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) | |||
Equity compensation plans approved by security holders | 25,946 | $257.24 | 83,584 | |||
Equity compensation plans not approved by security holders | — | — | — | |||
Total | 25,946 | $257.24 | 83,584 |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Review of Related Person Transactions
In accordance with its written charter, our Audit Committee is responsible for reviewing all related party transactions as they are presented, and the approval of the Audit Committee is required for all such transactions. The term “related party transactions” refers to transactions required to be disclosed in our filings with the SEC pursuant to Item 404 of Regulation S-K. As a smaller reporting company, we are also required to review and approve any transaction, arrangement or relationship in which our company is a participant, the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, and a related person has a direct or indirect material interest. In considering related party transactions, our Audit Committee is guided by its fiduciary duty to our stockholders. Our Audit Committee does not have any written or oral policies or procedures regarding the review, approval and ratification of transactions with related parties. Additionally, each of our directors and executive officers are required to annually complete a directors’ and officers’ questionnaire that elicits information about related party transactions. Our Nominating and Governance Committee and Board of Directors annually review all transactions and relationships disclosed in the director and officer questionnaires, and the Board makes a formal determination regarding each director’s independence.
Director Independence
Our Board of Directors reviews at least annually the independence of each director. During these reviews, our Board of Directors considers transactions and relationships between each director (and his or her immediate family and affiliates), ReShape Lifesciences and our management to determine whether any such transactions or relationships are inconsistent with a determination that the director was independent. This review is based primarily on responses of the directors to questions in a directors’ and officers’ questionnaire regarding employment, business, familial, compensation
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and other relationships with ReShape Lifesciences and our management. Our Board of Directors has determined that no transactions or relationships existed that would disqualify any of our directors under the Nasdaq Stock Market rules or require disclosure under SEC rules, with the exception of Paul Hickey, our President and Chief Executive Officer, because of his current employment relationship with ReShape Lifesciences. Based upon that finding, the Board of Directors determined that Ms. McDougal and Messrs. Blackford, Gladney and Minocherhomjee are “independent” and the composition of our Board of Directors meets the requirements for independence under the Nasdaq Stock Market. Each of our Audit, Compensation, and Nominating and Governance Committees is composed only of independent directors
ITEM 14. PRINCIPAL ACCOUNTing FEES AND SERVICES
Change in Independent Auditor
As previously disclosed, on April 8, 2022, BDO USA, LLP resigned as the independent registered public accounting firm of the Company effective upon the date of filing of the Company’s Form 10-Q for the quarter ended March 31, 2022. BDO’s report on the Company’s financial statements the fiscal years ended December 31, 2021 and 2020 did not contain an adverse opinion or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope, or accounting principles. During the fiscal years ended December 31, 2021 and 2020, and through the interim period ended April 8, 2022, there were no disagreements with BDO on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to BDO’s satisfaction, would have caused it to make reference to the subject matter of the disagreement(s) in connection with its report on any of the Company’s financial statements for such periods. During the fiscal years ended December 31, 2021 and 2020 and the subsequent interim period through April 8, 2022, there were no reportable events (as that term is described in Item 304(a)(1)(v) of Regulation S-K).
On July 15, 2022, the Audit Committee appointed RSM US LLP as the Company’s independent registered public accounting firm. During the fiscal years ended December 31, 2021 and 2020, and during the subsequent interim periods through RSM’s appointment, neither the Company nor anyone on its behalf consulted with RSM regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report nor oral advice was provided to the Company that RSM concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue, any matter that was the subject of a “disagreement” with its former auditors or a “reportable event,” as those terms are defined in Item 304 of Regulation S-K.
Principal Accountant Fees and Services
The following table represents aggregate fees billed to the Company for the fiscal year ended December 31, 2022 and December 31, 2021 by RSM US LLP and BDO USA, LLP, the Company’s independent registered accounting firms during such fiscal years.
