tm219536-9_defm14a - none - 53.3909853s
TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.   )
Filed by the Registrant ☒
Filed by a Party other than the Registrant ☐
Check the appropriate box:

Preliminary Proxy Statement

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

Definitive Proxy Statement

Definitive Additional Materials

Soliciting Material under §240.14a-12
ReShape Lifesciences Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):

No fee required.

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1)
Title of each class of securities to which transaction applies:
   
(2)
Aggregate number of securities to which transaction applies:
   
(3)
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):    
(4)
Proposed maximum aggregate value of transaction:
   
(5)
Total fee paid:
   

Fee paid previously with preliminary materials.

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
(1)
Amount Previously Paid:
   
(2)
Form, Schedule or Registration Statement No.:
   
(3)
Filing Party:
   
(4)
Date Filed:
   

TABLE OF CONTENTS
[MISSING IMAGE: lg_reshapelife-4clr.jpg]
[MISSING IMAGE: lg_obalon-4clr.jpg]
MERGER PROPOSAL — YOUR VOTE IS VERY IMPORTANT
April 13, 2021
Dear Stockholders of ReShape Lifesciences Inc. and Stockholders of Obalon Therapeutics, Inc.:
As previously announced, the Boards of Directors of ReShape Lifesciences Inc. (“ReShape”) and Obalon Therapeutics, Inc. (“Obalon”) have unanimously approved a merger. ReShape, Obalon, and Optimus Merger Sub, Inc., a wholly owned subsidiary of Obalon (“Merger Sub”), entered into an Agreement and Plan of Merger, dated as of January 19, 2021 (as amended from time to time, the “Merger Agreement”), pursuant to which Merger Sub will merge with and into ReShape, with ReShape becoming a wholly owned subsidiary of Obalon (the “Merger”). The combined company will seek approval from The Nasdaq Stock Market LLC (“Nasdaq”) to change its name to ReShape Lifesciences Inc., with the surviving subsidiary to be named ReShape Weightloss Inc. Upon consummation of the Merger, each issued and outstanding share of common stock of ReShape, $0.001 par value per share (“ReShape Common Stock”) and series B preferred stock of ReShape, $0.001 par value per share (together with ReShape Common Stock, “ReShape Shares”), will be converted into the right to receive a number of fully paid and non-assessable shares of common stock of Obalon, $0.001 par value per share (“Obalon Shares”), according to a ratio determined at least 10 days prior to the anticipated date of the consummation of the Merger (the “Determination Date”) that will result in the holders of ReShape Shares owning 51% of the outstanding common stock of Obalon immediately after the Merger (such ratio, the “Exchange Ratio”) and cash in lieu of fractional shares. Obalon will assume (i) each outstanding and unexercised warrant to purchase ReShape capital stock, which will be converted into warrants to purchase Obalon Shares and (ii) all of the obligations of ReShape under ReShape’s certificate of designation of preferences, rights and limitations (the “Series C Certificate of Designation”) of ReShape’s series C preferred stock, $0.001 par value per share (the “ReShape Series C Preferred Stock”) and each outstanding share of ReShape Series C Preferred Stock, which will be converted into new preferred stock of Obalon. Obalon stockholders will continue to own and hold their existing Obalon Shares. Because the price of Obalon Shares will fluctuate between now and the Determination Date and the exact number of Obalon Shares to be issued in the Merger will not be fixed until the Determination Date, the value of the Obalon Shares to be received by ReShape stockholders in the Merger cannot be determined as of the date of this joint proxy statement/prospectus. We urge you to obtain current share price quotations for Obalon Shares and ReShape Shares.
Immediately following the effective time of the Merger, ReShape stockholders and Obalon stockholders are expected to own 51% and 49%, respectively, of Obalon. ReShape Shares and Obalon Shares are currently listed on The OTCQB Market and The Nasdaq Capital Market, respectively, under the symbols “RSLS” and “OBLN,” respectively. Following the Merger, the combined company, subject to Nasdaq approval, will continue to have its shares be listed on The Nasdaq Capital Market and will seek approval from Nasdaq to change its name to ReShape Lifesciences Inc. and its ticker symbol to “RSLS.”
To obtain the approvals of the ReShape stockholders and the Obalon stockholders required in connection with the Merger, ReShape will hold a special meeting of its stockholders (the “ReShape Special Meeting”) and Obalon will hold a special meeting of its stockholders (the “Obalon Special Meeting”). As part of our precautions regarding the COVID-19 (coronavirus) pandemic, we are sensitive to the public health and travel concerns that our stockholders may have, as well as any quarantine or similar protocols that governments may impose. As a result, the ReShape Special Meeting and Obalon Special Meeting will each be held virtually via live webcast. There will not be a physical meeting location. You or your proxyholder will be able to attend the ReShape Special Meeting or Obalon Special Meeting online and vote your shares electronically by visiting www.virtualshareholdermeeting.com/RSLS2021SM for the ReShape Special Meeting or www.virtualshareholdermeeting.com/OBLN2021SM for the Obalon Special Meeting. You will need to have your 16-Digit Control Number included on your Notice or your proxy card (if you received a printed copy of the proxy materials) to join and vote at the respective special meeting. Regardless of whether you plan to attend the ReShape Special Meeting or Obalon Special Meeting, we encourage you to vote your shares now by mail, by telephone or through the Internet by following the procedures outlined below.
 

TABLE OF CONTENTS
At the ReShape Special Meeting, ReShape stockholders will be asked to consider and vote on, among other things, a proposal to adopt the Merger Agreement (the “ReShape Merger Proposal”).
At the Obalon Special Meeting, Obalon stockholders will be asked to consider and vote on, among other things, the issuance of Obalon Shares in connection with the Merger (the “Obalon Share Issuance Proposal”).
We cannot consummate the Merger unless the stockholders of ReShape approve the ReShape Merger Proposal and the stockholders of Obalon approve the Obalon Share Issuance Proposal and Obalon Reverse Stock Split Proposal, each as described herein. Your vote is very important, regardless of the number of shares you own. Whether or not you expect to attend either the ReShape Special Meeting or the Obalon Special Meeting virtually, please submit a proxy to vote your shares as promptly as possible so that your shares may be represented and voted at the ReShape Special Meeting or Obalon Special Meeting, as applicable.
The ReShape Board of Directors has carefully considered and unanimously approved the Merger Agreement and determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are advisable and in the best interests of ReShape and its stockholders. The ReShape Board of Directors unanimously recommends that ReShape stockholders vote “FOR” the ReShape Merger Proposal and “FOR” each of the other proposals to be considered at the ReShape Special Meeting and described in the accompanying joint proxy statement/prospectus.
The Obalon Board of Directors has carefully considered and unanimously approved the Merger Agreement and determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are advisable and in the best interests of Obalon and its stockholders. The Obalon Board of Directors unanimously recommends that Obalon stockholders vote “FOR” the Obalon Share Issuance Proposal and “FOR” each of the other proposals to be considered at the Obalon Special Meeting and described in the accompanying joint proxy statement/prospectus.
The obligations of ReShape and Obalon to consummate the Merger are subject to the satisfaction or waiver of several conditions set forth in the Merger Agreement, including receipt of stockholder approval for the required proposals described above. The accompanying joint proxy statement/prospectus contains detailed information about ReShape, Obalon, the ReShape Special Meeting, the Obalon Special Meeting, the Merger Agreement, the Merger and the other business to be considered by the ReShape stockholders and Obalon stockholders at the ReShape Special Meeting and the Obalon Special Meeting, respectively. ReShape and Obalon encourage you to read the accompanying joint proxy statement/prospectus carefully. In particular, you should read the “Risk Factors” section beginning on page 25 of the accompanying joint proxy statement/prospectus for a discussion of the risks you should consider in evaluating the Merger and how it will affect you.
On behalf of the ReShape Board of Directors and the Obalon Board of Directors, thank you for your consideration and continued support.
Dan W. Gladney
Chair of the Board
ReShape Lifesciences Inc.
Kim Kamdar, Ph.D.
Chair of the Board
Obalon Therapeutics, Inc.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the Merger, the securities to be issued in connection with the Merger or any other transaction described in the accompanying joint proxy statement/prospectus or passed upon the adequacy or accuracy of the disclosure in the accompanying joint proxy statement/prospectus. Any representation to the contrary is a criminal offense.
The accompanying joint proxy statement/prospectus is dated April 13, 2021 and is first being mailed to the ReShape stockholders and Obalon stockholders on or about April 13, 2021.

TABLE OF CONTENTS
 
ADDITIONAL INFORMATION
This joint proxy statement/prospectus forms a part of a registration statement on Form S-4 filed by Obalon with the SEC. It constitutes a prospectus of Obalon under Section 5 of the Securities Act and the rules and regulations thereunder, with respect to the Obalon Shares of to be issued in the Merger. In addition, it constitutes a proxy statement under Section 14(a) of the Exchange Act and the rules and regulations thereunder, and a notice of meeting with respect to the Obalon Special Meeting. It also constitutes a proxy statement of ReShape and a notice of meeting with respect to the ReShape Special Meeting. Obalon has supplied all information contained in this joint proxy statement/prospectus relating to Obalon and ReShape has supplied all information contained in this joint proxy statement/prospectus relating to ReShape.
If you would like to request documents from ReShape or Obalon, please send a request in writing or by telephone to the appropriate company at the following addresses and telephone numbers:
ReShape Lifesciences Inc.
1001 Calle Amanecer
San Clemente, California 92673
Attention: Investor Relations
Telephone: (949) 429-6680
https://ir.reshapelifesciences.com/
Obalon Therapeutics, Inc.
5421 Avenida Encinas, Suite F
Carlsbad, California 92008
Attention: Nooshin Hussainy, Chief Financial Officer
and Corporate Secretary
Telephone: (760) 607-5164
https://investor.obalon.com/
or
[MISSING IMAGE: lg_mackenziepartninc-bw.jpg]
1407 Broadway, 27th Floor
New York, NY 10018
Toll-Free: (800) 322-2885
Email: proxy@mackenziepartners.com
ReShape stockholders and Obalon stockholders may also consult the websites of ReShape or Obalon for more information concerning the Merger and other transactions described in the accompanying joint proxy statement/prospectus. The website of ReShape is www.reshapelifesciences.com and the website of Obalon is www.investor.obalon.com. Information included on these websites is not incorporated by reference into the accompanying joint proxy statement/prospectus.
If you would like to request any documents, you must do so by May 6, 2021, in order to receive them before the special meetings.
Please also see “Where You Can Find More Information” beginning on page 268 of the accompanying joint proxy statement/prospectus.
 

TABLE OF CONTENTS
 
[MISSING IMAGE: lg_reshapelife-4clr.jpg]
RESHAPE LIFESCIENCES INC.
1001 Calle Amanecer
San Clemente, California 92673
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 13, 2021
To the Stockholders of ReShape Lifesciences Inc.:
We cordially invite you to attend a special meeting of the stockholders of ReShape Lifesciences Inc. (“ReShape”) being held virtually at www.virtualshareholdermeeting.com/RSLS2021SM in connection with a proposed merger with Obalon Therapeutics, Inc. (“Obalon”). On January 19, 2021, Obalon, ReShape and Optimus Merger Sub, Inc., a wholly owned subsidiary of Obalon (“Merger Sub”), entered into an Agreement and Plan of Merger (as amended from time to time, the “Merger Agreement”), pursuant to which Merger Sub will merge with and into ReShape, with ReShape surviving as a wholly owned subsidiary of Obalon (the “Merger”).
The special meeting will be held at 11:30 Eastern time on May 13, 2021 and will be conducted as a virtual meeting via the internet at www.virtualshareholdermeeting.com/RSLS2021SM (the “ReShape Special Meeting”). As part of our precautions regarding the COVID-19 (coronavirus) pandemic, we are sensitive to the public health and travel concerns that our stockholders may have, as well as any quarantine or other similar protocols that governments may impose. As a result, the ReShape Special Meeting will be held virtually via live webcast. There will not be a physical meeting location. You or your proxyholder will be able to attend the ReShape Special Meeting online and vote your shares electronically by visiting www.virtualshareholdermeeting.com/RSLS2021SM. You will need to have your 16-Digit Control Number included on your Notice or your proxy card (if you received a printed copy of the proxy materials) to join and vote at the ReShape Special Meeting. At the ReShape Special Meeting, you will be asked to consider and vote upon the following proposals:
1.   ReShape Merger Proposal.   To adopt the Merger Agreement, a copy of which is attached as Annex A to the accompanying joint proxy statement/prospectus, and thereby approve the Merger and other transactions contemplated thereby (the “ReShape Merger Proposal”); and
2.   ReShape Adjournment Proposal.   To approve adjournments of the ReShape Special Meeting from time to time, if necessary or appropriate to solicit additional proxies in favor of the ReShape Merger Proposal if there are insufficient votes at the time of such adjournment to approve such proposal (the “ReShape Adjournment Proposal”).
Approval of the ReShape Merger Proposal is required for the consummation of the Merger. The approval of the ReShape Adjournment Proposal is not required for the consummation of the Merger. The ReShape Board of Directors (the “ReShape Board”) is not aware of any other business to be acted upon at the ReShape Special Meeting.
Approval of the ReShape Merger Proposal requires the affirmative vote of the holders of a majority of all outstanding shares of ReShape common stock, $0.001 par value per share (the “ReShape Common Stock”), entitled to vote at the ReShape Special Meeting. Approval of the ReShape Adjournment Proposal requires the affirmative vote of the holders of a majority of the voting interest of the shares of ReShape Common Stock present, in person or by proxy, and entitled to vote on the applicable proposal at the ReShape Special Meeting.
The ReShape Merger Proposal and ReShape Adjournment Proposal are each described in more detail in the accompanying joint proxy statement/prospectus, which you should read carefully in its entirety.
 

TABLE OF CONTENTS
 
The failure of any stockholder of record of ReShape to submit a signed proxy card, grant a proxy electronically over the Internet or by telephone or to vote in person by ballot at the ReShape Special Meeting will have the same effect as a vote “AGAINST” the ReShape Merger Proposal, but will not have an effect on the outcome of the ReShape Adjournment Proposal. If you hold your shares in “street name,” failure to instruct your bank, broker, or other nominee on how to vote your shares will have the same effect as a vote “AGAINST” the ReShape Merger Proposal, but will not have any effect on the ReShape Adjournment Proposal. Abstentions will have the same effect as a vote “AGAINST” the ReShape Merger Proposal and the ReShape Adjournment Proposal.
The ReShape Board has set April 7, 2021 as the record date for the ReShape Special Meeting. Only holders of record of shares of ReShape Common Stock as of 5:00 p.m. Eastern Time on April 7, 2021 will be entitled to notice of and to vote at the ReShape Special Meeting and any adjournments thereof. Any stockholder entitled to attend and vote at the ReShape Special Meeting is entitled to appoint a proxy to attend and vote on such stockholder’s behalf. Such proxy need not be a holder of shares of ReShape Common Stock.
Your vote is very important. To ensure your representation at the ReShape Special Meeting, please complete and return the enclosed proxy card or submit your proxy by telephone or through the Internet. Please submit your proxy promptly whether or not you expect to attend the ReShape Special Meeting. Submitting a proxy now will not prevent you from being able to vote in person at the ReShape Special Meeting. If your shares of ReShape Common Stock are held in “street name” in the name of a bank, broker, or other nominee, follow the instructions on the voting instruction card furnished to you by such bank, broker, or other nominee.
The ReShape Board has unanimously approved the Merger Agreement and the transactions contemplated thereby, and has determined that the Merger Agreement and the Merger are advisable, fair to, and in the best interests of ReShape and its stockholders. The ReShape Board therefore unanimously recommends that you vote “FOR” the ReShape Merger Proposal and “FOR” the ReShape Adjournment Proposal.
By Order of the Board of Directors,
Bart Bandy
Chief Executive Officer
San Clemente, California
April 13, 2021
 

TABLE OF CONTENTS
 
[MISSING IMAGE: lg_obalon-4clr.jpg]
OBALON THERAPEUTICS, INC.
5421 Avenida Encinas, Suite F
Carlsbad, California 92008
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 13, 2021
To the Stockholders of Obalon Therapeutics, Inc.:
We cordially invite you to attend a special meeting of the stockholders of Obalon Therapeutics, Inc. (“Obalon”) being held virtually at www.virtualshareholdermeeting.com/OBLN2021SM, in connection with a proposed merger with ReShape Lifesciences Inc. (“ReShape”). On January 19, 2021, Obalon, ReShape, and Optimus Merger Sub, Inc., a wholly owned subsidiary of Obalon (“Merger Sub”), entered into an Agreement and Plan of Merger, dated as of January 19, 2021, (as amended from time to time, the “Merger Agreement”), pursuant to which Merger Sub will merge with and into ReShape, with ReShape surviving as a wholly owned subsidiary of Obalon (the “Merger”).
As part of our precautions regarding the COVID-19 (coronavirus) pandemic, we are sensitive to the public health and travel concerns that our stockholders may have, as well as any quarantine or other similar protocols that governments may impose. As a result, the special meeting (the “Obalon Special Meeting”) will be held virtually via live webcast. There will not be a physical meeting location. You or your proxyholder will be able to attend the Obalon Special Meeting online and vote your shares electronically by visiting www.virtualshareholdermeeting.com/OBLN2021SM. You will need to have your 16-Digit Control Number included on your Notice or your proxy card (if you received a printed copy of the proxy materials) to join and vote at the Obalon Special Meeting. At the Obalon Special Meeting, you will be asked to consider and vote upon the following proposals:
1.   Obalon Share Issuance Proposal.   To approve the issuance of shares of common stock, par value $0.001 per share, of Obalon (“Obalon Shares”) in connection with the Merger (the “Obalon Share Issuance Proposal”);
2.   Obalon Reverse Stock Split Proposal.   To approve the authorization of Obalon’s Board of Directors, in its discretion but in no event later than the date of the 2021 annual meeting of stockholders, to amend Obalon’s Restated Certificate of Incorporation, as amended, to effect a reverse stock split of Obalon Shares, at a ratio in the range of 1-for-3 to 1-for-10, such ratio to be determined by the Board of Directors and included in a public announcement (the “Obalon Reverse Stock Split Proposal”); and
3.   Obalon Adjournment Proposal.   To approve adjournments of the Obalon Special Meeting from time to time, if necessary or appropriate, including to solicit additional proxies in favor of the Obalon Share Issuance Proposal if there are insufficient votes at the time of such adjournment to approve such proposal (the “Obalon Adjournment Proposal” and, together with the Obalon Share Issuance Proposal and the Obalon Reverse Stock Split Proposal, the “Obalon Proposals”).
The approval by Obalon stockholders of the Obalon Share Issuance Proposal and the Obalon Reverse Stock Split Proposal are conditions to the consummation of the Merger. If the Obalon Share Issuance Proposal and the Obalon Reverse Stock Split Proposal are not approved, the Merger will not be consummated. The approval of the Obalon Adjournment Proposal is not required for the consummation of the Merger. The Obalon Board of Directors (the “Obalon Board”) is not aware of any other business to be acted upon at the Obalon Special Meeting.
Please refer to the accompanying joint proxy statement/prospectus for further information with respect to the business to be transacted at the Obalon Special Meeting.
 

TABLE OF CONTENTS
 
The Obalon Board has set April 7, 2021 as the record date for the Obalon Special Meeting. Only holders of record of Obalon Shares as of 5:00 p.m. U.S. Eastern Time on April 7, 2021 will be entitled to notice of and to vote at the Obalon Special Meeting and any adjournments thereof. Any stockholder entitled to attend and vote at the Obalon Special Meeting is entitled to appoint a proxy to attend and vote on such stockholder’s behalf. Such proxy need not be a holder of Obalon Shares.
To be approved, the Obalon Share Issuance Proposal, the Obalon Reverse Stock Split Proposal and the Obalon Adjournment Proposal require the affirmative vote of the holders of a majority of the votes cast affirmatively or negatively thereon at the Obalon Special Meeting.
The failure of any stockholder of record of Obalon to submit a signed proxy card, grant a proxy electronically over the Internet or by telephone or to vote virtually by ballot at the Obalon Special Meeting will not have an effect on the outcome of the Obalon Share Issuance Proposal, the Obalon Reverse Stock Split Proposal or the Obalon Adjournment Proposal. An abstention will have no effect on the outcome of the Obalon Share Issuance Proposal or the Obalon Adjournment Proposal, but will count as a vote cast AGAINST the Obalon Reverse Stock Split Proposal. If you hold your Obalon Shares in “street name” through a bank, broker, or other nominee and you do not instruct your bank, broker, or other nominee on how to vote your shares, your bank, broker, or other nominee will not be permitted to vote your shares on any of the Obalon Proposals, which will have no effect on the outcome of the Obalon Share Issuance Proposal or the Obalon Adjournment Proposal, but will count as a vote cast AGAINST the Obalon Reverse Stock Split Proposal.
Your vote is very important. Whether or not you expect to attend the Obalon Special Meeting virtually, we urge you to submit your proxy with respect to your Obalon Shares as promptly as possible by: (1) accessing the Internet website specified on your proxy card; (2) calling the toll-free number specified on your proxy card; or (3) signing and returning the enclosed proxy card in the postage-paid envelope provided, to ensure that your Obalon Shares are represented and voted at the Obalon Special Meeting. Submitting a proxy now will not prevent you from being able to vote virtually at the Obalon Special Meeting. If your Obalon Shares are held in “street name” in the name of a bank, broker, or other nominee, please follow the instructions on the voting instruction card furnished by the record holder.
The Obalon Board has unanimously approved the Merger Agreement and the transactions contemplated thereby, including the issuance of Obalon Shares, and has determined that the Merger Agreement and the Merger, including the issuance of Obalon Shares, are advisable, fair to, and in the best interests of Obalon and its stockholders. The Obalon Board unanimously recommends that you vote “FOR” the Obalon Share Issuance Proposal, “FOR” the Obalon Reverse Stock Split Proposal and “FOR” the Obalon Adjournment Proposal.
By Order of the Board of Directors,
Andrew Rasdal
President and Chief Executive Officer
Carlsbad, California
April 13, 2021
 

TABLE OF CONTENTS
 
YOUR VOTE IS IMPORTANT!
WHETHER OR NOT YOU EXPECT TO ATTEND THE OBALON SPECIAL MEETING VIRTUALLY, WE URGE YOU TO SUBMIT YOUR PROXY AS PROMPTLY AS POSSIBLE (1) VIA THE INTERNET, (2) BY TELEPHONE OR (3) BY MARKING, SIGNING AND DATING THE ENCLOSED OBALON PROXY CARD AND RETURNING IT IN THE POSTAGE-PAID ENVELOPE PROVIDED. IF YOU ATTEND THE OBALON SPECIAL MEETING AND WISH TO VOTE YOUR OBALON SHARES VIRTUALLY, YOU MAY DO SO AT ANY TIME PRIOR TO THE CLOSING OF THE POLLS AT THE SPECIAL MEETING. You may revoke your proxy or change your vote at any time before the polls close at the Obalon Special Meeting. If your Obalon Shares are held in “street name” in the name of a bank, broker, or other nominee holder of record, please follow the instructions on the voting instruction form furnished to you by such record holder.
We urge you to read the accompanying joint proxy statement/prospectus including all documents incorporated by reference into the joint proxy statement/prospectus and its annexes and exhibits carefully and in their entirety. If you have any questions concerning the Merger Agreement, the Merger, the Obalon Proposals, the Obalon Special Meeting or the accompanying joint proxy statement/prospectus, would like additional copies of the accompanying joint proxy statement/prospectus or need help voting your Obalon Shares, please contact:
[MISSING IMAGE: lg_mackenziepartninc-bw.jpg]
1407 Broadway, 27th Floor
New York, NY 10018
Toll-Free: (800) 322-2885
Email: proxy@mackenziepartners.com
or
[MISSING IMAGE: lg_obalon-4clr.jpg]
5421 Avenida Encinas, Suite F
Carlsbad, California 92008
Attention: Nooshin Hussainy, Chief Financial Officer
Telephone: (760) 607-5164
https://investor.obalon.com/
 

TABLE OF CONTENTS
 
TABLE OF CONTENTS
1
15
24
25
27
38
52
91
93
93
93
93
93
94
94
94
94
95
96
96
96
97
97
97
97
98
98
99
100
100
100
100
100
101
101
101
101
102
103
103
103
103
 
i

TABLE OF CONTENTS
 
104
104
104
105
105
106
112
113
113
113
113
122
125
128
130
139
140
148
148
148
148
149
149
150
151
151
152
155
155
155
155
156
156
159
159
159
159
160
160
160
161
161
163
164
 
ii

TABLE OF CONTENTS
 
166
167
167
167
168
168
168
168
169
170
170
170
170
171
171
172
196
210
221
229
240
250
251
251
251
252
252
254
260
262
264
265
266
267
268
269
272
F-1
F-33
A-1
 
iii

TABLE OF CONTENTS
 
B-1
C-1
D-1
E-1
 
iv

TABLE OF CONTENTS
 
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETINGS
The following are brief answers to certain questions that you may have regarding the Merger Agreement, the Merger, the issuance of Obalon Shares in connection with the Merger, the ReShape Special Meeting, the Obalon Special Meeting and the Merger Consideration (each as defined below). You are urged to read carefully this entire joint proxy statement/prospectus and additional important information contained in the annexes and exhibits to, and the documents incorporated by reference into, this joint proxy statement/prospectus because the information in this section may not provide all of the information that might be important to you in determining how to vote. See “Where You Can Find More Information” beginning on page 268 in this joint proxy statement/prospectus.
Q:
What is the proposed transaction?
A:
On January 19, 2021, ReShape Lifesciences Inc. (“ReShape”), Obalon Therapeutics, Inc. (“Obalon”), and Optimus Merger Sub, Inc., a wholly owned direct subsidiary of Obalon (“Merger Sub”), entered into an Agreement and Plan of Merger (as amended from time to time, the “Merger Agreement”). The merger contemplated by the Merger Agreement will be implemented through a merger of Merger Sub with and into ReShape, with ReShape becoming a wholly owned subsidiary of Obalon (the “Merger”). Following the Effective Time (as defined below), Obalon will be the combined company entity, renamed as ReShape Lifesciences Inc. (the “Combined Company”), and ReShape, renamed as ReShape Weightloss Inc., will be the Combined Company’s wholly owned subsidiary.
In the Merger, each share of common stock of ReShape, par value $0.001 per share (“ReShape Common Stock”), and each share of series B preferred stock of ReShape, par value $0.001 per share (“ReShape Series B Preferred Stock”, and together with ReShape Common Stock, the “ReShape Shares”), issued and outstanding (other than shares held by Obalon, Merger Sub, any subsidiaries of Obalon or ReShape, or by ReShape as treasury shares) immediately prior to the effective time of the Merger (the “Effective Time”) will be converted into the right to receive a number of fully paid and non-assessable shares of common stock of Obalon, par value $0.001 per share (“Obalon Shares”), according to a ratio determined at least 10 days prior to the anticipated completion of the Merger (the “Determination Date”) that will result in the holders of ReShape Shares owning 51% of the outstanding stock of the Combined Company immediately following the Merger (such ratio, the “Exchange Ratio”) and cash in lieu of fractional shares (such consideration, the “Merger Consideration”).
In addition, in the Merger, Obalon will assume each outstanding and unexercised warrant to purchase ReShape capital stock, which will be converted into and exchangeable for warrants to purchase a number of Obalon Shares according to the Exchange Ratio. In the Merger, Obalon will assume all of the obligations of ReShape under ReShape’s series C certificate of designation and will file a new certificate of designation for new Obalon preferred stock with the same terms and conditions as ReShape’s series C certificate of designation (provided that such new certificate of designation would provide that such new preferred stock would be entitled to vote for the election of directors, voting on an as-converted to common stock basis and voting together as a single class with the holders of Obalon Shares), and each share of series C preferred stock of ReShape, par value $0.001 per share, issued and outstanding immediately prior to the Effective Time will be converted into the right to receive a number of shares of such new preferred stock of Obalon based on the Exchange Ratio. In the Merger, each outstanding option to purchase ReShape Shares will be cancelled and terminated without any payment. In the Merger, Obalon stockholders will continue to own and hold their existing Obalon Shares.
Immediately following the Effective Time, ReShape stockholders and Obalon stockholders are expected to own approximately 51% and 49%, respectively, of the outstanding stock of the Combined Company.
Q:
Why are ReShape and Obalon proposing the Merger?
A:
Each of the ReShape Board of Directors (the “ReShape Board”) and the Obalon Board of Directors (the “Obalon Board”) believes that the proposed Merger will provide a number of significant potential strategic benefits and opportunities that will be in the best interests of the ReShape stockholders and Obalon stockholders, respectively. To review the reasons for the proposed Merger in greater detail, see “The Merger — ReShape’s Reasons for the Merger; Recommendation of the ReShape Board” and “The
 
1

TABLE OF CONTENTS
 
Merger — Obalon’s Reasons for the Merger; Recommendation of the Obalon Board” beginning on pages 122 and 125 respectively, in this joint proxy statement/prospectus.
Q:
Why am I receiving this joint proxy statement/prospectus?
A:
Each of ReShape and Obalon is sending these materials to the ReShape stockholders and Obalon stockholders, respectively, as of the applicable record date, to help the ReShape stockholders and the Obalon stockholders decide how to vote their shares of ReShape Common Stock and/or their Obalon Shares, as the case may be, with respect to the matters to be considered at the special meeting of stockholders of ReShape (the “ReShape Special Meeting”) and the special meeting of stockholders of Obalon (the “Obalon Special Meeting”), respectively.
Consummation of the Merger requires certain approvals by both ReShape stockholders and Obalon stockholders. To obtain these required approvals, ReShape will hold the ReShape Special Meeting to request that the ReShape stockholders approve, among other things, a proposal to adopt the Merger Agreement (the “ReShape Merger Proposal”), and Obalon will hold the Obalon Special Meeting to request that the Obalon stockholders approve, among other things, the issuance of Obalon Shares in connection with the Merger (the “Obalon Share Issuance Proposal”). Further information about the ReShape Special Meeting, the Obalon Special Meeting, the Merger Agreement, the Merger, and the issuance of Obalon Shares as the Merger Consideration is contained in this joint proxy statement/prospectus. This joint proxy statement/prospectus constitutes both a joint proxy statement of ReShape and Obalon and a prospectus of Obalon with respect to the Obalon Shares to be issued in connection with the Merger. It is a joint proxy statement because it will be used by both ReShape in soliciting proxies from the ReShape stockholders and by Obalon in soliciting proxies from the Obalon stockholders. It is a prospectus because Obalon, in connection with the Merger, is offering Obalon Shares in exchange for outstanding ReShape Shares, as described in further detail elsewhere in this joint proxy statement/prospectus.
The enclosed proxy materials allow you to submit a proxy by telephone or over the Internet, or by signing and returning the enclosed proxy card in the postage-paid envelope provided, without attending the applicable company’s special meeting virtually.
Your vote is very important. You are encouraged to submit your proxy as soon as possible by telephone or over the Internet, or by signing and returning the enclosed proxy card in the postage-paid envelope provided, even if you do plan to attend the ReShape Special Meeting or the Obalon Special Meeting virtually.
Q:
What will ReShape stockholders receive in the Merger?
A:
In the Merger, the ReShape Shares issued and outstanding immediately prior to the Effective Time (other than shares held by Obalon, Merger Sub, any subsidiaries of Obalon or ReShape, or by ReShape as treasury shares) will become the right to receive a number shares of Obalon Shares that will result in the holders of ReShape Shares owning 51% of the outstanding shares of common stock of the Combined Company immediately after the Merger. Based on the number of shares outstanding as of April 7, 2021, each ReShape Share would become the right to receive an estimated 1.6911 Obalon Shares. However, this estimated Exchange Ratio is subject adjustment prior to the Effective Time based on the actual shares outstanding as of the Determination Date. No fractional Obalon Shares will be issued to ReShape stockholders in connection with the Merger. Instead, following the Effective Time, each former holder of ReShape Shares who otherwise would be entitled to receive a fractional Obalon Share (after taking into account all ReShape Shares held immediately prior to the Effective Time by such holder) will receive an amount in cash (without interest) determined by multiplying (i) the fraction of an Obalon Share that such holder would otherwise be entitled to receive by (ii) the prevailing prices of Obalon Shares on The Nasdaq Capital Market as of the Determination Date.
 
