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Table of Contents

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 March 31, 2024

OR

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

 

For the transition period from to

Commission file number: 1-37897

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.)

18 Technology Dr, Suite 110, Irvine, California 92618
(Address of principal executive offices (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 May 13, 2024, 23,457,090 shares of the registrant’s Common Stock were outstanding.

Table of Contents

INDEX

PART I – FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements (unaudited)

3

Condensed Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023

3

Condensed Consolidated Statements of Operations for the three months ended March 31, 2024 and 2023

4

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2024 and 2023

5

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2024 and 2023

6

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023

7

Notes to Condensed Consolidated Financial Statements

8

Item 2.

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

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

Item 4.

Controls and Procedures

22

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

23

Item 1A.

Risk Factors

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

Item 3.

Defaults Upon Senior Securities

24

Item 4.

Mine Safety Disclosures

24

Item 5.

Other Information

24

Item 6.

Exhibits

25

SIGNATURES

26

2

Table of Contents

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)

March 31, 

December 31, 

    

2024

    

2023

ASSETS

Current assets:

Cash and cash equivalents

$

2,379

 

$

4,459

Restricted cash

100

100

Accounts and other receivables (net of allowance for doubtful accounts of $458 and $804, respectively)

 

1,566

 

 

1,659

Inventory

 

3,467

 

 

3,741

Prepaid expenses and other current assets

 

383

 

 

337

Total current assets

 

7,895

 

 

10,296

Property and equipment, net

 

54

 

 

60

Operating lease right-of-use assets

226

250

Deferred tax asset, net

27

28

Other assets

 

29

 

 

29

Total assets

$

8,231

 

$

10,663

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

1,314

 

$

1,689

Accrued and other liabilities

 

1,930

 

 

1,814

Warranty liability, current

163

163

Operating lease liabilities, current

112

111

Total current liabilities

 

3,519

 

 

3,777

Operating lease liabilities, noncurrent

127

151

Common stock warrant liability

51

72

Total liabilities

3,697

 

4,000

Commitments and contingencies (Note 10)

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 March 31, 2024 and December 31, 2023

Common stock, $0.001 par value; 300,000,000 shares authorized at March 31, 2024 and December 31, 2023; 23,457,090 and 23,457,047 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively

 

23

 

 

23

Additional paid-in capital

 

642,374

 

 

642,302

Accumulated deficit

 

(637,767)

 

 

(635,574)

Accumulated other comprehensive loss

(96)

(88)

Total stockholders’ equity

 

4,534

 

 

6,663

Total liabilities and stockholders’ equity

$

8,231

 

$

10,663

See accompanying notes to Condensed Consolidated Financial Statements.

3

Table of Contents

RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Operations

(unaudited)

(dollars in thousands, except per share amounts)

Three Months Ended March 31, 

2024

2023

Revenue

$

1,944

$

2,287

Cost of revenue

779

 

1,063

Gross profit

1,165

 

1,224

Operating expenses:

Sales and marketing

1,019

 

2,182

General and administrative

1,872

4,220

Research and development

484

 

453

Total operating expenses

3,375

 

6,855

Operating loss

(2,210)

 

(5,631)

Other expense (income), net:

Interest (income) expense, net

(9)

5

Gain on changes in fair value of liability warrants

(21)

(2,965)

(Gain) loss on foreign currency exchange, net

24

(21)

Other

(25)

(2)

Loss before income tax provision

(2,179)

(2,648)

Income tax expense

14

14

Net loss

$

(2,193)

$

(2,662)

Net loss per share - basic and diluted:

Net loss per share - basic and diluted

$

(0.09)

$

(1.56)

Shares used to compute basic and diluted net loss per share

23,457,127

 

1,708,141

See accompanying notes to Condensed Consolidated Financial Statements.

4

Table of Contents

RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Comprehensive Loss

(unaudited)

(dollars in thousands)

Three Months Ended March 31, 

2024

    

2023

Net loss

$

(2,193)

$

(2,662)

Foreign currency translation adjustments

(8)

(5)

Other comprehensive income, net of tax

(8)

(5)

Comprehensive loss

$

(2,201)

$

(2,667)

See accompanying notes to Condensed Consolidated Financial Statements.

