SEC Filing - ReShape Lifesciences

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

For the quarterly period ended June 30, 2022


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

For the transition period from to

Commission file number: 1-37897

RESHAPE LIFESCIENCES INC.

(Exact name of registrant as specified in its charter)


Delaware	26-1828101
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

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

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

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

Title of Each Class		Trading Symbol	Name of Each Exchange on which Registered
Common stock, $0.001 par value per share		RSLS	The Nasdaq Capital Market

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

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

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


Large Accelerated Filer	☐	Accelerated Filer	☐
Non-accelerated Filer	☒	Smaller Reporting Company	☒
Emerging Growth Company	☐

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

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

As of August 15, 2022, 22,559,404 shares of the registrant’s Common Stock were outstanding.

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INDEX


PART I – FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021	4
	Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2022 and 2021	5
	Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021	6
	Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2022 and 2021	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	35
SIGNATURES		36

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PART I – FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

RESHAPE LIFESCIENCES INC.

Condensed Consolidated Balance Sheets

(unaudited)

(dollars in thousands, except per share amounts)


	June 30,		December 31,
	2022		2021
ASSETS
Current assets:
Cash and cash equivalents	$	11,494	$	22,765
Restricted cash		50		50
Accounts and other receivables (net of allowance for doubtful accounts of $934 and $1,172 respectively)		2,448		2,815
Inventory		4,226		3,003
Prepaid expenses and other current assets		1,269		1,622
Total current assets		19,487		30,255
Property and equipment, net		887		1,454
Operating lease right-of-use assets		338		266
Other intangible assets, net		19,915		20,827
Other assets		1,298		1,456
Total assets	$	41,925	$	54,258
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,513	$	3,468
Accrued and other liabilities		5,814		3,169
Warranty liability, current		525		415
Operating lease liabilities, current		338		279
Total current liabilities		9,190		7,331
Operating lease liabilities, noncurrent		—		—
Warranty liability, noncurrent		5		300
Deferred income taxes, net		367		555
Total liabilities		9,562		8,186
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, 10,000,000 shares authorized:
Series C convertible preferred stock, $0.001 par value; 95,388 shares issued and outstanding at June 30, 2022 and December 31, 2021		—		—
Common stock, $0.001 par value; 100,000,000 shares authorized at both June 30, 2022 and December 31, 2021; 19,629,708 and 17,831,875 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively		20		18
Additional paid-in capital		626,966		622,906
Accumulated deficit		(594,551)		(576,760)
Accumulated other comprehensive loss		(72)		(92)
Total stockholders’ equity		32,363		46,072
Total liabilities and stockholders’ equity	$	41,925	$	54,258

See accompanying notes to Condensed Consolidated Financial Statements.

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RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Operations

(unaudited)

(dollars in thousands, except per share amounts)


	Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021
Revenue	$	2,892	$	3,529	$	5,332	$	6,750
Cost of revenue		1,009		1,376		2,231		2,314
Gross profit		1,883		2,153		3,101		4,436
Operating expenses:
Sales and marketing		4,663		1,441		9,371		2,691
General and administrative		5,454		4,311		9,616		7,031
Research and development		761		103		1,508		674
Loss on disposal of assets, net		381		—		381		—
Total operating expenses		11,259		5,855		20,876		10,396
Operating loss		(9,376)		(3,702)		(17,775)		(5,960)
Other expense (income), net:
Interest (income) expense, net		(14)		172		(15)		771
Loss on extinguishment of debt, net		—		101		—		2,061
Loss (Gain) on foreign currency exchange, net		204		(101)		188		(69)
Other		1		—		(9)		—
Loss before income tax provision		(9,567)		(3,874)		(17,939)		(8,723)
Income tax (benefit) expense		9		28		(148)		53
Net loss	$	(9,576)	$	(3,902)	$	(17,791)	$	(8,776)
Net loss per share - basic and diluted:
Net loss per share - basic and diluted (as revised for the three and six months ended June 30, 2021, see Note 1)	$	(0.50)	$	(0.86)	$	(0.94)	$	(2.07)
Shares used to compute basic and diluted net loss per share (as revised for the three and six months ended June 30, 2021, see Note 1)		19,310,968		4,553,976		18,933,217		4,246,060

See accompanying notes to Condensed Consolidated Financial Statements.