2

TABLE OF CONTENTS
 
Q:
What will happen to my Obalon Shares?
A:
Following the Effective Time, Obalon will be the combined company entity, renamed as ReShape Lifesciences Inc. (referred to as the Combined Company) and ReShape, renamed as ReShape Weightloss Inc. will be the Combined Company’s wholly owned subsidiary, and you will continue to own the same Obalon Shares that you own prior to the Effective Time except that the shares, subject to Nasdaq approval, will trade under the symbol “RSLS.” However, as a result of the issuance of new Obalon Shares to ReShape stockholders as Merger Consideration, your ownership percentage in the Combined Company will be reduced.
Q:
When will the Merger be consummated?
A:
The Merger is expected to be consummated during the second quarter of 2021, subject to the satisfaction (or waiver to the extent permitted) of certain conditions to closing as set forth in the Merger Agreement. However, neither ReShape nor Obalon can predict the actual date on which the Merger will be consummated, or whether it will be consummated at all, because the Merger is subject to factors beyond each company’s control, including approval of the ReShape Merger Proposal by ReShape stockholders, approval of the Obalon Share Issuance Proposal and Obalon Reverse Stock Split Proposal by Obalon stockholders, and the Nasdaq Filings discussed below. See “The Merger Agreement — Conditions to Completion of the Merger” beginning on page 169 of this joint proxy statement/prospectus.
Q:
What are the conditions to the consummation of the Merger?
A:
In addition to approval of the ReShape Merger Proposal by ReShape stockholders and approval of the Obalon Share Issuance Proposal and Obalon Reverse Stock Split Proposal by Obalon stockholders, consummation of the Merger is subject to the satisfaction or, to the extent permitted by applicable law, waiver by Obalon and ReShape of a number of other conditions, including the approval by the Nasdaq Stock Market LLC (“Nasdaq”) of (i) a Listing of Additional Shares Notice covering the Obalon Shares to be issued to holders of ReShape Shares pursuant to the Merger Agreement and (ii) a continued listing application for the Combined Company after the Merger to maintain Obalon’s existing listing on The Nasdaq Capital Market ((i) and (ii) together, the “Nasdaq Filings”). See “The Merger Agreement — Conditions to Completion of the Merger” beginning on page 169 of this joint proxy statement/prospectus.
Q:
What effect will the Merger have on ReShape and Obalon?
A:
At the Effective Time, Merger Sub will merge with and into ReShape, with ReShape surviving as a wholly owned subsidiary of Obalon. Following the consummation of the Merger, ReShape Shares will no longer be listed on The OTCQB Market or any other stock exchange or quotation system, and ReShape will cease to be a publicly traded company.
Obalon will seek approval from Nasdaq to change its name to ReShape Lifesciences Inc. and to trade under the current ReShape symbol, “RSLS,” following the Merger. Subject to Nasdaq approval, the Obalon Shares will continue to be listed on The Nasdaq Capital Market under the “RSLS” ticker symbol. Obalon Shares will continue to be registered and subject to reporting obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), following the consummation of the Merger.
Q:
Who will serve as the directors and senior management of the Combined Company after the consummation of the Merger?
A:
Pursuant to the Merger Agreement, following the consummation of the Merger, the board of directors of the Combined Company (the “Combined Board”) will consist of Dan W. Gladney, Barton P. Bandy, Arda M. Minocherhomjee, Lori C. McDougal, and Gary D. Blackford, who are currently members of the ReShape Board. Dan W. Gladney will serve as the Chair of the Combined Board, and Gary D. Blackford will be Lead Director as of the Effective Time.
The current executive leadership team at ReShape is expected to continue to serve in their same roles, but at the Combined Company after the consummation of the Merger. As of the Effective Time, Bart
 
3

TABLE OF CONTENTS
 
Bandy will serve as the Chief Executive Officer of the Combined Company, and Tom Stankovich will be the Chief Financial Officer of the Combined Company. No current Obalon directors, officers or employees are expected to continue with the Combined Company.
Q:
Who is entitled to vote?
A:
ReShape:   The ReShape Board has fixed 5:00 p.m. U.S. Eastern Time on April 7, 2021 as the record date for determining the ReShape stockholders who are entitled to notice of and to vote at the ReShape Special Meeting. If you were a holder of record of ReShape Common Stock as of 5:00 p.m. U.S. Eastern Time on April 7, 2021, you are entitled to receive notice of and to vote at the ReShape Special Meeting and any adjournments thereof.
Obalon:   The Obalon Board has fixed 5:00 p.m. U.S. Eastern Time on April 7, 2021 as the record date for determining the Obalon stockholders who are entitled to notice of and to vote at the Obalon Special Meeting. If you were a holder of record of Obalon Shares as of 5:00 p.m. U.S. Eastern Time on April 7, 2021, you are entitled to receive notice of and to vote at the Obalon Special Meeting and any adjournments thereof.
Q:
Where and when will the special meeting be held?
A:
Each of the ReShape Special Meeting and Obalon Special Meeting will be held virtually via the Internet on May 13, 2021 beginning at 8:30 am Pacific Time. As part of our precautions regarding the COVID-19 (coronavirus) pandemic, we are sensitive to the public health and travel concerns that our stockholders may have, as well as any quarantine or other similar protocols that governments may impose. As a result, the ReShape Special Meeting and Obalon Special Meeting will be held in a virtual meeting format only, via live webcast. There will not be a physical meeting location. You will be able to attend the ReShape Special Meeting by visiting www.virtualshareholdermeeting.com/RSLS2021SM or attend the Obalon Special Meeting by visiting www.virtualshareholdermeeting.com/OBLN2021SM and vote your shares electronically. If you plan to attend the ReShape Special Meeting or Obalon Special Meeting, you will need the 16-digit control number included on your proxy card or voting instruction form that accompanies your proxy materials.
Q:
What are ReShape stockholders being asked to vote on?
A:
At the ReShape Special Meeting, ReShape stockholders will be asked to approve the following items:
1.
the ReShape Merger Proposal; and
2.
a proposal to approve adjournments of the ReShape Special Meeting from time to time to another date and place, if necessary or appropriate to solicit additional votes in favor of the ReShape Merger Proposal if there are insufficient votes at the time of such adjournment to approve such proposal (the “ReShape Adjournment Proposal” and, together with the ReShape Merger Proposal, the “ReShape Proposals”).
Approval of the ReShape Merger Proposal is required for consummation of the Merger. The approval of the ReShape Adjournment Proposal is not required for consummation of the Merger.
No other matters are intended to be brought before the ReShape Special Meeting by ReShape.
Q:
What vote is required to approve each proposal at the ReShape Special Meeting?
A:
1.
ReShape Merger Proposal:   Approval of the ReShape Merger Proposal requires the affirmative vote of the holders of a majority of all outstanding shares of ReShape Common Stock entitled to vote at the ReShape Special Meeting. For the ReShape Merger Proposal, an abstention or a failure to vote (i.e., a failure to submit a proxy card or vote virtually) will have the same effect as a vote cast “AGAINST” this proposal.
2.
ReShape Adjournment Proposal:   Approval of the ReShape Adjournment Proposal requires the affirmative vote of the holders of a majority of the voting interest of the shares of ReShape Common Stock present and entitled to vote on the proposal. For the ReShape Adjournment Proposal, an abstention will have the same effect as a vote cast “AGAINST” this proposal and a failure to vote
 
4

TABLE OF CONTENTS
 
(i.e., a failure to submit a proxy card or vote virtually) will have no effect on the outcome of the ReShape Adjournment Proposal.
Q:
How does the ReShape Board recommend ReShape stockholders vote?
A:
The ReShape Board has determined that the Merger Agreement and the Merger are advisable and in the best interests of ReShape and the ReShape stockholders, and has approved and adopted the Merger Agreement and the Merger. The ReShape Board therefore unanimously recommends that the ReShape stockholders vote their ReShape Shares:
1.
FOR” the ReShape Merger Proposal; and
2.
FOR” the ReShape Adjournment Proposal.
Q:
Are there any risks relating to the Merger or ReShape’s, Obalon’s or the proposed Combined Company’s business that ReShape stockholders should consider in deciding whether to vote for the ReShape Proposals?
A:
Yes. Before making any decision on whether and how to vote, ReShape stockholders are urged to read carefully and in its entirety the information contained in “Risk Factors” beginning on page 25 of this joint proxy statement/prospectus.
Q:
Do any of ReShape’s directors or executive officers have interests in the Merger that may be different from, or in addition to, those of ReShape stockholders?
A:
Yes. ReShape’s directors and executive officers have interests in the Merger that may be different from, or in addition to, the interests of ReShape stockholders generally. See “The Merger — Interests of ReShape’s Directors and Executive Officers in the Merger” beginning on page 148 of this joint proxy statement/prospectus. The members of the ReShape Board were aware of and considered these interests, among other matters, in evaluating the Merger Agreement and the Merger, and in recommending that the ReShape stockholders approve the ReShape Proposals.
Q:
What are Obalon stockholders being asked to vote on?
A:
At the Obalon Special Meeting, Obalon stockholders will be asked to approve the following items:
1.
the Obalon Share Issuance Proposal;
2.
a proposal authorizing Obalon’s Board of Directors, in its discretion but in no event later than the date of the 2021 annual meeting of stockholders, to amend Obalon’s Restated Certificate of Incorporation, as amended, to effect a reverse stock split of Obalon’s common stock, at a ratio in the range of 1-for-3 to 1-for-10; such ratio to be determined by the Board of Directors and included in a public announcement (the “Obalon Reverse Stock Split Proposal”); and
3.
a proposal to approve adjournments of the Obalon Special Meeting from time to time, if necessary or appropriate, including to solicit additional proxies in favor of the Obalon Share Issuance Proposal if there are insufficient votes at the time of such adjournment to approve such proposal (the “Obalon Adjournment Proposal” and, together with the Obalon Share Issuance Proposal and the Obalon Reverse Stock Split Proposal, the “Obalon Proposals”).
Approval by Obalon stockholders of the Obalon Share Issuance Proposal and Obalon Reverse Stock Split Proposal are conditions to the consummation of the Merger. If the Obalon Share Issuance Proposal and the Obalon Reverse Stock Split Proposal are not approved, the Merger will not be consummated. The approval of the Obalon Adjournment Proposal is not required for the consummation of the Merger.
No other matters are intended to be brought before the Obalon Special Meeting by Obalon.
Q:
What vote is required to approve each proposal at the Obalon Special Meeting?
A:
1.
Obalon Share Issuance Proposal:   To be approved, the Obalon Share Issuance Proposal requires the affirmative vote of the holders of a majority of the votes cast affirmatively or negatively thereon at the Obalon Special Meeting. For the Obalon Share Issuance Proposal, an abstention or a failure to vote (i.e., a failure to submit a proxy card or vote virtually at the Obalon Special Meeting)
 
5

TABLE OF CONTENTS
 
will have no effect on the outcome of this proposal. If you hold Obalon Shares in “street name” through a bank, broker, or other nominee and you do not instruct your bank, broker, or other nominee on how to vote your shares, your bank, broker, or other nominee will not be permitted to vote your shares on the Obalon Share Issuance Proposal, which will have no effect on the outcome of this proposal.
2.
Obalon Reverse Stock Split Proposal.   To be approved, the Obalon Reverse Stock Split Approval requires the affirmative vote of the holders of a majority of the voting power of all of the outstanding Obalon Shares entitled to vote thereon. For the Obalon Reverse Stock Split Proposal, an abstention or a failure to vote (i.e., a failure to submit a proxy card or vote virtually at the Obalon Special Meeting) will count as a vote cast AGAINST this proposal. If you hold Obalon Shares in “street name” through a bank, broker, or other nominee and you do not instruct your bank, broker, or other nominee on how to vote your shares, your bank, broker, or other nominee will not be permitted to vote your shares on the Obalon Reverse Stock Split Proposal, which will have count as a vote cast AGAINST this proposal.
3.
Obalon Adjournment Proposal:   To be approved, the Obalon Adjournment Proposal requires the affirmative vote of the holders of a majority of the votes cast affirmatively or negatively thereon at the Obalon Special Meeting. For the Obalon Adjournment Proposal, an abstention or a failure to vote will have no effect on the outcome of the proposal. If you hold Obalon Shares in “street name” through a bank, broker, or other nominee and you do not instruct your bank, broker, or other nominee on how to vote your shares, your bank, broker, or other nominee will not be permitted to vote your shares on the Obalon Adjournment Proposal, which will have no effect on the outcome of this proposal.
Q:
How does the Obalon Board recommend Obalon stockholders vote?
A:
The Obalon Board has determined that the Merger, the Merger Agreement and the issuance of Obalon Shares in connection with the Merger are advisable and in the best interests of Obalon and the Obalon stockholders. The Obalon Board therefore unanimously recommends that the Obalon stockholders vote:
1.
FOR” the Obalon Share Issuance Proposal;
2.
FOR” the Obalon Reverse Stock Split Proposal; and
3.
FOR” the Obalon Adjournment Proposal.
Q:
Are there any risks relating to the Merger or Obalon’s, ReShape’s or the proposed Combined Company’s business that Obalon stockholders should consider in deciding whether to vote for the Obalon Proposals?
A:
Yes. Before making any decision on whether and how to vote, Obalon stockholders are urged to read carefully and in its entirety the information contained in “Risk Factors” beginning on page 25 of this joint proxy statement/prospectus.
Q:
Do any of Obalon’s directors or executive officers have interests in the Merger that may be different from, or in addition to, those of Obalon stockholders?
A:
Yes. Obalon’s directors and executive officers have interests in the Merger that may be different from, or in addition to, the interests of Obalon stockholders generally. See “The Merger — Interests of Obalon’s Directors and Executive Officers in the Merger” beginning on page 149 of this joint proxy statement/prospectus. The members of the Obalon Board were aware of and considered these interests, among other matters, in evaluating the Merger Agreement and the Merger, and in recommending that the Obalon stockholders approve the Obalon Proposals.
 
6

TABLE OF CONTENTS
 
Q:
Are there any ReShape stockholders already committed to vote in favor of the ReShape Merger Proposal? Are there any Obalon stockholders already committed to vote in favor of the Obalon Share Issuance Proposal?
A:
ReShape:   Yes. Subsequent to the execution of the Merger Agreement, Obalon entered into a voting agreement (the “ReShape Voting Agreement”) with Armistice Capital Master Fund Ltd. (“Armistice”), pursuant to which Armistice has agreed, among other things, to vote the shares of ReShape Common Stock that it owns at the time such vote is taken in favor of the ReShape Proposals and against approval of any proposal made in opposition to, in competition with, or inconsistent with, the Merger Agreement or the Merger. As of the record date for the ReShape Special Meeting, Armistice beneficially owns approximately 86.4% of the outstanding shares of ReShape Common Stock. Therefore, Armistice holds a sufficient number of ReShape Shares in order to approve both of the ReShape Proposals.
Obalon:   Yes. Subsequent to the execution of the Merger Agreement, ReShape entered into a voting agreement (the “Obalon Voting Agreement”) with Andrew Rasdal, President and Chief Executive Officer of Obalon (on behalf of himself and The Rasdal Family Trust dated December 10, 1996), Domain Partners VII, L.P. and DP VII Associates, L.P., InterWest Partners X, L.P., Okapi Ventures, L.P. and Okapi Ventures II, L.P., and Armistice, pursuant to which such stockholders have agreed, among other things, to vote the Obalon Shares that they beneficially own at the time such vote is taken in favor of the Obalon Proposals and against approval of any proposal made in opposition to, in competition with, or inconsistent with, the Merger Agreement or the Merger. As of the record date for the Obalon Special Meeting, such stockholders beneficially own approximately 28.1% of the outstanding Obalon Shares. On January 21, 2021, the day following the public announcement of the Merger Agreement, Armistice exercised a warrant to purchase 525,000 Obalon Shares at an exercise price of $4.40 per share. Under the terms of the Obalon Voting Agreement, Armistice could not sell those Obalon Shares without ReShape’s prior written consent, which ReShape granted on January 21, 2021 and Armistice subsequently sold 525,000 Obalon Shares in the open market. If Armistice would have continued to own such Obalon Shares, they would have been subject to the Obalon Voting Agreement. However, as of the record date for the Obalon Special Meeting, Armistice continues to own the 1,100,000 Obalon Shares that it owned at the time it entered into the Obalon Voting Agreement.
Q:
Who else must approve the Merger?
A:
ReShape and Obalon may not consummate the Merger until the Nasdaq Filings have been approved. Additional information regarding the Nasdaq Filings required for consummation of the Merger is set forth “The Merger Agreement — Conditions to Completion of the Merger” beginning on page 169 of this joint proxy statement/prospectus.
Q:
What do I need to do now?
A:
After carefully reading and considering the information contained in, or incorporated by reference into, this joint proxy statement/prospectus, please submit your proxy or voting instruction card for your shares of ReShape Common Stock or Obalon Shares, as applicable, as soon as possible so that your shares will be represented at your respective company’s special meeting. Please follow the instructions set forth on the proxy card or on the voting instruction card provided by your bank, broker, or other nominee if your shares are held in “street name” through your bank, broker, or other nominee.
Q:
How do I vote?
A:
If you are a stockholder of record of ReShape as of the record date for the ReShape Special Meeting, or a stockholder of record of Obalon as of the record date for the Obalon Special Meeting, you may submit your proxy before your respective company’s special meeting in one of the following ways:
1.
visit the website shown on your proxy card to submit your proxy via the Internet;
2.
call the toll-free number for telephone proxy submission shown on your proxy card; or
3.
complete, sign, date and return the enclosed proxy card in the enclosed postage-paid envelope provided.
 
7

TABLE OF CONTENTS
 
You may also cast your vote virtually at your respective company’s special meeting.
If your shares are held in “street name,” through a bank, broker, or other nominee, that institution will send you separate instructions describing the procedure for voting your shares. Please follow the voting instructions provided by your bank, broker, or other nominee. “Street name” stockholders or stockholders who wish to vote virtually at the applicable company’s special meeting will need to obtain a “legal proxy” from their bank, broker, or other nominee.
Q:
How many votes do I have?
A:
ReShape:   You are entitled to one vote for each share of ReShape Common Stock that you owned as of 5:00 p.m. U.S. Eastern Time on the record date for the ReShape Special Meeting. As of 5:00 p.m. U.S. Eastern Time on the record date for the ReShape Special Meeting, 6,166,554 shares of ReShape Common Stock were outstanding and entitled to vote at the ReShape Special Meeting.
Obalon:   You are entitled to one vote for each Obalon Share that you owned as of 5:00 p.m. U.S. Eastern Time on the record date for the Obalon Special Meeting. As of 5:00 p.m. U.S. Eastern Time on the record date for the Obalon Special Meeting, 10,020,068 Obalon Shares were outstanding and entitled to vote at the Obalon Special Meeting.
Q:
What if I transfer my shares of ReShape Common Stock before the ReShape Special Meeting, or I transfer my Obalon Shares before the Obalon Special Meeting?
A:
ReShape:   If you transfer your shares of ReShape Common Stock after the record date for the ReShape Special Meeting but before the ReShape Special Meeting, unless you provide the transferee of your shares of ReShape Common Stock with a proxy, you will retain your right to vote at the ReShape Special Meeting, but will have transferred the right to receive the Merger Consideration. In order to receive Obalon Shares as a result of the Merger, you must hold your ReShape Shares through the Effective Time.
Obalon:   If you transfer your Obalon Shares after the record date for the Obalon Special Meeting but before the Obalon Special Meeting, unless you provide the transferee of your Obalon Shares with a proxy, you will retain your right to vote at the Obalon Special Meeting.
Q:
Should I send in my ReShape stock certificates now?
A:
No. Any ReShape stockholders who hold certificated ReShape Shares should keep their existing stock certificates at this time. If and when the Merger is consummated, ReShape stockholders will receive from the exchange agent a letter of transmittal and written instructions for exchanging their stock certificates for Obalon Shares. Obalon stockholders do not need to take any action with respect to their stock certificates.
Obalon will not issue stock certificates in respect of any Obalon Shares issued in connection with the Merger, except as required by law. ReShape stockholders who are entitled to receive the Merger Consideration will receive Obalon Shares in book-entry form.
Q:
Who is the exchange agent for the Merger?
A:
Broadridge Financial Solutions, Inc. (“Broadridge”) will be the exchange agent (the “Exchange Agent”) for the Merger.
Q:
How would I receive the Merger Consideration to which I would be entitled?
A:
After receiving the proper documentation from you, following completion of the Merger, the Exchange Agent for the Merger will forward to you the Obalon Shares and cash for fractional shares to which you are entitled. More information on the documentation you are required to deliver to the Exchange Agent may be found in the section entitled “The Merger Agreement — Procedures for Surrendering ReShape Stock Certificates” beginning on page 159 of this joint proxy statement/prospectus.
 
8

TABLE OF CONTENTS
 
Q:
What constitutes a quorum?
A:
ReShape:   The presence of ReShape stockholders representing a majority of the voting interest of all shares of ReShape Common Stock entitled to vote at the ReShape Special Meeting, virtually or represented by proxy, is necessary to constitute a quorum at the ReShape Special Meeting. Abstentions will be counted as present and entitled to vote for purposes of determining a quorum. If your shares of ReShape Common Stock are held in the name of a bank, broker, or other nominee, you must provide your bank, broker, or other nominee with instructions on how to vote your shares of ReShape Common Stock. If you do not provide voting instructions for any of the ReShape Proposals, your shares of ReShape Common Stock will not be voted on any ReShape Proposal, as your bank, broker, or other nominee will not have discretionary voting authority with respect to any of the ReShape Proposals and your shares of ReShape Common Stock will not be counted as present and entitled to vote for purposes of determining a quorum.
Obalon:   The presence of Obalon stockholders of a majority of the voting power of the shares of stock entitled to vote at the meeting, virtually or represented by proxy, is necessary to constitute a quorum at the Obalon Special Meeting. Abstentions will be counted as present and entitled to vote for purposes of determining a quorum. If your Obalon Shares are held in the name of a bank, broker, or other nominee, you must provide your bank, broker, or other nominee with instructions on how to vote your Obalon Shares. If you do not provide voting instructions for any of the Obalon Proposals, your Obalon Shares will not be voted on any Obalon Proposal, as your bank, broker, or other nominee will not have discretionary voting authority with respect to any of the Obalon Proposals and your Obalon Shares will not be counted as present and entitled to vote for purposes of determining a quorum.
Q:
If my shares are held in “street name” by a bank, broker, or other nominee, will my bank, broker, or other nominee vote my shares for me?
A:
No. If your shares are held in the name of a bank, broker, or other nominee, you are considered the “beneficial owner” of the shares held for you in what is known as “street name” and as such, you are not the “record holder” of such shares. If this is the case, this joint proxy statement/prospectus has been forwarded to you by your bank, broker, or other nominee. If your shares are held in “street name” in a stock brokerage account or by a bank or other nominee, you must provide your bank, broker, or other nominee with instructions on how to vote your shares. Please follow the instructions provided by your bank, broker, or other nominee. Please note that you may not submit a proxy with respect to shares held in “street name” by returning a proxy card directly to ReShape or Obalon or by voting virtually at your respective company’s special meeting unless you provide a “legal proxy,” which you would need to obtain from your bank, broker, or other nominee. If you do not provide voting instructions to your bank, broker, or other nominee, your shares will not be voted on any proposal, as your bank, broker, or other nominee will not have discretionary voting authority with respect to any of the proposals described in this joint proxy statement/prospectus.
A “broker non-vote” occurs when a broker submits a proxy that states that the broker votes for at least one proposal, but does not vote for proposals on non-routine matters because the broker has not received instructions from the beneficial owner on how to vote and does not have discretionary authority to vote on those proposals. Under the rules of Nasdaq, brokers do not have discretionary authority to vote on non-routine matters. Because all of the matters to be considered at the ReShape Special Meeting and the Obalon Special Meeting are non-routine and brokers will not have discretionary authority to vote on any of the Obalon Proposals or the ReShape Proposals, Obalon and ReShape do not expect to receive any broker non-votes, and shares for which voting instructions are not provided to the broker will not be deemed voting power present for any matter before the meeting, resulting in such shares being excluded from the calculation of quorum.
If you are a ReShape stockholder and you do not instruct your bank, broker, or other nominee on how to vote your shares on any of the ReShape Proposals:

your shares will not be counted towards determining whether a quorum is present; and

your bank, broker, or other nominee will not be permitted to vote your shares on the ReShape Merger Proposal, the ReShape Adjournment Proposal, or the ReShape Advisory Compensation
 
9

TABLE OF CONTENTS
 
Proposal, and this will have the same effect as a vote cast “AGAINST” the ReShape Merger Proposal and will have no effect on the vote count for the ReShape Adjournment Proposal.
If you are an Obalon stockholder and you do not instruct your bank, broker, or other nominee on how to vote your shares on any of the Obalon Proposals:

your shares will not be counted towards determining whether a quorum is present; and

your bank, broker, or other nominee will not be permitted to vote your shares on the Obalon Share Issuance Proposal, the Obalon Reverse Stock Split Proposal or the Obalon Adjournment Proposal, and this non-vote will have no effect on the vote count for each of the Obalon Share Issuance Proposal or the Obalon Adjournment Proposal, and will have the same effect as a vote cast “AGAINST” the Obalon Reverse Stock Split Proposal.
Q:
What if I do not vote?
A:
ReShape Quorum:   If you are a ReShape stockholder and you fail to vote (i.e., fail to submit a proxy card or vote virtually) or fail to properly instruct your bank, broker, or other nominee how to vote with respect to any of the ReShape Proposals, your shares of ReShape Common Stock will not count towards determining whether a quorum is present. However, if you respond with an “abstain” vote on any of the ReShape Proposals, or vote on one or more of the ReShape Proposals, your ReShape Shares will count towards determining whether a quorum is present.
ReShape Merger Proposal:   If you are a ReShape stockholder and you fail to vote (i.e., fail to submit a proxy card or vote virtually) or fail to return a voting instruction card instructing your bank, broker, or other nominee how to vote on the ReShape Merger Proposal, or if you respond with an “abstain” vote on the ReShape Merger Proposal, this will have the same effect as a vote cast “AGAINST” the ReShape Merger Proposal.
ReShape Adjournment Proposal:   If you are a ReShape stockholder and you fail to vote (i.e., fail to submit a proxy card or vote virtually) or fail to return a voting instruction card instructing your bank, broker, or other nominee how to vote on the ReShape Adjournment Proposal, this will have no effect on the vote count for the ReShape Adjournment Proposal. If you are a ReShape stockholder and you respond with an “abstain” vote on the ReShape Adjournment Proposal, this will have the same effect as a vote cast “AGAINST” the ReShape Adjournment Proposal.
Obalon Quorum:   If you are an Obalon stockholder and you fail to vote (i.e., fail to submit a proxy card or vote virtually) or fail to properly instruct your bank, broker, or other nominee how to vote with respect to any of the Obalon Proposals, your Obalon Shares will not count towards determining whether a quorum is present. However, if you respond with an “abstain” vote on any of the Obalon Proposals, or vote on one or more of the Obalon Proposals, your Obalon Shares will count towards determining whether a quorum is present.
Obalon Proposals:   If you are an Obalon stockholder and you fail to vote (i.e., fail to submit a proxy card or vote virtually) or fail to return a voting instruction card instructing your bank, broker, or other nominee how to vote, or if you respond with an “abstain” vote on the Obalon Proposals, this will have no effect on the outcome of the Obalon Proposals.
An abstention occurs when a holder attends the applicable meeting virtually and does not vote (assuming that such holder did not previously authorize a proxy) or returns a proxy or voting instruction card with an “abstain” vote.
Please note that if you sign and return your proxy or voting instruction card without indicating how to vote on any particular proposal (and you do not change your vote after delivering your proxy or voting instruction card), the shares of ReShape Common Stock represented by your proxy will be voted “FOR” each ReShape Proposal in accordance with the recommendation of the ReShape Board, or the Obalon Shares represented by your proxy will be voted “FOR” each Obalon Proposal in accordance with the recommendation of the Obalon Board, as applicable. See the Q&A below entitled “May I change my vote after I have delivered my proxy or voting instruction card?” for further information on how to change your vote.
 
10

TABLE OF CONTENTS
 
Your vote is very important. Whether or not you plan to attend the ReShape Special Meeting or the Obalon Special Meeting, as applicable, please promptly complete and return the enclosed proxy card or submit your proxy by telephone or through the Internet.
Q:
May I change my vote after I have delivered my proxy or voting instruction card?
A:
ReShape:   If you are a ReShape stockholder of record, you may change your vote or revoke a proxy at any time before your proxy is voted at the ReShape Special Meeting. You can do this by:

sending a written notice of revocation that is received by ReShape prior to 11:59 p.m. (U.S. Eastern Time) on the day preceding the ReShape Special Meeting, stating that you would like to revoke your proxy, to ReShape’s Corporate Secretary at ReShape’s corporate headquarters, 1001 Calle Amanecer, San Clemente, California 92673;

submitting a new proxy bearing a later date (by Internet, telephone or mail) that is received by ReShape prior to 11:59 p.m. (U.S. Eastern Time) on the day preceding the ReShape Special Meeting; or

attending the ReShape Special Meeting and voting virtually or bringing a written notice of revocation to the Secretary of the ReShape Special Meeting prior to the voting at the ReShape Special Meeting (your attendance at the meeting will not, by itself, revoke your proxy; you must vote virtually by ballot at the meeting to change your vote or submit a written notice of revocation to revoke your proxy).
Attending the ReShape Special Meeting will not automatically revoke a proxy that was submitted through the Internet or by telephone or mail. If you wish to change your vote at the ReShape Special Meeting, you must vote by ballot at such meeting or if you wish to revoke your vote at the ReShape Special Meeting, you must bring a written notice of revocation to the Secretary of the ReShape Special Meeting prior to the voting at the ReShape Special Meeting.
If you are a ReShape stockholder whose shares are held in “street name” by a bank, broker, or other nominee, you may revoke your proxy and vote your shares of ReShape Common Stock virtually at the ReShape Special Meeting only in accordance with applicable rules and procedures as employed by such bank, broker, or other nominee. If your shares of ReShape Common Stock are held in an account at a bank, broker, or other nominee, you should contact your bank, broker, or other nominee to change your vote.
Obalon:   If you are an Obalon stockholder of record, you may change your vote or revoke a proxy at any time before your proxy is voted at the Obalon Special Meeting. You can do this by:

sending a written notice of revocation that is received by Obalon prior to 11:59 p.m. (U.S. Eastern Time) on the day preceding the Obalon Special Meeting, stating that you would like to revoke your proxy, to Obalon’s Secretary, at 5421 Avenida Encinas, Suite F, Carlsbad, CA 92008;

submitting a new proxy bearing a later date (by Internet, telephone or mail) that is received by Obalon prior to 11:59 p.m. (U.S. Eastern Time) on the day preceding the Obalon Special Meeting; or

attending the Obalon Special Meeting and voting virtually or bringing a written notice of revocation to the Secretary of the Obalon Special Meeting prior to the voting at the Obalon Special Meeting (your attendance at the meeting will not, by itself, revoke your proxy; you must vote virtually by ballot at the meeting to change your vote or submit a written notice of revocation to revoke your proxy).
Attending the Obalon Special Meeting will not automatically revoke a proxy that was submitted through the Internet or by telephone or mail. If you wish to change your vote at the Obalon Special Meeting, you must vote by ballot at such meeting or if you wish to revoke your vote at the Obalon Special Meeting, you must bring a written notice of revocation to the Secretary of the Obalon Special Meeting prior to the voting of the Obalon Special Meeting.
If you are an Obalon stockholder whose shares are held in “street name” by a bank, broker, or other nominee, you may revoke your proxy and vote your Obalon Shares virtually at the Obalon Special Meeting only in accordance with applicable rules and procedures as employed by such bank, broker, or
 
11

TABLE OF CONTENTS
 
other nominee. If your shares are held in an account at a bank, broker, or other nominee, you should contact your bank, broker, or other nominee to change your vote.
Q:
Will a proxy solicitor be used?
A:
Yes.
Obalon has engaged MacKenzie Partners, Inc. (“MacKenzie”) to assist in the solicitation of proxies for the Obalon Special Meeting, and Obalon estimates it will pay MacKenzie a fee of approximately $15,000, plus reimbursement for reasonable and documented out-of-pocket expenses and disbursements incurred in connection with the proxy solicitation. Obalon has also agreed to indemnify MacKenzie against certain losses, costs, and expenses. In addition to mailing proxy solicitation material, Obalon’s directors, officers, and employees may also solicit proxies virtually, by telephone or by any other electronic means of communication deemed appropriate. No additional compensation will be paid to Obalon’s directors, officers, or employees for such services.
ReShape has not engaged a proxy solicitor. However, in addition to mailing proxy solicitation material, ReShape’s directors, officers, and employees may also solicit proxies virtually, by telephone, or by any other electronic means of communication deemed appropriate. No additional compensation will be paid to ReShape’s directors, officers or employees for such services.
Q:
Who will count the votes?
A:
At the ReShape Special Meeting, Broadridge will serve as inspector of elections, count all of the proxies or ballots submitted and report the votes at the ReShape Special Meeting. Whether you submit your proxy by accessing the Internet, telephone or mail, your proxy will be received directly by Broadridge.
At the Obalon Special Meeting, Broadridge will serve as inspector of elections, count all of the proxies or ballots submitted and report the votes at the Obalon Special Meeting. Whether you submit your proxy by accessing the Internet, telephone or mail, your proxy will be received directly by Broadridge.
Q:
What should I do if I receive more than one set of voting materials?
A:
ReShape stockholders and Obalon stockholders may receive more than one set of voting materials, including multiple copies of this joint proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, if you hold shares of ReShape Common Stock or Obalon Shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold such shares. If you are a holder of record of shares of ReShape Common Stock or Obalon Shares and your shares are registered in more than one name, you will receive more than one proxy card. In addition, if you are a holder of both shares of ReShape Common Stock and Obalon Shares, you will receive one or more separate proxy cards or voting instruction cards for each company. Therefore, if you are a record holder, please complete, sign, date, and return each proxy card and voting instruction card that you receive or otherwise follow the voting instructions set forth in this joint proxy statement/prospectus to ensure that you vote every share of ReShape Common Stock and/or every Obalon Share that you own.
Q:
Where can I find the voting results of the ReShape Special Meeting and the Obalon Special Meeting?
A:
Preliminary voting results are expected to be announced at the ReShape Special Meeting and the Obalon Special Meeting and may be set forth in a press release of ReShape or Obalon after the ReShape Special Meeting and the Obalon Special Meeting, respectively. Final voting results for the ReShape Special Meeting and the Obalon Special Meeting are expected to be published in Current Reports on Form 8-K to be filed by ReShape and Obalon with the Securities and Exchange Commission (the “SEC”) within four business days after the ReShape Special Meeting and the Obalon Special Meeting, as applicable.
 