5

Table of Contents

RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

(dollars in thousands)

Three Months Ended March 31, 2024

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, 2023

95,388

$

23,457,047

$

23

$

642,302

$

(635,574)

$

(88)

$

6,663

Net loss

(2,193)

(2,193)

Other comprehensive income, net of tax

(8)

(8)

Stock compensation

72

72

Issuance of stock from RSUs

43

Balance March 31, 2024

95,388

$

23,457,090

$

23

$

642,374

$

(637,767)

$

(96)

$

4,534

Three Months Ended March 31, 2023

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, 2022

95,388

$

519,219

$

1

$

627,935

$

(624,187)

$

(88)

$

3,661

Net loss

(2,662)

(2,662)

Other comprehensive income, net of tax

(5)

(5)

Issuance of common stock pursuant to reverse stock split

18,399

Stock compensation

222

222

Common stock purchased

1,185,000

1

1

Equity issuance costs

298

298

Issuance of stock from RSUs

834

Exercise of warrants

925,313

1

6,242

6,243

Balance March 31, 2023

95,388

$

2,648,765

$

3

$

634,697

$

(626,849)

$

(93)

$

7,758

See accompanying Notes to Condensed Consolidated Financial Statements.

6

Table of Contents

RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(dollars in thousands)

Three Months Ended March 31, 

2024

2023

Cash flows from operating activities:

    

Net loss

$

(2,193)

$

(2,662)

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

Depreciation expense

 

6

 

37

Amortization of intangible assets

11

Stock-based compensation

72

222

Bad debt expense

(347)

34

Provision for inventory excess and obsolescence

(45)

9

Deferred income tax

1

(1)

Gain on changes in fair value of liability warrants

(21)

(2,965)

Offering cost

298

Other noncash items

1

3

Change in operating assets and liabilities:

 

 

Accounts and other receivables

 

440

 

21

Inventory

 

320

 

108

Prepaid expenses and other current assets

 

(47)

 

(365)

Accounts payable and accrued liabilities

(259)

344

Warranty liability

 

 

(144)

Other

 

 

(11)

Net cash used in operating activities

(2,072)

(5,061)

Cash flows from investing activities:

Capital expenditures

(7)

Cash used in investing activities:

(7)

Cash flows from financing activities:

Proceeds from sale and issuance of securities, net

10,201

Net cash provided by financing activities

10,201

Effect of currency exchange rate changes on cash and cash equivalents

 

(8)

 

(5)

Net change in cash, cash equivalents and restricted cash

 

(2,080)

 

5,128

Cash, cash equivalents and restricted cash at beginning of period

4,559

3,955

Cash, cash equivalents and restricted cash at end of period

$

2,479

$

9,083

Supplemental disclosure:

Cash paid for income taxes

$

8

$

Noncash investing and financing activities:

Capital expenditures accruals

$

$

5

See accompanying notes to Condensed Consolidated Financial Statements.

 

7

Table of Contents

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, 2023, filed on April 1, 2024. 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.

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, 2023, which are included in the Company’s Annual Report on Form 10-K which was filed with the SEC on April 1, 2024.

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.

Long-Lived Assets

We assess the potential impairment of long-lived assets, principally property and equipment, whenever events or changes in circumstances indicate that the carrying value of the asset group may not be fully recoverable. If an indicator of impairment exists for any of its asset groups, an estimate of undiscounted future cash flows, over the life of the primary asset for each asset group is compared to that long-lived asset group's carrying value. If the carrying value of the asset group is greater than the estimated future undiscounted cash flow, the Company then determines the fair value of the assets, and if an asset is determined to be impaired, the impairment loss is measured by the excess of the carrying amount of the asset over its fair value.

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 6 regarding fair value measurements and inputs of warrants.