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RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Comprehensive Loss

(unaudited)

(dollars in thousands)


	Three Months Ended June 30,				Six Months Ended June 30,
		2022	2021		2022		2021
Net loss	$	(9,576)	$	(3,902)	$	(17,791)	$	(8,776)
Foreign currency translation adjustments		(1)		(7)		20		12
Other comprehensive (loss) income, net of tax		(1)		(7)		20		12
Comprehensive loss	$	(9,577)	$	(3,909)	$	(17,771)	$	(8,764)

See accompanying notes to Condensed Consolidated Financial Statements.

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RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(dollars in thousands)


	Three Months Ended June 30, 2022
	Series C Convertible						Additional				Accumulated Other		Total
	Preferred Stock			Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Deficit		Loss		Equity
Balance March 31, 2022	95,388	$	—	18,597,522	$	19	$	623,652	$	(584,975)	$	(71)	$	38,625
Net loss	—		—	—		—		—		(9,576)		—		(9,576)
Other comprehensive loss, net of tax	—		—	—		—		—		—		(1)		(1)
Stock compensation	—		—	—		—		823		—		—		823
Issuance of stock from RSUs	—		—	143,544		—		—		—		—		—
Exercise of warrants	—		—	888,642		1		2,491		—		—		2,492
Balance June 30, 2022	95,388	$	—	19,629,708	$	20	$	626,966	$	(594,551)	$	(72)	$	32,363


	Six Months Ended June 30, 2022
	Series C Convertible						Additional				Accumulated Other		Total
	Preferred Stock			Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Deficit		Loss		Equity
Balance December 31, 2021	95,388	$	—	17,831,875	$	18	$	622,906	$	(576,760)	$	(92)	$	46,072
Net loss	—		—	—		—		—		(17,791)		—		(17,791)
Other comprehensive income, net of tax	—		—	—		—		—		—		20		20
Stock compensation	—		—	—		—		1,570		—		—		1,570
Issuance of stock from RSUs	—		—	909,191		1		(1)		—		—		—
Exercise of warrants	—		—	888,642		1		2,491		—		—		2,492
Balance June 30, 2022	95,388	$	—	19,629,708	$	20	$	626,966	$	(594,551)	$	(72)	$	32,363

See accompanying Notes to Condensed Consolidated Financial Statements.

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RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Stockholders’ Equity (Continued)

(unaudited)

(dollars in thousands)


	Three Months Ended June 30, 2021
	Series B Convertible			Series C Convertible						Additional				Accumulated		Total
	Preferred Stock			Preferred Stock			Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Deficit		Income (Loss)		Equity
Balance March 31, 2021	3	$	—	95,388	$	1	3,486,253	$	3	$	532,507	$	(519,701)	$	(102)	$	12,708
Net loss	—		—	—		—	—		—		—		(3,902)		—		(3,902)
Other comprehensive income (loss), net of tax	—		—	—		—	—		—		—		—		(7)		(7)
Issuance of common stock pursuant to reverse acquisition	(3)		—	—		(1)	3,340,035		4		30,558		—		—		30,561
Reversal of stock compensation	—		—	—		—	—		—		(364)		—		—		(364)
Deferred issuance cost of shares held in abeyance	—		—	—		—	—		—		17,705		—		—		17,705
Exercise of warrants	—		—	—		—	1,250,470		1		1,202		—		—		1,203
Stock options exercised	—		—	—		—	91,864		—		215		—		—		215
Balance June 30, 2021	—	$	—	95,388	$	—	8,168,622	$	8	$	581,823	$	(523,603)	$	(109)	$	58,119


