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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-Q


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

For the quarterly period ended June 30, 2020

OR

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

 

For the transition period from            to

Commission file number: 1-33818


RESHAPE LIFESCIENCES INC.

(Exact name of registrant as specified in its charter)


Delaware

48-1293684

(State or other jurisdiction
of incorporation or organization)

(IRS Employer
Identification No.)

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

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


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

Title of Each Class

    

Trading Symbol

Name of Each Exchange on which Registered

Common stock, $0.001 par value per share

RSLS

OTCQB Market

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

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

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

Large accelerated filer

Accelerated Filer

Non-accelerated filer

  

Smaller Reporting Company

Emerging Growth Company

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

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

As of August 11, 2020, 5,586,554 shares of the registrant’s Common Stock were outstanding.


Table of Contents

INDEX

PART I – FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements (unaudited)

3

Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019

3

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019

4

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2020 and 2019

5

Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2020 and 2019

6

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019

8

Notes to Condensed Consolidated Financial Statements

9

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 3.

Defaults Upon Senior Securities

29

Item 4.

Mine Safety Disclosures

29

Item 5.

Other Information

29

Item 6.

Exhibits

30

SIGNATURES

31

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PART I – FINANCIAL INFORMATION

ITEM 1.        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

RESHAPE LIFESCIENCES INC.

Condensed Consolidated Balance Sheets

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

June 30, 

December 31, 

    

2020

    

2019

ASSETS

Current assets:

Cash and cash equivalents

$

1,526

 

$

2,935

Restricted cash

50

50

Accounts and other receivables (net of allowance for doubtful accounts of $894 and $709 respectively)

 

2,883

 

 

4,096

Inventory (Note 3)

 

2,080

 

 

1,317

Prepaid expenses and other current assets (Note 3)

 

2,006

 

 

1,711

Total current assets

 

8,545

 

 

10,109

Property and equipment, net

 

99

 

 

16

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

613

758

Other intangible assets, net

27,841

28,674

Other assets

 

46

 

 

99

Total assets

$

37,144

 

$

39,656

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

4,123

 

$

4,263

Accrued and other liabilities (Note 3)

 

3,009

 

 

3,821

Warranty liability, current

315

105

Debt, current portion, net of deferred financing costs

4,597

1,909

Operating lease liabilities, current (Note 6)

303

291

Total current liabilities

 

12,347

 

 

10,389

Debt, noncurrent portion

3,434

2,728

Operating lease liabilities, noncurrent (Note 6)

323

477

Warranty liability, noncurrent

1,185

1,253

Deferred income taxes

702

702

Total liabilities

17,991

 

15,549

Commitments, contingencies (Note 12)

Stockholders’ equity:

Preferred stock, 5,000,000 shares authorized:

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

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

1

1

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

 

5

 

 

Additional paid-in capital

 

520,288

 

 

517,311

Accumulated deficit

 

(501,112)

 

 

(493,197)

Accumulated other comprehensive loss

(29)

(8)

Total stockholders’ equity

 

19,153

 

 

24,107

Total liabilities and stockholders’ equity

$

37,144

 

$

39,656

See accompanying notes to Condensed Consolidated Financial Statements.

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RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Operations

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

Three Months Ended June 30, 

Six Months Ended June 30, 

2020

2019

    

2020

2019

Revenue

$

1,702

$

4,450

$

4,491

$

7,524

Cost of revenue

865

 

1,593

 

2,150

 

2,436

Gross profit

837

 

2,857

 

2,341

 

5,088

Operating expenses:

Sales and marketing

831

 

1,271

 

2,285

 

2,388

General and administrative

2,539

5,521

5,375

9,825

Research and development

465

 

960

 

1,761

 

2,016

Impairment of intangible assets

6,588

6,588

Total operating expenses

3,835

 

14,340

 

9,421

 

20,817

Operating loss

(2,998)

 

(11,483)

 

(7,080)

 

(15,729)

Other expense (income), net:

Interest expense, net

789

213

893

316

Loss on extinguishment of debt

71

71

Warrant expense

4,127

4,257

(Gain) loss on foreign currency exchange

(133)

10

Other, net

 

612

 

609

Loss before income tax provision

(3,654)

(16,506)

(7,983)

(20,982)

Income tax benefit

50

586

68

586

Net loss attributable to common shareholders

$

(3,604)

$

(15,920)

$

(7,915)

$

(20,396)

Net loss per share - basic and diluted:

Net loss per share - basic and diluted

$

(0.52)

$

(150.24)

$

(1.15)

$

(233.29)

Shares used to compute basic and diluted net loss per share

6,911,497

 

105,962

 

6,885,368

 

87,428

See accompanying notes to Condensed Consolidated Financial Statements.