8

Table of Contents

Net Loss Per Share

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

March 31, 

    

2024

    

2023

Stock options

 

10,448

 

18,594

Unvested restricted stock units

975

3,424

Convertible preferred stock

10

10

Warrants

 

15,598,390

 

531,164

Recent Accounting Pronouncements

New accounting standards not yet adopted are discussed below.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires entities to provide additional information in the rate reconciliation and additional disaggregated disclosures about income taxes paid. This guidance requires public entities to disclose in their rate reconciliation table additional categories of information about federal, state, and foreign income taxes and to provide more details about the reconciling items in some categories if the items meet a quantitative threshold. The guidance is effective for annual periods beginning after December 15, 2024. The Company does not expect the adoption of this guidance to impact its consolidated financial statements, but the guidance will impact its income tax disclosures.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments require disclosure of significant segment expenses and other segment items and requires entities to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually. The amendment also requires disclosure of the title and position of the chief operating decision maker (“CODM”) and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Retrospective application is required, and early adoption is permitted. 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 as the Company has modified its strategy to a metrics-driven approach through a sustainable and scalable business model, via a digital lead generation and re-engagement strategy. As of March 31, 2024, the Company had net working capital of approximately $4.4 million, primarily due to cash and cash equivalents and restricted cash of $2.5 million, and $1.6 million of accounts receivable. The Company has raised gross proceeds of $13.7 million between the public offerings that occurred on February 8, 2023, April 24, 2023 and October 3, 2023. Based on its available cash resources, the Company will 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’s anticipated operations include plans to (i) grow sales and operations of the Company with the Lap-Band product line both domestically and internationally as well as to obtain cost savings synergies, (ii) introduce to the market Lap-Band 2.0 FLEX, (iii) continue development of the Diabetes Bloc-Stim Neuromodulation (“DBSN”) device, (iv) identifying strategic merger and acquisition alternatives, (v) seek opportunities to find strategic partners to leverage our intellectual property portfolio and custom development services to provide third-party sales and licensing opportunities, and (vi) explore and capitalize on synergistic opportunities to expand our portfolio and offer future minimally invasive treatments and therapies in the obesity continuum of care. The Company believes that it has the flexibility to manage the growth of its expenditures and operations depending on the amount of available cash flows, which could include reducing expenditures for marketing, and product development activities. If management’s plans do not develop, and the Company does not raise additional cash, at the current burn rate, management expects to run out of cash during the third quarter of 2024.

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There can be no assurance as to whether additional financing will be available on terms acceptable to the Company, if at all. If sufficient funds on acceptable terms are not available when needed, it would have a negative impact on the Company’s financial condition and could force the Company to delay, limit, reduce, or terminate product development or future commercialization efforts or grant rights to develop and market product candidates or testing products that the Company would otherwise plan to develop.

Therefore, the plans cannot be deemed probable of being implemented. As a result, the Company’s plans do not alleviate substantial doubt about our ability to continue as a going concern.

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

(3)  Supplemental Balance Sheet Information

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

Inventory:

March 31, 

December 31,

2024

    

2023

Raw materials

$

1,007

$

1,020

Sub-assemblies

1,271

1,379

Finished goods

 

1,189

 

1,342

Total inventory

$

3,467

$

3,741

Prepaid expenses and other current assets:

March 31, 

December 31,

2024

    

2023

Prepaid insurance

$

191

$

110

Professional services

65

Patents

10

13

Prepaid advertising and marketing

21

41

Taxes

26

47

Other current assets

70

126

Total prepaid expenses and other current assets

$

383

$

337

Accrued and other liabilities:

March 31, 

December 31,

2024

    

2023

Payroll and benefits

$

602

$

701

Accrued legal settlements

200

200

Customer deposits

643

639

Taxes

52

61

Accrued professional

377

155

Other liabilities

 

56

 

58

Total accrued and other liabilities

$

1,930

$

1,814

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(4) Leases

The Company had a noncancelable operating lease for office and warehouse space in San Clemente, which expired June 30, 2023. On March 13, 2023, the Company entered into a lease for approximately 5,038 square feet of office and warehouse space at 18 Technology Drive, Suite 110, Irvine, California 92618 and relocated its principal executive offices from our former San Clemente, California location to the Irvine, California location. The Irvine California lease has a term of 36 months, commencing on May 1, 2023.

The Company does not have any short-term leases or financing lease arrangements. Lease and non-lease components are accounted for separately.

Operating lease costs were $0.1 million for both the three months ended March 31, 2024 and 2023. Variable lease costs were not material.