12

TABLE OF CONTENTS
 
Q:
Are ReShape stockholders entitled to appraisal rights?
A:
A: Yes. If the Merger is completed, ReShape stockholders who have not waived such rights are entitled to appraisal rights under Section 262 of the Delaware General Corporation Law (“DGCL”), provided that they comply with the conditions established by Section 262. See “The Merger Agreement — Appraisal Rights” beginning on page 156 of this joint proxy statement/prospectus and Annex E for a more complete description of the appraisal rights available to ReShape stockholders under the DGCL in connection with the Merger.
Q:
Are Obalon stockholders entitled to appraisal rights?
A:
No. Under the DGCL § 262(b)(1), Obalon stockholders are not entitled to exercise any appraisal rights in connection with the Merger.
Q:
What if I hold ReShape stock options?
A:
Options to purchase ReShape Shares (“ReShape Option”) granted under a ReShape equity incentive plan (“ReShape Equity Plan”) or under a stand-alone stock option agreement that are outstanding immediately prior to the Effective Time (whether vested or unvested) will automatically and without any action on the part of the holder thereof, be cancelled and terminated without any payment being made in respect thereof as of immediately prior to, and contingent upon, the Effective Time.
Q:
What if I hold ReShape warrants?
A:
All warrants of ReShape (“ReShape Warrants”) that are outstanding immediately prior to the Effective Time will be converted into and exchangeable for warrants to purchase a number of Obalon Shares equal to (i) the number of shares of ReShape capital stock issuable upon exercise of such ReShape Warrant, multiplied by (ii) the Exchange Ratio with an exercise price equal to the exercise of such ReShape Warrant divided by the Exchange Ratio and otherwise in accordance with the terms and conditions of such ReShape Warrant.
Q:
What if I hold ReShape Series C Preferred Stock?
A:
Obalon will assume all of the obligations of ReShape under the ReShape Series C Certificate of Designation and will file a new certificate of designation with the same terms and conditions as the ReShape Series C Certificate of Designation. Obalon will issue new preferred stock consistent with the foregoing provisions to holders of ReShape Series C Preferred Stock outstanding immediately prior to the Effective Time, provided that such new certificate of designation would provide that such new preferred stock would be entitled to vote for the election of directors, voting on an as-converted to common stock basis and voting together as a single class with the holders of Combined Company Shares.
Q:
What are the U.S. federal income tax consequences of the Merger to U.S. Holders of ReShape Shares?
A:
The Merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Assuming that the Merger so qualifies, a U.S. Holder (as defined on page 152 of this joint proxy statement/prospectus) of ReShape Shares generally will not recognize any gain or loss for U.S. federal income tax purposes upon the exchange of ReShape Shares for Obalon Shares in the Merger, except with respect to cash received by ReShape stockholders in lieu of fractional Obalon Shares.
Please review the information set forth in the section entitled “Certain U.S. Federal Income Tax Consequences” beginning on page 152 of this joint proxy statement/prospectus for a more complete description of certain U.S. federal income tax consequences of the Merger. The tax consequences to you of the Merger will depend on your particular facts and circumstances. Please consult your tax advisors as to the specific tax consequences to you of the Merger.
Q:
What happens if the Merger is not consummated?
A:
If the Merger is not consummated, ReShape stockholders will not receive the Merger Consideration in exchange for their ReShape Shares. Instead, Obalon and ReShape will remain independent public companies and the shares of ReShape Common Stock and the Obalon Shares will continue to be listed
 
13

TABLE OF CONTENTS
 
and traded on The OTCQB Market and The Nasdaq Capital Market, respectively, under their current ticker symbols. Under specified circumstances, ReShape may be required to pay to Obalon a fee with respect to the termination of the Merger Agreement, as described under “The Merger Agreement — Termination Fee” beginning on page 170 of this joint proxy statement/prospectus.
Q:
Whom should I contact if I have any questions about the proxy materials or voting?
A:
If you have any questions about the proxy materials or if you need assistance submitting your proxy or voting your shares or need additional copies of this joint proxy statement/prospectus or the enclosed proxy card, you should, if you are a ReShape stockholder, contact ReShape’s Corporate Secretary by mail at ReShape’s corporate headquarters, 1001 Calle Amanecer, San Clemente, CA 92673, and, if you are an Obalon stockholder, contact MacKenzie Partners, Inc., Obalon’s proxy solicitor, by mail at 1407 Broadway, 27th Floor, New York, NY 10018, by email at proxy@mackenziepartners.com, or toll-free at (800) 322-2885.
Q:
Where can I find more information about ReShape and Obalon?
A:
You can find more information about ReShape and Obalon from the various sources described under “Where You Can Find More Information” beginning on page 268 of this joint proxy statement/prospectus.
 
14

TABLE OF CONTENTS
 
SUMMARY
This summary highlights selected information included in this joint proxy statement/prospectus. You should read carefully this entire joint proxy statement/prospectus and its annexes and exhibits and the other documents referred to in this joint proxy statement/prospectus because the information in this summary may not provide all of the information that might be important to you in determining how to vote. Additional important information about ReShape and Obalon is also contained in the annexes and exhibits to this joint proxy statement/prospectus. For a description of, and instructions as to how to obtain, this information, see “Where You Can Find More Information” beginning on page 268 of this joint proxy statement/prospectus. Certain items in this summary include a page reference directing you to a more complete description of that item.
Parties to the Merger
ReShape Lifesciences Inc.
ReShape is a weight-loss solutions company, offering an integrated portfolio of proven products and services that manage and treat obesity and metabolic disease. The U.S. Food and Drug Administration (“FDA”) approved Lap-Band® and associated program provide minimally invasive, long-term treatment of obesity and is an alternative to more invasive surgical stapling procedures such as the gastric bypass or sleeve gastrectomy. The ReShape Vest System is an investigational minimally invasive, laparoscopically implanted medical device that wraps around the stomach, emulating the gastric volume reduction effect of conventional weight-loss surgery. It is intended to help obese and morbidly obese patients with rapid weight loss without permanently changing patient anatomy. The recently launched ReShapeCare Virtual health coaching program is a virtual telehealth weight management program that supports lifestyle changes for all weight-loss patients, to help them keep the weight off over time.
The principal executive offices of ReShape are located at 1001 Calle Amanecer, San Clemente, CA 92673. Its telephone number is (949) 429-6680 and its website is www.reshapelifesciences.com. Information on this Internet website is not incorporated by reference into or otherwise part of this joint proxy statement/prospectus.
Obalon Therapeutics, Inc.
Obalon is a vertically integrated medical device company focused on developing and commercializing innovative medical devices to treat people with obesity. Obalon’s current product offering is the Obalon Balloon System, the first and only FDA approved swallowable, gas-filled intragastric balloon designed to provide progressive and sustained weight loss in patients with obesity. The Obalon Balloon System is FDA approved for temporary use to facilitate weight loss in adults with obesity having a body mass index, or BMI, of 30 to 40, or approximately 30 to 100 pounds overweight, who have failed to lose weight through diet and exercise.
The principal executive offices of Obalon are located at 5421 Avenida Encinas, Suite F, Carlsbad, CA 92008. Its telephone number is (760) 607-5164, and its website is www.obalon.com. Information on this Internet web site is not incorporated by reference into or otherwise part of this joint proxy statement/prospectus.
Optimus Merger Sub, Inc.
Merger Sub was incorporated in the State of Delaware on January 14, 2021, and is a direct, wholly owned subsidiary of Obalon. Merger Sub was formed solely for the purpose of consummating the Merger. Merger Sub has not carried on any activities to date, except for activities incidental to its formation and activities undertaken in connection with the Merger.
The principal executive offices of Merger Sub are located at 5421 Avenida Encinas, Suite F, Carlsbad, California 92008-4410; its telephone number is (760) 607-5164.
 
15

TABLE OF CONTENTS
 
The Merger (See Page 113)
Structure of the Merger (See Page 155)
Pursuant to the Merger Agreement, Merger Sub will merge with and into ReShape, with ReShape surviving as a direct, wholly owned subsidiary of Obalon. In the Merger, each ReShape Share issued and outstanding immediately prior to the Effective Time (other than shares held by Obalon, Merger Sub, any subsidiaries of Obalon or ReShape, or by ReShape as treasury shares) will become the right to receive a number of Obalon Shares based on a ratio determined as of the Determination Date that will result in the holders of ReShape Shares owning 51% of the Combined Company Shares immediately after the effective time of the Merger.
The shares of ReShape Common Stock currently trade on The OTCQB Market under the symbol “RSLS,” and Obalon Shares currently trade on The Nasdaq Capital Market under the symbol “OBLN.” Following the consummation of the Merger, subject to Nasdaq approval, Combined Company Shares will continue to be listed on The Nasdaq Capital Market and the Combined Company will seek approval from Nasdaq to change its name to ReShape Lifesciences Inc. and its ticker symbol to “RSLS.” Based on the number of outstanding ReShape Shares and Obalon Shares as of the record date of the ReShape Special Meeting and the record date of the Obalon Special Meeting, respectively, a total of approximately 20,450,506 million Combined Company Shares are expected to be outstanding immediately after the consummation of the Merger.
Treatment of ReShape Series C Preferred Stockholders (See Page 156)
Obalon will assume all of the obligations of ReShape under the ReShape Series C Certificate of Designation and will file a new certificate of designation with the same terms and conditions as the ReShape Series C Certificate of Designation and issue to the holders of ReShape Series C Preferred Stock outstanding immediately prior to the effective time of the Merger new preferred stock consistent with the foregoing provisions (provided that such new certificate of designation would provide that such new preferred stock would be entitled to vote for the election of directors, voting on an as-converted to common stock basis and voting together as a single class with the holders of Obalon Shares), in each case in accordance with Section 7(d) of the ReShape Series C Certificate of Designation.
Treatment of ReShape Warrants (See Page 159)
Each ReShape Warrant outstanding immediately prior to the Effective Time shall be converted into and exchangeable for warrants to purchase a number of Obalon Shares equal to the number of shares of ReShape Common Stock issuable upon exercise of such ReShape Warrant multiplied by the Exchange Ratio with an exercise price equal to the exercise price of such ReShape Warrant divided by the Exchange Ratio and otherwise in accordance with the terms and conditions of such ReShape Warrant.
Treatment of ReShape Stock Options (See Page 159)
Each ReShape Option outstanding immediately prior to the Effective Time, whether vested or unvested, shall become fully vested and shall be canceled and terminated without any payment being made in respect thereof as of immediately prior to, and contingent upon, the Effective Time.
The Combined Company Board and Management After the Merger (See Page 147)
Pursuant to the Merger Agreement, following the consummation of the Merger, the Combined Board will consist of Dan W. Gladney, Barton P. Bandy, Arda M. Minocherhomjee, Lori C. McDougal, and Gary D. Blackford.
As of the Effective Time, the Combined Board will be allocated among three classes of directors as follows:

Class II will consist of Gary D. Blackford and Arda M. Minocherhomjee, Ph.D. and will be up for re-election in 2021;
 
16

TABLE OF CONTENTS
 

Class III will consist of Barton P. Bandy and will be up for re-election in 2022; and

Class I will consist of Dan W. Gladney and Lori C. McDougal and will be up for re-election in 2023.
At the Effective Time, Mr. Bandy will be the Chief Executive Officer of the Combined Company and Tom Stankovich will be the Chief Financial Officer of the Combined Company.
No current Obalon directors, officers or employees are expected to continue with the Combined Company.
ReShape’s Reasons for the Merger; Recommendation of the ReShape Board (See Page 122)
After consideration, the ReShape Board, by a unanimous vote of all directors at its meeting on January 18, 2021, approved the Merger Agreement and the transactions contemplated thereby, including the Merger.
The ReShape Board unanimously recommends that the ReShape stockholders vote “FOR” the ReShape Merger Proposal and “FOR” the ReShape Adjournment Proposal.
For the factors considered by the ReShape Board in reaching its decision to approve the Merger Agreement and the transactions contemplated thereby, including the Merger, and to make the foregoing recommendations, see “The Merger — ReShape’s Reasons for the Merger; Recommendation of the ReShape Board” beginning on page 122 of this joint proxy statement/prospectus.
Obalon’s Reasons for the Merger; Recommendation of the Obalon Board (See Page 125)
After consideration, the Obalon Board, by a unanimous vote of all directors at its meeting on January 18, 2021, approved the Merger Agreement and the transactions contemplated thereby, including the Merger and the issuance of Obalon Shares in connection with the Merger.
The Obalon Board unanimously recommends that the Obalon stockholders vote “FOR” the Obalon Share Issuance Proposal and “FOR” the Obalon Adjournment Proposal.
For the factors considered by the Obalon Board in reaching its decision to approve the Merger Agreement and the transactions contemplated thereby, including the Merger and the Obalon Share Issuance Proposal, and to make the foregoing recommendations, see “The Merger — Obalon’s Reasons for the Merger; Recommendation of the Obalon Board” beginning on page 125 of this joint proxy statement/prospectus.
Voting Agreements
Subsequent to the execution of the Merger Agreement, ReShape entered the Obalon Voting Agreement with Andrew Rasdal, President and Chief Executive Officer of Obalon (on behalf of himself and The Rasdal Family Trust dated December 10, 1996), Domain Partners VII, L.P. and DP VII Associates, L.P., InterWest Partners X, L.P., Okapi Ventures, L.P. and Okapi Ventures II, L.P., and Armistice (the “Obalon Voting Agreement”), pursuant to which such stockholders have agreed, among other things, to vote the Obalon Shares that they beneficially own as of the record date for the Obalon Special Meeting in favor of the Obalon Proposals and against approval of any proposal made in opposition to, in competition with, or inconsistent with, the Merger Agreement or the Merger.
Such stockholders are the beneficial owners of approximately 28.1% of the outstanding Obalon Shares as of the record date for the Obalon Special Meeting. On January 21, 2021, the day following the public announcement of the Merger Agreement, Armistice exercised a warrant to purchase 525,000 Obalon Shares at an exercise price of $4.40 per share. Under the terms of the Obalon Voting Agreement, Armistice could not sell those Obalon Shares without ReShape’s prior written consent, which ReShape granted on January 21, 2021 and Armistice subsequently sold 525,000 Obalon Shares in the open market. If Armistice would have continued to own such Obalon Shares, they would have been subject to the Obalon Voting Agreement. However, as of the record date for the Obalon Special Meeting, Armistice continues to own the 1,100,000 Obalon Shares that it owned at the time it entered into the Obalon Voting Agreement.
 
17

TABLE OF CONTENTS
 
Subsequent to the execution of the Merger Agreement, Obalon entered into the ReShape Voting Agreement with Armistice (the “ReShape Voting Agreement”), pursuant to which Armistice has agreed, among other things, to vote the ReShape Shares that it beneficially owns as of the record date for the ReShape Special Meeting in favor of the ReShape Proposals and against approval of any proposal made in opposition to, in competition with, or inconsistent with, the Merger Agreement or the Merger.
Armistice is the beneficial owner of approximately 86.4% of the outstanding shares of ReShape Common Stock as of the record date for the ReShape Special Meeting. Therefore, Armistice holds a sufficient number of ReShape Shares in order to approve both of the ReShape Proposals.
Voting by ReShape’s Directors and Executive Officers
As of the record date for the ReShape Special Meeting, directors and executive officers of ReShape and their affiliates owned and were entitled to vote 4,635 shares of ReShape Common Stock, representing less than 0.1% of the shares of ReShape Common Stock outstanding on that date. ReShape currently expects that ReShape’s directors and executive officers will vote their shares of ReShape Common Stock in favor of the ReShape Proposals, although none of them has entered into any agreement obligating them to do so.
Voting by Obalon’s Directors and Executive Officers
As of the record date for the Obalon Special Meeting, directors and executive officers of Obalon and their affiliates owned and were entitled to vote 281,018 Obalon Shares, representing approximately 2.8% of the Obalon Shares outstanding on that date. Directors and executive officers of Obalon and their affiliates did not own any ReShape Shares on that date. Obalon currently expects that Obalon’s directors and executive officers will vote their Obalon Shares in favor of the Obalon Proposals and their ReShape Shares in favor of the ReShape Proposals, although none of them has entered into any agreement obligating them to do so, other than Mr. Rasdal with respect to his Obalon Shares.
Opinion of ReShape’s Financial Advisor — Maxim Group LLC (See Page 130)
ReShape has retained Maxim Group LLC (“Maxim”) to act as a financial advisor in connection with the Merger. The ReShape Board engaged Maxim based on Maxim’s qualifications, experience, and reputation, as well as its familiarity with the business and management team of ReShape. Maxim provides a multitude of financial services including investment banking, private wealth management, and global institutional equity, fixed-income and derivatives sales and trading as well as equity research. As part of this engagement, ReShape requested that Maxim evaluate the fairness, from a financial point of view, of the Exchange Ratio to ReShape. On January 18, 2021, Maxim delivered to the ReShape Board its oral opinion, subsequently confirmed by its delivery of a written opinion dated as of January 18, 2021, that, as of January 18, 2021, and based upon and subject to the assumptions, procedures, factors, qualifications, limitations, and other matters set forth in Maxim’s written opinion, the Exchange Ratio was fair, from a financial point of view, to ReShape.
The full text of Maxim’s written opinion, dated January 18, 2021, which sets forth, among other things, the assumptions made, procedures followed, matters considered, and qualifications and limitations on the scope of review undertaken by Maxim in delivering its opinion, is attached as Annex B to this joint proxy statement/prospectus and is incorporated herein by reference in its entirety. The description of Maxim’s written opinion set forth in this joint proxy statement/prospectus is qualified in its entirety by reference to the full text of such opinion. Maxim’s opinion should not be construed as creating any fiduciary duty on Maxim’s part to any party, and such opinion is not intended to be, and does not constitute a recommendation to the ReShape Board or to any other person in respect of the Merger, including as to how any holder of ReShape Shares should vote or act in respect of the Merger.
You are urged to read Maxim’s opinion carefully and in its entirety. Maxim’s opinion was addressed to, and provided for the information and benefit of, the ReShape Board, and was delivered to the ReShape Board in connection with its evaluation of the fairness, from a financial point of view, of the Exchange Ratio to ReShape. The opinion did not address any other aspects or implications of the Merger.
Maxim’s opinion necessarily was based upon information made available to Maxim as of January 18, 2021 and financial, economic, monetary, market, regulatory, and other conditions and circumstances as they
 
18

TABLE OF CONTENTS
 
existed and could be evaluated on such date. It is understood that subsequent developments may have affected or may affect the opinion, and Maxim undertook no obligation, and is under no obligation, to update, revise, or reaffirm its opinion based on subsequent developments. Maxim’s opinion did not express any opinion as to the price at which the ReShape Shares or the Obalon Shares will trade at any time.
Opinion of Obalon’s Financial Advisor — Canaccord Genuity LLC (See Page 140)
Obalon engaged Canaccord Genuity LLC (“Canaccord Genuity”) to provide financial advisory services and to assist the Obalon Board in the consideration and evaluation of the Merger. At a meeting of the Obalon Board held on January 18, 2021 to evaluate the Merger, Canaccord Genuity delivered to the Obalon Board an oral opinion, which opinion was confirmed by delivery of a written opinion, dated January 18, 2021, to the effect that, as of that date and based upon and subject to certain assumptions, factors and qualifications set forth in the written opinion, the Exchange Ratio was fair, from a financial point of view, to Obalon. Canaccord Genuity did not express any view on, and its opinion did not address, any other term or aspect of any other agreements or arrangements contemplated by the Merger Agreement or entered into in connection with the Merger.
The full text of Canaccord Genuity’s written opinion is attached to this joint proxy statement/prospectus as Annex C and is incorporated into this joint proxy statement/prospectus by reference. The description of Canaccord Genuity’s opinion set forth in this joint proxy statement/prospectus is qualified in its entirety by reference to the full text of such opinion. Obalon stockholders are encouraged to read Canaccord Genuity’s opinion carefully and in its entirety for a description of the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Canaccord Genuity in connection with its opinion. Canaccord Genuity’s opinion was addressed to the Obalon Board, was only one of many factors considered by the Obalon Board in its evaluation of the Merger and only addresses the fairness, from a financial point of view and as of the date of the opinion, to Obalon of the Exchange Ratio. Canaccord Genuity’s opinion does not address the relative merits of the Merger as compared to other business strategies or transactions that might be available to Obalon, nor does it address the underlying business decision of Obalon to proceed with the Merger. Canaccord Genuity’s opinion was directed to and for the information of the Obalon Board only (in its capacity as such) in connection with its evaluation of the Merger and does not constitute advice or a recommendation to the Obalon Board, any stockholder of Obalon, or any other person as to how the Obalon Board or such stockholder or other person should vote with respect to the Merger or otherwise act on any other matter with respect to the Merger.
For a more complete description, see the section of this joint proxy statement/prospectus captioned “The Merger — Opinion of Obalon’s Financial Advisor — Canaccord Genuity LLC.”
Conditions to Completion of the Merger (See Page 169)
As more fully described in this joint proxy statement/prospectus and as set forth in the Merger Agreement, the consummation of the Merger depends on a number of conditions being satisfied or waived. These conditions include:

approval of the Obalon Share Issuance Proposal and Obalon Reverse Stock Split Proposal;

approval of the ReShape Merger Proposal;

the absence of any adverse law or order promulgated, entered, enforced, enacted, or issued by any government entity that prohibits, restrains, or makes illegal the consummation of the Merger or the other transactions contemplated by the Merger Agreement;

the effectiveness of a registration statement on Form S-4, which shall include this joint proxy statement/prospectus, under the Securities Act and the absence of any stop order issued by the SEC suspending the use of such registration statement;

the Obalon Shares to be issued in the Merger being approved for listing on The Nasdaq Capital Market and approval of the Combined Company’s continued listing on The Nasdaq Capital Market;

subject to certain materiality exceptions, the accuracy of certain representations and warranties of each of Obalon and ReShape contained in the Merger Agreement and the compliance by each party with the covenants contained in the Merger Agreement; and
 
19

TABLE OF CONTENTS
 

the absence of a material adverse effect with respect to each of Obalon and ReShape.
ReShape and Obalon cannot be certain when, or if, the conditions to the Merger Agreement will be satisfied or waived (to the extent waiver is permitted by applicable law), or when or whether the Merger will be consummated.
No Solicitation; Board Recommendations (See Page 164)
Subject to certain exceptions specified in the Merger Agreement, each of Obalon and ReShape and their respective subsidiaries agreed not to directly or indirectly (i) solicit (or take other action reasonably expected to promote) proposals relating to, participate or engage in discussions or negotiations with respect to, or enter into any agreement (other than an acceptable confidentiality agreement pursuant to the Merger Agreement) with respect to an acquisition proposal, or which could reasonably be expected to lead to an acquisition proposal, with respect to itself or (ii) disclose any non-public information or data relating to, or afford access to the properties, books, or records of, itself or any of its subsidiaries to any person that has made an acquisition proposal with respect to it. In addition, each of Obalon and ReShape agreed to terminate any such solicitations, discussions or negotiations upon execution of the Merger Agreement, as well as immediately discontinue access to any data room established by it for such purpose.
If, however, prior to obtaining the approval of its stockholders, Obalon or ReShape receives an unsolicited written acquisition proposal from a third party that constitutes, or that its respective board of directors determines in good faith is reasonably expected to lead to, a superior proposal, then Obalon or ReShape, as applicable, may, subject to certain conditions included in the Merger Agreement, disclose any non-public information relating to, or afford access to the properties, books, or records of, itself or any of its subsidiaries to and participate or engage in discussions or negotiations with that third party with respect to that proposal.
For a more complete description of the prohibition on solicitations of acquisition proposals from third parties, see “The Merger Agreement — No Solicitation; Board Recommendations” beginning on page 164.
Change of Recommendation (See Page 166)
The Merger Agreement generally restricts the ability of the board of directors of each of Obalon and ReShape to withdraw its recommendation that its stockholders approve the transactions contemplated by the Merger Agreement or to propose publicly to recommend, adopt, or approve any acquisition proposal with respect to itself.
However, the board of directors of each of Obalon and ReShape may change its recommendation, prior to obtaining the approval of its respective stockholders, in response to a superior proposal that did not result from a breach of the provisions of the Merger Agreement described under “— No Solicitation”, or an intervening event, if, among other things, such board of directors concludes that a failure to change its recommendation would be a breach of its fiduciary duties to its stockholders and, if requested by the other party, its representatives have negotiated in good faith with the other party for five business days regarding any amendment to the Merger Agreement that would allow the transaction contemplated thereby to be effected.
For a more complete description of the circumstances under which the Obalon board of directors or ReShape board of directors may withdraw its recommendation that its stockholders approve the Merger, see “The Merger Agreement — Change of Recommendation” beginning on page 166.
Termination of the Merger Agreement (See Page 170)
The Merger Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time by mutual written agreement of Obalon and ReShape, as well as under certain other circumstances.
The Merger Agreement may be terminated by either Obalon or ReShape if:
 
20

TABLE OF CONTENTS
 

the other party’s board of directors or any committee thereof (i) makes an adverse recommendation change, (ii) fails to include its recommendation in this joint proxy statement/prospectus or (iii) publicly proposes to make an adverse recommendation change;

the other party materially breaches the provisions of the Merger Agreement described under “— No Solicitation”; or

at any time prior to the Effective Time, if any of the other party’s covenants, representations or warranties contained in the Merger Agreement has been breached or any of the other party’s representations and warranties has become untrue, such that any of such party’s conditions to the closing of the Merger described under “The Merger Agreement — Conditions to Completion of the Merger” will not be satisfied, and such breach is (i) incapable of being cured by the other party or (ii) has not been cured within 45 days of receipt by the other party of written notice of such breach describing in reasonable detail such breach.
The Merger Agreement may be terminated by either Obalon or ReShape if, subject to certain conditions being met:

the required approval of either party’s stockholders contemplated under the Merger Agreement at the respective stockholders’ meeting is not obtained;

the transactions contemplated by the Merger Agreement violate any order, decree or ruling of any court or governmental body that has become final and non-appealable or if there is a law that makes the transactions contemplated in the Merger Agreement illegal or otherwise prohibited;

the Merger has not been consummated by the Termination Date; or

the required approval by Nasdaq of the Nasdaq filings has not been obtained within 30 days of the later of the date of the Obalon Special Meeting and the ReShape Special Meeting, and all other conditions to the completion of the Merger (except for those conditions that by their nature are to be satisfied at the closing of the Merger) have been satisfied.
For a more complete discussion of the circumstances under which the merger agreement may be terminated, see “The Merger Agreement — Termination of the Merger Agreement” beginning on page 170.
Termination Fee (See Page 170)
If the Merger Agreement is terminated (i) by Obalon as a result of ReShape’s breach of its obligations to exercise its reasonable best efforts and take all necessary steps to obtain approval of the Nasdaq Filings or (ii) by Obalon or ReShape because the Nasdaq Filings have not been approved within 30 days of the later of the Obalon Special Meeting and the ReShape Special Meeting, then, subject to certain conditions, Obalon shall be entitled to a fee of $1,000,000, which amount was placed in escrow with a third-party escrow agent by ReShape concurrently with the execution of the Merger Agreement.
Accounting Treatment (See Page 150)
The Merger will be accounted for as a “reverse acquisition” pursuant to which ReShape will be considered the acquiring entity for accounting purposes in accordance with U.S. generally accepted accounting principles. As such, the purchase consideration will be allocated to the fair values of the tangible and identifiable intangible assets with the residual going to goodwill (or bargain purchase if in excess of consideration paid). ReShape’s historical results of operations will replace Obalon’s historical results of operations for all periods prior to the Merger. After completion of the Merger, the results of operations of both companies will be included in the Combined Company’s financial statements. For a more complete discussion of the anticipated accounting treatment of the Merger, see “The Merger — Accounting Treatment” beginning on page 150 of this joint proxy statement/prospectus.
Certain U.S. Federal Income Tax Consequences (See Page 152)
The Merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Assuming the Merger so qualifies, a U.S. Holder (as defined on page 152 of this joint proxy statement/
 
21

TABLE OF CONTENTS
 
prospectus) of ReShape Shares generally will not recognize any gain or loss for U.S. federal income tax purposes upon the exchange of ReShape Shares for Obalon Shares in the Merger, except with respect to cash received by ReShape shareholders in lieu of fractional Obalon Shares.
Please review the information set forth in the section entitled “Certain U.S. Federal Income Tax Consequences” for a more complete description of certain U.S. federal income tax consequences of the Merger. Please consult your tax advisors as to the specific tax consequences to you of the Merger.
Interests of ReShape’s Directors and Executive Officers in the Merger (See Page 148)
In considering the recommendation of the ReShape Board, ReShape stockholders should be aware that certain of ReShape’s executive officers and directors have interests in the Merger that may be different from, or in addition to, those of ReShape’s stockholders generally. These interests include, but are not limited to:

continued service as a director or officer of the Combined Company; and

continued indemnification in favor of the current and former directors and officers of ReShape.
These interests may present such executive officers and directors with actual or potential conflicts of interest. The ReShape Board was aware of these interests during its deliberations on the merits of the Merger and in deciding to recommend that ReShape stockholders vote for the ReShape Proposals. For additional information on the interests of ReShape’s directors and officers in the Merger, see “The Merger — Interests of ReShape’s Directors and Executive Officers in the Merger” beginning on page 148 of this joint proxy statement/prospectus.
Interests of Obalon’s Directors and Executive Officers in the Merger (See Page 149)
In considering the recommendation of the Obalon Board, Obalon stockholders should be aware that certain of Obalon’s executive officers and directors have interests in the Merger that may be different from, or in addition to, those of Obalon’s stockholders generally. These interests include, but are not limited to:

the accelerated vesting of outstanding and unvested options to purchase Obalon Shares (“Obalon Options”) in connection with the consummation of the Merger;

entitlement to change in control bonuses under preexisting retention agreements; and

continued indemnification in favor of the current and former directors and officers of Obalon, as well as certain obligations related to the maintenance of directors’ and officers’ liability insurance.
These interests may present such executive officers and directors with actual or potential conflicts of interest. The Obalon Board was aware of these interests during its deliberations on the merits of the Merger and in deciding to recommend that Obalon stockholders vote for the Obalon Proposals. For additional information on the interests of Obalon’s directors and officers in the Merger, see “The Merger — Interests of Obalon’s Directors and Executive Officers in the Merger” beginning on page 149 of this joint proxy statement/prospectus.
Appraisal Rights (See Page 156)
Under the DGCL, holders of Obalon Shares are not entitled to exercise any appraisal rights in connection with the Merger or the other transactions contemplated by the Merger Agreement.
If the Merger is completed, ReShape stockholders who have not waived such rights are entitled to appraisal rights under Section 262 of the DGCL, referred to as Section 262, provided that they comply with the conditions established by Section 262. See Annex E.
Comparison of Stockholder Rights (See Page 254)
As a result of the Merger, the holders of ReShape Shares will become holders of Obalon Shares, and their rights will be governed by the DGCL and by the Amended and Restated Certificate of Incorporation of Obalon, as amended (the “Obalon charter”) and Obalon’s Amended and Restated Bylaws (the “Obalon
 
22

TABLE OF CONTENTS
 
bylaws”) (instead of the amended and restated certificate of incorporation of ReShape, as amended (the “ReShape charter”) or ReShape’s Amended and Restated Bylaws (the “ReShape bylaws”)). Following the Merger, former ReShape stockholders will have different rights as Obalon stockholders than they had as ReShape stockholders. For additional information on stockholders rights, see “Comparison of Stockholder Rights” beginning on page 254 of this joint proxy statement/prospectus.
Risk Factors (See Page 25)
In deciding how to vote your ReShape Shares or Obalon Shares, you should read carefully this entire joint proxy statement/prospectus, including the annexes and exhibits hereto, and in particular, you should read the “Risk Factors” section beginning on page 25 of this joint proxy statement/prospectus. See also “Where You Can Find More Information” beginning on page 268 of this joint proxy statement/prospectus.
 
23

TABLE OF CONTENTS
 
MARKET PRICE AND DIVIDEND INFORMATION
Obalon Shares are currently listed on The Nasdaq Capital Market under the symbol “OBLN.” ReShape Common Stock is currently listed on The OTCQB Market under the symbol “RSLS.”
Obalon Shares
The closing price of Obalon Shares on January 19, 2021, the trading day immediately prior to the public announcement of the Merger on January 20, 2021, as reported on The Nasdaq Capital Market, was $1.61 per share.
Because the market price of Obalon Shares is subject to fluctuation, the market value of Obalon Shares that ReShape stockholders will be entitled to receive in the Merger may increase or decrease.
Assuming the approval of the Nasdaq Filings, following the consummation of the Merger, Obalon anticipates that the Obalon Shares will trade under Obalon’s new name “ReShape Lifesciences Inc.” and the new trading symbol “RSLS” on The Nasdaq Capital Market.
As of April 7, 2021, the record date for the Obalon special meeting, there were approximately 36 holders of record of the Obalon Shares.
ReShape Shares
The closing price of shares of ReShape Common Stock on January 19, 2021, the trading day immediately prior to the public announcement of the Merger on January 20, 2021, as reported on the OTCQB, was $4.00 per share.
As of April 7, 2021, the record date for the ReShape special meeting, there were approximately 19 holders of record of the shares of ReShape Common Stock.
Dividends
Obalon has never declared or paid any cash dividends on the Obalon Shares and does not anticipate paying cash dividends on the Obalon Shares for the foreseeable future. Notwithstanding the foregoing, any determination to pay cash dividends subsequent to the Merger will be at the discretion of the combined organization’s then-current board of directors and will depend upon a number of factors, including the combined organization’s results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors the then-current board of directors deems relevant.
ReShape has never declared or paid any cash dividends on the ReShape Shares. ReShape anticipates that the Combined Company will retain all of its future earnings to advance its product offerings and does not anticipate paying any cash dividends on shares of its common stock in the foreseeable future. Any future determination to declare cash dividends on shares of the Combined Company’s common stock will be made at the discretion of its board of directors, subject to applicable law and contractual restrictions and will depend on its financial condition, results of operations, capital requirements, general business conditions and other factors that its board of directors may deem relevant.
 
24

TABLE OF CONTENTS
 
RISK FACTORS
In addition to the other information contained in or incorporated by reference into this joint proxy statement/prospectus, including the matters addressed under “Cautionary Statement Regarding Forward-Looking Statements” of this joint proxy statement/prospectus, Obalon stockholders should carefully consider the following risks in deciding whether to vote for the approval of the Obalon Proposals, and ReShape stockholders should carefully consider the following risks in deciding whether to vote for the approval of the ReShape Proposals. Descriptions of some of these risks can be found in the Annual Report for Obalon on Form 10-K for the year ended December 31, 2020 and the Annual Report for ReShape on Form 10-K for the period ended December 31, 2020, and any amendments thereto, as such risks may be updated or supplemented in each company’s subsequently filed Quarterly Reports on Form 10-Q or Current Reports on Form 8-K, and other filings with the SEC from time to time. You should read carefully this entire joint proxy statement/prospectus and its annexes and exhibits and the other documents incorporated by reference into this joint proxy statement/prospectus. See also “Where You Can Find More Information” beginning on page 268, respectively, of this joint proxy statement/prospectus.
Summary of Risk Factors
Risks Related to the Merger

Fluctuations in the market price of Obalon Shares will affect the value of the Merger Consideration.