Fiscal Year Ended | ||||||
| 2022 |
| 2021 | |||
Audit Fees(1) | $ | 587,000 | $ | 322,000 | ||
Audit-Related Fees |
| — |
| — | ||
Tax Fees |
| — |
| — | ||
All Other Fees |
| — |
| — | ||
Total Fees | $ | 587,000 | $ | 322,000 | ||
| (1) | Includes fees billed, or estimates of fees to be billed, for professional services rendered in connection with the audit of our consolidated financial statements for the referenced fiscal year ended, review of interim consolidated financial statements and services that are normally provided by RSM and BDO, respectively, in connection with statutory and regulatory filings and engagements. |
Administration of Engagement of Independent Auditor
The Audit Committee is responsible for appointing, setting compensation for and overseeing the work of our independent registered public accounting firm. The Audit Committee has established a policy for pre-approving the
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services provided by our independent registered public accounting firm in accordance with the auditor independence rules of the SEC. This policy requires the review and pre-approval by the Audit Committee of all audit and permissible non-audit services provided by our independent registered public accounting firm and an annual review of the financial plan for audit fees. To ensure that auditor independence is maintained, the Audit Committee annually pre-approves the audit services to be provided by our independent registered public accounting firm and the related estimated fees for such services, as well as the nature and extent of specific types of audit-related, tax and other non-audit services to be provided by the independent registered public accounting firm during the year.
As the need arises, other specific permitted services are pre-approved on a case-by-case basis during the year. A request for pre-approval of services on a case-by-case basis must be submitted by our Chief Financial Officer, providing information as to the nature of the particular service to be provided, estimated related fees and management’s assessment of the impact of the service on the auditor’s independence. The Audit Committee has delegated to its Chair pre-approval authority between meetings of the Audit Committee. Any pre-approvals made by the Chair must be reported to the Audit Committee. The Audit Committee will not delegate to management the pre-approval of services to be performed by our independent registered public accounting firm.
All of the services provided by our independent registered public accounting firm in 2022 were approved by the Audit Committee under its pre-approval policies.
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | The following documents are filed as part of this report: |
| 1. | Consolidated Financial Statements. See “Index to Consolidated Financial Statements” in Part II, Item 8 herein. |
| 2. | Financial Statement Schedules. Other schedules are not applicable and have not been included herein. |
| 3. | Exhibits |
ITEM 16. FORM 10-K SUMMARY
Not applicable
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EXHIBIT INDEX
Exhibit |
| Description of Document |
|---|---|---|
2.2 | ||
3.1 | ||
3.2 | ||
3.3 | ||
3.4 | ||
3.5 | ||
3.6 | ||
3.7 | ||
3.8 | ||
4.1* | ||
4.2 | ||
4.3 | ||
4.4 | ||
4.5 | ||
4.6 | ||
4.7 |
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Exhibit |
| Description of Document |
|---|---|---|
4.8 | ||
4.9 | ||
4.10 | ||
4.11 | ||
4.12 | ||
4.13 | ||
4.14 | ||
4.15 | ||
4.16 | ||
4.17 | ||
4.18 | ||
4.19 | ||
4.20 | ||
4.21 | ||
4.22 | ||
4.23 |
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Exhibit |
| Description of Document |
|---|---|---|
4.24 | ||
4.25 | ||
4.26 | ||
10.1† | ||
10.2† | ||
10.3† | ||
10.4 | ||
10.5† | ||
10.6†* | ||
10.7† | ||
10.8* | Lease Agreement, dated March 13, 2023, by and between The Irvine Company LLC and the Company. | |
10.9 | ||
10.10 | ||
10.11 | ||
10.12 | ||
10.13 | ||
14.1 |
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* Filed herewith.
† Indicates management contract or compensation plan or agreement.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RESHAPE LIFESCIENCES INC. | ||
By: | /S/ paul f. Hickey | |
Paul F. Hickey | ||
President and Chief Executive Officer |
Dated: April 17, 2023
POWERS OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Paul F. Hickey and Thomas Stankovich, and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
|---|---|---|---|---|
/S/ paul f. hickey | President, and Chief Executive Officer (principal executive officer) | April 17, 2023 | ||
Paul F. Hickey | ||||
/S/ Thomas Stankovich | Senior Vice President and Chief Financial Officer (principal financial and accounting officer) | April 17, 2023 | ||
Thomas Stankovich | ||||
/S/ DAN W. GLADNEY | Executive Chair of the Board | April 17, 2023 | ||
Dan W. Gladney | ||||
/S/ GARY D. BLACKFORD | Director | April 17, 2023 | ||
Gary D. Blackford | ||||
/S/ LORI C. MCDOUGAL | Director | April 17, 2023 | ||
Lori McDougal | ||||
/S/ ARDA MINOCHERHOMJEE | Director | April 17, 2023 | ||
Arda Minocherhomjee |
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