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RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Comprehensive Loss

(dollars in thousands; unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

2020

    

2019

    

2020

2019

Net loss

$

(3,604)

$

(15,920)

$

(7,915)

$

(20,396)

Foreign currency translation adjustments

27

(21)

Other comprehensive loss, net of tax

27

(21)

Comprehensive loss

$

(3,577)

$

(15,920)

$

(7,936)

$

(20,396)

See accompanying notes to Condensed Consolidated Financial Statements.

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RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Stockholders’ Equity

(dollars in thousands; unaudited)

Three Months Ended June 30, 2020

Series B Convertible

Series C Convertible

Additional

Accumulated Other

Total

Preferred Stock

Preferred Stock

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

     

Capital

    

Deficit

    

Income (Loss)

     

Equity

Balance March 31, 2020

3

$

95,388

$

1

391,739

$

$

519,131

$

(497,508)

$

(56)

$

21,568

Net loss

(3,604)

(3,604)

Other comprehensive loss, net of tax

27

27

Stock-based compensation expense

347

347

Institutional exercise of warrants

5,085,834

5

605

610

Cashless exercise of warrants

58,981

Common stock issued for professional services

50,000

205

205

Balance June 30, 2020

3

$

95,388

$

1

5,586,554

$

5

$

520,288

$

(501,112)

$

(29)

$

19,153

Six Months Ended June 30, 2020

Series B Convertible

Series C Convertible

Additional

Accumulated Other

Total

Preferred Stock

Preferred Stock

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

     

Capital

    

Deficit

    

Income (Loss)

     

Equity

Balance December 31, 2019

3

$

95,388

$

1

391,739

$

$

517,311

$

(493,197)

$

(8)

$

24,107

Net loss

(7,915)

(7,915)

Other comprehensive income (loss), net of tax

(21)

(21)

Stock-based compensation expense

774

774

Issuance of warrants

1,393

1,393

Institutional exercise of warrants

5,085,834

5

605

610

Cashless exercise of warrants

58,981

Common stock issued for professional services

50,000

205

205

Balance June 30, 2020

3

$

95,388

$

1

5,586,554

$

5

$

520,288

$

(501,112)

$

(29)

$

19,153

See accompanying notes to Condensed Consolidated Financial Statements.

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RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Stockholders’ Equity (Continued)

(dollars in thousands; unaudited)

Three Months Ended June 30, 2019

Series B Convertible

Series C Convertible

Series E Convertible

Additional

Total

Preferred Stock

Preferred Stock

Preferred Stock

Common Stock

Paid-in

Accumulated

Stockholders’

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

     

Capital

    

Deficit

     

Equity

Balance March 31, 2019

3

$

95,388

$

1

1,192,000

$

12

64,199

$

$

452,026

$

(423,466)

$

28,573

Net loss

(15,920)

(15,920)

Stock-based compensation expense

728

728

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

130,000

283

283

Warrant adjustment

(312)

(312)

Conversion of convertible preferred stock into common stock

(1,192,000)

(12)

9,933

12

Issuance of common stock upon exercise of warrants

33,417

40

40

Balance June 30, 2019

3

$

95,388

$

1

$

237,549

$

$

452,777

$

(439,386)

$

13,392

Six Months Ended June 30, 2019

Series B Convertible

Series C Convertible

Series E Convertible

Additional

Total

Preferred Stock

Preferred Stock

Preferred Stock

Common Stock

Paid-in

Accumulated

Stockholders’

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

     

Capital

    

Deficit

     

Equity

Balance December 31, 2018

159

$

95,388

$

1

$

73,092

$

$

450,652

$

(418,990)

$

31,663

Net loss

(20,396)

(20,396)

Stock-based compensation expense

1,984

1,984

Warrant expense

130

130

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

130,000

283

283

Warrant adjustment

(312)

(312)

Conversion of common stock into convertible preferred stock

1,192,000

12

(9,933)

(12)

Conversions of convertible preferred stock into common stock

(156)

(1,192,000)

(12)

10,973

12

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

33,417

40

40

Balance June 30, 2019

3

$

95,388

$

1

$

237,549

$

$

452,777

$

(439,386)

$

13,392

See accompanying Notes to Condensed Consolidated Financial Statements.