The Merger may not be consummated unless important conditions are satisfied or waived and there can be no assurance that the Merger will be consummated.

Although an application has been filed to list the Obalon Shares on The Nasdaq Capital Market, there can be no assurance that the common stock will be so listed or, if listed, that the Combined Company will be able to comply with the continued listing standards.

The pendency of the Merger could materially adversely affect the business, financial condition, results of operations or cash flows of ReShape or Obalon.

Following the consummation of the Merger, the composition of the board of directors and management of the Combined Company will be comprised of the current board of directors and management of ReShape, no Obalon employees will continue with the Combined Company and Obalon’s current stockholders will not have a majority ownership and voting interest in the Combined Company, each of which may affect the strategy and operations of the Combined Company.
Risks Related to the Business of the Combined Company

Combining the two companies may be more difficult, costly or time consuming than expected, and Obalon and ReShape may not realize all of the anticipated benefits of the Merger.

Both Obalon and ReShape have operated with a loss and negative cash flows for the entirety of their existence and it is expected the Combined Company will have to raise significant capital in the future that could be dilutive to stockholders of the Combined Company.
Risks Related to ReShape

The ReShape Vest product is in the early stages of clinical evaluation. If the clinical trial is not successfully completed or any required regulatory approvals are not obtained, the ReShape Vest may not be commercialized and ReShape’s business prospects may suffer.

The shares of series C convertible preferred stock issued in connection with ReShape’s acquisition of ReShape Medical have certain rights and preferences senior to ReShape’s common stock, including a liquidation preference that is senior to ReShape’s common stock.

ReShape is a medical device company with a limited history of operations and sales and cannot assure you that it will ever generate substantial revenue or be profitable.

During the second quarter of 2019 ReShape recorded a non-cash indefinite-lived intangible assets impairment loss, which significantly impacted its results of operations, and it may be exposed to additional impairment losses that could be material.
 
25

TABLE OF CONTENTS
 

ReShape will need substantial additional funding and may be unable to raise capital when needed, which would force it to delay, reduce or eliminate its product development programs or liquidate some or all of its assets.

ReShape’s efforts to increase revenue from its Lap-Band system and ReShapeCare, and commercialize the ReShape Vest, Diabetes Bloc-Stim Neuromodulation and expanded line of bariatric surgical accessories may not succeed or may encounter delays which could significantly harm ReShape’s ability to generate revenue.

ReShape may not be able to obtain required regulatory approvals for the ReShape Vest and/or Diabetes Bloc-Stim Neuromodulation in a cost-effective manner or at all, which could adversely affect its business and operating results.

If ReShape is unable to obtain or maintain intellectual property rights relating to its technology and neuroblocking therapy, the commercial value of its technology and any future products will be adversely affected and its competitive position will be harmed.

ReShape’s common stock trades on an over-the-counter market.

ReShape has a significant number of outstanding warrants, which may cause significant dilution to its stockholders, have a material adverse impact on the market price of its common stock and make it more difficult for it to raise funds through future equity offerings.
Risks Related to Obalon

Obalon has suspended or terminated essentially all of its commercial efforts, shut down its manufacturing operations and terminated nearly all of its employees, and Obalon cannot assure you when, if ever, these efforts will recommence.

If Obalon is unable to complete the Merger with ReShape and, in the alternative unable to secure additional financing on favorable terms, or at all, Obalon could be forced to sell all or portions of its business, liquidate all or some of its assets or seek bankruptcy protection to protect stakeholder value.

Obalon has temporarily ceased its efforts to seek third-party reimbursement and is focused primarily on the successful close of the Merger with ReShape. If the Merger does not close and Obalon is able to continue to operate as a standalone company, Obalon’s strategy to attain coverage and reimbursement by third-party payors may not be successful and will subject it to new risks, some of which Obalon may not yet have identified.

If Obalon is unable to reestablish commercial operations, including sales, marketing, manufacturing and distribution capabilities, whether after the completion of the Merger with ReShape, on its own or in collaboration with third parties, Obalon may not be successful in commercializing its products.

Obalon has limited operating experience and a history of net losses, and Obalon recently discontinued all of its commercial operations.

Obalon’s business is entirely dependent on sales of the Obalon Balloon System, which Obalon is currently not manufacturing, marketing or selling.

Physicians have been slow to adopt and use intragastric balloons, and adverse events or other negative developments involving other companies’ intragastric balloons or other obesity treatments in the past or future may further slow patient adoption and negatively impact Obalon’s financial performance and strategic options, and this could continue into the future.

Obalon depends on third-party suppliers, including single source suppliers, and Obalon has not ordered from those suppliers in approximately one year and they may not be willing or able to reinitiate supply of key materials and components to Obalon.

Obalon has dramatically reduced its senior management team to only two full-time employees and Obalon cannot assure you that it has or would be able to attract sufficient resources to manage its current operations or restart commercialization of the Obalon Balloon System.
 
26

TABLE OF CONTENTS
 

The FDA and other regulatory agencies actively enforce the laws and regulations governing the development, approval and commercialization of medical devices. If Obalon is found to have failed to comply with these laws and regulations, Obalon may become subject to significant liability.

Risks related to Obalon’s intellectual property could materially adversely impact its business, competitive position, financial condition, and results of operations.

If Obalon fails to meet all applicable Nasdaq Global Capital Market requirements, Nasdaq could delist Obalon’s common stock, which could adversely affect the market liquidity of its common stock and the market price of its common stock could decrease.

Current and future litigation could have a material adverse effect on Obalon’s business and results of operations.
Risks Related to the Merger
Fluctuations in the market price of Obalon Shares will affect the value of the Merger Consideration.
At the Effective Time, each ReShape Share (other than shares held by Obalon, Merger Sub, any wholly-owned subsidiary of Obalon or ReShape, or by ReShape as treasury shares, which will be canceled and retired and cease to exist) will be converted into the right to receive a number of Obalon Shares, according to a ratio determined as of the Determination Date that will result in the holders of such ReShape Shares owning 51% of the outstanding Combined Company Shares immediately after the effective time of the Merger. Based on the number of shares outstanding as of April 7, 2021, the Exchange Ratio would be equal to 1.6911 Obalon Shares for each share of ReShape Common Stock outstanding or underlying the ReShape Series B Preferred Stock, Series C Preferred Stock or warrants, without giving effect to the proposed reverse stock split of Obalon Shares described in this joint proxy statement/prospectus. However, that estimated Exchange Ratio is not final and is subject adjustment based on the actual shares outstanding as of the Determination Date.
Because the exact number of Obalon Shares that will be issued in exchange for each ReShape Share will not be determined until a later date, the market value of the Merger Consideration that ReShape stockholders will receive will depend both on the number of Obalon Shares to be issued and the price per Obalon Share at the Effective Time. The exact number of Obalon Shares to be issued and the market price per Obalon Share will not be known at the time of the ReShape Special Meeting or the Obalon Special Meeting and may be less or more than the current market price or the market price at the time of the stockholder meetings.
Based on the closing price per share of Obalon Shares on The Nasdaq Capital Market on April 7, 2021 of $2.81, the date on which the assumed Exchange Ratio of 1.6911 Obalon Shares for each ReShape Share was calculated for purposes of this joint proxy statement/prospectus, the estimated value of each ReShape Share in the Merger would be approximately $4.75. The exact dollar value of the Obalon Shares that the Obalon stockholders and the ReShape stockholders will hold upon consummation of the Merger will not be known at the time of the Obalon Special Meeting or the ReShape Special Meeting and may be greater than, the same as or less than the current market prices of Obalon Shares at the time of the Obalon Special Meeting or the ReShape Special Meeting. The market price of the Obalon Shares is subject to general price fluctuations in the market for publicly traded equity securities and has experienced volatility in the past and may vary significantly from the dates of the Obalon Special Meeting and the ReShape Special Meeting. As a result of these fluctuations, the value of the Merger Consideration will also vary. For example, based on the range of closing prices of Obalon Shares during the period from January 19, 2021, the last trading day before public announcement of the Merger, through April 7, 2021, of $1.61 to $8.28, the assumed Exchange Ratio represented a value ranging from a low of $2.72 to a high of $14.00 for each ReShape Share.
Stock price changes may result from a variety of factors, including general market, industry and economic conditions, changes in the respective businesses, operations and prospects of ReShape and Obalon, regulatory considerations, results of the ReShape Special Meeting and the Obalon Special Meeting, announcements with respect to the Merger or any of the foregoing, and other factors beyond the control of ReShape or Obalon. You should obtain current market price quotations for ReShape Shares and for
 
27

TABLE OF CONTENTS
 
Obalon Shares, but as indicated above, the prices at the time the Merger is consummated may be greater than, the same as or less than such price quotations.
The Merger may not be consummated unless important conditions are satisfied or waived and there can be no assurance that the Merger will be consummated.
The Merger Agreement contains a number of conditions that must be satisfied or waived (to the extent permitted by applicable law) to consummate the Merger. Those conditions include, among others:

approval of the Obalon Share Issuance Proposal and Obalon Reverse Stock Split Proposal by the Obalon stockholders;

approval of the ReShape Merger Proposal by the ReShape stockholders;

the absence of any adverse law or order promulgated, entered, enforced, enacted, or issued by any government entity that prohibits, restrains, or makes illegal the consummation of the Merger or the other transactions contemplated by the Merger Agreement;

the effectiveness of a registration statement on Form S-4, which shall include this joint proxy statement/prospectus, under the Securities Act and the absence of any stop order issued by the SEC suspending the use of such registration statement;

the Obalon Shares to be issued in the Merger being approved for listing on The Nasdaq Capital Market and approval of the Combined Company’s continued listing on The Nasdaq Capital Market (certain risks related to obtaining such approvals are described below);

subject to certain materiality exceptions, the accuracy of certain representations and warranties of each of Obalon and ReShape contained in the Merger Agreement and the compliance by each party with the covenants contained in the Merger Agreement; and

the absence of a material adverse effect with respect to each of Obalon and ReShape.
These conditions to the consummation of the Merger may not be satisfied or waived (to the extent permitted by applicable law) and, as a result, the Merger may not be consummated at the time expected, or at all. For additional information regarding the conditions to the Merger, see “The Merger Agreement — Conditions to Completion of the Merger” beginning on page 169 of this joint proxy statement/prospectus.
In addition, ReShape or Obalon may elect to terminate the Merger Agreement in certain other circumstances. See “The Merger Agreement — Termination of the Merger Agreement” beginning on
page 170 of this joint proxy statement/prospectus.
Although an application has been filed to list the Obalon Shares on The Nasdaq Capital Market, there can be no assurance that the common stock will be so listed or, if listed, that the Combined Company will be able to comply with the continued listing standards.
Nasdaq has determined that the proposed transaction constitutes a business combination that results in a change of control pursuant to its listing rules. Accordingly, the Combined Company will be required to satisfy all of Nasdaq’s initial listing criteria and to complete Nasdaq’s initial listing process in order for the Obalon Shares to be listed on Nasdaq. An application to list the Obalon Shares on The Nasdaq Capital Market upon consummation of the Merger has been filed as required by The Nasdaq Capital Market. Since Obalon went public in 2016, it has twice fallen below Nasdaq’s minimum required level for stockholder equity and minimum bid price requirement. Obalon was downlisted in November 2020 from Nasdaq’s Global Market to its Capital Market though it is currently in compliance with the continued listing standards of the Nasdaq Capital Market.
Nasdaq’s approval of the listing application is a condition to the closing of the Merger and while ReShape and Obalon can each terminate the Merger Agreement if the condition is not satisfied (in which case, a $1 million termination fee may be payable to Obalon by ReShape), the parties can also each choose to waive the condition and consummate the Merger without Nasdaq’s approval of the listing application. In
 
28

TABLE OF CONTENTS
 
the event ReShape and Obalon waive that condition and consummate the Merger without Nasdaq’s approval of the listing application, the Combined Company would not be listed on The Nasdaq Capital Market.
In addition, if after listing, The Nasdaq Capital Market delists the Obalon Shares from trading on its exchange for failure to meet the continued listing standards, the Combined Company and its stockholders could face significant material adverse consequences including:

a limited availability of market quotations for its securities;

a determination that its common stock is a “penny stock” which will require brokers trading in its common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for its common stock;

a limited amount of analyst coverage; and

a decreased ability to issue additional securities or obtain additional financing in the future.
The Merger Agreement contains provisions that could discourage a potential competing acquirer of either ReShape or Obalon.
The Merger Agreement contains “no shop” provisions that restrict each of Obalon’s and ReShape’s ability to solicit, initiate or knowingly encourage and induce, or take any other action designed to facilitate competing third-party proposals relating to a merger, reorganization or consolidation of the company or an acquisition of the company’s stock or assets. In addition, the other party generally has an opportunity to offer to modify the terms of the Merger in response to any competing acquisition proposals before the board of directors of the company that has received a third-party proposal may withdraw or qualify its recommendation with respect to the Merger.
The Merger Agreement does not permit either Obalon or ReShape to terminate the Merger Agreement in order to pursue a superior proposal. These provisions could discourage a potential third-party acquirer that might have an interest in acquiring all or a significant portion of Obalon or ReShape from considering or proposing an acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than the market value proposed to be received or realized in the Merger.
See “The Merger Agreement — No Solicitation; Board Recommendations” and “The Merger Agreement — Termination of the Merger Agreement” beginning on pages 164 and 170, respectively, of this joint proxy statement/prospectus.
The pendency of the Merger could materially adversely affect the business, financial condition, results of operations or cash flows of ReShape or Obalon.
The announcement and pendency of the Merger could disrupt ReShape’s or Obalon’s businesses, in any of the following ways, among others:

ReShape’s employees may experience uncertainty about their future roles with the Combined Company, which might adversely affect each company’s ability to retain and hire key managers and other employees;

the attention of ReShape management or Obalon management may be directed toward completion of the Merger, integration planning and transaction-related considerations and may be diverted from the company’s day-to-day business operations and, following the completion of the Merger, the attention of the Combined Company’s management may also be diverted to such matters;

vendors, suppliers, business partners or others may seek to modify or terminate their business relationship with ReShape or Obalon or the Combined Company following completion of the Merger;

ReShape or Obalon, or the Combined Company following completion of the Merger, and their respective directors could become subject to lawsuits relating to the Merger; and

ReShape or Obalon may experience negative reactions from their stockholders and the medical community, among others.
 
29

TABLE OF CONTENTS
 
These disruptions could be exacerbated by a delay in the completion of the Merger or termination of the Merger Agreement. Additionally, if the Merger is not consummated, each company will have incurred significant costs and diverted the time and attention of management. A failure to consummate the Merger may also result in negative publicity, reputational harm, litigation against ReShape or Obalon or their respective directors and officers, and a negative impression of the companies in the financial markets. The occurrence of any of these events individually or in combination could have a material adverse effect on either or both companies’ financial statements and stock price.
In addition, the Merger Agreement restricts Obalon and ReShape from taking certain actions until the Effective Time without the consent of the other party, including, among others: the payment of dividends; the issuance of equity (including certain equity incentive awards); certain increases to employee compensation and benefits; capital expenditures; the incurrence of indebtedness; acquisitions and divestitures; and the entry into or amending certain material contracts. Obalon and ReShape are required to conduct business in the ordinary course consistent with past practice. The restrictive covenants, which are subject to various specific exceptions, may prevent Obalon or ReShape from pursuing attractive business opportunities that may arise prior to the consummation of the Merger. Although Obalon and ReShape may be able to pursue such activities with the other company’s consent, the other company may not be willing to provide its consent. For a description of the restrictive covenants applicable to Obalon and ReShape, see “The Merger Agreement — Covenants; Conduct of Business Prior to the Merger” beginning on page 163 of this joint proxy statement/prospectus.
ReShape directors and executive officers and Obalon directors and executive officers have interests in the Merger that may be different from, or in addition to, the interests of ReShape stockholders and Obalon stockholders.
Certain of the directors and executive officers of ReShape and certain of the directors and executive officers of Obalon negotiated the terms of the Merger Agreement and these individuals have interests in the Merger that may be different from, or in addition to, those of ReShape stockholders and Obalon stockholders, respectively. These interests include, but are not limited to, the continued service of certain of these ReShape individuals as directors and executive officers of Obalon after the date of the consummation of the Merger (the “Closing Date”), certain other compensation arrangements with the Obalon directors and executive officers, and provisions in the Merger Agreement regarding continued indemnification of and advancement of expenses of the directors and executive officers of ReShape and Obalon. ReShape stockholders and Obalon stockholders should be aware of these interests when they consider their respective Boards of Directors’ recommendations that they vote in favor of the Merger-related proposals.
The members of the ReShape Board were aware of and considered these interests relating to ReShape, among other matters, in evaluating the Merger Agreement and the Merger, and in recommending that ReShape stockholders approve the ReShape Proposals. The interests of ReShape directors and executive officers are described under “The Merger — Interests of ReShape’s Directors and Executive Officers in the Merger” beginning on page 148 of this joint proxy statement/prospectus.
The members of the Obalon Board were aware of and considered these interests relating to Obalon, among other matters, in evaluating the Merger Agreement and the Merger, and in recommending that Obalon stockholders approve the Obalon Proposals. The interests of Obalon directors and executive officers are described in more detail under “The Merger — Interests of Obalon’s Directors and Executive Officers in the Merger” beginning on page 149 of this joint proxy statement/prospectus.
Following the consummation of the Merger, the composition of the board of directors and management of the Combined Company will be comprised of the current board of directors and management of ReShape and Obalon’s current stockholders will not have a majority ownership and voting interest in the Combined Company, which may affect the strategy and operations of the Combined Company.
Pursuant to the Merger Agreement, following the consummation of the Merger, the board of directors of the Combined Company will consist of the five current members of the board of directors of ReShape: Dan W. Gladney, Barton P. Bandy, Arda M. Minocherhomjee, Ph.D., Lori C. McDougal and Gary D. Blackford. Mr. Gladney will serve as the chair and Mr. Blackford will serve as lead director of the board of directors.
 
30

TABLE OF CONTENTS
 
No current Obalon directors, officers or employees are expected to continue with the Combined Company and therefore will not be able to transfer knowledge or operational capability of Obalon products, systems and operations to the directors, officers, or employees of the Combined Company.
As of the effective time, the members of the Combined Company’s board of directors will be allocated among three classes of directors as follows:

Class II will consist of Gary D. Blackford and Arda M. Minocherhomjee, Ph.D. and will be up for re-election in 2021;

Class III will consist of Barton P. Bandy and will be up for re-election in 2022; and

Class I will consist of Dan W. Gladney and Lori C. McDougal and will be up for re-election in 2023.
At the Effective Time, Obalon will take all necessary action to cause Mr. Bandy, the current Chief Executive Officer of ReShape, to be Chief Executive Officer of the Combined Company and to cause Thomas Stankovich, the current Chief Financial Officer of ReShape, to be the Chief Executive Officer of the Combined Company. If any director or officer designee of ReShape becomes unable or unwilling to serve, then a replacement for such designee will be determined by ReShape.
This composition of the Combined Board may affect the Combined Company’s business strategy and operating decisions following the consummation of the Merger, as compared to the board of directors of Obalon prior to the Merger. In addition, immediately following completion of the Merger and the issuance of the Obalon Shares to the ReShape stockholders at the Effective Time, Obalon’s current stockholders in the aggregate will not have a majority ownership and voting interest in the Combined Company, which may result in Obalon stockholders having less influence on the Combined Company’s management and policies. Immediately following completion of the Merger, Obalon’s stockholders and ReShape’s stockholders are expected to own 49% and 51%, respectively, of the Combined Company’s outstanding shares. As a result, current Obalon stockholders may have less influence on the Combined Company’s management and policies than they currently have.
The opinions of ReShape’s and Obalon’s financial advisors do not reflect changes in circumstances that may have occurred or that may occur between the signing of the Merger Agreement and the consummation of the Merger.
The opinion rendered to the ReShape Board by Maxim Group, and the opinion rendered to the Obalon Board by Canaccord Genuity, were provided in connection with, and at the time of, the ReShape and Obalon Boards’ respective evaluations of the Merger. These opinions were based on the respective financial analyses performed, which considered market and other conditions then in effect, and financial forecasts and other information made available to them, as of the date of their respective opinions, which may have changed, or may change, after the date of the opinions. Except for the correction to the computational error in the ReShape discounted cash flow analysis that is described in this joint proxy statement/prospectus, neither the ReShape Board nor the Obalon Board has obtained updated opinions from their respective financial advisors as of the date of this joint proxy statement/prospectus or as of any other date, nor does either expect to receive updated, revised or reaffirmed opinions prior to the consummation of the Merger. Changes in the operations and prospects of ReShape or Obalon, general market and economic conditions and other factors that may be beyond the control of ReShape or Obalon, and which changes were not taken into account by ReShape’s and Obalon’s financial advisors in rendering their respective opinions, may significantly alter the value of ReShape or Obalon or the prices of ReShape Shares or Obalon Shares by the time the Merger is consummated. The opinions do not speak as of the time the Merger will be consummated or as of any date other than the date of such opinions. Because there are no plans for ReShape’s and Obalon’s financial advisors to update their opinions, the opinions do not address the fairness of the Exchange Ratio or the Merger Consideration, as applicable, from a financial point of view, at any time other than the time such opinions were issued, even though the ReShape Board’s recommendation that ReShape stockholders vote “FOR” the ReShape Proposals and the Obalon Board’s recommendation that Obalon stockholders vote “FOR” the Obalon Proposals are made as of the date of this joint proxy statement/prospectus. For a description of the opinions that the ReShape Board and the Obalon Board received from their respective financial advisors, see “The Merger — Opinion of ReShape’s Financial
 
31

TABLE OF CONTENTS
 
Advisor — Maxim Group LLC,” and “The Merger — Opinion of Obalon’s Financial Advisor — Canaccord Genuity LLC” beginning on pages 130 and 140, respectively, of this joint proxy statement/prospectus.
Failure to consummate the Merger could negatively impact respective future stock prices, operations and financial results of ReShape and Obalon.
If the Merger is not consummated for any reason, ReShape and Obalon may be subjected to a number of material risks, including the following:

a decline in the market prices of the shares of ReShape Common Stock or Obalon Shares to the extent that their current market prices reflect a market assumption that the Merger will be consummated and will be beneficial to the value of the business of Obalon after the Closing Date;

having to pay certain costs related to the proposed Merger, such as legal, accounting, financial advisory, printing and mailing fees, which must be paid regardless of whether the Merger is consummated;

addressing the consequences of operational decisions made since the signing of the Merger Agreement, including because of restrictions on ReShape’s or Obalon’s operations imposed by the terms of the Merger Agreement and decisions to delay or defer capital expenditures;

returning the focus of management and personnel to operating ReShape or Obalon, as applicable, on a standalone basis, without any of the benefits expected to have been provided by the consummation of the Merger; and

negative reactions from their respective stockholders, suppliers, employees, patients enrolled in our studies and the medical community.
In addition to the above risks, ReShape may be required, under certain circumstances, to pay to Obalon a termination fee of $1.0 million, which may materially adversely affect ReShape’s financial condition. The business of ReShape or Obalon may be adversely impacted by the failure to pursue other beneficial opportunities due to the focus of ReShape and Obalon management on the Merger. A failure to consummate the Merger may also result in negative publicity, reputational harm, litigation against ReShape or Obalon or their respective directors and officers, and a negative impression of the companies in the financial markets.
If the Merger is not consummated, we cannot assure the Obalon stockholders or the ReShape stockholders that these risks will not materialize and will not materially adversely affect the business, financial results and stock price of the respective companies.
Financial projections regarding ReShape may not prove accurate.
In connection with the Merger, ReShape prepared and considered internal financial forecasts for ReShape. These financial projections are based on several assumptions, including regarding future operating cash flows, expenditures and income of ReShape, including benefits to be realized from the Merger. These financial projections were not prepared with a view to public disclosure, are subject to significant economic, competitive, industry and other uncertainties and may not be achieved in full, within projected timeframes or at all. The failure of ReShape to achieve projected results could have a material adverse effect on the price of the Obalon Shares, the Combined Company’s financial position after the Closing Date, and the Combined Company’s ability to pay dividends, and/or pay dividends at or above the rate currently paid by Obalon or ReShape, following the consummation of the Merger.
The Merger may disrupt attention of ReShape management and Obalon management from ongoing business operations.
Each of ReShape and Obalon has expended, and expects to continue to expend, significant management resources to consummate the Merger. The attention of each company’s management may be diverted away from the day-to-day operations of the businesses of ReShape and Obalon, respectively, including implementing initiatives to improve performance, execution of existing business plans and pursuing other beneficial opportunities, in an effort to consummate the Merger. This diversion of management resources
 
32

TABLE OF CONTENTS
 
could disrupt ReShape’s or Obalon’s operations and may have an adverse effect on the respective businesses, financial conditions, results of operations and cash flows of the two companies or the Combined Company after the Closing Date.
The market price for Obalon Shares following completion of the Merger will continue to fluctuate and may be affected by factors different from those that historically have affected Obalon Shares and ReShape Shares.
Following the completion of the Merger, Obalon stockholders and ReShape stockholders will be stockholders in the Combined Company. ReShape’s business differs in important respects from that of Obalon and the Combined Company’s business will differ from that of Obalon and ReShape prior to the completion of the Merger. Accordingly, the results of operations of the Combined Company and the market price of Obalon Shares after the completion of the Merger may be affected by factors different from those currently affecting the independent results of operations of each of Obalon and ReShape. This joint proxy statement/prospectus describes the businesses of ReShape and Obalon and also describes important factors to consider in connection with those businesses and the business of the Combined Company.
Risks Related to the Business of the Combined Company After the Merger
Combining the two companies may be more difficult, costly or time consuming than expected, and Obalon may not realize all of the anticipated benefits of the Merger.
ReShape and Obalon have operated and, until the consummation of the Merger, will continue to operate, independently. The success of the Merger will depend on, among other things, the Combined Company’s ability to integrate the businesses of ReShape and Obalon in a timely fashion. Additionally, the Combined Company may not be able to successfully achieve the level of cost savings, revenue enhancements and synergies that it expects. If the Combined Company is not able to successfully achieve these objectives, the anticipated benefits of the Merger may not be realized fully or at all or may take longer to realize than expected. In addition, failure to successfully integrate the businesses in the expected timeframe may adversely affect the Combined Company’s business, financial condition, results of operations or cash flows.
In addition, the combined operation of two businesses may be a complex, costly and time-consuming process. The difficulties of combining the operations of the companies include, among others:

none of Obalon’s directors, officers or employees are expected to continue with the Combined Company and none of them will be available to transfer operational knowledge of Obalon, especially the manufacturing of the Obalon products, to the new management team;

the diversion of management attention to integration matters;

difficulties in integrating functions, personnel and systems;

difficulties in assimilating employees and in attracting and retaining key personnel;

difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the combination;

challenges of managing a larger Combined Company following the Merger, including challenges of conforming standards, controls, procedures and accounting and other policies and compensation structures;

declines in Obalon’s results of operations, financial condition or cash flows;

a decline in the market price of Obalon Shares;

contingent liabilities that are larger than expected;

potential unknown liabilities, adverse consequences and unforeseen increased expenses associated with the Merger;

disruption of existing relationships, patients, doctors, business partners, and other constituencies; and
 
33

TABLE OF CONTENTS
 

the disruption of, or the loss of momentum in, ongoing research and development, including ongoing clinical trials.
Many of these factors are outside the control of ReShape and Obalon, and any one of them could result in increased costs, decreased expected revenues and diversion of management time and energy, which could materially impact the business, financial condition, results of operations and cash flows of the Combined Company. These factors could cause dilution to the earnings per share of the Combined Company, decrease or delay the expected benefits of the Merger and negatively impact the price of Obalon Shares. As a result, it cannot be assured that the Combined Company will realize the full benefits anticipated from the Merger within the anticipated time frames, or at all.
In addition, following the Merger, Obalon will become responsible for ReShape’s liabilities and obligations, including with respect to legal, financial, regulatory, and compliance matters. These obligations will result in additional cost and investment by Obalon and, if Obalon has underestimated the amount of these costs and investments or if Obalon fails to satisfy any such obligations, Obalon may not realize the anticipated benefits of the Merger. Further, it is possible that there may be unknown, contingent or other liabilities or problems that may arise in the future, the existence and/or magnitude of which Obalon was previously unaware. Any such liabilities or problems could have an adverse effect on the Combined Company’s business, financial condition, results of operations or cash flows.
Even if the Merger is successfully consummated and the businesses integrated, there can be no assurance that the Merger will result in the realization of the full benefit of the anticipated synergies and cost savings or that these benefits will be realized within the expected time frames or at all. Difficulties in integrating the businesses could harm the reputation of the Combined Company. In addition, by engaging in the Merger, Obalon and ReShape may forego or delay pursuit of other opportunities that may have proven to have greater commercial potential.
Armistice, ReShape’s current largest stockholder, may have significant influence over the Combined Company following the Merger and may cause the Combined Company to take actions that may not be, or refrain from taking actions that may be, in the Combined Company’s best interest or the best interest of its other stockholders.
Armistice is the owner of approximately 86.4% of the outstanding shares of ReShape Common Stock as of the record date for the ReShape Special Meeting and the owner of approximately 10.4% of the outstanding Obalon Shares as of the record date for the Obalon Special Meeting. Based on the assumed Exchange Ratio, as of the Record Date, Armistice would be the holder of approximately 49.5% of the Combined Company Shares immediately after the Merger. In addition, as of the Record Date. Armistice holds warrants to purchase 12,650,000 shares of ReShape Common Stock, with exercise prices ranging from $2.64 to $6.00 per share. Therefore, after consummation of the Merger, Armistice is expected to be the beneficial owner of approximately 49.5% of outstanding shares of the Combined Company and approximately 75.3% of the shares of the Combined Company on a fully-diluted basis, assuming the exercise of all of its warrants. Armistice, through its equity interests, may have significant influence over matters submitted to stockholders of the Combined Company for approval and other corporate actions, such as:

the election of directors;

the timing and manner in which the Combined Company raises additional funds;

the timing and manner of dividend distributions;

the approval of contracts between the Combined Company and Armistice or its respective affiliates, if any, which could involve conflicts of interest;

open market purchase programs or other purchases of Obalon Shares;

to delay, defer or prevent a change in who controls the Combined Company; and

other matters that may adversely affect the market price of Obalon Shares.
Moreover, because large stockholders have potential power to direct or influence the Combined Company’s corporate actions, the Combined Company may be required to engage in transactions that may not be agreeable to or in the best interest of its other stockholders.
 
34

TABLE OF CONTENTS
 
ReShape and Obalon will incur substantial direct and indirect costs as a result of the Merger and the Combined Company will incur substantial direct and indirect costs in connection with combining the business of ReShape and Obalon following the Merger.
ReShape and Obalon will incur substantial expenses in connection with and as a result of consummating the Merger, and over a period of time following the consummation of the Merger, Obalon also expects to incur substantial expenses as a Combined Company in connection with coordinating and, in certain cases, combining the businesses, operations, policies and procedures of ReShape and Obalon. A portion of the transaction costs related to the Merger will be incurred regardless of whether the Merger is consummated. While ReShape and Obalon have assumed that a certain level of transaction expenses will be incurred, factors beyond ReShape’s and Obalon’s control could affect the total amount or the timing of these expenses. Although many of the expenses that will be incurred, by their nature, are difficult to estimate accurately, the current estimate of the aggregate cash expenses that will be incurred by ReShape and Obalon is approximately $5.4 million, which is subject to change. These expenses may exceed the costs historically borne by ReShape and Obalon. These expenses could adversely affect the financial condition, results of operations and cash flows of the Combined Company following the consummation of the Merger.
Obalon’s actual financial position and results of operations after the Merger as a Combined Company may differ materially from the unaudited pro forma financial information included in this joint proxy statement/prospectus.
The unaudited pro forma financial information included in this joint proxy statement/prospectus is presented for informational purposes only and may not be an indication of what Obalon’s financial position or results of operations would have been had the Merger been consummated on the dates indicated. The unaudited pro forma financial information has been derived from the audited and unaudited historical financial statements of Obalon and ReShape and certain adjustments and assumptions regarding Obalon after giving effect to the Merger. The assets and liabilities of ReShape have been measured at fair value based on various preliminary estimates using assumptions that Obalon and ReShape management believes are reasonable, utilizing information currently available. These fair value measurements can be highly subjective and the reasonable application of measurement principles may result in a range of alternative estimates using the same facts and circumstances. These estimates, which require extensive use of accounting estimates and management judgment, may be revised as additional information becomes available and as additional analyses are performed. Differences between preliminary estimates in the unaudited pro forma financial information and the final acquisition accounting will occur and could have a material impact on the unaudited pro forma financial information and the Combined Company’s financial position and future results of operations.
Furthermore, during the preparation of the unaudited pro forma condensed combined financial statements, Obalon was aware of one material difference between Obalon’s accounting policies and the accounting policies of ReShape related to revenue recognition. As further described in Note 3, Obalon adopted ASC 606 using the full retrospective transition method, whereas ReShape adopted ASC 606 using the modified retrospective method. Following the Merger, the Combined Company will conduct a more detailed review of ReShape’s accounting policies in an effort to determine if differences in accounting policies require restatement or reclassification of results of operations or reclassification of assets or liabilities to conform to Obalon’s accounting policies and classifications. As a result of that review, the Combined Company may identify other differences among the accounting policies of the companies that, when conformed, could have a material impact on the unaudited pro forma condensed combined financial statements contained in this joint proxy statement/prospectus.
In addition, the assumptions used in preparing the unaudited pro forma financial information may not prove to be accurate, and other factors may affect the Combined Company’s financial condition or results of operations following the consummation of the Merger. Any material variance from the pro forma financial information may cause significant variations in the market price of the Obalon Shares. See “Obalon and ReShape Unaudited Pro Forma Condensed Combined Financial Statements” beginning on page 269 of this joint proxy statement/prospectus.
 