	Six Months Ended June 30, 2021
	Series B Convertible			Series C Convertible						Additional				Accumulated Other		Total
	Preferred Stock			Preferred Stock			Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Deficit		Loss		Equity
Balance December 31, 2020	3	$	—	95,388	$	1	3,486,253	$	3	$	529,432	$	(514,827)	$	(121)	$	14,488
Net loss	—		—	—		—	—		—		—		(8,776)		—		(8,776)
Other comprehensive income, net of tax	—		—	—		—	—		—		—		—		12		12
Issuance of common stock pursuant to reverse acquisition	(3)		—	—		(1)	3,340,035		4		30,558		—		—		30,561
Reversal of stock compensation	—		—	—		—	—		—		(263)		—		—		(263)
Issuance of warrants	—		—	—		—	—		—		2,974		—		—		2,974
Deferred issuance cost for shares held in abeyance	—		—	—		—	—		—		17,705		—		—		17,705
Institutional exercise of warrants	—		—	—		—	1,250,470		1		1,202		—		—		1,203
Stock options exercised	—		—	—		—	91,864		—		215		—		—		215
Balance June 30, 2021	—	$	—	95,388	$	—	8,168,622	$	8	$	581,823	$	(523,603)	$	(109)	$	58,119

See accompanying Notes to Condensed Consolidated Financial Statements.

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RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(dollars in thousands)


	Six Months Ended June 30,
	2022		2021
Cash flows from operating activities:
Net loss	$	(17,791)	$	(8,776)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		184		40
Amortization of intangible assets		911		828
Noncash interest expense		—		78
Loss on extinguishment of debt, net		—		2,061
Loss on disposal of assets, net		381		—
Stock-based compensation		1,570		(263)
Bad debt expense		(104)		56
Provision for inventory excess and obsolescence		129		13
Deferred income tax		(188)		—
Amortization of debt discount and deferred debt issuance costs		—		494
Other noncash items		(18)		15
Change in operating assets and liabilities, net of business combination:
Accounts and other receivables		471		(859)
Inventory		(1,352)		481
Prepaid expenses and other current assets		353		(267)
Accounts payable and accrued liabilities		1,681		1,853
Warranty liability		(185)		(219)
Other		158		316
Net cash used in operating activities		(13,800)		(4,149)
Cash flows from investing activities:
Capital expenditures		(19)		(196)
Proceeds from acquisition		—		5,207
Proceeds from sale of capital assets		39		—
Cash provided by investing activities:		20		5,011
Cash flows from financing activities:
Proceeds from warrants exercised		2,489		45,616
Proceeds from stock options exercised		—		216
Proceeds from credit agreement		—		1,000
Payment of credit agreement		—		(10,500)
Net cash provided by financing activities		2,489		36,332
Effect of currency exchange rate changes on cash and cash equivalents		20		12
Net (decrease) increase in cash, cash equivalents and restricted cash		(11,271)		37,206
Cash, cash equivalents and restricted cash at beginning of period		22,815		3,007
Cash, cash equivalents and restricted cash at end of period	$	11,544	$	40,213
Supplemental disclosure:
Cash paid for income taxes	$	—	$	31
Cash paid for interest				296
Noncash investing and financing activities:
Capital expenditures accruals	$	14	$	51
Purchase price, net of cash received		—		25,355
Deferred issuance cost related to abeyance of shares		—		17,705
Fair value of warrants included as a component of loss on extinguishment of debt		—		2,974

See accompanying notes to Condensed Consolidated Financial Statements.

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ReShape Lifesciences Inc.

Notes to Condensed Consolidated Financial Statements

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

(1) Basis of Presentation

The accompanying interim condensed consolidated financial statements and related disclosures of Reshape Lifesciences Inc. (the “Company” or “ReShape”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed on April 8, 2022. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") have been condensed or omitted.

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

Revision of Previously Issued Financial Statement for Correction of Immaterial Errors

The Company revised the statement of operations for the periods ended December 31, 2020, March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021, and March 31, 2022, to reflect the correction of an immaterial error in the computation of the weighted average shares used to compute basic and diluted net loss per share. This revision has no impact on the Company’s net loss or accumulated deficit.