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RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Cash Flows

(dollars in thousands; unaudited)

Six Months Ended June 30, 

 

2020

2019

 

Cash flows from operating activities:

    

    

Net loss

$

(7,915)

$

(20,396)

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

Depreciation expense

 

5

 

30

Amortization of intangible assets

833

833

Impairment of intangible assets

6,588

Noncash interest expense

117

797

Fair value adjustment to embedded derivative

(481)

Loss on extinguishment of debt

71

Stock-based compensation

774

1,983

Bad debt expense

185

151

Provision for inventory excess and obsolescence

188

Warrant expense

4,257

Amortization of deferred debt issuance costs

756

Deferred income tax benefit

(586)

Other noncash items

20

14

Change in operating assets and liabilities:

 

Accounts and other receivables

 

1,028

(3,860)

Inventory

 

(950)

(363)

Prepaid expenses and other current assets

 

(90)

(1,034)

Accounts payable and accrued liabilities

(958)

3,397

Warranty liability

142

Other

 

53

Net cash used in operating activities

 

(5,812)

 

(8,599)

Cash flows from investing activities:

Capital expenditures

(82)

Cash used in investing activities:

(82)

Cash flows from financing activities:

Proceeds from issuance of subordinated convertible debentures

2,000

Payments of financing costs

 

(59)

 

(21)

Repayment of subordinated convertible debentures

(2,200)

Proceeds from institutional exercise of warrants

 

610

 

40

Proceeds from credit agreement

3,000

7,616

Proceeds from PPP loan

955

(29)

Net cash provided by financing activities

 

4,506

 

7,406

Effect of currency exchange rate changes on cash and cash equivalents

(21)

Net decrease in cash, cash equivalents and restricted cash

 

(1,409)

 

(1,193)

Cash, cash equivalents and restricted cash at beginning of period

 

2,985

 

5,548

Cash, cash equivalents and restricted cash at end of period

$

1,576

$

4,355

Noncash investing and financing activities:

Relative fair value of warrants classified as debt issuance costs

$

1,393

$

Capital expenditures accruals

6

Conversion of common stock to convertible preferred stock

(1)

See accompanying notes to Condensed Consolidated Financial Statements.

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ReShape Lifesciences Inc.

Notes to Condensed Consolidated Financial Statements

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

(1)  Basis of Presentation

The accompanying interim condensed consolidated financial statements and related disclosures of Reshape Lifesciences Inc. (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed on April 30, 2020. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") have been condensed or omitted.

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

Reverse Stock Splits

During the year ended December 31, 2019, the Company’s board of directors and stockholders approved the following reverse stock split:

1-for-120 reverse split of the Company’s outstanding common stock that became effective after the close of market on November 11, 2019. In addition, the Company’s certificate of incorporation was amended to change the common stock and preferred stock par value from $0.01 per share to $0.001 per share. The reverse stock split in 2019 did not change the number of common or preferred shares authorized by the Company’s certificate of incorporation. All par value, share and per-share amounts have been retroactively adjusted to reflect the reverse stock split for all periods presented.

Fair Value of Financial Instruments

The carrying amounts of cash equivalents, accounts receivable, accounts payable and certain accrued and other liabilities approximate fair value due to their short-term maturities. Refer to Note 5 regarding the fair value of debt instruments and Note 8 regarding fair value measurements and inputs of warrants.

Net Loss Per Share

The following table sets forth the potential shares of common stock that are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive as of the end of each period presented:

June 30, 

 

    

2020

    

2019

 

Stock options

 

46

 

190

Convertible preferred stock

1,288

1,288

Warrants

 

8,283,447

 

2,022,576

Recent Accounting Pronouncements

New accounting standards adopted by the Company in 2020 are discussed below or in the related notes, where appropriate.

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure

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Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements and is intended to improve the effectiveness of disclosures, including the consideration of costs and benefits. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The adoption of this guidance did not have a material impact on the Company’s financial statements.