Supplemental information related to operating leases is as follows:

March 31,

December 31,

Balance Sheet information

2024

2023

Operating lease ROU assets

$

226

$

250

Operating lease liabilities, current portion

$

112

$

111

Operating lease liabilities, long-term portion

127

151

Total operating lease liabilities

$

239

$

262

Cash flow information for the three months ended March 31,

2024

2023

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

$

27

$

87

Maturities of operating lease liabilities were as follows as of March 31, 2024:

2024

$

84

2025

115

2026

59

Total lease payments

258

Less: imputed interest

19

Total lease liabilities

$

239

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

2.2

Weighted-average discount rate at end of period

6.9

%

(5)  Equity

Common Stock Issued Related to Restricted Stock Units

During the three months ended March 31, 2024 and 2023, the Company issued 43 shares of common stock and 834 shares of common stock, respectively, subject to vesting of the restricted stock units. For further details see Note 9.

February 2023 Public Offering of Common Stock and Warrants

On February 8, 2023, the Company closed a public offering of 1,275,000 units, with each consisting of one share of its common stock, or one pre-funded warrant to purchase one share of its common stock, and one warrant to purchase one and one-half shares of its common stock. Each unit was sold at public offering price of $8.00. The warrants in the units are immediately exercisable at a price of $8.00 per share and expire five years from the date of issuance. Alternatively, each warrant can be exercised pursuant to the “alternative cashless exercise” provision, to which the holders would receive an aggregate number of shares of common stock equal the product of (x) the aggregate number of shares of common stock that would be issuable upon a cash exercise and (y) 0.50. For purposes of clarity, one common warrant to purchase one and one-half shares would be exercisable for 0.75 shares under this alternative cashless exercise provision. The shares of common stock (or pre-funded warrants in lieu thereof) and accompanying warrants were only

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purchasable together in this offering but were issued separately and immediately separable upon issuance. As of March 31, 2024 warrants to purchase 1,674,376 shares of common stock have been exercised under the alternative cashless exercise for a total of 835,313 shares of common stock.

Net proceeds, after deducting underwriting discounts and commissions and estimated offering expenses, were approximately $10.2 million. The Company has been using the net proceeds of this offering to continue implementation of its growth strategies, for working capital and general corporate purposes.

The Company also granted the underwriters an option to purchase an additional 191,250 shares of common stock and/or additional warrants to purchase up to 286,875 shares of common stock, to cover over-allotments, of which Maxim Group LLC exercised its option to purchase additional warrants to purchase 286,875 shares of common stock.

(6) Warrants

On February 8, 2023, the Company completed a public offering in which three classes of warrants were issued. There were 2,199,375 common stock purchase warrants issued with an alternative cashless exercise provision. The alternative cashless exercise allows the holder to exercise one warrant share for 0.5 shares of common stock or exercise via the cash exercise price of $8.00 per share of common stock per warrant. The Company classifies these warrants as a liability, and the Company utilized a bifurcated Black-Scholes option pricing model to consider the cash exercise option and cashless exercise option. The bifurcated Black-Scholes option pricing model used an exercise price where the two exercise methods would be indifferent with market inputs of the stock price on the issuance, risk free interest rate, expected share price volatility and dividend yield. The Company calculates the fair value of the warrants at each reporting period and when a warrant is exercised, with the changes in fair value recognized in the statement of operations.

Below is a summary of the initial inputs used in the bifurcated Black-Scholes option pricing model.

Cash Exercise

Cashless Exercise

Stock Price

$

5.905

$

5.905

Exercise Price

$

16.00

$

0.00

Term (years)

5.00

5.00

Volatility

96.50%

96.50%

Risk Free Rate

3.784%

3.784%

Dividend Yield

0%

0%

The following table presents the changes in the fair value of warrant liabilities:

Common Stock

Purchase Warrants

Fair value as of December 31, 2023

$

72

Gain on changes in fair value of liability warrants

(21)

Fair value as of March 31, 2024

$

51

In addition, one of the investors purchased 90,000 pre-funded warrants at a price of $7.999 per warrant. These warrants have an exercise price of $0.0001 per share and do not expire. The pre-funded warrants were valued at $0.5 million using the fair value approach at the time of issuance. The fair value of the pre-funded warrants was determined using a Black Scholes option pricing model using a risk free rate of 3.784%, an expected term of 5.0 years, expected dividends of zero and expected volatility of 96.5%.

As part of the terms of the offering the Company issued 73,313 representative’s warrants with an exercise price of $8.80 per share and expiration date on February 3, 2028. The representative’s warrants were valued at $0.3 million using the fair value approach at the time of issuance. The fair value of the representative’s warrants was determined using a Black Scholes option pricing model using a risk free rate of 3.786%, an expected term of 4.99 years, expected dividends of zero and expected volatility of 96.5%.