35

TABLE OF CONTENTS
 
Sales of Obalon Shares after the completion of the Merger may cause the market price of Obalon Shares to fall.
ReShape stockholders may decide not to hold the Obalon Shares they receive in the Merger and other ReShape stockholders, such as funds with limitations on the amount of stock they are permitted hold in individual issuers, may be required to sell Obalon Shares that they receive in the Merger. Such sales, or market perception of such sales, of Obalon Shares could result in higher than average trading volume following the closing of the Merger and may cause the market price for Obalon Shares to decline. Such sales may take place promptly following the Merger or at other times in the future. There is no lock-up in place that would prevent institutional or larger stockholders from selling some or all of their Obalon Shares after the close of the transaction.
The Merger will be dilutive to Obalon’s earnings per share.
Because Obalon Shares will be issued in connection with the Merger, the Merger will be dilutive to Obalon’s earnings per share. Future events and conditions could increase the dilution that is currently projected, including adverse changes in market conditions, additional transaction and integration-related costs and other factors such as the failure to realize some or all of the benefits anticipated in the Merger. Any dilution of, or delay of any accretion to, Obalon’s earnings per share could cause the price of Obalon’s Shares to decline or grow at a reduced rate.
Obalon is expected to record goodwill and other intangible assets as a result of the Merger, and such goodwill and other intangible assets could become impaired in the future.
The Merger will be accounted for as a “reverse acquisition” pursuant to which ReShape will be considered the acquiring entity for accounting purposes in accordance with U.S. generally accepted accounting principles. As such, the purchase consideration will be allocated to the fair values of the tangible and identifiable intangible assets with the residual going to goodwill (or bargain purchase if in excess of consideration paid). ReShape’s historical results of operations will replace Obalon’s historical results of operations for all periods prior to the Merger. After completion of the Merger, the results of operations of both companies will be included in the Combined Company’s financial statements. This means that the total purchase price will be allocated to Obalon’s tangible and identifiable intangible assets and liabilities based on their estimated relative fair market values at the date of the completion of the Merger. Final valuations of property, plant and equipment, and intangible and other assets have not yet been completed as management is still reviewing the existence, characteristics and useful lives of Obalon’s intangible assets. The completion of the valuation work could result in significantly different amortization expenses and balance sheet classifications. Obalon currently estimates that the Merger will add approximately $40.7 million of goodwill and other intangible assets.
In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the Combined Company will be required to periodically assess these assets to determine if they are impaired. To the extent goodwill or other intangible assets become impaired, the Combined Company may be required to incur material charges relating to such impairment. Such a potential impairment charge could have a material impact on future operating results and statements of financial position of the Combined Company.
If third parties threaten to terminate, terminate or alter existing contracts or relationships with Obalon or ReShape, Obalon’s and ReShape’s respective businesses may be materially harmed.
ReShape has contracts with customers, suppliers, vendors, landlords, licensors and other business partners which may require ReShape to obtain consents from these other parties in connection with the Merger. If these consents cannot be obtained, the Combined Company may suffer a loss of potential future revenues and may lose rights that are material to the business of the Combined Company. In addition, third parties with whom Obalon or ReShape currently have relationships may terminate or otherwise reduce the scope of their relationship with either party in anticipation of the Merger. Any such disruptions could limit the Combined Company’s ability to achieve the anticipated benefits of the Merger. The adverse effect of such disruptions could also be exacerbated by a delay in the completion of the Merger or the termination of the Merger Agreement.
 
36

TABLE OF CONTENTS
 
No Obalon directors, officers or employees are expected to continue with the Combined 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.
The success of the Obalon Balloon System largely depends upon the services of Obalon’s executive management team, which was reduced in 2020 to Andy Rasdal, Obalon’s President and Chief Executive Officer, and Nooshin Hussainy, Obalon’s Chief Financial Officer. Following the consummation of the Merger, neither Mr. Rasdal nor Ms. Hussainy will continue with the Combined Company, nor will any members of the Obalon Board.
In order to restart manufacturing of the Obalon Balloon System, the Combined Company will 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 two FDA-mandated post-approval studies which were 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 the Combined Company on the prior terms or at all. Obalon has not manufactured or shipped products to customers since March 2020 and customers may not accept a relaunch of the Obalon Balloon System by the Combined Company.
There is significant competition for executive officers and skilled personnel. Obalon has, from time to time, experienced, and expects the Combined Company to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. If the Combined Company is unable to attract and retain key employees it could impede the achievement of the Combined Company’s research, development and commercialization objectives related to the Obalon Balloon System and seriously harm the Combined Company’s ability to restart commercial operations for the Obalon Balloon System.
Both Obalon and ReShape have operated with a loss and negative cash flows for the entirety of their existence and it is expected the Combined Company will have to raise significant capital in the future that could be dilutive to stockholders of the Combined Company.
Both Obalon and ReShape have operated with a loss and negative cash flows for the entirety of their existence. Obalon has incurred significant losses in each period since its inception in 2008, with net losses of $12.3 million and $23.7 million during the fiscal years ended December 31, 2020 and 2019, respectively. These losses and Obalon’s accumulated deficit reflect the substantial investments Obalon have made to develop, seek and obtain regulatory approval for its current and future generation Obalon Balloon System and commercialize the Obalon Balloon System in international and U.S. markets. Based on Obalon’s cash balances and recurring losses since inception, there is substantial doubt about Obalon’s ability to continue as a going concern as a standalone company.
ReShape has incurred significant losses in each period since its inception in 2002, with net losses of $21.6 million and $74.2 million during the fiscal years ended December 31, 2020 and 2019, respectively. ReShape’s operations have consumed substantial amounts of cash since inception. ReShape expects to continue to spend substantial amounts on the development and commercialization of its products and on research and development, including conducting current and future clinical trials for its LAP-BAND system, ReShapeCare, ReShape Vest (if approved for sale) and Diabetes Bloc-Stim Neuromodulation (if approved for sale) and subsequent versions of its products. In addition, in December 2021, ReShape is obligated to pay Apollo the final $3.0 million installment of the purchase price related to ReShape’s acquisition of the LAP-BAND system. For the years ended December 31, 2020 and 2019, net cash used in ReShape’s operating activities was $8.5 million and $14.2 million, respectively.
The Combined Company may not be able to raise capital to continue operations in the future which could result in bankruptcy or liquidation of the Combined Company. The Combined Company will have a large amount of debt and may not be able to service that debt in the future. As a result, adequate funding may not be available to the Combined Company on acceptable terms, or at all.
 
37

TABLE OF CONTENTS
 
Risks Related to ReShape
Risks Related to ReShape’s Business and Industry
The ReShape Vest product is in the early stages of clinical evaluation. If the clinical trial is not successfully completed or any required regulatory approvals are not obtained, the ReShape Vest may not be commercialized and ReShape’s business prospects may suffer.
The ReShape Vest product is in the early stages of development and is currently in the early stages of clinical evaluation. ReShape’s ability to market the ReShape Vest in the United States and abroad depends upon its ability to demonstrate the safety and effectiveness of the product with clinical data to support ReShape’s requests for regulatory approval. The ReShape Vest may not be found to be safe and, where required, effective in clinical trials and may not ultimately be approved for marketing by U.S. or foreign regulatory authorities, which would have a negative impact on ReShape’s net sales.
There is no assurance that ReShape will be successful in achieving the desired results in its anticipated clinical trials for the ReShape Vest or, if it does, that the FDA or other regulatory agencies will approve the product for sale without the need for additional clinical trial data to demonstrate safety and efficacy. ReShape continually evaluates the potential financial benefits and costs of clinical trials and the products being evaluated in them. If ReShape determines that the costs associated with obtaining regulatory approval of a product exceed the potential financial benefits of that product or if the projected development timeline is inconsistent with ReShape’s investment horizon, ReShape may choose to stop a clinical trial and/or the development of a product.
The shares of series C convertible preferred stock issued in connection with ReShape’s acquisition of ReShape Medical have certain rights and preferences senior to ReShape’s common stock, including a liquidation preference that is senior to ReShape’s common stock.
There are currently 95,388 shares of ReShape’s series C convertible preferred stock outstanding, which are convertible into 38 shares of ReShape common stock. ReShape issued the shares of series C convertible preferred stock in connection with its acquisition of ReShape Medical. The series C convertible preferred stock has a liquidation preference of $274.88 per share, or $692,691.05 per underlying share of common stock, or approximately $26.2 million in the aggregate. Holders of the series C convertible preferred stock have the right to convert their shares into shares of common stock instead of receiving the liquidation preference. 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. While the series C convertible preferred stock generally does not have voting rights, as long as any shares of series C convertible preferred stock remain outstanding, ReShape 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, 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 its 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 or (e) enter into any agreement with respect to any of the foregoing.
ReShape is 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.
ReShape is a medical device company with a limited operating history upon which you can evaluate its business. The success of ReShape’s business will depend on its ability to generate increased sales and control costs, as well as its ability to obtain additional regulatory approvals needed to market new versions of its LAP-BAND system or regulatory approvals needed to market its ReShape Vest, Diabetes Bloc-Stim Neuromodulation and any other products ReShape may develop in the future, all of which ReShape may be unable to do. If ReShape is unable to successfully market its LAP-BAND system for its indicated use,
 
38

TABLE OF CONTENTS
 
ReShapeCare, or develop and commercialize the ReShape Vest or Diabetes Bloc-Stim Neuromodulation, ReShape may never become profitable and may have to cease operations as a result. ReShape’s lack of a significant operating history also limits your ability to make a comparative evaluation of ReShape, its products and its prospects.
During the second quarter of 2019 ReShape recorded a non-cash indefinite-lived intangible assets impairment loss, which significantly impacted its results of operations, and it may be exposed to additional impairment losses that could be material.
ReShape conducts its 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. During the second quarter of 2019, ReShape performed a qualitative impairment analysis of the in-process research and development (“IPR&D”). Due to delays in the clinical trials experienced during the first six months of 2019, ReShape 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, ReShape recorded an impairment charge of approximately $6.6 million of the excess of the carrying value over the estimated fair value. In the future, ReShape may have additional indicators of potential impairment requiring it to record an impairment loss related to its remaining indefinite-lived and finite-lived intangible assets, which could also have a material adverse effect on ReShape’s results of operations.
ReShape will need substantial additional funding and may be unable to raise capital when needed, which would force it to delay, reduce or eliminate its product development programs or liquidate some or all of its assets.
ReShape’s operations have consumed substantial amounts of cash since inception. ReShape expects to continue to spend substantial amounts on the development and commercialization of its products and on research and development, including conducting current and future clinical trials for the LAP-BAND system, ReShapeCare, ReShape Vest (if approved for sale) and Diabetes Bloc-Stim Neuromodulation (if approved for sale) and subsequent versions of its products. In addition, in December 2021 ReShape is obligated to pay Apollo the final $3.0 million installment of the purchase price related to ReShape’s acquisition of LAP-BAND system. For the years ended December 31, 2020 and 2019, net cash used in operating activities was $8.5 million and $14.2 million, respectively. ReShape expects that its cash used in operations will continue to be significant in the upcoming years, and that it will need to raise additional capital to commercialize the LAP-BAND system and ReShapeCare, and to develop the ReShape Vest and Diabetes Bloc-Stim Neuromodulation, and to continue its research and development programs, and to fund its ongoing operations.
ReShape’s future funding requirements will depend on many factors, including:

the cost and timing of establishing sales, marketing and distribution capabilities;

the cost of establishing clinical and commercial supplies of the LAP-BAND system, ReShapeCare, ReShape Vest, Diabetes Bloc-Stim Neuromodulation and any products that ReShape may develop;

the rate of market acceptance of the LAP-BAND system, ReShapeCare, ReShape Vest, Diabetes Bloc-Stim Neuromodulation and any other product candidates;

the cost of filing and prosecuting patent applications and defending and enforcing ReShape’s patent and other intellectual property rights;

the cost of defending, in litigation or otherwise, any claims that ReShape infringes 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 ReShape may establish;

any revenue generated by sales of the LAP-BAND system, ReShapeCare, ReShape Vest and Diabetes Bloc-Stim Neuromodulation or our future products;
 
39

TABLE OF CONTENTS
 

the scope, rate of progress, results and cost of any clinical trials and other research and development activities;

the cost and timing of obtaining any further required regulatory approvals; and

the extent to which ReShape invests in products and technologies, although ReShape currently has no commitments or agreements relating to these types of transactions.
Until the time, if ever, when ReShape can generate a sufficient amount of product revenue, ReShape expects to finance its future cash needs through public or private equity offerings, debt financings or corporate collaboration, licensing arrangements and grants, as well as through interest income earned on cash balances.
Additional capital may not be available on terms favorable to ReShape, or at all. If ReShape raises additional funds by issuing equity securities, ReShape stockholders may experience dilution. Debt financing, if available, may involve restrictive covenants or additional security interests in ReShape’s assets. Any additional debt or equity financing that ReShape complete may contain terms that are not favorable to ReShape or its stockholders. If ReShape raises additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to ReShape’s technologies or products, or grant licenses on terms that are not favorable to ReShape. If ReShape is unable to raise adequate funds, it may have to delay, reduce the scope of, or eliminate some or all of, its development programs or liquidate some or all of its assets.
ReShape incurs significant costs as a result of operating as a public company, and ReShape’s management is required to devote substantial time to compliance initiatives.
As a public company, ReShape incurs 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. ReShape’s 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 ReShape maintain effective internal controls for financial reporting and disclosure. In particular, ReShape is required to perform system and process evaluation and testing of its internal controls over financial reporting to allow management to report on the effectiveness of its internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. ReShape’s testing may reveal deficiencies in its internal controls over financial reporting that are deemed to be material weaknesses. ReShape has incurred and continue to expect to incur significant expense and devote substantial management effort toward ensuring compliance with Section 404. Moreover, if ReShape does not comply with the requirements of Section 404, or if ReShape identifies deficiencies in its internal controls that are deemed to be material weaknesses, the market price of ReShape’s stock could decline and ReShape could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources.
General economic and political conditions could have a material adverse effect on ReShape’s business.
External factors can affect ReShape’s 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. ReShape cannot predict to what extent the global economic conditions may negatively impact its business. For example, negative conditions in the credit and capital markets could impair ReShape’s ability to access the financial markets for working capital and could negatively impact its ability to borrow.
In addition, the coronavirus outbreak has begun to have indeterminable adverse effects on general commercial activity and the world economy. If the impact of the coronavirus outbreak continues for an extended period, it could materially adversely impact ReShape’s operating and clinical activities as a result of the impacts on ReShape’s supply chain, clinical trial sites, access to patients and additional regulatory
 
40

TABLE OF CONTENTS
 
guidance could be delayed or impacted. ReShape’s business and results of operations could be adversely affected to the extent that this coronavirus or any epidemic harms the global economy.
ReShape faces 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 ReShape’s 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. The Affordable Care Act contains many provisions designed to generate the revenues necessary to fund the coverage expansions and to reduce costs of Medicare and Medicaid, including imposing a 2.3% excise tax on domestic sales of many medical devices by manufacturers that began in 2013. A moratorium was placed on the medical device excise tax through 2019. During December of 2019, the medical device excise tax was permanently repealed.
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. ReShape expects 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 ReShape’s revenue, increase its costs, or require it to revise the ways in which it conducts business or put ReShape at risk for loss of business. In addition, ReShape’s 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.
ReShape is 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 ReShape may become subject to such litigation. If ReShape is unable to, or has not fully complied with such laws, it could face substantial penalties.
ReShape’s 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, ReShape’s sales, marketing and education programs.
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
 
41

TABLE OF CONTENTS
 
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.
ReShape is unable to predict whether it could be subject to actions under any of these laws, or the impact of such actions. If ReShape is found to be in violation of any of the laws described above or other applicable state and federal fraud and abuse laws, it 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 ReShape’s information technology information technology infrastructure against cyber-based attacks, network security breaches, service interruptions or data corruption could materially disrupt ReShape’s operations and adversely affect its business.
The operation of ReShape’s business depends on its information technology systems. ReShape relies on its 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. ReShape’s 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 ReShape to enforcement actions and investigations by regulatory authorities, and potentially result in regulatory penalties and significant legal liability, if ReShape’s information technology security efforts fail. In addition, a variety of ReShape’s 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.
ReShape operates in a highly competitive industry that is subject to rapid change. If ReShape’s competitors are able to develop and market products that are safer or more effective than ReShape’s products, its 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 ReShape operates 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 ReShape is not aware of any competitors in the neuroblocking market, it faces potential competition from pharmaceutical and surgical obesity treatments. Many of ReShape’s competitors in the obesity treatment field have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, clinical trials, obtaining regulatory approvals and marketing approved products than ReShape does. 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, Apollo Endosurgery, Boston Scientific, LivaNova PLC, Johnson & Johnson, Medtronic or St. Jude Medical. ReShape’s competitors may develop and patent processes or products earlier than ReShape, obtain regulatory approvals for competing products more rapidly than ReShape is able to and develop more effective, safer and less expensive products or technologies that would render ReShape’s products non-competitive or obsolete.
Risks Related to Product Development and Commercialization
ReShape’s efforts to increase revenue from its LAP-BAND system and ReShapeCare, and commercialize the ReShape Vest, Diabetes Bloc-Stim Neuromodulation and expanded line of bariatric surgical accessories may not succeed or may encounter delays which could significantly harm ReShape’s ability to generate revenue.
ReShape’s ability to generate revenue will depend upon the sales of its LAP-BAND system, expanded line of bariatric surgical accessories, and ReShapeCare and successful commercialization of the ReShape
 
42

TABLE OF CONTENTS
 
Vest (if approved for sale) and Diabetes Bloc-Stim Neuromodulation (if approved for sale). ReShape’s efforts to commercialize these products may not succeed for a number of reasons, including:

ReShape may not be able to obtain the regulatory approvals required for the ReShape Vest and/or Diabetes Bloc-Stim Neuromodulation;

ReShape’s products may not be accepted in the marketplace by physicians, patients and third-party payers;

the price of ReShape’s 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 the ReShape Vest;

coverage policies for bariatric surgeries, including LAP-BAND may be restricted in the future;

ReShape may not be able to sell its products at a price that allows it to meet the revenue targets necessary to generate enough revenue for profitability;

the frequency and severity of any side effects of ReShape’s products;

physicians and potential patients may not be aware of the perceived effectiveness and sustainability of the results of ReShape’s products;

ReShape, or the investigators of its 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;

any rapid technological change may make ReShape’s products obsolete;

ReShape may not be able to have its products manufactured in commercial quantities or at an acceptable cost;

ReShape may not have adequate financial or other resources to complete the development and commercialization of its products or to develop sales and marketing capabilities for its products; and

ReShape may be sued for infringement of intellectual property rights and could be enjoined from manufacturing or selling its products.
Besides requiring physician adoption, market acceptance of ReShape’s products will depend on successfully communicating the benefits of its products to three additional constituencies involved in deciding whether to treat a particular patient using ReShape’s 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 the LAP-BAND system, ReShape Care, ReShape Vest (if approved for sale) and Diabetes Bloc-Stim Neuromodulation (if approved for sale). Marketing to each of these constituencies requires a different marketing approach, and ReShape must convince each of these groups of the efficacy and utility of its products to be successful.
If ReShape’s products, or any other therapy or products for other gastrointestinal diseases and disorders that ReShape may develop, do not achieve an adequate level of acceptance by the relevant constituencies, ReShape may not generate significant product revenue and may not become profitable.
ReShape may not be able to obtain required regulatory approvals for the ReShape Vest and/or Diabetes Bloc-Stim Neuromodulation in a cost-effective manner or at all, which could adversely affect its business and operating results.
The production and marketing of the ReShape Vest and Diabetes Bloc-Stim Neuromodulation, and ReShape’s ongoing research and development, preclinical testing and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities both in the United States and abroad.
 
43

TABLE OF CONTENTS
 
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. ReShape is required to obtain regulatory approval before it can market the ReShape Vest and Diabetes Bloc-Stim Neuromodulation 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 the ReShape Vest and/or Diabetes Bloc-Stim Neuromodulation will not be approved for sale. Even if regulatory approval of the ReShape Vest and/or Diabetes Bloc-Stim Neuromodulation is granted, it may not be granted within the timeframe that ReShape expects, which could have an adverse effect on ReShape’s operating results and financial condition. Even after the ReShape Vest and/or Diabetes Bloc-Stim Neuromodulation is approved by the FDA, ReShape 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. ReShape also is subject to medical device reporting regulations that require it to report to the FDA if any of its 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 ReShape from successfully marketing its products, which could adversely affect its business and operating results.
ReShape depends on clinical investigators and clinical sites to enroll patients in its clinical trials, and on other third parties to manage the trials and to perform related data collection and analysis, and, as a result, ReShape may face costs and delays that are outside of its control.
ReShape relies on clinical investigators and clinical sites to enroll patients in its clinical trials and other third parties to manage the trials and to perform related data collection and analysis. However, ReShape may not be able to control the amount and timing of resources that clinical sites may devote to its clinical trials. If these clinical investigators and clinical sites fail to enroll a sufficient number of patients in ReShape’s clinical trials, ensure compliance by patients with clinical protocols or comply with regulatory requirements, ReShape will be unable to complete these trials, which could prevent us from obtaining or maintaining regulatory approvals for its product. ReShape’s 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, ReShape’s 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 ReShape’s clinical protocols, regulatory requirements or for other reasons, ReShape’s clinical trials may be extended, delayed or terminated, or the clinical data may be rejected by the FDA, adversely affecting ReShape’s ability to successfully commercialize its product.
Modifications to the LAP-BAND system may require additional approval from regulatory authorities, which may not be obtained or may delay ReShape’s commercialization efforts.
The FDA and ReShape’s 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 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 study. ReShape 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 ReShape’s ability to introduce new or enhanced products in a timely manner, which in turn would harm its commercialization efforts and future growth.
If ReShape or its suppliers fail to comply with ongoing regulatory requirements, or if ReShape experiences unanticipated product problems, the LAP-BAND system could be subject to restrictions or withdrawal from the market.
Any product for which ReShape obtains marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continual review
 
44

TABLE OF CONTENTS
 
and periodic inspections by our European Notified Body and the FDA and other regulatory bodies. In particular ReShape and its 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 ReShape obtains 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. ReShape’s 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 ReShape or one of its 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 ReShape or its manufacturers or suppliers, including, restrictions on ReShape’s 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 ReShape’s reputation and cause its product sales to suffer. Furthermore, ReShape’s 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, ReShape’s commercialization efforts could be delayed, which would harm its business and results of operations.
Additionally, if the FDA determines that ReShape’s promotional materials, training or other activities constitute promotion of an unapproved use, ReShape could be subject to significant liability, the FDA could request that ReShape cease, correct or modify its training or promotional materials or subject it to regulatory enforcement actions. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider ReShape’s 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.
ReShape is subject to medical device reporting regulations that require it to report to the FDA, Competent Authorities or other governmental authorities in other countries if its 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 ReShape’s products in the event of material deficiencies or defects in design or manufacturing. A government mandated, or voluntary, recall by ReShape 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 ReShape’s 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 ReShape’s 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.
ReShape may be unable to attract and retain management and other personnel it needs to succeed.
ReShape’s success depends on the services of our senior management and other key employees. The loss of the services of one or more of its officers or key employees could delay or prevent the successful completion of its clinical trials and the commercialization of the LAP-BAND system and ReShapeCare, and the development of the ReShape Vest and Diabetes Bloc-Stim Neuromodulation. ReShape’s 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 ReShape’s success. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of ReShape’s activities. If ReShape fails to identify, attract, retain and motivate these highly skilled personnel, it may be unable to continue its development and commercialization activities.
 
45

TABLE OF CONTENTS
 
ReShape may be unable to manage its growth effectively.
ReShape’s business strategy entails significant future growth. For example, it will have to expand existing operations in order to increase revenue from the LAP-BAND system and ReShapeCare, and develop the ReShape Vest and Diabetes Bloc-Stim Neuromodulation, conduct additional clinical trials, increase its contract manufacturing capabilities, hire and train new personnel to handle the marketing and sales of its product, assist patients and healthcare providers in obtaining reimbursement for the use of its product and create and develop new applications for its technology. This growth may place significant strain on ReShape’s management and financial and operational resources. Successful growth is also dependent upon ReShape’s ability to implement appropriate financial and management controls, systems and procedures. ReShape’s ability to effectively manage growth depends on its success in attracting and retaining highly qualified personnel, for which the competition may be intense. If ReShape fails to manage these challenges effectively, its business could be harmed.
ReShape faces the risk of product liability claims that could be expensive, divert management’s attention and harm its reputation and business. ReShape may not be able to obtain adequate product liability insurance.
ReShape’s business exposes it 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. ReShape may be subject to product liability claims if its products cause, or appear to have caused, an injury. Claims may be made by consumers, healthcare providers, third-party strategic collaborators or others selling ReShape’s products.
ReShape has product liability insurance, which covers the use of its products in its clinical trials and any commercial sales, in an amount ReShape believes is appropriate. ReShape’s current product liability insurance may not continue to be available to ReShape on acceptable terms, if at all, and, if available, the coverage may not be adequate to protect ReShape against any future product liability claims. If ReShape is 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, it could be exposed to significant liabilities, which may harm its 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 ReShape’s business, financial condition and results of operations. These liabilities could prevent or interfere with ReShape’s 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 ReShape’s products in the market.
ReShape may be subject to product liability claims even if it appears that the claimed injury is due to the actions of others. For example, ReShape relies on the expertise of surgeons and other associated medical personnel to perform the medical procedure to implant and remove its products and to perform the related therapy. If these medical personnel are not properly trained or are negligent, the therapeutic effect of ReShape’s products may be diminished or the patient may suffer critical injury, which may subject ReShape to liability. In addition, an injury that is caused by the negligence of one of ReShape’s suppliers in supplying ReShape with a defective component that injures a patient could be the basis for a claim against ReShape. A product liability claim, regardless of its merit or eventual outcome, could result in decreased demand for ReShape’s products; injury to ReShape’s reputation; diversion of management’s attention; withdrawal of clinical trial participants; significant costs of related litigation; substantial monetary awards to patients; product recalls or market withdrawals; loss of revenue; and the inability to commercialize ReShape’s products under development.
Risks Related to Intellectual Property
If ReShape is unable to obtain or maintain intellectual property rights relating to its technology and neuroblocking therapy, the commercial value of its technology and any future products will be adversely affected and its competitive position will be harmed.
ReShape’s commercial success depends in part on its ability to obtain protection in the United States and other countries for the LAP-BAND system, ReShapeCare, ReShape Vest and Diabetes Bloc-Stim
 
46

TABLE OF CONTENTS
 
Neuromodulation by establishing and maintaining intellectual property rights relating to or incorporated into its technology and products. ReShape owns 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. ReShape has also received or applied for additional patents outside the United States. ReShape’s pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will provide ReShape any competitive advantage. ReShape expects to incur substantial costs in obtaining patents and, if necessary, defending its proprietary rights. The patent positions of medical device companies, including ReShape’s, can be highly uncertain and involve complex and evolving legal and factual questions. ReShape does not know whether it will obtain the patent protection it seeks, or that the protection it does obtain will be found valid and enforceable if challenged. If ReShape fails to obtain adequate protection of its intellectual property, or if any protection ReShape obtains is reduced or eliminated, others could use its intellectual property without compensating ReShape, resulting in harm to its business. ReShape may also determine that it is in its 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 ReShape seeks to enforce any of its owned or exclusively licensed patents against an infringing party, it is likely that the party defending the claim will seek to invalidate the patents ReShape asserts, which, if successful could result in the loss of the entire patent or the relevant portion of ReShape’s patent, which would not be limited to any particular party. Any litigation to enforce or defend ReShape’s patent rights, even if ReShape were to prevail, could be costly and time-consuming and could divert the attention of ReShape’s management and key personnel from its business operations. Even if ReShape were to prevail in any litigation, ReShape cannot assure you that it can obtain an injunction that prevents its competitors from practicing ReShape’s patented technology. ReShape’s competitors may independently develop similar or alternative technologies or products without infringing any of ReShape’s patent or other intellectual property rights, or may design around ReShape’s proprietary technologies.
ReShape cannot assure you that it will obtain any patent protection that it seeks, that any protection ReShape does 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 ReShape’s 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 ReShape’s intellectual property. Thus, any patents that ReShape owns or licenses from others may provide limited or no protection against competitors. ReShape’s pending patent applications, those ReShape may file in the future, or those ReShape may license from third parties, may not result in patents being issued. If issued, they may not provide ReShape with proprietary protection or competitive advantages against competitors with similar technology.
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 ReShape’s 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 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 ReShape’s competitors have significant resources and incentives to apply for and obtain intellectual property rights that could limit or prevent ReShape’s ability to commercialize its current or future products in the United States or abroad.
Many of ReShape’s 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
 
47

TABLE OF CONTENTS
 
ReShape’s ability to make, use or sell its products either in the U.S. or in international markets. ReShape’s 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, ReShape cannot be certain that it was the first to make the inventions covered by each of its pending patent applications, or that ReShape was the first to file patent applications for such inventions.
If ReShape is unable to protect the confidentiality of its proprietary information and know-how, the value of its technology and products could be adversely affected.
In addition to patented technology, ReShape relies on its unpatented proprietary technology, trade secrets, processes and know-how. ReShape generally seeks to protect this information by confidentiality agreements with its employees, consultants, scientific advisors and third parties. These agreements may be breached, and ReShape may not have adequate remedies for any such breach. In addition, ReShape’s trade secrets may otherwise become known or be independently developed by competitors. To the extent that ReShape’s employees, consultants or contractors use intellectual property owned by others in their work for ReShape, 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 ReShape becomes subject to a lawsuit, it may be required to expend significant financial and other resources and its management’s attention may be diverted from its 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, ReShape 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. ReShape may also become subject to claims or litigation seeking payment of royalties based on sales of its 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 ReShape’s 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 ReShape, cause significant strain on its financial resources, divert the attention of its technical and management personnel and harm its reputation. ReShape may not have the financial resources to defend its patents from infringement or claims of invalidity. An adverse determination in any litigation could subject ReShape to significant liabilities to third parties, require ReShape to seek licenses from or pay royalties to third parties or prevent ReShape from manufacturing, selling or using its proposed products, any of which could have a material adverse effect on ReShape’s business and prospects.
The LAP-BAND system, ReShapeCare, ReShape Vest or Diabetes Bloc-Stim Neuromodulation may infringe or be claimed to infringe patents that ReShape does not own or license, including patents that may issue in the future based on patent applications of which ReShape is currently aware, as well as applications of which ReShape is unaware. For example, ReShape are is of other companies that are investigating neurostimulation, including neuroblocking, and of patents and published patent applications held by companies in those fields. While ReShape believes that none of such patents and patent applications are applicable to its 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 ReShape that would cause ReShape to incur substantial expenses and, if such claims are successfully asserted against ReShape, they could cause ReShape to pay substantial damages, could result in an injunction preventing ReShape from selling, manufacturing or using its proposed products and would divert management’s attention. Because
 
48

TABLE OF CONTENTS
 
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 ReShape is unaware, and which may later result in issued patents that ReShape’s products infringe. If a patent infringement suit were brought against ReShape, it could be forced to stop its 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, ReShape 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 ReShape may not be able to redesign its products to avoid infringement. Modification of ReShape’s products or development of new products could require ReShape to conduct additional clinical trials and to revise its filings with the FDA and other regulatory bodies, which would be time-consuming and expensive. Even if ReShape were able to obtain a license, the rights may be nonexclusive, which could result in ReShape’s competitors gaining access to the same intellectual property. Ultimately, ReShape could be forced to cease some aspect of its business operations if, as a result of actual or threatened patent infringement claims, ReShape is unable to enter into licenses on acceptable terms. This could harm ReShape’s business significantly.
Risks Relating to Ownership of ReShape’s Common Stock
ReShape’s common stock trades on an over-the-counter market.
ReShape’s common stock trades on the OTCQB market and therefore may have less liquidity and may experience potentially more price volatility than experienced when its shares traded on Nasdaq. Stockholders may not be able to sell their shares of common stock on the OTCQB market in the quantities, at the times, or at the prices that could potentially be available on a more liquid trading market. The delisting of ReShape’s common stock from Nasdaq in 2018 could also adversely affect its ability to obtain financing for our operations and/or result in a loss of confidence by investors or employees.
ReShape’s common stock may be deemed to be a “penny stock” and broker-dealers who make a market in ReShape’s stock may be subject to additional compliance requirements.
If ReShape’s common stock is deemed to be a “penny stock” as defined in the Securities Exchange Act of 1934, broker-dealers who make a market in ReShape’s stock will be subject to additional sales practice requirements for selling its common stock to persons other than established customers and accredited investors. For instance, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Consequently, the penny stock rules, if they were to become applicable, would affect the ability or willingness of broker-dealers to sell ReShape’s securities, and accordingly would affect the ability of stockholders to sell their securities in the public market. These additional procedures could also limit ReShape’s ability to raise additional capital in the future.
The trading price of ReShape’s common stock has been volatile and is likely to be volatile in the future.
The trading price of ReShape’s common stock has been highly volatile. The market price for ReShape’s common stock will be affected by a number of factors, including:

the denial or delay of regulatory clearances or approvals of ReShape’s product or receipt of regulatory approval of competing products;

ReShape’s ability to accomplish clinical, regulatory and other product development milestones and to do so in accordance with the timing estimates ReShape has 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 ReShape product;

ability of ReShape’s products to achieve market success;
 
49

TABLE OF CONTENTS
 

the performance of third-party contract manufacturers and component suppliers;

ReShape’s ability to develop sales and marketing capabilities;

actual or anticipated variations in ReShape’s results of operations or those of its competitors;

announcements of new products, technological innovations or product advancements by ReShape or its competitors;

developments with respect to patents and other intellectual property rights;

sales of common stock or other securities by ReShape or its 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 ReShape’s ability to obtain patent protection for our technologies;

the trading volume of ReShape’s common stock;

changes in earnings estimates or recommendations by securities analysts, failure to obtain or maintain analyst coverage of ReShape’s common stock or our failure to achieve analyst earnings estimates;

public statements by analysts or clinicians regarding their perceptions of ReShape’s clinical results or the effectiveness of ReShape’s products;

decreases in market valuations of medical device companies; and

general market conditions and other factors unrelated to ReShape’s operating performance or the operating performance of ReShape’s 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 ReShape 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 ReShape common stock by ReShape or by its stockholders, announcements of the proposed sales of substantial amounts of ReShape common stock or the perception that substantial sales may be made, could cause the market price of ReShape’s common stock to decline. ReShape may issue additional shares of 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. ReShape also plans to issue additional shares to its employees, directors or consultants in connection with their services to ReShape. All of the currently outstanding shares of ReShape common stock are freely tradable under federal and state securities laws, except for shares held by ReShape’s 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 ReShape common stock in the public market could occur at any time and could reduce the market price of ReShape’s common stock.
ReShape has a significant number of outstanding warrants, which may cause significant dilution to its stockholders, have a material adverse impact on the market price of its common stock and make it more difficult for it to raise funds through future equity offerings.
As of December 31, 2020, ReShape had outstanding 6,166,554 shares of common stock. In addition, as of that date ReShape had outstanding warrants to acquire 14,285,113 shares of common stock. 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 ReShape’s common stock and would increase the number of publicly traded shares, which could depress the market price of ReShape’s common stock.
 