New accounting standards not yet adopted are discussed below.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is intended to provide financial statement users with more useful information about expected credit losses on financial assets held by a reporting entity at each reporting date. In May 2019, the FASB issued ASU No. 2019-05, which amended the new standard by providing targeted transition relief. The new guidance replaces the existing incurred loss impairment methodology with a methodology that requires consideration of a broader range of reasonable and supportable forward-looking information to estimate all expected credit losses. In November 2019, the FASB issued ASU No. 2019-11, which amended the new standard by providing additional clarification. This guidance is effective for the fiscal years and interim periods within those years beginning after December 15, 2022. The Company is currently evaluating the impact the guidance will have on its consolidated financial statements.

(2)  Liquidity and Management’s Plans

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

As of June 30, 2020 the Company had net negative working capital of approximately $3.8 million. The Company’s principal source of liquidity as of June 30, 2020 consisted of approximately $1.6 million of cash and cash equivalents and restricted cash, and $2.9 million of accounts receivable.

The Company’s anticipated operations include plans to (i) continue to integrate the sales and operations of the Company with the Lap-Band product line, (ii) continue development of the ReShape Vest, (iii) seek opportunities to leverage the Company’s intellectual property portfolio and custom development services to provide third-party sales and licensing opportunities, and (iv) explore and capitalize on synergistic opportunities to expand our portfolio and offer future minimally invasive treatments and therapies in the obesity continuum of care. The Company believes that it has the flexibility to manage the growth of its expenditures and operations depending on the amount of available cash flows, which could include reducing expenditures for marketing, clinical and product development activities. However, the Company will ultimately need to achieve sufficient revenues from product sales and obtain additional equity or debt financing to support its operations.

Management is currently pursuing various funding options, including seeking additional equity or debt financing as well as a strategic merger or other transaction to obtain additional funding to support the expansion of Lap-Band product sales and to continue the development of, and to successfully commercialize, the ReShape Vest. While the acquisition of the Lap-Band product line does provide incremental revenues and cash flows to the Company, total expenses, including the cost to support the clinical trials of the ReShape Vest, are expected to exceed internally generated cash flows for the foreseeable future. While there can be no assurance that the Company will be successful in its efforts, the Company has a long history of raising equity financing to fund its development activities. Should the Company be unable to obtain adequate financing in the near term, the Company’s business, result of operations, liquidity and financial condition would be materially and negatively affected, and the Company would be unable to continue as a

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going concern. Additionally, there can be no assurance that, assuming the Company is able to strengthen its cash position, it will achieve sufficient revenue or profitable operations to continue as a going concern.

COVID-19 Risk and Uncertainties and CARES Act

Additionally, on January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally and on March 13, 2020, the United States declared a national emergency with respect to the coronavirus outbreak. This outbreak has severely impacted global economic activity, and many countries and many states in the United States have reacted to the outbreak by instituting quarantines, mandating business and school closures and restricting travel. These mandated business closures have at times included the cessation of non-elective surgeries in Australia, Europe and the United States for all but emergency procedures. As a result of these mandates, on April 16, 2020, the Company implemented various short-term cost reductions and cash flow improvement actions, such as reducing the compensation for executives, management and key employees and decreasing operating expenses where possible. In addition, the Company also identified temporary headcount reductions and made the decision to furlough a portion of its workforce. During the second quarter of 2020, the mandated closures began to ease in many areas throughout the world and within the United States. As a result of this, elective surgeries started back up again through various parts of the world, which led to improved sales progressing through the second quarter. Even after the COVID-19 outbreak has subsided, the Company may continue to experience materially adverse impact on its financial condition and results of operation. Additionally, on June 15, 2020, the Company ended the temporary pay reductions and the furloughed employees returned to work. The full impact of the COVID-19 outbreak continues to evolve and it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce and has taken actions to mitigate the impact including among other things, temporary reductions in pay, and furloughs of certain positions along with deferrals in payment for cash preservation. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020.

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. Provided under the CARES Act is the Paycheck Protection Program (“PPP”), which the Company received a PPP loan, for further details see Note 5 below. We continue to examine the impact that the CARES Act may have on our business and the PPP loan.