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(7) Revenue Disaggregation and Operating Segments

The Company conducts operations worldwide and has sales in the following regions: United States, Australia, Europe and Rest of World. For the three months ended March 31, 2024 and 2023, the Company primarily sold the Lap-Band system and accessories. The following table presents the Company’s revenue disaggregated by geography:

Three Months Ended

March 31, 

    

2024

    

2023

United States

$

1,618

$

1,813

Australia

102

157

Europe

198

304

Rest of World

26

13

Total revenue

$

1,944

$

2,287

Operating Segments

The Company conducts operations worldwide and is managed in the following geographical regions: United States, Australia, Europe and the Rest of World (primarily in the Middle East). All regions sell the Lap-Band system, which consisted of nearly all our revenue and gross profit for the three months ended March 31, 2024 and 2023. There was no revenue or gross profit recorded for the DBSN device for the three ended March 31, 2024 and 2023, as this product is still in the development stage. Additionally, there was no revenue recorded for the Obalon Balloon system during the three months ended March 31, 2024 and 2023.

(8) Income Taxes

During both the three months ended March 31, 2024 and 2023, the Company recorded income tax expense of $14 thousand. The income tax expense is related to minimum state taxes and projected Australian and Netherlands income, respectively. The income tax provisions for the three months ended March 31 2024 were calculated using the discrete year-to-date method. The effective tax rate differs from the statutory tax rate of 21% primarily due to the existence of valuation allowances against net deferred tax assets and current liabilities resulting from the estimated state income tax liabilities and foreign tax liability.

In assessing the realization of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Based on the level of historical losses, projections of losses in future periods and potential limitations pursuant to changes in ownership under Internal Revenue Code Section 382, the Company provided a full valuation allowance at both March 31, 2024 and December 31, 2023.

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(9)  Stock-based Compensation

Stock-based compensation expense related to stock options and RSUs issued under the ReShape Lifesciences Inc. 2022 Stock Incentive Plan (the “Plan”) for the three months ended March 31, 2024 and 2023 were as follows:

Three Months Ended

March 31, 

2024

2023

Sales and marketing

$

11

$

30

General and administrative

36

128

Research and development

25

64

Total stock-based compensation expense

$

72

$

222

Stock Options

A summary of the status of the Company’s stock options as of March 31, 2024, and changes during the three months ended March 31, 2024, are as follows:

    

Weighted

Weighted

Average

Aggregate

Average

Remaining

Intrinsic

    

Exercise Price

Contractual

Value

Shares

Per Share

Life (years)

(in thousands)

Outstanding at December 31, 2023

 

15,218

$

377.75

$

Options granted

 

Options exercised

 

Options cancelled

 

(3,569)

144.80

Outstanding at March 31, 2024

 

11,649

$

449.12

5.6

$

Exercisable at March 31, 2024

10,448

$

493.96

5.3

$

Vested and expected to vest at March 31, 2024

11,649

$

449.12

5.6

$

There was no intrinsic value to outstanding stock options at March 31, 2024. The unrecognized share-based expense at March 31, 2024 was $0.1 million, and will be recognized over a weighted average period of 1.5 years.

Stock option awards outstanding under the Company’s incentive plans have been granted at exercise prices that are equal to the market value of its common stock on the date of grant. Such options generally vest over a period of four years and expire at ten years after the grant date. The Company recognized compensation expense ratably over the vesting period. The Company uses a Black-Scholes option-pricing model to estimate the fair value of stock options granted, which requires the input of both subjective and objective assumptions as follows:

Expected Term – The estimate of expected term is based on the historical exercise behavior of grantees, as well as the contractual life of the options granted.

Expected Volatility – The expected volatility factor is based on the volatility of the Company’s common stock for a period equal to the term of the stock options.

Risk-free Interest Rate – The risk-free interest rate is determined using the implied yield for a traded zero-coupon U.S. Treasury bond with a term equal to the expected term of the stock options.

Expected Dividend Yield – The expected dividend yield is based on the Company’s historical practice of paying dividends on its common stock.