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The following table summarizes the effect of the revision on each financial statement line item for the periods ended as indicated:


	Condensed Consolidated Statement of Operations
	As Previously
	Reported		Adjustment		As Revised
For the year ended December 31, 2020
Net loss per share - basic and diluted:
Net loss per share - basic and diluted	$	(5.54)	$	(0.01)	$	(5.55)
Shares used to compute basic and diluted net loss per share		3,904,762		(6,612)		3,898,150
Three months ended March 31, 2021
Net loss per share - basic and diluted:
Net loss per share - basic and diluted	$	(1.24)	$	—	$	(1.24)
Shares used to compute basic and diluted net loss per share		3,927,986		10,159		3,938,145
Three months ended June 30, 2021
Net loss per share - basic and diluted:
Net loss per share - basic and diluted	$	(0.47)	$	(0.39)	$	(0.86)
Shares used to compute basic and diluted net loss per share		8,226,144		(3,672,168)		4,553,976
Six months ended June 30, 2021
Net loss per share - basic and diluted:
Net loss per share - basic and diluted	$	(1.11)	$	(0.96)	$	(2.07)
Shares used to compute basic and diluted net loss per share		7,928,702		(3,682,642)		4,246,060
Three months ended September 30, 2021
Net loss per share - basic and diluted:
Net loss per share - basic and diluted	$	(1.48)	$	0.44	$	(1.04)
Shares used to compute basic and diluted net loss per share		11,997,370		5,090,884		17,088,254
Nine months ended September 30, 2021
Net loss per share - basic and diluted:
Net loss per share - basic and diluted	$	(2.51)	$	(0.56)	$	(3.07)
Shares used to compute basic and diluted net loss per share		10,546,683		(1,932,362)		8,614,321
For the year ended December 31, 2021
Net loss per share - basic and diluted:
Net loss per share - basic and diluted	$	(5.00)	$	(0.67)	$	(5.67)
Shares used to compute basic and diluted net loss per share		12,378,502		(1,452,519)		10,925,983
Three months ended March 31, 2022
Net loss per share - basic and diluted:
Net loss per share - basic and diluted	$	(0.44)	$	0.00	$	(0.44)
Shares used to compute basic and diluted net loss per share		18,539,568		11,700		18,551,268

Reverse Stock Split and Merger Exchange Ratio

On June 15, 2021, and immediately prior to the closing of the merger of Obalon Therapeutics, Inc. and ReShape Lifesciences Inc., the Company effected a 1-for-3 reverse stock split. Accordingly, all share and per share amounts for the period presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the reverse stock split. No fractional shares were issued in connection with the reverse stock split. Unless otherwise noted, all references to shares of the Company’s common stock and per share amounts have also been adjusted to reflect the exchange ratio of 0.5367 Obalon shares for one ReShape share in connection with the merger.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 to its audited consolidated financial statements for the year ended December 31, 2021, which are included in the Company’s Annual Report on Form 10-K which was filed with the SEC on April 8, 2022.

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Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may materially differ from these estimates. The Company reviews its estimates on an ongoing basis or as new information becomes available to ensure that these estimates appropriately reflect changes in its business.

Acquisition

The Company accounts for business combinations in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations. The results of businesses acquired in a business combination are included in the Company’s consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business generally being recorded at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill. Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative related costs in the consolidated statements of operations. The Company performs valuations of assets acquired and liabilities assumed and allocates the purchase price to its respective assets and liabilities. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates.

Upon completion of the business combination with Obalon on June 15, 2021, the transaction was treated as a “reverse acquisition” for financial accounting purposes. As a result of the controlling interest of the former shareholders of ReShape, for financial statement reporting and accounting purposes, ReShape was considered the acquirer under the acquisition method of accounting in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805-10-55. The reverse acquisition is deemed a capital transaction in substance whereas the historical assets and liabilities of Obalon before the business combination were replaced with the historical financial statements of ReShape in all future filings with the SEC.

Goodwill and Long-Lived Assets

Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination.

Indefinite-lived intangible assets relate to in-process research and development ("IPR&D") acquired in business combinations. The estimated fair values of IPR&D projects acquired in a business combination which have not reached technological feasibility are capitalized and accounted for as indefinite-lived intangible assets until completion or abandonment of the projects. In accordance with guidance within FASB ASC 350 “Intangibles - Goodwill and Other,” goodwill and identifiable intangible assets with indefinite lives are not subject to amortization but must be evaluated for impairment.

We evaluate long-lived assets, including finite-lived intangible assets, for impairment by comparison of the carrying amounts to future net undiscounted cash flows expected to be generated by such assets when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Should an impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s fair value or estimates of future discounted cash flows.