(3)  Supplemental Balance Sheet Information

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

Inventory:

June 30, 

December 31, 

2020

    

2019

Sub-assemblies

$

579

$

Finished goods

 

1,501

 

1,317

Total inventory

$

2,080

$

1,317

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Prepaid expenses and other current assets:

June 30, 

December 31, 

2020

    

2019

Prepaid contract research organization expenses

$

830

$

1,356

Prepaid insurance

702

190

Other

474

165

Total prepaid expenses and other current assets

$

2,006

$

1,711

Accrued and other liabilities:

June 30, 

December 31, 

2020

    

2019

Accrued professional services

$

501

$

1,432

Payroll and benefits

 

1,285

 

1,021

Taxes

310

373

Equity transaction related liability

211

Customer deposits

358

202

Accrued insurance premium

51

87

Other

 

504

 

495

Total accrued and other liabilities

$

3,009

$

3,821

(4) Intangible Assets

Indefinite-lived intangible assets consist of in-process research and development (“IPR&D”) for the ReShape Vest recorded in connection with the Company’s acquisition of BarioSurg, Inc. The Company’s finite-lived intangible assets consists of developed technology, trademarks and tradenames, and covenant not compete. The estimated useful lives of these finite-lived intangible assets ranges from 3 to 10 years. The amortization expenses for both the three months ended June 30, 2020 and 2019 was $0.4 million, and for both the six months ended June 30, 2020 and 2019 was $0.8 million.

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

Impairment of Intangible Assets – Second Quarter 2019

The Company has completed the feasibility study for the ReShape Vest and began clinical trials in Europe in 2018. During the second quarter of 2019, the Company performed a qualitative impairment analysis of the IPR&D. Due to delays in the clinical trials experienced during the first six months of 2019, the Company revised its expectations of when revenues would commence for the ReShape Vest, thus reducing the projected near-term future net cash flows related to the ReShape Vest. As a result, the Company performed a quantitative impairment analysis of the IPR&D and recorded a one-time nonrecurring impairment charge of $6.6 million, for the excess of the carrying value over the estimated fair value. The fair value of the IPR&D was estimated using an income approach using Level 3 assumptions which included discounting the revised projected future net cash flows to their present value, with a discount rate of 22.4%. The Company also assessed the recoverability of finite-lived intangible assets and did not identify any impairment as a result the performance of this analysis.

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(5)  Debt

June 30, 

December 31, 

2020

    

2019

Asset purchase consideration

$

4,754

$

4,637

Credit agreement

3,000

PPP Loan

955

Total debt

8,709

4,637

Less: debt issuance costs

678

Less: current portion of debt

4,597

1,909

Debt, noncurrent portion

$

3,434

$

2,728

CARES Act

On April 24, 2020, the Company entered into a PPP Loan agreement with Silicon Valley Bank (“SVB”) under the PPP, which is part of the CARES Act administered by the United States Small Business Administration (“SBA”). As part of the application for these funds, the Company in good faith, has certified that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. Under this program, the Company received proceeds of $1.0 million from the PPP Loan. In accordance with the requirements of the PPP, the Company intends to use proceeds from the PPP Loan primarily for payroll costs, rent and utilities. The PPP Loan has a 1.00% interest rate per annum, matures on April 24, 2022 and is subject to the terms and conditions applicable to loans administered by the SBA under the PPP. Under the terms of PPP, all or certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act, which the Company continues to evaluate. Further, if despite the good-faith belief that given the Company’s circumstances all eligibility requirements for the PPP Loan were satisfied, if it is later determined the Company had violated any applicable laws or regulations or it is otherwise determined the Company was ineligible to receive the PPP Loan, it may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties.

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

Credit Agreement

On March 25, 2020, the Company executed a credit agreement up to $3.5 million, with an institutional investor (the “Lender”), who holds warrants in connection with the June 2019 and September 2019 transactions. On the day of closing, the Company received $2.5 million and the additional $1.0 million may be drawn from time to time 30 days after the closing date but prior to five months after the closing date, in $500 thousand increments per draw. On June 23, 2020, the Company made the first additional draw of $500 thousand. As a result of this drawdown, the Company has an outstanding principal balance of $3.0 million under the credit facility and has the option to borrow up to an additional $500 thousand pursuant to one additional delayed draw term loan.

The credit facility matures six months after the closing date and bears interest at LIBOR plus 2.5%. As required by the terms of this credit agreement, the lender exercised its warrants to purchase an aggregate of 5,085,834 shares of common stock with a current exercise price of $0.12 per warrant on April 15, 2020, in which the Company received net proceeds of $0.6 million. In addition, the Company issued to the lender 1,200,000 Series G warrants to purchase an aggregate of 1,200,000 shares of common stock. The Series G warrants were valued using the relative fair value basis and the amount was recorded as part of the debt issuance costs, see Note 8 for additional details.