50

TABLE OF CONTENTS
 
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 ReShape’s common stockholders to be more inclined to sell their shares, which would contribute to a downward movement in the price of ReShape’s common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on ReShape’s common stock price could encourage investors to engage in short sales of ReShape’s common stock, which could further contribute to price declines in ReShape’s common stock. The fact that ReShape’s stockholders and warrant holders can sell substantial amounts of common stock in the public market, whether or not sales have occurred or are occurring, could make it more difficult for ReShape to raise additional funds through the sale of equity or equity-related securities in the future at a time and price that ReShape deems reasonable or appropriate, or at all.
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 ReShape may offer additional shares of its common stock or other securities convertible into or exchangeable for its common stock at prices that may be lower than the current price per share of its 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 ReShape sells additional shares of its 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.
Since ReShape securities is quoted on the OTCQB market, its stockholders may face significant restrictions on the resale of ReShape’s securities due to state “blue sky” laws.
Each state has its own securities laws, often called “blue sky” laws, which (i) limit sales of securities to a state’s residents unless the securities are registered in that state or qualify for an exemption from registration, and (ii) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or the transaction must be exempt from registration. The applicable broker must be registered in that state. ReShape does not know whether its common stock will be registered or exempt from registration under the laws of any state. Since ReShape’s common stock is currently quoted on the OTCQB, a determination regarding registration will be made by those broker-dealers, if any, who agree to serve as the market-makers for ReShape’s common stock. There may be significant state blue sky law restrictions on the ability of investors to sell, and on purchasers to buy, ReShape’s common stock. Investors should therefore consider the resale market for ReShape’s common stock to be limited, as they may be unable to resell ReShape’s common stock without the significant expense of state registration or qualification.
ReShape’s organizational documents and Delaware law make a takeover of ReShape more difficult, which may prevent certain changes in control and limit the market price of ReShape’s common stock.
ReShape’s 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 ReShape’s stockholders to remove or replace management, engage in proxy contests and effect changes in control. These provisions include:

the ability of ReShape’s board of directors to create and issue preferred stock without stockholder approval, which could be used to implement anti-takeover devices;

the authority for ReShape’s board of directors to issue without stockholder approval up to the number of shares of common stock authorized in its certificate of incorporation, that, if issued, would dilute the ownership of its 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 ReShape’s outstanding voting stock to replace all or a majority of ReShape’s directors;

the prohibition on actions by written consent of ReShape stockholders;
 
51

TABLE OF CONTENTS
 

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 ReShape’s 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, ReShape is 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 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 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 ReShape’s common stock. Some provisions in ReShape’s certificate of incorporation and bylaws may deter third parties from acquiring ReShape, which may limit the market price of ReShape’s common stock.
ReShape has not paid dividends in the past and does not expect to pay dividends in the future, and any return on investment may be limited to the value of ReShape’s common stock.
ReShape has never paid dividends on its common stock and does not anticipate paying dividends on its common stock in the foreseeable future. The payment of dividends on ReShape’s common stock will depend on its earnings, financial condition and other business and economic factors affecting ReShape at such time as its board of directors may consider relevant. If ReShape does not pay dividends, ReShape’s common stock may be less valuable because a return on your investment will only occur if ReShape’s stock price appreciates.
Risks Related to Obalon
Risks Related to Obalon’s Business
Obalon has suspended or terminated essentially all of its commercial efforts, shut down its manufacturing operations and terminated nearly all of its employees, and Obalon cannot assure you when, if ever, these efforts will recommence.
Obalon’s commercial operations expose it to risks associated with public health crises and outbreaks of epidemic, pandemic, or contagious diseases, such as the current outbreak of a novel strain of coronavirus (COVID-19). To date, COVID-19 has had, and is expected to continue to have, an adverse impact on Obalon’s operations, including its product sales, manufacturing, supply chains, and its expenses, including as a result of preventive and precautionary measures that Obalon, other businesses, and governments are taking. Largely as a result of the COVID-19 crisis, Obalon has permanently closed its two Obalon-branded or managed retail weight loss centers, suspended future expansion plans for new retail centers, stopped shipping product to all U.S. customers, terminated its agreement with its only international distributor, and terminated its sales and marketing organizations. Obalon has also shut down its manufacturing operations, including terminating all manufacturing and related support personnel. During fiscal year 2020, Obalon terminated or accepted resignations from all but two essential employees. These terminations included key long-time senior executives and other functional personnel with deep knowledge and expertise important to its business that has been acquired and developed over many years. Obalon does not expect to restart any of its operations unless it is able to complete the Merger with ReShape. Obalon cannot assure you when, if ever, it will achieve any of these objectives and it does not expect to generate any revenue unless and until it can restart.
There are many uncertainties regarding COVID-19, including governmental and public health responses and the unknown duration and extent of economic disruption. Due to the uncertainty surrounding
 
52

TABLE OF CONTENTS
 
COVID-19, Obalon does not currently plan to re-open its retail treatment centers, re-initiate its retail treatment center expansion plans, restart manufacturing operations or to ship orders to U.S. customers or its former international distributor. Despite Obalon’s efforts to manage and remedy these impacts on it, their ultimate impact also depends on factors beyond Obalon’s knowledge or control, including the duration and severity of the COVID-19 outbreak as well as third-party actions taken to contain its spread and mitigate its public health effects. However, based on the current state of the pandemic in the United States and abroad, the disease has already disrupted Obalon’s operations and had a material adverse effect on its business, results of operations, financial condition, cash flows and stock price, as well heightened many of the risks described elsewhere in the “Risk Factors” section of this joint proxy statement/prospectus.
If Obalon is unable to complete the Merger with ReShape and in the alternative unable to secure additional financing on favorable terms, or at all, Obalon could be forced to liquidate all or some of its assets or seek bankruptcy protection to protect stakeholder value.
Given the changes during fiscal year 2020 to drastically reduce Obalon’s organizational structure and eliminate its commercial operations, Obalon anticipates that its cash and cash equivalents as of December 31, 2020 are sufficient to fund its operations beyond March 2022. If Obalon is not able to raise capital to meet its needs, Obalon will not be able to support any ongoing operations and may not be able to settle all of Obalon’s liabilities. Obalon has actively reviewed financial and strategic alternatives, including debt and equity financing, whole or partial sale of the company and a reverse merger in order to meet Obalon’s capital needs and financial obligations, and increase stockholder value. If the Merger with ReShape is not completed, Obalon may not be able to identify a viable alternative for capital raising and adequate funding to operate its business as a standalone company may not be available to Obalon on acceptable terms, or at all.
In February 2020, Obalon implemented a new purchase agreement with Lincoln Park Capital Fund, LLC, or Lincoln Park. Pursuant to the new purchase agreement with Lincoln Park, or the Lincoln Park Purchase Agreement, Lincoln Park has committed to purchase up to $15.0 million of Obalon’s common stock from time to time over a 36-month period. The number of shares Obalon may sell to Lincoln Park on any single business day in a Regular Purchase is 150,000, but that amount may be increased to up to 250,000 shares of Obalon’s common stock, depending on the market price of Obalon’s common stock at the time of sale and subject to a maximum limit of $1,000,000 per Regular Purchase. Depending on the prevailing market price of Obalon’s common stock, Obalon may not be able to sell shares to Lincoln Park for the maximum $15.0 million over the term of the Lincoln Park Purchase Agreement. In addition, under the rules of the Nasdaq Capital Market, in no event may Obalon issue more than 19.99% of Obalon’s shares outstanding under the Lincoln Park Purchase Agreement unless Obalon obtains stockholder approval or an exception pursuant to the rules of the Nasdaq Capital Market is obtained to issue more than 19.99%. This limitation will not apply in certain limited circumstances as set out in the Lincoln Park Purchase Agreement. Obalon has not sold any shares to Lincoln Park in fiscal year 2020 under the current Purchase Agreement. Obalon is not required or permitted to issue any shares of common stock under the Purchase Agreement if such issuance would breach its obligations under the rules or regulations of the Nasdaq Capital Market. In addition, Lincoln Park will not be required to purchase any shares of Obalon’s common stock if such sale would result in Lincoln Park’s beneficial ownership exceeding 9.99% of the then outstanding shares of Obalon’s common stock. Given the limitations under this arrangement, Obalon does not believe it is adequate to provide sufficient funds for it to continue as a standalone company.
Even if Obalon is able to raise additional capital through the sale of equity or convertible debt securities, the ownership interest of Obalon’s stockholders is likely to be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect existing stockholders’ rights. Moreover, debt and equity financings, if available, may involve agreements that include covenants limiting or restricting Obalon’s ability to take specific actions, such as redeeming its shares, making investments, incurring additional debt, making capital expenditures, declaring dividends or placing limitations on Obalon’s ability to acquire, sell or license intellectual property rights and other operating restrictions that could negatively impact Obalon’s ability to conduct its business.
If Obalon does not complete the Merger with ReShape and is unable to obtain sufficient funds on acceptable terms or in a timely manner Obalon will be forced to take additional actions, including attempting to sell all or portions of Obalon’s business, liquidating all or some of its assets or seeking bankruptcy protection.
 
53

TABLE OF CONTENTS
 
Obalon has suspended its efforts to seek third-party reimbursement and are focused primarily on the successful close of the Merger with ReShape. If the Merger does not close and Obalon is able to continue to operate as a standalone Company, Obalon’s strategy to attain coverage and reimbursement by third-party payors may not be successful and will subject it to new risks, some of which Obalon may not yet have identified.
During fiscal year 2020, Obalon transitioned its business to develop a strategy to obtain coverage and reimbursement from third-party payors, which it believes could address one of the largest barriers to patient and physician adoption of the Obalon Balloon System. Historically, Obalon utilized both a direct to physician model and a Company-managed Obalon-branded retail treatment center strategy. Both of these commercial strategies utilized a patient cash-pay model, with varying degrees of success. Since entering into the Merger Agreement with ReShape, Obalon has suspended its efforts to obtain coverage and reimbursement from third-party payors. The Merger is subject to a number of closing conditions and, if one of more of those conditions are not satisfied or waived, the Merger may not close and Obalon would have to continue as a standalone company. As a standalone Company, Obalon may not be able to restart commercial operations, renew its efforts to seek third-party reimbursement or determine and launch a different commercial strategy. Further, if Obalon renews these efforts in the future, Obalon cannot assure you that this new strategy will be successful nor which delivery model to the patient will be utilized in the future should it be able to obtain coverage and reimbursement from third-party payors.
Payors may refuse to provide coverage and reimbursement or change their coverage and reimbursement policies for intragastric balloon products as a category and/or for other obesity treatments and procedures, and these changes could negatively impact Obalon’s business. No uniform policy of coverage and reimbursement for products exists among third-party payors and coverage and reimbursement levels for products can differ significantly from payor to payor. As a result, the coverage determination process is often a time consuming and costly process that may require Obalon to provide scientific and clinical support for the use of Obalon’s products to each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance.
Completion of clinical trials necessary to support coverage and reimbursement could take several years or more. Obalon cannot provide any assurance that Obalon will successfully, or in a timely manner, enroll clinical trials, that Obalon’s clinical trials will meet their primary endpoints or that such trials or their results will be accepted by third-party payors as sufficient to support coverage and reimbursement. Successful results of predecessor clinical trial results may not be replicated in subsequent clinical trials. Additionally, one or more third-party payors may disagree with Obalon’s analyses and interpretation of the data from any clinical trial Obalon undertakes, or may find the clinical trial design, conduct, monitoring, or results unreliable or inadequate to support coverage and reimbursement. If Obalon is unable to develop the clinical support needed to establish coverage and reimbursement, it may be unable to sell its products.
To contain costs of new technologies, governmental healthcare programs and third-party payors are increasingly scrutinizing new and existing treatments by requiring extensive evidence of favorable clinical outcomes. Even if Obalon is successful in obtaining coverage from third-party payors for the Obalon Balloon System or procedures using the product, physicians may not purchase the Obalon Balloon System if they do not receive sufficient reimbursement from these payors for the cost of the product or procedures using Obalon’s product. If government and other third-party payors do not provide coverage or adequate reimbursement levels for the Obalon Balloon System or procedures using the product, the demand for the Obalon Balloon System will not increase and/or create additional pricing pressure for us, either of which could adversely impact Obalon’s business and financial condition.
If Obalon is unable to reestablish commercial operations, including sales, marketing, manufacturing and distribution capabilities, whether after the completion of the Merger with ReShape, on its own or in collaboration with third parties, Obalon may not be successful in commercializing Obalon’s products.
Obalon terminated all of its commercial personnel and no longer have a functioning infrastructure for the sales, marketing, or distribution of any product, and the cost of reestablishing and maintaining such an organization may exceed the cost-effectiveness of doing so. In order to market Obalon’s product, Obalon must build its sales, distribution, marketing, managerial and other nontechnical capabilities or make arrangements with third parties to perform these services.
 
54

TABLE OF CONTENTS
 
If the Merger with ReShape, is consummated, and the Combined Company reestablishes commercial operations for the Obalon Balloon System, it will not be able to rely on the experience of Obalon’s current board of directors or management since all of the members of its board of directors and management will resign in connection with closing of the Merger.
There are significant expenses and risks involved with establishing Obalon’s own sales, marketing and distribution capabilities, including its ability to hire, retain and appropriately incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel, and effectively manage geographically dispersed sales and marketing teams.
Factors that may inhibit Obalon’s efforts to commercialize its products on its own include:

Obalon’s inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;

Obalon’s inability to regain customer confidence or recover market share that may have been ceded to competitors or other intragastric balloon technology;

the inability of sales personnel to obtain access to physicians or attain adequate numbers of physicians to prescribe any drugs;

the inability to negotiate with payors regarding reimbursement for Obalon’s products; and

unforeseen costs and expenses associated with creating an independent sales and marketing organization.
If Obalon chooses to enter into and maintain collaborative relationships for such sales, marketing and distribution capabilities, Obalon would be highly dependent upon the collaborator’s strategic interest in its products, and that collaborator’s ability to successfully market and sell the product. To the extent that Obalon depends on third parties for marketing and distribution, any revenue Obalon receives will depend upon the efforts of such third parties, and there can be no assurance that such efforts will be successful.
If Obalon is unable to establish adequate sales, marketing, and distribution capabilities, either on its own or in collaboration with third parties, Obalon will not be successful in commercializing its products and may not become profitable. Obalon may be competing with many companies that have extensive and well-funded marketing and sales operations. Without an internal team or the support of a third party to perform marketing and sales functions, Obalon may be unable to compete successfully against these companies.
Obalon has received funding under the Coronavirus Aid, Relief and Economic Security (CARES) Act
On April 22, 2020, Obalon executed a promissory note in favor of Silicon Valley Bank evidencing an unsecured loan in the aggregate principal amount of $430,047, which was made pursuant to the Paycheck Protection Program, or the PPP. The PPP was established under the CARES Act, which was enacted on March 27, 2020, and is administered by the U.S. Small Business Administration, or the SBA. All the funds under the loan were disbursed to Obalon on April 23, 2020. The Company has used all proceeds from the loan to retain employees, maintain payroll and make lease and utility payments.
The promissory note provides for a fixed interest rate of one percent per year with a maturity date of April 22, 2022. Monthly principal and interest payments due on the loan are deferred for a six-month period beginning from the date of disbursement. The loan may be prepaid by the Company at any time prior to April 22, 2022 with no prepayment penalties or premiums.
Under the terms of the CARES Act, loan recipients can apply for and be granted forgiveness for all or a portion of the loans granted under the PPP. Such forgiveness will be subject to approval by the SBA and the lender and determined, subject to limitations, based on factors set forth in the CARES Act, including verification of the use of loan proceeds for payment of payroll costs and payments of mortgage interest, rent and utilities. In the event the loan, or any portion thereof, is forgiven, the amount forgiven is applied to outstanding principal. The terms of any forgiveness may also be subject to further regulations and guidelines that the SBA may adopt. If the loan is not forgiven, Obalon will be required to repay the outstanding principal, along with accrued interest. Obalon will carefully monitor all qualifying expenses and
 
55

TABLE OF CONTENTS
 
other requirements necessary to attain loan forgiveness; however, no assurance is provided that Obalon will ultimately apply for or obtain forgiveness of the PPP loan in whole or in part.
The PPP loan application required Obalon to certify, among other things, that the current economic uncertainty made the PPP loan request necessary to support Obalon’s ongoing operations. On April 23, 2020, the SBA, in consultation with the Department of Treasury, issued new guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. Obalon made the certification in good faith after analyzing its financial situation and access to capital and believe that Obalon has satisfied all eligibility criteria for the PPP loan, but the SBA guidance and criteria is subject to interpretation and if Obalon is found to be ineligible, Obalon could be subject to significant penalties and required to repay the loan. If Obalon becomes subject to penalties or are not able to attain loan forgiveness, it could result in harm to Obalon’s business, results of operation and financial condition. If, prior to the consummation of the Merger, Obalon does not obtain a waiver from Silicon Valley Bank, the full amount of principal and interest outstanding under the PPP loan could become due and payable upon the consummation of the Merger.
Obalon has limited operating experience and a history of net losses, and Obalon recently discontinued all of Obalon’s commercial operations.
Obalon has a limited operating history upon which you can evaluate Obalon’s business and Obalon recently discontinued all of its commercial operations while it explores its ability to secure coverage and reimbursement for its products and other strategic alternatives. Prior to discontinuing its commercial operations, Obalon had marketed its products only since January 2017 and its commercial sales experience has been limited. Obalon has incurred significant losses in each period since its inception in 2008, with net losses of $12.3 million and $23.7 million during the fiscal year ended December 31, 2020 and 2019, respectively. As of December 31, 2020, Obalon had an accumulated deficit of approximately $184.8 million and had cash and cash equivalents of $3.9 million. These losses and its accumulated deficit reflect the substantial investments Obalon has made to develop, seek and obtain regulatory approval for its current and future generation Obalon Balloon System and sell its Obalon Balloon System in international and U.S. markets, and commercialize its Obalon Balloon System in the United States. Obalon’s consolidated financial statements as of and for the fiscal year ended December 31, 2020 have been prepared on the basis that Obalon will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Pending the result of the Merger, if Obalon is not able to raise additional capital in a timely manner, it will not be able to support or restart its commercial operations.
Obalon’s costs and expenses may increase significantly if Obalon determines to pursue additional clinical trials that may be needed to secure reimbursement. If Obalon secures reimbursement and returns to commercial operations, Obalon would expect its costs and expenses to increase substantially as it rebuilds its sales and marketing and manufacturing capabilities. As a public company, Obalon will continue to incur significant insurance, legal, accounting, compliance and other expenses, and Obalon expects its losses to continue for the foreseeable future. Unless and until Obalon returns to commercial operations, Obalon does not expect to generate any revenue. Obalon cannot assure you when, if ever, it will generate revenue and, if it does, whether it will ever achieve profitability.
Obalon’s business is entirely dependent on sales of the Obalon Balloon System, which Obalon is currently not manufacturing, marketing or selling.
All of Obalon’s revenue to date was attributable to sales of its Obalon Balloon System including its component parts and accessories. In 2020, largely due to the COVID-19 crisis, Obalon discontinued all of its commercial operations while it explores its ability to secure coverage and reimbursement for its products and other strategic alternatives. Even if Obalon is able to secure reimbursement for the Obalon Balloon System and restart commercial operations, there are a number of factors that may contribute to Obalon’s financial results, including:

patient interest in and demand for its Obalon Balloon System;

Obalon’s ability to obtain adequate coverage and reimbursement for the Obalon Balloon System;
 
56

TABLE OF CONTENTS
 

positive or negative media coverage, or public, patient and/or physician perception, of its Obalon Balloon System, the procedures or products of Obalon’s competitors, or its industry;

any safety or efficacy concerns that arise through physician and patient experience with its Obalon Balloon System;

any safety or efficacy concerns for the category of intragastric balloons, including liquid-filled balloons, as the FDA has issued four Letters to Health Care Providers warning them about the use of liquid-filled intragastric balloons citing potential risks, including death;

Obalon’s ability to service and maintain equipment such as the Obalon Navigation System;

delays in, or failure of, product and component deliveries by Obalon’s third-party suppliers and single-source suppliers;

willingness of physicians to purchase the capital equipment required to place balloons using the Obalon Navigation System;

difficulties in producing a sufficient quantity of Obalon’s product to meet commercial demand due to shortages of component parts or due to issues in the manufacturing process;

introduction of new procedures or products for treating patients who are obese or overweight that compete with its product;

adverse changes in the economy that reduce patient demand for elective procedures; and

favorable or unfavorable positions developed on intragastric balloons, or the Obalon Balloon System by professional medical associations, such as the American Society for Metabolic and Bariatric Surgery (ASMBS), the American Society for Gastrointestinal Endoscopy (ASGE), or other organizations with influence on physicians.
It is therefore difficult to predict Obalon’s future financial performance and growth, and such forecasts are inherently limited and subject to a number of uncertainties. If Obalon’s assumptions regarding the risks and uncertainties Obalon faces, which Obalon uses to plan its business, are incorrect or change due to circumstances in its business or its markets, or if Obalon does not address these risks successfully, Obalon’s operating and financial results could differ materially from its expectations and its business could suffer.
Because Obalon devotes substantially all of Obalon’s resources to its Obalon Balloon System and relies on its Obalon Balloon System as its sole source of revenue, any factors that negatively impact Obalon’s product, or result in decreasing product sales, would materially and adversely affect its business, financial condition and results of operations.
Obalon has historically maintained a high level of inventory, which could consume a significant amount of its resources, reduce its cash flows and lead to inventory impairment charges especially if Obalon restarts commercial operations and manufacturing in the future.
Obalon is a vertically integrated manufacturer and insufficient demand for its products subjects Obalon to risks. As a result of the need to maintain substantial levels of inventory due to single third-party sourcing and long lead-times to develop alternate third-party sources, Obalon historically carried a high level of inventory for strategic materials. Due to the suspension of its business operations, Obalon has ceased shipping product to U.S. and international customers, closed its Obalon-branded retail treatment centers and halted expansion of its retail treatment center model. Obalon performed an impairment analysis and recognized $1.3 million in asset impairment charges during the second quarter of 2020.
Physicians have been slow to adopt and use intragastric balloons, and adverse events or other negative developments involving other companies’ intragastric balloons or other obesity treatments may further slow patient adoption, which have negatively impacted Obalon’s financial performance and strategic options and this could continue into the future.
Intragastric balloons represent a relatively new category of treatment for obese and overweight patients that is small, immature and not currently covered or reimbursed by third-party payors. Obalon is currently
 
57

TABLE OF CONTENTS
 
aware of only one other intragastric balloon available for commercial sale in the United States, which was first commercially available in 2015. As a result, patient and physician awareness of intragastric balloons as a treatment option for obesity and weight management, and experience with intragastric balloons, is minimal. Prior to discontinuing Obalon’s commercial operations, Obalon experienced limited penetration of this market, and any future success will depend in large part on its ability to obtain coverage and reimbursement, to further develop the currently small and immature intragastric balloon market, educate physicians and patients, and to successfully demonstrate the safety, tolerability, ease of use, efficacy, cost effectiveness and other merits of its Obalon Balloon System.
Additionally, because the market for intragastric balloons is new and developing and contains a limited number of market participants, Obalon’s products could be negatively impacted by unfavorable market reactions to these other devices. If the use of these or future intragastric balloons results in serious adverse device events, or SADEs, or such products are subject to malfunctions or misuse, patients may attribute such negative events to intragastric balloons generally, which may adversely affect market adoption of its Obalon Balloon System. Since February 2017, the FDA has issued four separate letters to health care providers warning of serious adverse events, including deaths, which are specific to liquid-filled intragastric balloons. Obalon is aware of the filing of additional reports of serious adverse events, including deaths, associated with liquid-filled balloons since the issuance of the FDA safety alert letters. While the alerts were specific to liquid-filled intragastric balloons, not gas-filled intragastric balloons, these alerts could create negative perceptions of the entire category and slow down the acceptance of the Obalon Balloon System. Medical professional associations, such as ASMBS, have or may publish positions to their memberships which may be favorable or unfavorable toward the use of intragastric balloons, or the Obalon Balloon specifically. Additionally, if patients undergoing treatment with its Obalon Balloon System perceive the weight loss inadequate or adverse events too numerous or severe as compared with the treatment rates of alternative balloons or procedures, it will be difficult to demonstrate the value of its Obalon Balloon System to patients and physicians. As a result, demand for its Obalon Balloon System may decline or may not increase at the pace or to the levels Obalon expects.
The efficacy of its Obalon Balloon System depends on patient compliance with a moderate intensity diet and behavior modification program. If patients are unwilling to make dietary and behavioral changes, patient outcomes may suffer, which could negatively impact perception of Obalon’s product in the marketplace both in the past and in the future.
Its Obalon Balloon System is approved as an adjunct to a moderate intensity diet and behavior modification program. As a result, in addition to undergoing the Obalon balloon procedure, patients will also need to modify their existing diet and level of physical activity in order to achieve their desired weight loss. If patients are unwilling to implement the appropriate dietary and behavioral changes, the amount of weight loss may be less than desired, leading to a negative perception of Obalon’s product in the marketplace.
If patients are unable to successfully swallow the capsule or Obalon’s balloon cannot otherwise be successfully deployed, patients may seek a refund or monetary damages in connection with the treatment.
Patients may be unable to successfully swallow the capsule that contains the Obalon balloon, potentially creating an economic disincentive for physicians to prescribe the Obalon Balloon System. In Obalon’s SMART pivotal trial, 7.6% of the combined treatment and control group patients failed to swallow a capsule with the microcatheter attached despite success swallowing a placebo that did not have a catheter attached. Obalon is experiencing similar rates in U.S. commercial usage. There have also been instances where balloon deployment was negatively impacted due to a leak in the microcatheter caused by the patient biting the catheter during placement and requiring endoscopic removal. There may be other reasons for unsuccessful placements of which Obalon is not yet aware. If the balloon is not successfully placed for any reason, the patient may attempt to seek a refund or monetary damages for the treatment. Either scenario could cause a negative financial impact for Obalon and could also create ill will with patients and physicians.
Additionally, patients may seek a refund or monetary damages from Obalon due to Company-branded treatment center closures, inability to complete treatment, persistent side-effects resulting in early removal, and general discontent with outcomes.
 
58

TABLE OF CONTENTS
 
Patients may experience serious injury related to the device or procedures as the result of the misuse or malfunction of, or design flaws in, Obalon’s products, that could expose Obalon to expensive litigation, divert management’s attention and harm its reputation and business.
Obalon’s business is subject to significant risks associated with manufacture, distribution and use of medical devices that are placed inside the human body, including the risk that patients may be severely injured by or even die from the misuse or malfunction of Obalon’s products caused by design flaws or manufacturing defects. In addition, Obalon’s business may suffer adverse consequences even in circumstances where a patient injury is caused by the actions of others, such as where a patient is injured due to the improper or negligent use of Obalon’s products by a physician.
For instance, if the Obalon capsule does not reach a patient’s stomach and there is a hardware or software malfunction such that it is inflated in the esophagus, the patient could experience a serious injury. A patient who experiences an esophageal inflation of the balloon would most likely require surgical intervention, and could die as a result of an esophageal inflation or as a result of complications from the subsequent intervention. Physicians may use the Obalon Navigation System to track the location of the balloon prior to inflation. Failure of the sensor to function or the Obalon Navigation System to dynamically track the capsule could result in serious injury if the Obalon balloon is inflated in another portion of the body, such as the esophagus. Perforation of the esophagus at any time, including during removal, is also possible. Esophageal perforation leading to sepsis and death associated with the sepsis has been reported with use of Obalon’s product. Serious injury could also occur if one or more of the balloons deflates and migrates into the lower intestine causing an obstruction. This can also lead to surgical removal of the device and associated complications including death. Failure of the Obalon Touch Inflation Dispenser to function could result in need for immediate endoscopic removal or patient injury. Balloon deflation and migration into the lower intestine requiring surgical removal has also been reported with use of Obalon’s product. Perforation of the stomach is also possible and can lead to surgical removal of the device and associated complications including death. Perforation of the stomach requiring surgical repair has also been reported with use of Obalon’s product. One or more balloons may get lodged in the pyloric channel which could lead to severe dehydration and be life threatening and/or require surgical procedures to remove. Failure to transit has been reported with use of Obalon’s product and unscheduled endoscopy has been performed to remove the uninflated balloon. Aspiration during placement or removal is also a risk with intragastric balloons which could lead to pneumonia or other serious injury. Acute pancreatitis has been reported that may or may not be associated with the use of Obalon’s product. While Obalon has designed its products, and established instructions and protocols for physicians, to attempt to mitigate such risks, it cannot guarantee that adverse events will not occur again in the future. For example, physicians and/or patients have in the past failed, and may again in the future fail, to follow Obalon’s instructions and protocols, and the safety systems Obalon designs into its products may not prevent all possible adverse events and injuries and/or Obalon’s products may fail to function properly.
Obalon’s quality assurance testing programs may not be adequate to detect all defects, which may result in patient adverse events, interfere with customer satisfaction, reduce sales opportunities, harm Obalon’s marketplace reputation, increase warranty repairs and/or harm Obalon’s revenue and results of operations. Obalon’s inability to remedy a product defect could result in a product recall, temporary or permanent withdrawal of a product from a market, product liability suits, damage to its reputation or its brand, inventory replacement costs or product reengineering expenses, any of which could have a material impact on Obalon’s business, results of operations and financial condition.
In the past Obalon has employed, and in the future Obalon may employ social media and call center activities as part of its marketing strategy, which could give rise to regulatory violations, liability, breaches of data security or reputational damage.
Despite Obalon’s efforts to monitor evolving social media communication guidelines and comply with applicable laws and regulations, there is risk that the use of social media by us, Obalon’s employees or its customers to communicate about its products or business may cause Obalon to be found in violation of applicable requirements, including requirements of regulatory bodies such as the FDA, CMS and Federal Trade Commission. For example, adverse events, product complaints, off-label usage by physicians, unapproved marketing or other unintended messages could require an active response from us, which may
 
59

TABLE OF CONTENTS
 
not be completed in a timely manner and could result in regulatory action by a governing body. In addition, Obalon’s employees may knowingly or inadvertently make use of social media in ways that may not comply with its social media policy or other legal or contractual requirements, which may give rise to liability, lead to the loss of trade secrets or other intellectual property, or result in public exposure of personal information of Obalon’s employees, clinical trial patients, customers and others. Furthermore, negative posts or comments about Obalon or its products in social media could seriously damage Obalon’s reputation, brand image and goodwill.
Obalon has limited experience manufacturing its Obalon Balloon System and Obalon Navigation System in commercial quantities and, if Obalon restarts manufacturing, Obalon may experience production delays or issues in its manufacturing organization and be unable to meet current or future demand.
Prior to 2017, the majority of Obalon’s product sales had been to a single international distributor in the Middle East. Obalon first sold its products to physicians and institutions in the United States in 2017, and Obalon anticipates the United States to be its primary market focus going forward. Obalon has limited experience in manufacturing the current Obalon Balloon System and all its related components in commercial quantities. Moreover, Obalon recently terminated its existing manufacturing capabilities, and if Obalon determines to restart commercial operations, Obalon will need to reestablish those capabilities, and likely improve them, in order to satisfy expected demand. Obalon may find that it is unable to successfully manufacture its products in sufficient quantities, on a timely basis and with the expected quality. Any failure to meet the quality, quantity and timeliness expectations of Obalon’s customers could negatively impact its results of operations.
Obalon has had and may in the future continue to encounter production delays or shortfalls caused by many factors, including the following:

the termination of Obalon’s manufacturing organization and related support functions and/or ability to successfully rehire the necessary talent and capabilities;

the timing and process needed to assimilate the changes necessary to enable Obalon’s production processes to accommodate anticipated demand;

shortages that Obalon may experience in any of the key components or sub-assemblies that it obtains from third-party suppliers, especially as Obalon has not placed any future orders from those supplies;

production delays or stoppages caused by receiving components or supplies which do not meet Obalon’s quality specifications;

delays that Obalon may experience in completing validation and verification testing for new controlled-environment rooms at its manufacturing facilities;

delays that Obalon may experience in seeking FDA review and approval of PMA supplements required for certain changes in manufacturing facilities, methods or quality control procedures;

Obalon’s limited experience in complying with the FDA’s Quality System Regulation, or the QSR, which sets forth good manufacturing practice requirements for medical devices and applies to the manufacture of the components of its Obalon Balloon System;

Obalon’s ability to attract, train, and retain qualified employees, who are in short supply, in order to increase its manufacturing output;