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Restricted Stock Units

A summary of the Company’s unvested RSUs award activity for the three months ended March 31, 2024, is as follows:

Weighted

Average

    

Grant Date

Shares

Fair Value

Unvested RSUs at December 31, 2023

 

1,417

$

129.38

Granted

 

Vested (1)

 

(442)

$

164.88

Cancelled/Forfeited

 

Non-vested RSUs at March 31, 2024

 

975

$

112.81

(1)At March 31, 2024, there were 108 shares of common stock related to RSU awards that had vested and the shares were not distributed to the participants.

The fair value of each RSU is the closing stock price on the Nasdaq of the Company’s common stock on the date of grant. Upon vesting, a portion of the RSU award may be withheld to satisfy the statutory income tax withholding obligation. The remaining RSUs will be settled in shares of the Company’s common stock after the vesting period. The unrecognized compensation cost related to the RSUs at March 31, 2024 was $0.1 million and expected to be recognized over a period of 1.1 years.

(10)  Commitment and Contingencies

Litigation

On August 6, 2021, Cowen and Company, LLC filed a complaint against ReShape, as successor in interest to Obalon Therapeutics, in the Supreme Court of the State of New York based on an alleged breach of contract arising out of Cowen’s prior engagement as Obalon’s financial advisor. The complaint alleges that Cowen is entitled to be paid a $1.35 million fee in connection with ReShape’s merger with Obalon under the terms of Cowen’s engagement agreement with Obalon. The complaint also sought reimbursement of Cowen’s attorneys’ fees and interest in connection with its claim. On May 11, 2023, the Supreme Court of the State of New York issued the final judgement in favor of Cowen & Company in the amount of $1.35 million, plus interest at the statutory rate of 9% per annum from June 16, 2021 until judgement is paid in full, and reimbursement of $675,000 of Cowen’s attorneys’ fees, with $275,000 to be paid upfront, $200,000 paid after six months and $200,000 paid after 12 months. As of March 31, 2024, the Company has paid the $1.35 million judgement, including related interest, and the first $275,000 installment of Cowen’s attorneys’ fees. At March 31, 2024, $200,000 of attorneys’ fees were included as accrued expenses and paid during April 2024.

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

Product Liability Claims

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

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(11) Subsequent Events

Management has evaluated events from March 31, 2024 through May 15, 2024, the date these financial statements were available to be issued and determined that there have been no other events that occurred that would require adjustment to our disclosures in the condensed consolidated financial statements.

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

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

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

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

Overview

We are the premier global weight-loss solutions company, offering an integrated portfolio of proven products and services that manage and treat obesity and associated metabolic disease. Our primary operations are in the following geographical areas: United States, Australia and certain European and Middle Eastern countries. Our current portfolio includes the Lap-Band Adjustable Gastric Banding System, the Obalon Balloon System, and the Diabetes Bloc-Stim Neuromodulation device, a technology under development as a new treatment for type 2 diabetes mellitus. There has been no revenue recorded for the Obalon Balloon System, and there has been no revenue recorded for the Diabetes Bloc-Stim Neuromodulation as this product is still in the development stage.

Results of Operations

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

Three Months Ended March 31, 

2024

2023

Revenue

$

1,944

100.0

%

$

2,287

100.0

%

Cost of revenue

779

40.1

%

1,063

46.5

%

Gross profit

1,165

59.9

%

1,224

53.5

%

Operating expenses:

Sales and marketing

1,019

52.4

%

2,182

95.4

%

General and administrative

1,872

96.3

%

4,220

184.5

%

Research and development

484

24.9

%

453

19.8

%

Total operating expenses

3,375

173.6

%

6,855

299.7

%

Operating loss

(2,210)

(113.7)

%

(5,631)

(246.2)

%

Other expense (income), net:

Interest (income) expense, net

(9)

(0.5)

%

5

0.2

%

Gain on changes in fair value of liability warrants

(21)

(1.1)

%

(2,965)

(130)

%

(Gain) loss on foreign currency exchange, net

24

1.2

%

(21)

(0.9)

%

Other

(25)

(1)

%

(2)

(0)

%

Loss before income tax provision

(2,179)

(112.0)

%

(2,648)

(115.8)

%

Income tax expense (benefit)

14

0.7

%

14

0.6

%

Net loss

$

(2,193)

(112.7)

%

$

(2,662)

(116.4)

%

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Non-GAAP Disclosures

In addition to the financial information prepared in conformity with GAAP, we provide certain historical non-GAAP financial information. Management believes that these non-GAAP financial measures assist investors in making comparisons of period-to-period operating results.