Asset Purchase Consideration Payable

The asset purchase consideration payable related to the Company’s December 2018 acquisition of the Lap-Band product line from Apollo Endosurgery, Inc. (“Apollo”), was initially recorded at net present value using a discount rate

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of 5.1%. The asset purchase consideration payable was originally secured by a first security interest in substantially all of the Company’s assets, but that security interest terminated in accordance with its terms in October 2019. At June 30, 2020, the aggregate carrying value of the current and noncurrent asset purchase consideration payable of approximately $4.8 million, as adjusted for accretion of interest of approximately $0.4 million.

Convertible Subordinated Debentures

On March 29, 2019, the Company completed a private placement with certain healthcare focused institutional investors for the sale of secured subordinated original issue discount convertible debentures (“debentures”) for a purchase price of $2.0 million. The debentures had a maturity of June 28, 2019 and a face amount of $2.2 million, reflecting a 10% original issue discount. The Company recorded an additional debt discount and a derivative liability for the fair value of the bifurcated embedded conversion features discussed below. The initial carrying amount of the debentures, net of discounts and deferred financing costs, was approximately $1.5 million. The Company repaid the debentures on June 20, 2019 at their face amount of $2.2 million.

The Company analyzed the conversion features embedded in the debentures and determined that bifurcation and liability classification was required under ASC 815 due to the variable number of shares issuable upon conversion. The fair value of the bifurcated embedded conversion features was determined to be $0.5 million as of the issuance date using a Monte Carlo model and primarily Level 3 inputs using a risk-free rate of 2.19%; probability of conversion of 98.0%; probability of repayment at each conversion of 2.0%; volatility of 161.74%; option-adjusted spread of 50.0%; and a discount for lack or marketability of 20.0%. Upon the closing of the Company’s equity financing and the Company’s planned use of a portion of the proceeds to repay the debentures, the fair value of the embedded derivative liability was reduced to zero as the conversion feature was no longer available. As the Company did not elect the fair value option for the debentures, the initial carrying amount of the debentures, net of discounts and deferred financing costs of $1.5 million, which was accreted to the face amount over the term to maturity.

In connection with the financing, the Company amended the exercise price of warrants to purchase up to 8,000,000 shares of common stock held by the investors that were issued on November 28, 2018 from $1.50 per share to $0.01 per share. The value attributable to the exercise price reduction of $0.1 million was recorded in Warrant Expense and was estimated using the Black Scholes option pricing model using a risk-free rate of 2.2%, an expected term of 4.7 years, expected dividends of zero and expected volatility of 204.4%.

(6) Leases

The Company has a noncancelable operating lease for office and warehouse space in San Clemente, California and noncancelable operating leases for certain office equipment that expire at various dates through 2022. The Company does not have any short-term leases or financing lease arrangements and the effects of any lease modifications have not been material. Certain of the Company’s equipment leases include variable lease payments that are adjusted periodically based on actual usage. Lease and non-lease components are accounted for separately.

Operating lease costs was $0.1 million for both the three months ended June 30, 2020 and 2019, and $0.2 million for both the six months ended June 30, 2020 and 2019. Variable lease costs were not material.

Supplemental information related to operating leases is as follows:

Balance Sheet Information at June 30, 2020

Operating lease ROU assets

$

613

Operating lease liabilities, current portion

$

303

Operating lease liabilities, long-term portion

323

Total operating lease liabilities

$

626

Cash Flow Information for the Six Months Ended June 30, 2020

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

$

161

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Maturities of operating lease liabilities were as follows:

Twelve months ending June 30, 

    

    

2021

$

328

2022

332

2023

Total lease payments

660

Less: imputed interest

34

Total lease liabilities

$

626

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

1.9

Weighted-average discount rate at end of period

5.1

%

(7)  Equity

June 2020 Cashless Exercise of Warrants for Common Stock

On June 23, 2020, the Company issued 58,981 shares of common stock as a cashless exercise of warrants issued to the placement agents in connection with the June 2019 private placement with healthcare focused institutional investors.

May 2020 Common Stock Issued for Professional Services

On May 28, 2020, the Company issued 50,000 shares of common stock, having an aggregate fair value of $0.2 million for ongoing professional services. The $0.2 million was recorded as a prepaid asset and will be amortized over the minimum life of the agreement.

April 2020 Exercise of Warrants for Common Stock

As discussed in Note 5 above, in an agreement to the credit agreement, the lender exercised its Series C and Series F warrants to purchase an aggregate of 5,085,834 shares of common stock with a current exercise price of $0.12 per warrant on April 15, 2020, in which the Company received net proceeds of $0.6 million.