Obalon’s ability to design and validate processes to allow Obalon to manufacture future generations of the Obalon Balloon System that meets or exceeds its quality specifications in an efficient, cost-effective manner;

Obalon’s ability to produce commercial product that meets or exceeds its manufacturing specifications and release criteria;

production delays or stoppages caused by malfunction of production equipment and/or malfunction of the electrical, plumbing, ventilation, or cooling systems supporting Obalon’s manufacturing facility; and
 
60

TABLE OF CONTENTS
 

production stoppages and/or product scrap caused by positive tests for objectionable organisms on Obalon’s products.
Obalon depends on third-party suppliers, including single source suppliers, to manufacture some of its components and sub-assemblies, which could make Obalon vulnerable to supply shortages, interruptions in production and price fluctuations that could harm Obalon’s business. Obalon has not ordered from those suppliers in approximately one year and they may be unwilling or unable to reinitiate supply of key materials and components.
Historically, Obalon manufactured its Obalon Balloon System and some of its components and sub-assemblies at its Carlsbad facility, and Obalon relied on third-party suppliers for other components and sub-assemblies used in production. In some cases, these suppliers were single source suppliers. For example, Obalon relied on single suppliers for the extruded film, swallowable capsule, molded silicone valve used to manufacture its Obalon balloons and the hydrophilic coating for its catheters. Obalon also relied on additional single source suppliers for components of its Obalon Navigation balloons and console, including sensors. These components are critical to its current and future products and there are relatively few alternative sources of supply. Obalon does not carry a significant inventory of these components and obtaining additional components may require significant lead-time. Obalon has experienced and may continue to experience production challenges due to shortages of key components from suppliers.
Moreover, Obalon has not placed any future orders with its suppliers and they could refuse to fill future orders in the event Obalon restarts manufacturing, they may lose the capabilities to produce for Obalon or they may refuse to do business with Obalon at all in the future. Identifying and qualifying additional or replacement suppliers for any of the components or sub-assemblies used in Obalon’s products could involve significant time and cost and could delay Obalon’s ability to restart production and, going forward, could adversely affect its ability to fill product orders, service and maintain equipment with customers. For example, given that its Obalon Balloon System is a PMA approved product, any replacement supplier will have to be assessed by Obalon through audits and other verification and assessment tools and found capable of producing quality components that meet Obalon’s approved specifications, and Obalon may be required to notify or obtain approval from the FDA for a change in a supplier prior to Obalon’s ability to use the components it provides. If Obalon were unable to find a replacement supplier, it could result in significant delays as Obalon would be unable to produce additional product until such replacement supplier had been identified and qualified. If an existing or replacement supplier proposes to change any component specifications or quality requirements, the change may require FDA approval of a PMA supplement. If a supplier changes a component without notifying us, that change could result in an undetected change being incorporated into the finished product. Once detected and investigated, if the change is found to potentially affect the safety or effectiveness of the product, Obalon would have to take corrective and preventive action, including possibly recalling the product, which could be time-consuming and expensive, and could impair Obalon’s ability to meet the demand of its customers and harm its business and reputation.
In addition, Obalon’s reliance on third-party suppliers for current and future products subjects Obalon to a number of risks that could impact Obalon’s ability to manufacture its products, service and maintain equipment with customers and harm its business, including:

inability to obtain adequate supply in a timely manner or on commercially reasonable terms;

change in payment terms, requiring upfront payment;

concern regarding Obalon’s current financial position or delay in its payments to suppliers; especially Obalon’s key suppliers for the Obalon Navigation System console and balloon components, could negatively impact suppliers’ perception of the Company and result in delayed or canceled delivery of components;

difficulty identifying and qualifying alternative suppliers for components in a timely manner;

interruption of supply resulting from modifications to, or discontinuation of, a supplier’s operations;

damage to suppliers’ facilities could interrupt supply;

delays in product shipments resulting from uncorrected defects, reliability issues or a supplier’s failure to produce components that consistently meet Obalon’s quality specifications;
 
61

TABLE OF CONTENTS
 

price fluctuations due to a lack of long-term supply arrangements with Obalon’s suppliers for key components;

inability of suppliers to comply with applicable provisions of the QSR or other applicable laws or regulations enforced by the FDA and state regulatory authorities;

inability to ensure the quality of products manufactured by third parties;

production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications;

delays in delivery by Obalon’s suppliers due to changes in demand from Obalon or their other customers;

Obalon’s suppliers could attempt to manufacture products for Obalon’s competitors using Obalon’s intellectual property; and

decisions by suppliers to exit the medical device business or discontinue supplying us.
Although Obalon requires its third-party suppliers to supply Obalon with components that meet Obalon’s specifications and comply with applicable provisions of the QSR and other applicable legal and regulatory requirements in its agreements and contracts, and Obalon performs incoming inspection, testing or other acceptance activities to assure the components meet Obalon’s requirements, there is a risk that its suppliers will not always act consistent with Obalon’s best interests, and may not always supply components that meet Obalon’s requirements, or supply components in a timely manner. Any significant delay or interruption in the supply of components or sub-assemblies, or its inability to obtain substitute components, sub-assemblies or materials from alternate sources at acceptable prices in a timely manner, could impair Obalon’s ability to meet the demand of its customers and harm its business and financial results.
Historically, all of Obalon’s international revenue was derived from sales to a single distributor that accounted for a significant amount of its revenue.
Al Danah Medical Company W.L.L, or Al Danah, was the sole distributor of its Obalon Balloon System in the Middle East and Obalon’s sole international customer. International sales to Al Danah represented 15.1% and 48.4% of Obalon’s total revenue for the year ended December 31, 2020 and 2019, respectively. Bader Sultan & Bros. Co. W.L.L., or Bader, was previously the sole distributor of Obalon’s prior generation Obalon balloon system in the Middle East and Obalon’s sole international customer. The agreement with Bader was terminated in December 2019. In May 2020 Obalon terminated the agreement with Al Danah and will not ship them product in the future. The significant reduction in international revenue in 2020 has had a significant impact on Obalon’s financial performance. Currently, Obalon does not have regulatory approval for its Obalon Navigation System and Obalon Touch Inflation Dispenser in the Middle East. However, there are certain countries in the Middle East that allow importation of medical device products with United States FDA approval or clearance to meet local regulatory standards, including Qatar.
If Obalon were to restart commercial operations as a standalone company, Obalon would not intend to devote significant additional resources in the near-term to market its Obalon Balloon System internationally, which will limit its potential revenue from Obalon’s product.
Marketing its Obalon Balloon System outside of the United States would require substantial additional sales and marketing, regulatory and personnel expenses. As part of Obalon’s longer-term product development and regulatory strategy, Obalon may expand into other select international markets, but Obalon does not currently intend to devote significant additional resources to market its Obalon Balloon System internationally. Obalon’s decision to market its product primarily in the United States in the near-term will limit Obalon’s ability to reach all of its potential markets and will limit its potential sources of revenue. In addition, Obalon’s competitors will have an opportunity to further penetrate and achieve market share outside of the United States until such time, if ever, that Obalon devotes significant additional resources to market its product internationally. Obalon has not submitted to the Competent Authority for CE-marking of the Obalon Navigation System or Obalon Touch Inflation Dispenser. Furthermore, given recent changes to the CE-mark process, which requires additional filings, the CE Mark for the prior version of the Obalon balloon system was not renewed in May 2020.
 
62

TABLE OF CONTENTS
 
The medical device industry, and the market for weight loss and obesity in particular, is highly competitive. If Obalon’s competitors are able to develop and market products that are safer, more effective, easier to use or more readily adopted by patients and physicians, Obalon’s commercial opportunities will be reduced or eliminated.
The medical device industry generally, and the market for weight loss and obesity specifically, are highly competitive, subject to rapid change and significantly affected by new product introductions, results of clinical research, corporate combinations, actions by regulatory bodies, changes by public and private payers and other factors. Because of the market opportunity and the high growth potential of the non-surgical device market for weight loss and obesity, competitors and potential competitors have historically dedicated, and will continue to dedicate, significant resources to aggressively develop and commercialize their products.
In the United States, Obalon’s product competes with a variety of pharmaceuticals, surgical procedures and devices for the treatment of obese and overweight people. Large competitors in the surgical segment for weight loss and obesity include Ethicon Inc. (subsidiary of Johnson & Johnson), Medtronic plc (formerly Covidien Ltd.), Apollo EndoSurgery, Inc., and ReShape LifeSciences (which acquired the LAP-BAND from Apollo Endosurgery, Inc. and currently sells that device worldwide). Obalon is aware of only one FDA approved, commercially marketed liquid-filled balloon device for treating overweight people, the ORBERA Balloon by Apollo EndoSurgery. Outside of the United States, Allurion Technologies, Inc. has developed a swallowable, passable liquid-filled intragastric for which they are seeking U.S. regulatory approval. Spatz Medical has also developed a liquid-filled intragastric balloon that has been approved for sale in Latin America and Europe and is seeking regulatory approval in the U.S. Additionally, Obalon is aware of numerous companies around the world working to develop less invasive and less costly alternatives for the treatment of obesity, any of which, if approved, could compete with Obalon in the future.
At any time, these or other competitors may introduce new or alternative products that compete directly or indirectly with Obalon’s products and services. They may also develop and patent products and processes earlier than Obalon can or obtain regulatory clearance or approvals faster than us, which could impair Obalon’s ability to develop and commercialize similar products or services. If clinical outcomes of procedures performed with Obalon’s competitors’ products are, or are perceived to be, superior to treatments performed with its products, sales of its products could be negatively affected and its business, results of operations and financial condition could suffer.
Many of Obalon’s competitors have significantly greater financial and other resources than Obalon does, as well as:

well-established reputations and name recognition with key opinion leaders and physician networks;

an established base of long-time customers with strong brand loyalty;

products supported by long-term data;

longer operating histories;

significantly larger installed bases of equipment;

greater existing market share in the obesity and weight management market;

broader product offerings and established distribution channels;

greater ability to cross-sell products;

additional lines of products, and the ability to offer rebates or bundle products to offer higher discounts or incentives; and

more experience in conducting research and development, manufacturing, performing clinical trials and obtaining regulatory approvals or clearances.
Competition with these companies could result in significant price-cutting, reduced profit margins and loss of market share, any of which would harm Obalon’s business, financial condition and results of operations. In addition, competitors with greater financial resources than Obalon could acquire other
 
63

TABLE OF CONTENTS
 
companies to gain enhanced name recognition and market share, as well as new technologies or products that could effectively compete with Obalon’s existing and future products, which may cause its revenues to decline and harm its business.
Obalon has dramatically reduced its senior management team to only two full time employees and Obalon cannot assure you that Obalon has or would be able to recruit sufficient resources to manage its current operations or restart commercialization in the future.
Obalon’s success as a standalone company largely depends upon the services of its executive management team, which has been reduced to two: Andy Rasdal, Obalon’s President and CEO, and Nooshin Hussainy, Obalon’s Chief Financial Officer. Obalon’s former President and CEO, William Plovanic resigned on June 19, 2020. Mr. Plovanic continues to serve as a member of the Board of Directors. Mark Brister, its Chief Technology Officer, and Amy VandenBerg, its Chief Clinical, Regulatory and Quality Officer, resigned on July 3, 2020 but continue to provide limited services on a consulting basis. Bob MacDonald, Obalon’s Chief Retail Officer, resigned on March 13, 2020. Obalon cannot assure you that the remaining executives will be sufficient to implement its current business plan. Additionally, Obalon does not currently maintain key personnel life insurance policies on any of Obalon’s employees. Moreover, if Obalon is successful in securing reimbursement for its products, Obalon will need to attract and retain additional executive officers and numerous highly qualified personnel. Competition for executive officers and skilled personnel is intense. Obalon has, from time to time, experienced, and it expects to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. If Obalon is unable to attract and retain additional executive officers or other key employees it could impede the achievement of Obalon’s research, development and commercialization objectives and seriously harm its ability to successfully implement Obalon’s business strategy.
Many of the companies with which Obalon competes for experienced personnel have greater resources than Obalon has. If Obalon hires employees from competitors or other companies, their former employers may attempt to assert that these employees or Obalon has breached legal obligations, resulting in a diversion of Obalon’s time and resources and, potentially, damages. In addition, job candidates and existing employees, particularly in the San Diego area, are particularly focused on the value of the stock awards they receive in connection with their employment. As a result, the current market price of Obalon’s common stock, in particular as it relates to exercise prices of Obalon’s outstanding options, limits its ability to retain existing employees and makes it difficult to attract additional highly skilled employees. In addition, Obalon invests significant time and expense in training its employees, which increases their value to competitors who may seek to recruit them. If Obalon fails to attract new personnel or fail to retain and motivate its current personnel, its business and future growth prospects would be harmed.
From time to time, Obalon engages outside parties to perform services related to certain of Obalon’s clinical studies and trials, and any failure of those parties to fulfill their obligations could increase costs and cause delays.
From time to time, Obalon engages consultants to help design, monitor and analyze the results of certain of Obalon’s clinical studies and trials. The consultants Obalon engages interact with clinical investigators to enroll patients in its clinical trials. Obalon depends on these consultants and clinical investigators to help facilitate the clinical studies and trials and monitor and analyze data from these studies and trials under the investigational plan and protocol for the study or trial and to comply with applicable regulations and standards, commonly referred to as good clinical practices, or GCP, requirements for conducting, monitoring, recording and reporting the results of clinical trials, in order to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. Obalon relies on medical institutions, clinical investigators, contract laboratories and other third parties, such as CROs, to conduct GLP-compliant preclinical studies and GCP-compliant clinical trials on Obalon’s product properly and on time. While Obalon will have agreements governing their activities, Obalon controls only certain aspects of their activities and have limited influence over their actual performance. Obalon may face delays in its regulatory approval process if these parties do not perform their obligations in a timely, compliant or competent manner. If these third parties do not successfully carry out their duties or meet expected deadlines, or if the quality, completeness or accuracy of the data they obtain is compromised due to the failure to adhere to Obalon’s clinical trial protocols or for other reasons, its clinical studies or trials may be extended, delayed or terminated
 
64

TABLE OF CONTENTS
 
or may otherwise prove to be unsuccessful to support product approval of a commercially viable product, or at all, and Obalon may have to conduct additional studies, which would significantly increase Obalon’s costs, in order to obtain the regulatory clearances or approvals that Obalon needs to commercialize its products and delay commercialization.
Risks Related to Regulatory Matters
In the future, its Obalon Balloon System may be subject to product recalls that could harm Obalon’s reputation and business.
The FDA and similar governmental authorities in other countries have the authority to require the recall of commercialized products in the event of material regulatory deficiencies or defects in design or manufacture. A government-mandated or voluntary recall by Obalon could occur as a result of component failures, manufacturing errors, design or labeling defects with the Obalon Balloon System and the Obalon Navigation System or deficiencies of other products in the intragastric balloon category. Recalls of its Obalon Balloon System would divert managerial attention, be expensive, harm Obalon’s reputation with customers and harm its financial condition and results of operations.
Depending on the corrective action Obalon takes to redress a device product’s deficiencies or defects, the FDA may require us, or Obalon may decide to, obtain new approvals, clearances, or other marketing authorizations for the device before Obalon may market or distribute the corrected device. Seeking such authorizations may delay Obalon’s ability to replace the recalled devices in a timely manner. Moreover, if Obalon does not adequately address problems associated with its devices, Obalon may face additional regulatory enforcement action, including FDA warning letters, Form 483s, product seizure, injunctions, administrative penalties, or civil or criminal fines.
Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA. Obalon may initiate voluntary recalls or corrections for Obalon’s products in the future that it determines do not require notification of the FDA. If the FDA disagrees with Obalon’s determinations, they could require Obalon to report those actions as recalls and Obalon may be subject to enforcement action. A future recall announcement could harm Obalon’s reputation with customers, potentially lead to product liability claims against Obalon and negatively affect its stock price.
If patients using Obalon’s products experience adverse events or other undesirable side effects, regulatory authorities could withdraw or modify Obalon’s commercial approvals, which would adversely affect Obalon’s reputation and commercial prospects and/or result in other significant negative consequences.
Undesirable side effects caused by its Obalon Balloon System could cause Obalon, the FDA or other regulatory authorities to interrupt, delay or halt clinical trials, and could result in more restrictive labeling than originally required, cause the FDA or other regulatory authorities to subsequently withdraw or modify Obalon’s PMA or other commercial approvals, or result in the delay or denial of regulatory approval by other notified bodies. For example, in the 1980s and early 1990s, the FDA required additional post-market safety and efficacy data collection and analysis on an earlier version of an intragastric balloon after patients suffered severe side effects and complications with the device, which ultimately resulted in the withdrawal of the PMA approval.
Since February 2017, the FDA has issued four separate letters (known as Safety Alerts) to health care providers warning of serious adverse events, including deaths, which are specific to liquid-filled intragastric balloons. While the Safety Alerts were specific to liquid-filled intragastric balloons and not gas-filled intragastric balloons, these adverse events could result in the FDA taking action against the entire intragastric balloon category which may cause negative consequences for Obalon including requiring additional warnings, precautions and/or contraindications in the labeling than originally required, delaying or denying approval of Obalon’s future products, or possible review or withdrawal of its current approval.
If Obalon is unable to demonstrate that any adverse events are not related to its product, the FDA or other regulatory authorities could order Obalon to cease further development of, require more restrictive indications for use and/or additional warnings, precautions and/or contraindications in the labeling than originally required, or delay or deny approval of any of its future products. Even if Obalon is able to do so,
 
65

TABLE OF CONTENTS
 
such event could affect patient recruitment or the ability of enrolled patients to complete a clinical trial. Moreover, if Obalon elects, or is required, to not initiate, delay, suspend or terminate any future clinical trial of any of Obalon’s products, the commercial prospects of such product may be harmed and its ability to generate product revenues from Obalon’s product may be delayed or eliminated. Any of these occurrences may harm Obalon’s ability to develop other products, and may harm its business, financial condition and prospects significantly.
In addition, Obalon or others may later identify undesirable side effects caused by the product (or any other similar product), resulting in potentially significant consequences, including:

the FDA or European notified bodies may withdraw or limit their approval of the product;

the FDA or European notified bodies may require the addition of labeling statements, such as a contraindication;

Obalon may be required to change the way the product is distributed or administered, conduct additional clinical trials or change the labeling of the product;

Obalon may be required to correct or remove the products from the marketplace or decide to conduct a voluntary recall;

Obalon may decide to alert physicians through customer notifications;

the FDA may use publicity such as a press release to alert Obalon’s customers and the public of the issue;

physicians and patients may be dissatisfied, seek refunds and refuse to use Obalon’s products;

Obalon could be sued and held liable for injury caused to individuals using its product; and

Obalon’s reputation may suffer.
Any of these events could prevent Obalon from achieving or maintaining market acceptance of its Obalon Balloon System and could substantially increase the costs of commercializing Obalon’s product and significantly impact its ability to successfully commercialize Obalon’s product and generate product sales.
Even though Obalon has received FDA approval of Obalon’s PMA application to commercially market the Obalon balloon system in the United States, Obalon will continue to be subject to extensive FDA regulatory oversight.
Its Obalon Balloon System, Obalon Navigation System, and Obalon Touch Inflation Dispenser are medical devices that are subject to extensive regulation by the FDA in the United States and by regulatory agencies in other countries where Obalon does business. Obalon will be required to timely file various reports with the FDA, including reports required by the medical device reporting regulations, or MDRs, that require that Obalon reports to the regulatory authorities if Obalon’s devices 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. If these reports are not filed timely, regulators may impose sanctions and sales of Obalon’s products may suffer, and Obalon may be subject to product liability or regulatory enforcement actions, all of which could harm Obalon’s business.
Obalon relies on its U.S. physician customers and international distributors for timely reporting of any adverse events or product malfunctions that occur, which 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. Notification by Obalon’s U.S. physician customers and its international distributor on a timely basis or at all of such events could result in product liability or regulatory enforcement actions, both of which could harm its business.
In addition, as a condition of approving a PMA application, 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 a number of 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 safety and effectiveness
 
66

TABLE OF CONTENTS
 
data for the device. For example, as part of Obalon’s PMA approval, Obalon is required to conduct a post-approval study at up to 16 sites in the United States to evaluate the safety and efficacy of its Obalon Balloon System in approximately 200 subjects over a twelve-month period, consisting of six months of treatment with the Obalon Balloon System followed by six months of observation after balloon removal. Obalon began patient enrollment in the post approval study in the second quarter of 2018 and in April 2019 Obalon notified the FDA that Obalon had temporarily paused active new patient enrollment to conserve cash resources and ensure it could meet future financial obligations to physicians and patients. Obalon has subsequently notified the FDA in July 2019 that it restarted enrollment and as of March 31, 2020 Obalon enrolled approximately 200 patients, which it believes represents full enrollment, and Obalon would expect to complete follow-up on these patients in 2021. As part of Obalon’s PMA-S approval of the Obalon Navigation System, Obalon is required to conduct a post-approval study at up to 40 sites in the United States to evaluate the safety and efficacy of its Obalon Navigation System for approximately 4,000 balloon placements, as it relates to the safety and efficacy of acute balloon placement including deployment, but not long-term results such as weight loss. Obalon began enrollment of the Obalon Navigation System post-approval study in December 2019. In the first quarter of 2020, Obalon enrolled 32 patients with 81 balloon administrations in the Obalon Navigation System post-approval study. Obalon has notified the FDA that it has temporarily paused active new patient enrollment as a result of ceasing to ship new product to commercial customers and the closure of the Obalon-branded retail treatment centers. Obalon intends to keep this study paused until it secures a pathway to a product reimbursement trial where Obalon will evaluate how to collect the data required to support this study in conjunction with the data required of a third-party payor or other wise begin commercializing again. This study will have to be resumed in connection with the resumption of manufacturing and distributing the Obalon Balloon System. The product labeling for any product subject to a post-approval study must be updated and submitted in a PMA supplement as results, including any adverse event data, from the post-approval study data become available. Failure to conduct post-approval studies in compliance with applicable regulations or to timely complete required post-approval studies or comply with other post-approval requirements could result in withdrawal of approval of the PMA, which would materially harm Obalon’s business. Moreover, if post-approval studies of Obalon’s products reveal unanticipated adverse effects, increases in the incidence of anticipated adverse effects, or device failures, and Obalon is required to modify the approved labeling for its products to include such adverse findings, such labeling modifications could have a materially adverse effect on its ability to market and sell the affected products.
If Obalon initiates a correction or removal for one of its devices, issue a safety alert, or undertake a field action or recall to reduce a risk to health posed by the device, Obalon would be required to submit a publicly available Correction and Removal report to the FDA and in many cases, similar reports to other regulatory agencies. This report could be classified by the FDA as a device recall, which could lead to increased scrutiny by the FDA, other international regulatory agencies and Obalon’s customers regarding the quality and safety of its devices and to negative publicity, including FDA alerts, press releases, or administrative or judicial enforcement actions. Furthermore, the submission of these reports has been and could be used by competitors against Obalon in competitive situations and cause customers to delay purchase decisions or cancel orders and would harm Obalon’s reputation.
Since February 2017, the FDA has issued four separate letters to health care providers warning of serious adverse events, including deaths, which are specific to liquid-filled intragastric balloons. The letters were specific to liquid-filled intragastric balloons and not gas-filled intragastric balloons. However, these adverse events associated with liquid-filled intragastric balloons could result in the FDA taking action against the entire gastric balloon category, which may cause negative consequences for Obalon including requiring additional warnings, precautions and/or contraindications in the labeling than originally required, delaying or denying approval of Obalon’s future products, or possible review or withdrawal of its current approval.
The FDA and the Federal Trade Commission, or FTC, also regulate the advertising and promotion of Obalon’s products to ensure that the claims Obalon makes are consistent with its regulatory clearances and approvals, that there are adequate and reasonable data to substantiate the claims and that Obalon’s promotional labeling and advertising is neither false nor misleading in any respect. If the FDA or FTC determines that any of Obalon’s advertising or promotional claims are false, misleading, not substantiated
 
67

TABLE OF CONTENTS
 
or not permissible, Obalon may be subject to enforcement actions, including Warning Letters, and Obalon may be required to revise its promotional claims and make other corrections or restitutions.
Additionally, the medical device industry’s relationship with physicians is under increasing scrutiny by the Health and Human Services Office of Inspector General, or OIG, the Department of Justice, or DOJ, state attorneys general, and other foreign and domestic government agencies. Obalon’s failure to comply with laws, rules and regulations governing its relationships with physicians, or an investigation into Obalon’s compliance by the OIG, DOJ, state attorneys general and other government agencies, could significantly harm its business.
The FDA and state authorities have broad enforcement powers. Obalon’s failure to comply with applicable regulatory requirements could result in enforcement action by the FDA or state agencies, which may include any of the following sanctions:

adverse publicity, warning letters, untitled letters, Form 483s, fines, injunctions, consent decrees and civil penalties;

repair, replacement, refunds, recalls, termination of distribution, administrative detention or seizures of Obalon’s products;

operating restrictions, partial suspension or total shutdown of production;

customer notifications or repair, replacement or refunds;

refusing Obalon’s requests for 510(k) clearance or PMA approvals or foreign regulatory approvals of new products, new intended uses or modifications to existing products;

withdrawals of current 510(k) clearances or PMAs or foreign regulatory approvals, resulting in prohibitions on sales of Obalon’s products;

FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries; and

criminal prosecution.
Any of these sanctions could also result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on Obalon’s reputation, business, results of operations and financial condition.
In addition, the FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of Obalon’s product candidates. If Obalon is slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if it is not able to maintain regulatory compliance, Obalon may lose any marketing approval that it may have obtained and Obalon may not achieve or sustain profitability, which would adversely affect Obalon’s business, prospects, financial condition and results of operations.
Obalon also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States or abroad. For example, certain policies of the current administration may impact Obalon’s business and industry. The current administration has taken several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. It is difficult to predict how these executive actions, including the Executive Orders, will be implemented, and the extent to which they will affect the FDA’s ability to exercise its regulatory authority. If these executive actions impose constraints on FDA’s ability to engage in oversight and implementation activities in the normal course, Obalon’s business may be negatively impacted.
Material modifications to its Obalon Balloon System and Obalon Navigation System may require new premarket approvals and may require Obalon to recall or cease marketing its Obalon Balloon System until approvals are obtained.
Once a medical device is approved, a manufacturer must notify the FDA of any modifications to the device. Any modification to a device that has received FDA approval that affects its safety or effectiveness
 
68

TABLE OF CONTENTS
 
requires approval from the FDA pursuant to a PMA supplement. An applicant may make a change in a device approved through a PMA without submitting a PMA supplement if the change does not affect the safety and effectiveness of the device and the change is reported to FDA in a post-approval periodic report required as a condition of approval. Obalon may not be able to obtain additional premarket approvals for new products or obtain approval of PMA supplements for modifications to, or additional indications for, its Obalon Balloon System in a timely fashion, or at all. Delays in obtaining required future approvals would harm Obalon’s ability to introduce new or enhanced products in a timely manner, which in turn would harm Obalon’s future growth. If Obalon makes additional modifications in the future that Obalon believes do not or will not require additional approvals and the FDA disagrees and requires new approvals for the modifications, it may be required to recall and to stop selling or marketing its Obalon Balloon System as modified, which could harm its operating results and require Obalon to redesign its Obalon Balloon System and Obalon Navigation System. In these circumstances, Obalon may be subject to significant enforcement actions.
If Obalon or its suppliers fail to comply with the FDA and international quality system requirements, Obalon’s manufacturing operations could be delayed or shut down and sales of its Obalon Balloon System could suffer.
Obalon’s manufacturing processes and those of Obalon’s third-party suppliers are required to comply with the FDA’s QSR, which covers the procedures and documentation of the design, testing, production, control, quality assurance, inspection, complaint handling, record keeping, management review, labeling, packaging, sterilization, storage and shipping of its Obalon Balloon System. Obalon is also subject to similar state requirements and licenses. In addition, Obalon must engage in extensive record keeping and reporting and must make available its manufacturing facilities and records for periodic unannounced inspections by governmental agencies, including the FDA, state authorities and comparable agencies in other countries. If Obalon is found to not be in compliance at the conclusion of an FDA QSR inspection, its operations could be disrupted and its manufacturing interrupted. Failure to take adequate corrective action in response to an adverse QSR inspection could result in, among other things, issuance of a Warning Letter, a shut-down of Obalon’s manufacturing operations, significant fines, suspension of marketing clearances and approvals, seizures or recalls of Obalon’s device, operating restrictions and criminal prosecutions, any of which would cause Obalon’s business to suffer. Furthermore, Obalon’s key component suppliers may not currently be or may not continue to be in compliance with applicable regulatory requirements, which may result in manufacturing delays for its product and cause its revenues to decline.
Obalon has registered with the FDA as a medical device manufacturer and have obtained a manufacturing license from the California Department of Public Health, or CDPH. The FDA has broad post-market and regulatory enforcement powers. Obalon is subject to unannounced inspections by the FDA and the Food and Drug Branch of CDPH to determine Obalon’s compliance with the QSR and other regulations, and these inspections may include the manufacturing facilities of Obalon’s suppliers. Obalon’s current facility has been inspected by the FDA numerous times, the most recent of which occurred in November 2017, which resulted in no observations. Although Obalon believes its manufacturing facilities and those of its critical component suppliers are in compliance with the QSR requirements, Obalon can provide no assurance that Obalon will continue to remain in compliance with the QSR. If Obalon’s manufacturing facilities or those of any of its component suppliers are found to be in violation of applicable laws and regulations, or Obalon or its suppliers have significant noncompliance issues or fail to timely and adequately respond to any adverse inspectional observations or product safety issues, or if any corrective action plan that Obalon or its suppliers propose in response to observed deficiencies is not sufficient, the FDA could take enforcement action, including any of the following sanctions:

untitled letters, warning letters, and Form 483s;

fines, injunctions, consent decrees and civil penalties;

customer notifications or repair, replacement, refunds, recall, detention or seizure of Obalon’s products;

operating restrictions or partial suspension or total shutdown of production;
 
69

TABLE OF CONTENTS
 

refusing or delaying Obalon’s requests for clearance or approval of new products or modified products;

withdrawing clearances or approvals that have already been granted;

refusal to grant export approval for Obalon’s products; or

criminal prosecution.
Taking corrective action may be expensive, time consuming and a distraction for management and if Obalon experiences a shutdown or delay at Obalon’s manufacturing facility, Obalon may be unable to produce its Obalon Balloon System, which would materially harm its business.
Outside the United States, Obalon’s products and operations are also often required to comply with standards set by industrial standards bodies, such as the International Organization for Standardization. Foreign regulatory bodies may evaluate Obalon’s products or the testing that its products undergo against these standards. The specific standards, types of evaluation and scope of review differ among foreign regulatory bodies. If Obalon fails to adequately comply with any of these standards, a foreign regulatory body may take adverse actions similar to those within the power of the FDA. Any such action may harm Obalon’s reputation and could have an adverse effect on its business, results of operations and financial condition.
Obalon also has an ISO 13485:2003 Quality System Certificate through British Standards Institution, or BSI, that is required to support Obalon’s CE mark. Obalon has been audited at least annually and is subject to unannounced audits by BSI which could result in major nonconformances. Major nonconformances could result in the suspension or revocation of its ISO Certificate, which would disrupt distribution in the European Union and other countries that require certificated Quality Systems.
Obalon’s success depends on Obalon’s ability to obtain FDA approval or other regulatory approvals for its future products and product improvements.
The successful commercialization of the Obalon Balloon System is dependent on the successful development and commercialization of future devices intended to improve the safety, efficacy, ease-of-use or cost of the Obalon Balloon System. A product Obalon has under development includes a longer-term duration balloon, intended to remain in the stomach for up to twelve months.
Obalon cannot assure you that this or other devices or improvements Obalon develops will receive regulatory approval in the United States or in other regulatory jurisdictions outside the United States, including the Middle East or CE-Mark. A number of companies in the medical device field have suffered significant setbacks during evaluation due to lack of efficacy or unacceptable safety issues, notwithstanding promising preliminary results. Obalon’s failure to receive regulatory approval in jurisdictions outside the United States, in a timely manner or at all, could harm its financial results and ability to become profitable. Even if Obalon obtains regulatory approval for one or more of these new products, the terms of such regulatory approval may limit its ability to successfully market the approved product.
The FDA and other regulatory agencies actively enforce the laws and regulations governing the development, approval and commercialization of medical devices. If Obalon is found to have failed to comply with these laws and regulations, Obalon may become subject to significant liability.
The Obalon Balloon System is classified by the FDA as a Class III medical device. As a result, Obalon is subject to extensive government regulation in the United States by the FDA and state regulatory authorities. Obalon is also subject to foreign regulatory authorities in the countries in which Obalon currently and intends to conduct business. These regulations relate to, among other things, research and development, design, pre-clinical testing, clinical trials, manufacturing, packaging, storage, premarket approval, environmental controls, safety and efficacy, labeling, advertising, promotion, pricing, recordkeeping, reporting, import and export, post-approval studies and the sale and distribution of the Obalon Balloon System.
Further, the FDA and European regulatory authorities strictly regulate the indications for use and associated promotional safety and effectiveness claims, including comparative and superiority claims vis a
 
70

TABLE OF CONTENTS
 
vis competitors’ products, that may be made about products, such as the Obalon Balloon System. In particular, a medical device may not be promoted for uses or indications that are not approved by the FDA or other regulatory agencies as reflected in the product’s approved labeling. For example, Obalon will not be able to promote or make claims for the Obalon Balloon System for the treatment of patients outside of the BMI ranges specifically approved by the FDA or other regulatory authorities. In the United States, Obalon received FDA approval of the Obalon Balloon System for temporary use to facilitate weight loss in adults with obesity (BMI of 30 to 40) who have failed to lose weight through diet and exercise. The Obalon Balloon System is intended to be used as an adjunct to a moderate intensity diet and behavior modification program. All balloons must be removed six months after the first balloon is placed. Obalon’s pivotal trial inclusion and exclusion criteria included patients with a BMI of 30 to 40; thus, its approved labeling is limited to the same BMI range. Obalon also will not be able to make comparative or superiority claims for the Obalon Balloon System versus other products without scientific data supporting or establishing those claims, including possibly data from head-to-head clinical trials if appropriate. Obalon’s CE mark label includes patients with a BMI of 27 or greater. As a part of Obalon’s PMA approval, Obalon is required to conduct a post-approval study at up to 16 sites in the United States to evaluate the safety and efficacy of its Obalon Balloon System over a twelve-month period, consisting of six months of treatment with the Obalon Balloon System followed by six months of observation after balloon removal. Obalon began patient enrollment in the post-approval study in the second quarter of 2018 and in April 2019 Obalon notified the FDA that it had temporarily paused active new patient enrollment to conserve cash resources and ensure Obalon could meet future financial obligations to physicians and patients. Obalon has subsequently notified the FDA in July 2019 that it restarted enrollment and as of December 31, 2020 it has completed enrollment and would expect to complete follow up on these patients in 2021. Failure to conduct post-approval studies in compliance with applicable regulations or to timely complete required post-approval studies or comply with other post-approval requirements could result in withdrawal of approval of the PMA, which would materially harm Obalon’s business. As part of Obalon’s PMA-S approval of the Obalon Navigation System, Obalon is required to conduct a post-approval study of up to 40 sites in the United States to evaluate the safety and efficacy of its Obalon Navigation System as it relates to acute balloon placement including deployment. Obalon began enrollment of the Obalon Navigation System post approval study in December 2019. Obalon has notified the FDA that it has temporarily paused active new patient enrollment as a result of ceasing to ship new product to commercial customers and the closure of the Obalon-branded retail treatment centers. Obalon intends to keep this study paused until it secures a pathway to a product reimbursement trial where Obalon will evaluate how to collect the data required to support this study in conjunction with the data required of a third-party payor or otherwise begin commercializing again. This study will have to be resumed in connection with the resumption of manufacturing and distributing the Obalon Balloon System. The product labeling for any product subject to a post-approval study must be updated and submitted in a PMA supplement as results, including any adverse event data, from the post-approval study data become available. Failure to conduct the post-approval study in compliance with applicable regulations or to timely complete required post-approval studies, obtaining results different than Obalon’s pivotal trial results or failure to comply with other post-approval requirements could result in withdrawal of approval of the PMA, which would harm its business.
Physicians may choose to prescribe such products to their patients in a manner that is inconsistent with the approved label, as the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine. However, if the FDA determines that Obalon’s promotional materials or physician training, including its paid consultants’ educational materials, constitutes promotion of an off-label use, it could request that Obalon modifies its training or promotional materials or subject Obalon to enforcement action, including warning letters, untitled letters, fines, penalties, or seizures. If Obalon is found to have promoted such off-label uses, Obalon may become subject to significant liability. The federal government has levied large civil and criminal fines and/or other penalties against companies for alleged improper promotion and has investigated, prosecuted, and/or enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees of permanent injunctions under which specified promotional conduct is changed, curtailed or prohibited. If Obalon cannot successfully manage the promotion of and training for its Obalon Balloon System, Obalon could become subject to significant liability, which would materially adversely affect Obalon’s business and financial condition.
 