For goodwill and indefinite-lived intangible assets, in-process research and development, we review for impairment annually and upon the occurrence of certain events as required by ASC Topic 350, “Intangibles — Goodwill and Other.” Goodwill and indefinite-lived intangible assets are tested at least annually for impairment and more frequently if events or changes in circumstances indicate that the asset might be impaired. We review goodwill for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If we are able to determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, we would conclude that goodwill is not impaired. If the carrying amount of a reporting unit is zero or negative, the second step of the impairment test is performed to measure the amount of

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impairment loss, if any, when it is more likely than not that a goodwill impairment exists. The Company did not record any impairment loss for goodwill or indefinite-lived intangible assets for the three months and six months ended June 30, 2022 and 2021.

Fair Value of Financial Instruments

The carrying amounts of cash equivalents, accounts receivable, accounts payable and certain accrued and other liabilities approximate fair value due to their short-term maturities. Refer to Note 5 regarding the fair value of debt instruments and Note 9 regarding fair value measurements and inputs of warrants.

Net Loss Per Share

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


	June 30,
	2022	2021
Stock options	820,092	256,881
Convertible preferred stock	38	742
Warrants	6,952,328	6,181,997

Recent Accounting Pronouncements

There were no new accounting standards adopted by the Company during the six months ended June 30, 2022.

New accounting standards not yet adopted are discussed below.

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

(2) Liquidity and Management’s Plans

The Company currently does not generate revenue sufficient to offset operating costs and anticipates such shortfalls to continue primarily due to the unpredictability of new variants of COVID-19, which may result in a slow-down of elective surgeries and restrictions in some locations. As of June 30, 2022, the Company had net working capital of approximately $10.3 million, primarily due to cash and cash equivalents and restricted cash of $11.5 million. The Company’s principal source of liquidity as of June 30, 2022, consisted of approximately $11.5 million of cash and cash equivalents and restricted cash, and $2.4 million of accounts receivable. Based on its available cash resources, the Company may not have sufficient cash on hand to fund its current operations for more than twelve months from the date of filing this Quarterly Report on Form 10-Q. This condition raises substantial doubt about the Company’s ability to continue as a going concern. The Company believes in the viability of its business strategy and in its ability to raise additional funds, however, there can be no assurance to that effect.

Given the Company’s projected operating requirements and its existing cash and cash equivalents management’s plans include evaluating different strategies to obtain the required funding of future operations. Our anticipated operations include plans to (i) integrate the sales and operations of the Company with the Lap-Band product line in order to expand sales domestically and internationally (ii) improve operational efficiencies, resulting in a reduction of

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operational expenses, as well as a reduction to marketing and advertising costs, primarily due to focusing on digital media rather than television and print and (iii) to continue promoting reshapecare as an addition to bariatric surgery or as an alternative to individuals that do not meet the criteria and/or do not want to go through bariatric surgery. If sales do not improve, we will reduce our expenditures for marketing, clinical and product development activities to maintain operational activities until a period of time in which we could obtain additional debt or equity financing to support our operations. However, there can be no assurance that the Company will be able to secure such additional financing. Therefore, the plans cannot be deemed probable of being implemented. As a result, the Company’s plans do not alleviate substantial doubt about our ability to continue as a going concern.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above.

COVID-19 Risk and Uncertainties and CARES Act

Since the first quarter of 2020, the COVID-19 pandemic has led to unprecedented restrictions on, distributions in, and other related impacts on business and personal activities, including a shift in healthcare priorities, which resulted in a significant decline in medical procedures in 2020 in the United States and foreign countries. Concerns remain regarding the pace of economic recovery due to virus resurgence, including new variants, across the globe as well as vaccine distribution and hesitancy. The United States and other foreign governments may reimplement restrictions and other requirements in light of the continuing spread of the COVID-19 pandemic. Due to the uncertainty caused by the COVID-19 pandemic, the full extent to which the pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including sales, expenses, manufacturing, clinical trials, research and development costs, reserves and allowances, will depend on future developments that are highly uncertain and difficult to predict. These developments include, but are not limited to, the duration and spread of the outbreak (including new and more contagious variants of COVID-19), its severity, the actions to contain the virus or address its impact, the public acceptance and efficacy of vaccines and other treatments, United States and foreign governments actions to respond to the reduction of global activity, and how quickly and to what extent normal economic and op