June 2019 Issuance of Common Stock and Warrants

On June 18, 2019, the Company completed a private placement with certain healthcare focused institutional investors for the sale of 130,000 shares of common stock at a purchase price of $2.40 per share and Series C pre-funded warrants to purchase 3,203,334 shares of common stock at a purchase price of $2.28 per share. The exercise price of each pre-funded warrant is $0.12 per share. The Company also issued Series A warrants to purchase 3,333,334 shares of common stock at an exercise price of $2.64 per share and Series B warrants to purchase 3,333,334 shares of common stock at an exercise price of $2.40 per share. Net proceeds from the private placement were $6.9 million after deducting placement agent fees and other transaction costs. In connection with the registered direct offering, the placement agent received warrants to purchase 233,334 shares of common stock at an exercise price of $3.00 per share.

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

On February 1, 2019, pursuant to an exchange agreement with Sabby Volatility Warrant Master Fund, Ltd. (“Sabby”) 9,993 shares of the Company’s common stock were exchanged for an aggregate of 1,192,000 shares of Series E Convertible Preferred Stock (“Series E Preferred Stock”), were issued in a noncash transaction. Each share of Series E Preferred Stock was convertible into one share of common stock at Sabby’s election pre-effect of the reverse stock split

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that occurred during November 2019. In April 2019, all shares of Series E Preferred Stock were converted into an equal number of shares of common stock. The November 2019 reverse stock split had no effect on this transaction.

Conversion of Series B Convertible Preferred Stock into Common Stock

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

(8) Warrants

On March 25, 2020, the Company issued 1,200,000 Series G Warrants to an institutional investor in connection with the credit agreement, see Note 5 above for details. The Series G Warrants were valued at $1.4 million using the relative fair value approach at the time of issuance and was recorded as deferred debt issuance cost. The relative fair value of the Series G Warrants was determined using a Black Scholes option pricing model using a risk-free interest rate of 0.56%; an expected term of five years; expected dividends of zero and expected volatility of 97.00%.

(9) Revenue Disaggregation and Operating Segments

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

Three Months Ended

Six Months Ended

    

2020

    

2019

    

2020

    

2019

United States

$

1,458

$

4,010

$

3,412

$

7,076

Australia

120

440

418

448

Europe

124

636

Rest of world

25

Total net revenue

$

1,702

$

4,450

$

4,491

$

7,524


*The next largest individual country outside the United States was Australia for both the three and six months ended June 30, 2020 which was 7.0% and 9.3%, respectively, of total revenues. Australia was the next largest individual country outside the United States for both the three and six months ended June 30, 2019 and was 9.5% and 5.6%, respectively, of total revenues.

Operating Segments

The Company’s operating segments currently consist of the Lap-Band segment and the ReShape Vest segment. These two operating segments are reported based on the financial information provided to the Chief Operating Decision Maker (the Chief Executive Officer, or “CODM”). The Company’s CODM evaluates segment performance based on gross profit, which currently only consists of LAP-BAND. The Company’s CODM does not use operating segment assets information to allocate resources or to assess performance of the operating segments and thus total segment assets have not been disclosed.

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(10) Income Taxes

The Company’s tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter the Company updates its estimate of the annual effective tax rate. The Company’s quarter tax provision, and quarterly estimate of annual effective tax rate, are subject to significant volatility due to several factors, including the Company’s ability to accurately predict pre-tax income and loss. During the three and six months ended June 30, 2020 a $50 thousand and $68 thousand, respectively, a tax benefit was recorded, primarily related to projected losses in Australia. The Company recorded an income tax benefit of $586 thousand for both the three and six months ended June 30, 2019, in connection with the impairment of IPR&D, which resulted in a reduction in the deferred tax liability associated with the indefinite-lived intangible asset.

In assessing the realization of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Based on the level of historical losses, projections of losses in future periods and potential limitations pursuant to changes in ownership under Internal Revenue Code (“IRC”) Section 382, the Company provided a valuation allowance at both June 30, 2020 and December 31, 2019.