Management believes that the presentation of this non-GAAP financial information provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, and amortization methods, which provides a more complete understanding of our financial performance, competitive position, and prospects for the future. However, the non-GAAP financial measures presented in Form 10-Q have certain limitations in that they do not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. Therefore, investors should consider non-GAAP financial measures in addition to, and not a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, the non-GAAP financial measures presented by the Company may be different from similarly named non-GAAP financial measures used by other companies.

Adjusted EBITDA

Management uses adjusted EBITDA in its evaluation of the Company’s core results of operations and trends between fiscal periods and believes that these measures are important components of its internal performance measurement process. Adjusted EBITDA is defined as net loss before interest, taxes, depreciation and amortization, stock-based compensation, changes in fair value of liability warrants, and other one-time costs.

The following table contains a reconciliation of GAAP net loss to Adjusted EBITDA attributable to common stockholders for the three months ended March 31, 2024 and 2023 (in thousands):

Three Months Ended March 31, 

2024

2023

GAAP net loss

$

(2,193)

$

(2,662)

Adjustments:

Interest (income) expense, net

(9)

5

Income tax expense (benefit)

14

14

Depreciation and amortization

6

48

Stock-based compensation expense

72

222

Gain on changes in fair value of liability warrants

(21)

(2,965)

Adjusted EBITDA

$

(2,131)

$

(5,338)

Comparison of Results of Operations

Three months ended March 31, 2024 and March 31, 2023

Revenue. The following table summarizes our unaudited revenue by geographic location based on the location of customers for the three months ended March 31, 2024 and 2023, as well as the percentage of each location to total revenue and the amount of change and percentage of change (dollars in thousands):

Three Months Ended March 31, 

Amount

Percentage

2024

2023

Change

Change

United States

$

1,618

83.3

%

$

1,813

79.3

%

$

(195)

(10.8)

%

Australia

102

5.2

%

157

6.9

%

(55)

(35.0)

%

Europe

198

10.2

%

304

13.3

%

(106)

(34.9)

%

Rest of World

26

1.3

%

13

0.5

%

13

100.0

%

Total revenue

$

1,944

100.0

%

$

2,287

100.0

%

$

(343)

(15.0)

%

Revenue totaled $1.9 million for the three months ended March 31, 2024, which represents a contraction of 15.0%, or $0.3 million compared to the same period in 2023. This primarily resulted from a decrease in sales volume primarily due to GLP-1 pharmaceutical weight-loss alternatives.

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Cost of Goods Sold and Gross Profit. The following table summarizes our unaudited cost of revenue and gross profit for the three months ended March 31, 2024 and 2023, as well as the percentage compared to total revenue and amount of change and percentage of change (dollars in thousands):

Three Months Ended March 31, 

Amount

Percentage

2024

2023

Change

Change

Revenue

$

1,944

100.0

%

$

2,287

100.0

%

$

(343)

(15.0)

%

Cost of revenue

779

40.1

%

1,063

46.5

%

(284)

(26.7)

%

Gross profit

$

1,165

59.9

%

$

1,224

53.5

%

$

(59)

(4.8)

%

Gross Profit. Gross profit for both the three months ended March 31, 2024 and 2023, was $1.2 million. Gross profit as a percentage of total revenue for the three months ended March 31, 2024, was 59.9% compared to 53.5% for the same period in 2023. The increase in gross profit percentage is due to the reduction in overhead related costs, primarily payroll, as we had a reduction of employees late in 2023.

Operating Expense. The following table summarizes our unaudited operating expenses for the three months ended March 31, 2024 and 2023, as well as the percentage of total revenue and the amount of change and percentage of change (dollars in thousands):

Three Months Ended March 31, 

Amount

Percentage

2024

2023

Change

Change

Sales and marketing

$

1,019

52.4

%

$

2,182

95.4

%

$

(1,163)

(53.3)

%

General and administrative

1,872

96.3

%

4,220

184.5

%

(2,348)

(55.6)

%

Research and development

484

24.9

%

453

19.8

%

31

6.8

%

Total operating expenses

$

3,375

173.6

%

$

6,855

299.7