71

TABLE OF CONTENTS
 
Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire, retain or deploy key leadership and other personnel, or otherwise prevent new or modified products from being developed, cleared or approved or commercialized in a timely manner or at all, which could negatively impact Obalon’s business.
The ability of the FDA to review and clear or approve new products can be affected by a variety of factors, including government budget and funding levels, statutory, regulatory, and policy changes, the FDA’s ability to hire and retain key personnel and accept the payment of user fees, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at the FDA and other agencies may also slow the time necessary for new medical devices or modifications to cleared or approved medical devices to be reviewed and/or approved by necessary government agencies, which would adversely affect Obalon’s business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities.
Separately, in response to the global COVID-19 pandemic, on March 10, 2020 the FDA announced its intention to postpone most foreign inspections of manufacturing facilities, and regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process Obalon’s regulatory submissions, which could have a material adverse effect on its business.
If Obalon fails to obtain and maintain regulatory approval in foreign jurisdictions, its market opportunities will be limited.
In order to market Obalon’s products in the European Union, the Middle East or other foreign jurisdictions, Obalon must obtain and maintain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies from country to country and can involve additional testing. The time required to obtain approval abroad may be longer than the time required to obtain FDA clearance or approval. Foreign regulatory approval processes include many of the risks associated with obtaining FDA clearance or approval and Obalon may not obtain foreign regulatory approvals on a timely basis, if at all. FDA clearance or approval does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries. However, the failure to obtain clearance or approval in one jurisdiction may have a negative impact on Obalon’s ability to obtain clearance or approval elsewhere. If Obalon does not obtain or maintain necessary approvals to commercialize its products in markets outside the United States, it would negatively affect Obalon’s overall market penetration. Obalon currently does not have any approvals for the Obalon Navigation System and Obalon Touch Inflation Dispenser outside the U.S., including the Middle East and CE-Mark. Furthermore, given recent changes to the CE-mark process which requires additional filings, the CE Mark for the prior version of the Obalon Balloon System were not renewed in May 2020 and Obalon has not renewed its agreement with its notified body. However, there are certain countries in the Middle East that allow importation of medical device products with United States FDA approval or clearance to meet local regulatory standards, including Qatar.
If Obalon fails to comply with healthcare regulations and fraud and abuse laws, Obalon could face substantial penalties and its business, operations and financial condition could be adversely affected.
Although intragastric balloon products similar to its Obalon Balloon System are not currently reimbursed by U.S. federal healthcare programs (such as Medicare or Medicaid) or other third-party payors, any future reimbursement by third-party payors could expose Obalon’s business to broadly applicable fraud and abuse and other healthcare laws and regulations that would regulate the business, including laws that would regulate financial arrangements and relationships through which Obalon markets, sells and distributes the Obalon Balloon System. Additionally, as a device manufacturer, Obalon is still subject to
 
72

TABLE OF CONTENTS
 
certain healthcare fraud and abuse regulation, including those laws that apply to self-pay products, and enforcement by the federal government and the states in which it conducts its business.
Applicable and potentially applicable U.S. federal and state healthcare laws and regulations and their foreign equivalents, include, but are not limited to, the following:

Anti-Kickback Laws.   The federal healthcare program Anti-Kickback Statute, which prohibits, among other things, any person from knowingly and willfully offering, soliciting, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as Medicare and Medicaid, unless the arrangement fits within one of several statutory exceptions or regulatory “safe harbors.” Courts have interpreted the term “remuneration” broadly under the Anti-Kickback Statute to include anything of value, such as, for example, gifts, discounts, payments of cash and waivers of payments. Violations can result in significant penalties, imprisonment and exclusion from Medicare, Medicaid and other federal healthcare programs. Exclusion of a manufacturer would preclude any federal healthcare program from paying for the manufacturer’s products. A person does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it in order to have committed a violation. In addition, kickback arrangements can provide the basis for an action under the False Claims Act, which is discussed in more detail below.
Government officials have recently increased enforcement efforts with respect to sales and marketing activities of pharmaceutical, medical device, and other healthcare companies, and they have brought cases against individuals and entities that allegedly offered unlawful inducements to potential or existing customers in an attempt to procure business. Settlements of these government cases have involved significant fines and penalties and, in some instances, criminal pleas.
In addition to the federal Anti-Kickback Statute, many states have their own anti-kickback laws. Often, these laws closely follow the language of the federal law, although they do not always have the same exceptions or safe harbors. In some states, the restrictions imposed by anti-kickback laws are not limited to items and services paid for by government programs but, instead, apply with respect to all payors for healthcare items and services, including commercial health insurance companies.

False Claims Laws.   The federal False Claims Act prohibits any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a false statement to get a false claim paid. A manufacturer can be held liable under false claims laws, even if it does not submit claims to the government, if it is found to have caused submission of false claims. For example, these laws may apply to a manufacturer that provides information regarding coverage, coding or reimbursement of its products to persons who bill third-party payers. In addition, a violation of the federal Anti-Kickback Statute is deemed to be a violation of the federal False Claims Act.
The federal False Claims Act also includes whistleblower provisions that allow private citizens to bring suit against an entity or individual on behalf of the United States and to recover a portion of any monetary recovery. Many of the recent, highly publicized settlements in the healthcare industry relating to sales and marketing practices have related to cases brought under the federal False Claims Act.
The majority of states also have adopted statutes or regulations similar to the federal laws, which apply to items and services reimbursed under Medicaid and other state programs. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines and imprisonment.

Other Healthcare Fraud Laws.   HIPAA includes criminal health care fraud provisions and related rules that prohibit knowingly and willfully executing a scheme or artifice to defraud any healthcare benefit program or falsifying, concealing or covering up a material fact or making any material false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items, or services. Similar to the Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
 
73

TABLE OF CONTENTS
 

Transparency Laws.   There has been a recent trend of increased federal and state regulation of payments and transfers of value provided to healthcare professionals and entities. For example, the Physician Payment Sunshine Act, imposes annual reporting requirements on certain manufacturers of drugs, medical devices, biologics and medical supplies with respect to payments and other transfers of value provided by them, directly or indirectly, to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain other health care professionals beginning in 2022, and teaching hospitals, as well as with respect to certain ownership and investment interests held by physicians and their family members. A manufacturer’s failure to submit timely, accurately and completely the required information regarding all payments, transfers of value or ownership or investment interests may result in civil monetary penalties. Certain states also mandate implementation of commercial compliance programs, impose restrictions on medical device manufacturers’ marketing practices, require reporting of marketing and pricing information, and require the tracking and reporting of gifts, compensation and other remuneration to healthcare professionals and entities under certain circumstances.
Efforts to ensure that Obalon’s business arrangements will comply with applicable healthcare laws may involve substantial costs. In addition, the dynamic healthcare regulatory compliance environment and the need to build and maintain robust systems to comply with different reporting and other legal requirements in multiple jurisdictions, increase the possibility that a healthcare company may fail to comply fully with one or more of these laws or regulations. It is possible that governmental and enforcement authorities will conclude that Obalon’s business practices do not comply with current or future statutes, regulations, agency guidance or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. If any such actions are instituted against us, defending against any such actions can be costly, time-consuming and may require significant financial and personnel resources. If Obalon’s operations are found to be in violation of any of the healthcare regulatory laws to which the business is subject, or any other laws that apply to the business, Obalon may be subject to penalties, including potentially significant criminal and civil and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in government healthcare programs, additional compliance and reporting requirements, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings, and the curtailment or restructuring of Obalon’s operations, any of which could adversely affect its ability to operate its business and its results of operations.
In addition, the clearance or approval and commercialization of any of Obalon’s products outside the United States will also likely subject Obalon to foreign equivalents of the healthcare laws mentioned above, among other foreign laws.
If retail arrangements with physicians or customers are found to violate state laws prohibiting the corporate practice of medicine or fee splitting, Obalon’s business, financial condition and its ability to operate in those states could be adversely impacted.
The practice of medicine is highly regulated, and any future operation of retail treatment centers, arrangements with physicians and interactions with retail customers will be subject to federal, state or local laws, rules and regulations, any of which may change from time to time. Regulatory oversight includes, but is not limited to, the corporate practice of medicine, fee-splitting, regulation and registration of medical practices, clinics and facilities and management companies by state and local licensing boards or other agencies, licensure and scope of practice limitation for physicians and other healthcare professionals, advertising and consumer protection laws. Certain states have laws, rules and regulations which require that medical practices be owned by licensed physicians and that business entities which are not owned by licensed physicians refrain from providing, or holding themselves out as providers of, medical care. These laws generally prohibit the practice of medicine by lay entities or persons and are intended to prevent unlicensed persons or entities from interfering with or inappropriately influencing the physician’s professional judgment. The specific restrictions with respect to enforcement of the corporate practice of medicine and fee-splitting laws varies from state to state. Such laws may make it difficult for Obalon to establish or expand its operations into a state, as interpretive legal precedent and regulatory guidance varies by jurisdiction and is often sparse and not fully developed. A determination that Obalon is in violation of applicable restrictions on the practice of medicine or fee-splitting in any jurisdiction in which Obalon operates, could
 
74

TABLE OF CONTENTS
 
have a material adverse effect on us, particularly if Obalon is unable to restructure its operations and arrangements to comply with the requirements of that jurisdiction, if Obalon is required to restructure its operations and arrangements at a significant cost, or if Obalon is subject to penalties or other adverse action.
If Obalon or its affiliated physicians fail to comply with licensing and accreditation requirements applicable to its business, various governmental agencies may impose fines or preclude Obalon from operating in certain states.
Federal, state, and local laws and policies impose various registration, accreditation, permit and/or licensing requirements on healthcare facilities and subject healthcare facilities to regulations ranging from the adequacy of medical care, to compliance with building codes and environmental protection laws. Additionally, physicians at Obalon’s retail treatment centers, once operational, will also be subject to various state and federal regulations, including utilization of diagnostic tests and regarding prescribing medication and controlled substances. Delays or failures to obtain or maintain any required registrations, accreditations, permits and other licenses could adversely impact Obalon’s ability to establish and operate its retail treatment centers.
Moreover, each state defines the scope of practice of physicians and other healthcare professionals through legislation and through their respective boards of medicine and Obalon 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 Obalon’s personnel to sanctions, or may even result in loss of their license and could, possibly, subject Obalon 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. Obalon’s ability to operate profitably will depend, in part, upon Obalon’s ability and the ability of its affiliated physicians and retail treatment centers to obtain and maintain all necessary licenses and other approvals and operate in compliance with applicable healthcare and other laws and regulations that evolve rapidly.
Obalon is subject to data privacy and security laws and regulations governing its collection, use, disclosure, or storage of personally identifiable information, including personal health information, which may impose restrictions on Obalon and its operations and subject Obalon to penalties if it is unable to fully comply with such laws.
In order to provide Obalon’s services and solutions, Obalon routinely receives, processes, transmits and stores personally identifiable information, or PII, including personal health information, of individuals, as well as other financial, confidential and proprietary information belonging to its patients and third parties from which Obalon obtains information. The receipt, maintenance, protection, use, transmission, disclosure and disposal of this information is regulated at the federal and state levels and Obalon also has obligations with respect to this information pursuant to Obalon’s contractual requirements with customers. These laws, rules and requirements are subject to frequent change. Compliance with new privacy and security laws, regulations and requirements may result in increased operating costs and may constrain or require Obalon to alter Obalon’s business model or operations.
HIPAA requires certain entities, referred to as “covered entities” ​(including most healthcare providers and health plans), to comply with established standards, including standards regarding the privacy and security of PHI. HIPAA further requires that covered entities enter into agreements meeting certain regulatory requirements with their “business associates,” as such term is defined by HIPAA, which, among other things, obligate business associates to safeguard the covered entity’s PHI against improper use and disclosure. In addition, a business associate may face significant statutory and contractual liability if the business associate breaches the agreement or causes the covered entity to fail to comply with HIPAA. Obalon believes that its Company-owned or managed treatment centers were required to be HIPAA compliant; Obalon does not believe its corporate offices are required to be HIPAA compliant, but are nevertheless committed to maintaining the security and privacy of patients’ health information. Violation of HIPAA could result in the imposition of civil or criminal penalties.
Numerous other federal, state and foreign laws may apply that restrict the use and protect the privacy and security of PII, including health information. These include state medical privacy laws, state social
 
75

TABLE OF CONTENTS
 
security number protection laws, state breach notification laws, and federal and state consumer protection laws. These various laws in many cases are not preempted by HIPAA and may be subject to varying interpretations by the courts and government agencies. For instance, In Europe, the GDPR, went into effect in May 2018 and imposes stringent data protection requirements for controllers and processors of personal data of persons within the EU. The GDPR applies to any company established in the EU as well as to those outside the EU if they collect and use personal data in connection with the offering of goods or services to individuals in the EU or the monitoring of their behavior. 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. In addition, 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.
Noncompliance or findings of noncompliance with applicable laws, regulations or requirements, or the occurrence of any privacy or security breach involving the misappropriation, loss or other unauthorized disclosure of sensitive personal information, whether by Obalon or by one of its third party service providers, could have a material adverse effect on Obalon’s reputation and business, including, among other consequences, mandatory disclosure to the media, loss of existing or new patients, significant increases in the cost of managing and remediating privacy or security incidents and material fines, penalties and litigation awards, any of which could have a material adverse effect on Obalon’s business, results of operations, and financial condition.
Further, as regulatory focus on privacy issues continues to increase and laws and regulations concerning the protection of personal information expand and become more complex, these potential risks to Obalon’s business could intensify. Obalon expects that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, including the California Consumer Privacy Act, which went into effect January 1, 2020. The CCPA creates individual privacy rights for California consumers and increases the privacy and security obligations of entities handling certain personal data. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase Obalon’s compliance costs and potential liability, and many similar laws have been proposed at the federal level and in other states. Obalon cannot yet determine the impact such future laws, regulations and standards may have on its business. Changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, including health data, along with increased patient demands for enhanced data security infrastructure, could greatly increase Obalon’s cost of providing its services, decrease demand for its services, reduce its revenue and/or subject Obalon to additional liabilities.
Compliance with environmental laws and regulations could be expensive. Failure to comply with environmental laws and regulations could subject Obalon to significant liability.
When operational, Obalon’s research and development and manufacturing operations involve the use of hazardous substances and a greenhouse gas, and are subject to a variety of federal, state, local and foreign environmental laws and regulations relating to the storage, use, discharge, disposal, remediation of, and human exposure to, hazardous substances and the sale, labeling, collection, recycling, treatment and disposal of products containing hazardous substances as well as the control and reduction of greenhouse gas emissions. In addition, such operations produce biological waste materials, such as human and animal tissue, and waste solvents, such as isopropyl alcohol. These operations are permitted by regulatory authorities, and, when operational, Obalon disposed of the resultant waste materials in material compliance with environmental laws and regulations.
Liability under environmental laws and regulations can be joint and several and without regard to fault or negligence. Compliance with environmental laws and regulations may be expensive and non-compliance could result in substantial liabilities, fines and penalties, personal injury and third part property damage
 
76

TABLE OF CONTENTS
 
claims and substantial investigation and remediation costs. Environmental laws and regulations could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. Obalon cannot assure you that violations of these laws and regulations will not occur in the future or have not occurred in the past as a result of human error, accidents, equipment failure or other causes. The expense associated with environmental regulation and remediation could harm Obalon’s financial condition and results of operations.
Risks Related to Obalon’s Intellectual Property
If Obalon is unable to adequately protect its proprietary technology or maintain issued patents that are sufficient to protect its Obalon Balloon System or its other products, others could compete against Obalon more directly, which would have a material adverse impact on Obalon’s business, results of operations, financial condition and prospects.
Obalon’s commercial success will depend in part on Obalon’s ability to protect its proprietary rights to the technologies and inventions used in, or embodied by, its products. Obalon relies on a combination of patents, trademarks, trade secret laws and confidentiality and invention assignment agreements to protect its intellectual property rights. If Obalon does not adequately protect its intellectual property rights and proprietary technology, competitors may be able to use Obalon’s technologies and erode or negate any competitive advantage that Obalon may have, which could harm Obalon’s business and ability to achieve profitability.
As of December 31, 2020, Obalon held 29 issued U.S. patents and had 17 pending U.S. patent applications, as well as 22 international patents issued in regions including Europe, Mexico, Australia, Canada, Asia, and China and 59 pending international patent applications in regions including Australia, Canada, Europe, Asia, the Middle East and South America. Obalon’s issued patents expire between the years 2023 and 2038, and are directed to various features and combinations of features of the Obalon Balloon System technology, including the apparatus for connecting the balloon to an inflation catheter, the structure and composition of the balloon wall, and the composition of the initial fill gas.
As of December 31, 2020, Obalon held two registered U.S. trademarks and 34 registered marks in Europe, the Middle East, Asia and Mexico. Obalon has four pending U.S. trademark applications and no pending marks outside the United States.
Although an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability, and it may not provide Obalon with adequate proprietary protection or competitive advantages against competitors with similar products. Competitors may also be able to design around Obalon’s patents. Other parties may develop and obtain patent protection for more effective technologies, designs or methods.
The degree of future protection for Obalon’s proprietary rights is uncertain, and Obalon cannot ensure that:

any of its patents, or any of its pending patent applications, if issued, will include claims having a scope sufficient to protect the Obalon Balloon System or any other products;

any of its pending patent applications will issue as patents;

Obalon will be able to successfully commercialize its Obalon Balloon System before its relevant patents expire;

Obalon was the first to make the inventions shown in each of its patents and pending patent applications;

Obalon was the first to file patent applications for these inventions;

others will not develop similar or alternative technologies that do not infringe its patents;

any of Obalon’s patents will be found to ultimately be valid and enforceable;
 
77

TABLE OF CONTENTS
 

any patents issued to Obalon will provide a basis for an exclusive market for its commercially viable products, will provide Obalon with any competitive advantages or will not be challenged by third parties;

Obalon will develop additional proprietary technologies or products that are separately patentable;

Obalon’s commercial activities or products will not infringe the patents of others; or

Obalon will be in the financial position to defend Obalon’s trademarks and patents.
If Obalon is unable to protect the confidentiality of its proprietary information and know-how, the value of its technology and products could be adversely affected.
In addition to patent protection, Obalon also relies on other proprietary rights, including protection of unpatented trade secrets, unpatented know-how and confidential and proprietary information, which Obalon seeks to protect, in part, by confidentiality agreements with Obalon’s employees and its collaborators and consultants. Obalon also has agreements with its employees and selected consultants that obligate them to assign their inventions to Obalon and have non-compete agreements with some, but not all, of its consultants. It is possible that technology relevant to Obalon’s business will become known or be independently developed by a person that is not a party to such an agreement, including Obalon’s competitors. Obalon may not be able to prevent the unauthorized disclosure or use of its technical knowledge or trade secrets by consultants, vendors, former employees and current employees. If the employees and consultants who are parties to these agreements breach or violate the terms of these agreements, Obalon may not have adequate remedies for any such breach or violation, and Obalon could lose its trade secrets through such breaches or violations.
Obalon may be subject to claims challenging the inventorship or ownership of its patents and other intellectual property.
Obalon may also be subject to claims that former employees, collaborators or other third parties have an ownership interest in its patents or other intellectual property. For example, each of Obalon’s patents and patent applications names one or more inventors having past or present affiliations with other institutions, and any of these institutions may assert an ownership claim. Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If Obalon fails in defending any such claims, in addition to paying monetary damages, Obalon may lose valuable intellectual property rights, such as ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on its business. Even if Obalon is successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
Obalon may infringe or be alleged to infringe the intellectual property rights of others, which may result in costly and time-consuming litigation, delay Obalon’s product development efforts or prevent Obalon from commercializing the Obalon Balloon System.
Obalon’s success will depend in part on its ability to operate without infringing the intellectual property and proprietary rights of third parties. The medical device industry is characterized by rapid technological change and extensive litigation regarding patent and other intellectual property rights. Obalon’s competitors and other industry participants, many of which have substantially greater resources and have made substantial investments in patent portfolios and competing technologies, may have applied for or obtained, or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with Obalon’s ability to make, use and sell its products. In addition, numerous third-party patents exist in the fields relating to Obalon’s products. Obalon cannot assure you that its business, products and methods do not or will not infringe the patents or other intellectual property rights of third parties.
From time to time, third parties, including Obalon’s competitors as well as other industry participants and/or non-practicing entities, may allege that the Obalon Balloon System or the use of its technologies infringes patent claims or other intellectual property rights held by them or that Obalon is employing their proprietary technology without authorization. For example, during 2017, Obalon settled intellectual property infringement claims made by two separate third parties. Obalon believed the claims in both instances were
 
78

TABLE OF CONTENTS
 
meritless but settled the matters for a nominal cash payment and aggregate stock issuances of 17,500 shares, in exchange for which Obalon received a general release of all claims. Additionally, Obalon has received and may from time to time in the ordinary course of business continue to receive, letters from third parties advising Obalon of third-party patents that may relate to its business. The letters typically do not explicitly seek any particular action or relief from us. Although these letters do not threaten legal action, these letters may be deemed to put Obalon on notice that continued operation of its business might infringe the patent rights of such third parties. If Obalon decides not to seek a license or do not otherwise obtain a license to such third-party patents, there can be no assurance that Obalon will not become subject to infringement claims or will not be forced to initiate legal proceedings in order to dispose of such actual or potential infringement claims or to seek to invalidate the claims of such third-party patents.
Patent and other types of intellectual property litigation can involve complex factual and legal questions, and can have an uncertain outcome. Any claim relating to intellectual property infringement that is successfully asserted against Obalon may require Obalon to pay substantial damages, including treble damages and attorney fees if Obalon is found to be willfully infringing another party’s patents, for past use of the asserted intellectual property and royalties and other consideration going forward if Obalon determines it necessary or are required to take a license. In addition, if any such claim were successfully asserted against Obalon and Obalon could not obtain such a license, an injunction may force Obalon to stop or delay developing, manufacturing, selling or otherwise commercializing the Obalon Balloon System or Obalon’s other products.
Intellectual property claims or litigation, regardless of merit, may be expensive and time-consuming to resolve, result in negative publicity, and divert Obalon’s management’s attention from its core business. In addition, if Obalon is subject to intellectual property claims or litigation, it may:

be subject to a protected period of uncertainty while the claims or litigation remain unresolved, which could adversely affect Obalon’s ability to raise additional capital and otherwise adversely affect its business;

lose the opportunity to license its technology to others or to collect royalty payments based upon successful protection and assertion of its intellectual property rights against others; and

be required to redesign those products that contain the allegedly infringing intellectual property, which could be costly, disruptive and/or infeasible.
Furthermore, Obalon also relies on its trademarks as one means to distinguish its products from the products of its competitors, and have registered or applied to register many of these trademarks. However, Obalon’s trademark applications may not be approved. Third parties may oppose Obalon’s trademark applications, or otherwise challenge Obalon’s use of the trademarks. In the event that Obalon’s trademarks are successfully challenged, Obalon could be forced to rebrand its products, which could result in loss of brand recognition and could require Obalon to devote resources to advertising and marketing new brands. Obalon’s competitors may infringe its trademarks and Obalon may not have adequate resources to enforce its trademarks.
If any of the risks described above come to fruition, Obalon’s business, results of operations, financial condition and prospects could be harmed.
Obtaining and maintaining Obalon’s patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and its patent protection could be reduced or eliminated for non-compliance with these requirements.
The U.S. Patent and Trademark Office, or US PTO, and various international, foreign governmental and foreign regional patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent application process. In addition, periodic maintenance fees on issued patents often must be paid to the US PTO and foreign patent agencies over the lifetime of the patent. There are situations in which noncompliance with these requirements can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case. Obalon’s recent reduction in personnel to two full time employees may heighten this risk.
 
79

TABLE OF CONTENTS
 
Obalon may be involved in legal proceedings to protect or enforce its intellectual property, which could be expensive, time-consuming, and unsuccessful.
Competitors may infringe Obalon’s patents, trademarks or other intellectual property rights. Obalon’s ability to enforce its intellectual property rights depends on its ability to identify infringement. It may be difficult to identify infringers who do not advertise the components of their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product.
To counter infringement of Obalon’s intellectual property rights, Obalon has in the past been, and may in the future be, required to file infringement claims, which can be expensive and time-consuming. Even if successful, litigation to enforce its intellectual property rights could be costly and time-consuming and would divert the attention of Obalon’s management and key personnel from its business operations. Moreover, Obalon may not have sufficient resources to bring these actions to a successful conclusion. Obalon may not prevail in any lawsuits that it initiates and the damages or other remedies awarded if it were to prevail may not be commercially meaningful. In addition, in an infringement proceeding, a court may decide that a patent of ours is not infringed and may refuse to stop the other party from using the technology at issue on the grounds that its patents do not cover the technology in question.
Interference proceedings instituted by third parties or brought by Obalon may be necessary to determine the priority of inventions with respect to its patents or patent applications. An unfavorable outcome could require Obalon to cease using the related technology or to attempt to obtain a license under such rights from the prevailing party. Obalon’s business could be harmed if the prevailing party does not offer Obalon a license on commercially reasonable terms or offer Obalon a license at all. Obalon’s defense of interference proceedings may fail and, even if successful, may result in substantial costs and distract its management and other employees.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of Obalon’s confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of Obalon’s common stock.
Issued patents covering Obalon’s products could be found invalid or unenforceable if challenged in court or before administrative bodies.
If Obalon initiated legal proceedings against a third party to enforce one of Obalon’s patents, the defendant could counterclaim that the patent is invalid and/or unenforceable. Even if legal proceedings were not initiated, if Obalon threatened a third party with a patent infringement lawsuit, the third party preemptively may sue Obalon in a declaratory judgment action and seek to have Obalon’s patent declared invalid or not infringed. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge include alleged failures to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for unenforceability assertions include allegations that someone connected with prosecution of the patent withheld relevant information from the U.S. PTO, or made a misleading statement during prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include reexamination, post-grant review and equivalent proceedings in foreign jurisdictions, e.g., opposition proceedings. Such proceedings could result in revocation or amendment of Obalon’s patents in such a way that they no longer cover Obalon’s products or competitive products. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for example, Obalon cannot be certain that there is no invalidating prior art of which Obalon and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity and/or unenforceability, Obalon would lose at least part, and perhaps all, of the patent protection on Obalon’s products. Such a loss of patent protection would have a material adverse impact on Obalon’s business. An adverse result in any legal proceeding could put one or more of Obalon’s patents at risk of being invalidated, found unenforceable or interpreted narrowly and could put Obalon’s patent applications at risk of not issuing.
 
80

TABLE OF CONTENTS
 
Obalon does not seek to protect Obalon’s intellectual property rights in all jurisdictions throughout the world and Obalon may not be able to adequately enforce its intellectual property rights even in the jurisdictions where Obalon seeks protection.
Filing, prosecuting and defending intellectual property rights related to Obalon’s products in all countries and jurisdictions throughout the world would be prohibitively expensive, and Obalon’s intellectual property rights in some countries outside the United States could be less extensive than those in the United States. Consequently, Obalon may not be able to prevent third parties from practicing Obalon’s inventions in all countries outside the United States, or from selling or importing products made using Obalon’s inventions in and into the United States or other jurisdictions. Competitors may use Obalon’s technologies in jurisdictions where Obalon has not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where Obalon has patent protection, but enforcement is not as strong as that in the United States. These products may compete with Obalon’s products, and Obalon’s patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
In addition, the laws of some foreign countries do not protect Obalon’s proprietary rights to the same extent as the laws of the United States, and Obalon may encounter significant problems in protecting its proprietary rights in these countries. If these problems were to occur, they could have a material adverse effect on Obalon’s sales. Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to medical devices, which could make it difficult for Obalon to stop the infringement of its patents or marketing of competing products in violation of its proprietary rights generally. Proceedings to enforce Obalon’s patent rights in foreign jurisdictions could result in substantial costs and divert Obalon’s efforts and attention from other aspects of its business, could put its patents at risk of being invalidated or interpreted narrowly, could put its patent applications at risk of not issuing and could provoke third parties to assert claims against Obalon. Obalon may not prevail in any lawsuits that it initiates and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, Obalon’s efforts to enforce its intellectual property rights around the world may not adequately protect its rights or permit Obalon to gain or keep any competitive advantage.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing Obalon’s ability to protect its products.
The United States has enacted and is implementing the America Invents Act of 2011, a wide-ranging patent reform legislation. Further, the U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to Obalon’s ability to obtain future patents, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts and the US PTO, the laws and regulations governing patents could change in unpredictable ways that would weaken Obalon’s ability to obtain new patents or to enforce its existing patents or future patents.
Obalon may be subject to damages resulting from claims that it, its employees, consultants or third parties it engages to manufacture Obalon’s products have wrongfully used, or disclosed, alleged trade secrets of Obalon’s competitors or are in breach of non-competition or non-solicitation agreements with its competitors.
Many of Obalon’s current and former employees were previously employed at pharmaceutical companies and other medical device companies, including Obalon’s potential competitors, in some cases until recently. Obalon may be subject to claims that Obalon, its current and former employees, consultants or third parties have inadvertently or otherwise used or disclosed alleged trade secrets or proprietary information of these former employers or competitors. In addition, Obalon may be subject to claims that it caused a current or former employee to breach the terms of his or her non-competition or non-solicitation agreement. Litigation may be necessary to defend against these claims. Even if Obalon is successful in defending against these claims, litigation could result in substantial costs and could be a distraction for Obalon’s management. If Obalon’s defense to those claims fails, in addition to paying monetary damages, Obalon may lose valuable
 
81

TABLE OF CONTENTS
 
intellectual property rights or personnel. Any litigation or the threat thereof may adversely affect Obalon’s ability to hire employees or contract with third parties. A loss of key personnel or their work product could have an adverse effect on Obalon’s business, results of operations and financial condition.
Risks Related to Ownership of Obalon’s Common Stock
The sale or issuance of Obalon’s common stock to Lincoln Park may cause dilution and the sale of the shares of common stock acquired by Lincoln Park, or the perception that such sales may occur, could cause the price of Obalon’s common stock to fall.
On February 5, 2020, Obalon entered into the Purchase Agreement with Lincoln Park, pursuant to which Lincoln Park has committed to purchase up to $15,000,000 of Obalon’s common stock. The shares of Obalon’s common stock that may be issued under the Purchase Agreement may be sold by Obalon to Lincoln Park at Obalon’s discretion from time to time over a 36-month period commencing after the satisfaction of certain conditions set forth in the Purchase Agreement, including that the SEC has declared effective the registration statement filed with the SEC on February 7, 2020. The purchase price for the shares that Obalon may sell to Lincoln Park under the Purchase Agreement will fluctuate based on the price of Obalon’s common stock. Depending on market liquidity at the time, sales of such shares may cause the trading price of Obalon’s common stock to fall.
Obalon generally has the right to control the timing and amount of any sales of Obalon’s shares to Lincoln Park under the Purchase Agreement. Sales of Obalon’s common stock, if any, to Lincoln Park under the Purchase Agreement will depend upon market conditions and other factors to be determined