(11)  Stock-based Compensation

Stock-based compensation expense related to stock options issued under the ReShape Lifesciences Inc. Second Amended and Restated 2003 Stock Incentive Plan (the “Plan”) and as inducement grants for the three and six months ended June 30, 2020 and 2019 was as follows:

Three Months Ended

Six Months Ended

June 30, 

June 30, 

2020

2019

2020

2019

Sales and marketing

$

$

71

$

$

148

General and administrative

347

625

774

1,771

Research and development

 

31

 

 

64

Total stock-based compensation expense

$

347

$

727

$

774

$

1,983

As of June 30, 2020 there was approximately $0.7 million of total unrecognized compensation costs related to unvested stock option awards, which are to be recognized over a weighted-average period of 1.7 years. There were no stock options granted during both the three and six months ended June 30, 2020 and 2019.

(12)  Commitments and Contingencies

Litigation

The Company is not currently a party to any material litigation and the Company is not aware of any pending or threatened litigation against it that could have a material adverse effect on the Company’s business, operating results or financial condition. The medical device industry in which the Company operates is characterized by frequent claims and litigations, including claims regarding patent and other intellectual property rights as well as improper hiring practices. As a result, the Company may be involved in various legal proceedings from time to time.

Product Liability Claims

The Company is exposed to product liability claims that are inherent in the testing, production, marketing and sale of medical devices. Management believes any losses that may occur from these matters are adequately covered by insurance, and the ultimate outcome of these matters will not have a material effect on the Company’s financial position or results of operations. The Company is not currently a party to any product liability litigation and is not aware of any pending or threatened product liability litigation that is reasonably possible to have a material adverse effect on the Company’s business, operating results or financial condition.

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(13) Subsequent Events

As part of the credit agreement discussed in Note 5 above, the Company is permitted to make two additional delayed drawdowns. On July 29, 2020 the Company received the second and final draw of $500 thousand dollars.

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

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

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

Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after the date of this report. 

Overview

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

Recent Developments

On January 30, 2020, WHO announced a global health emergency because of a new strain of coronavirus and the risks to the international community as the virus spreads globally beyond its points of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally and on March 13, 2020, the United States declared a national emergency with respect to the coronavirus outbreak. In response to the COVID-19 pandemic, on March 27, 2020, President Trump signed into law the CARES Act, which provides for the PPP. The Company received a PPP Loan of $1.0 million dollars. See Note 2 and Note 5 to the condensed consolidated financial statements.

On March 25, 2020, the Company executed a credit agreement with an institutional investor to borrow up to $3.5 million, of which $2.5 million was received up front and on June 23, 2020, the Company received the first draw down of $500 thousand. See Note 5 to the condensed consolidated financial statements.

On April 16, 2020, the Company implemented various short-term cost reductions and cash flow improvement actions, such as reducing the compensation for executives, management and key employees and decreasing operating expenses where possible. In addition, the Company also identified temporary headcount reductions and made the decision to furlough a portion of its workforce. During the second quarter of 2020, certain government-mandated closures began to ease and many areas throughout the world and within the United States began to allow elective surgeries. As a result of the easing, the Company did see sales volumes improve as we progressed through the second quarter. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impact on our financial condition and results of operations. Additionally, on June 15, 2020, the Company ended the temporary pay reductions and the furloughed employees returned to work.

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Results of Operations

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

Three Months Ended June 30, 

Six Months Ended June 30, 

2020

2019

2020

2019

Revenue

$

1,702

100.0

%

$

4,450

100.0

%

$

4,491

100.0

%

$

7,524

100.0

%

Cost of goods sold

865

50.8

%

1,593

35.8

%

2,150

47.9

%

2,436

32.4

%

Gross profit

837

49.2

%

2,857

64.2

%

2,341

52.1

%

5,088

67.6

%

Operating expenses:

Sales and marketing

831

48.8

%

1,271

28.6

%

2,285

50.9

%

2,388

31.7

%

General and administrative

2,539

149.2

%

5,521

124.1

%

5,375

119.7

%

9,825

130.6

%

Research and development

465

27.3

%

960

21.6

%

1,761

39.2

%

2,016

26.8

%

Impairment of intangible assets

%

6,588

148.0

%

%

6,588

87.6

%

Total operating expenses

3,835

225.3

%

14,340

322.2

%

9,421

209.8

%

20,817

276.7

%

Operating loss

(2,998)

(176.1)

%

(11,483)

(258.0)

%

(7,080)

(157.6)

%

(15,729)

(209.1)

%

Other expense (income), net:

Interest expense, net

789

46.4

%

213

4.8

%

893

19.9

%

316

4.2

%

Loss on extinguishment of debt

%

71

1.6

%