HIND 10-Q
Vyome Holdings, Inc (HIND)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction | (IRS Employer |
(Address of principal executive offices, including zip code)
(
(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 |
|---|---|---|---|
The |
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.
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).
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 | ☐ |
☒ | 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
As of August 3, 2023,
INDEX
2
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, | |||||
| 2023 |
| 2022 | |||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | |
| $ | | |
Restricted cash | | | ||||
Accounts and other receivables (net of allowance for doubtful accounts of $ |
| |
|
| | |
Inventory |
| |
|
| | |
Prepaid expenses and other current assets |
| |
|
| | |
Total current assets |
| |
|
| | |
Property and equipment, net |
| |
|
| | |
Operating lease right-of-use assets | | | ||||
Deferred tax asset, net | | | ||||
Other intangible assets, net | | | ||||
Other assets |
| |
|
| | |
Total assets | $ | |
| $ | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Current liabilities: | ||||||
Accounts payable | $ | |
| $ | | |
Accrued and other liabilities |
| |
|
| | |
Warranty liability, current | | | ||||
Operating lease liabilities, current | | | ||||
Total current liabilities |
| |
|
| | |
Operating lease liabilities, noncurrent | | — | ||||
Common stock warrant liability | | — | ||||
Total liabilities | |
| | |||
Commitments and contingencies (Note 13) | ||||||
Stockholders’ equity: | ||||||
Preferred stock, | ||||||
Series C convertible preferred stock, $ | ||||||
Common stock, $ |
| |
|
| | |
Additional paid-in capital |
| |
|
| | |
Accumulated deficit |
| ( |
|
| ( | |
Accumulated other comprehensive loss | ( | ( | ||||
Total stockholders’ equity |
| |
|
| | |
Total liabilities and stockholders’ equity | $ | |
| $ | | |
See accompanying notes to Condensed Consolidated Financial Statements.
3
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, | |||||||||||
2023 | 2022 |
| 2023 | 2022 | ||||||||
Revenue | $ | | $ | | $ | | $ | | ||||
Cost of revenue | |
| |
| |
| | |||||
Gross profit | |
| |
| |
| | |||||
Operating expenses: | ||||||||||||
Sales and marketing | |
| |
| |
| | |||||
General and administrative | | | | | ||||||||
Research and development | |
| |
| |
| | |||||
(Gain) loss on disposal of assets, net | ( | | ( | | ||||||||
Total operating expenses | |
| |
| |
| | |||||
Operating loss | ( |
| ( |
| ( |
| ( | |||||
Other expense (income), net: | ||||||||||||
Interest income, net | ( | ( | ( | ( | ||||||||
Gain on changes in fair value of liability warrants | ( | — | ( | — | ||||||||
(Gain) loss on foreign currency exchange, net | — | | ( | | ||||||||
Other | ( | | ( | ( | ||||||||
Loss before income tax provision | ( | ( | ( | ( | ||||||||
Income tax expense | | | | | ||||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Net loss per share - basic and diluted: | ||||||||||||
Net loss per share - basic and diluted | ( | ( | ( | ( | ||||||||
Shares used to compute basic and diluted net loss per share | |
| |
| |
| | |||||
See accompanying notes to Condensed Consolidated Financial Statements.
4
RESHAPE LIFESCIENCES INC.
Condensed Consolidated Statements of Comprehensive Loss
(unaudited)
(dollars in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
2023 |
| 2022 |
| 2023 | 2022 | ||||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Foreign currency translation adjustments | ( | ( | ( | | |||||||||
Other comprehensive income, net of tax | ( | ( | ( | | |||||||||
Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
See accompanying notes to Condensed Consolidated Financial Statements.
5
RESHAPE LIFESCIENCES INC.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited)
(dollars in thousands)
Three Months Ended June 30, 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 March 31, 2023 | | $ | — | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | ( | ( | ||||||||||||||
Stock compensation | — | — | — | — | | — | — | | ||||||||||||||
Common stock purchased | — | — | | — | | — | — | | ||||||||||||||
Equity issuance costs | — | — | — | — | ( | — | — | ( | ||||||||||||||
Issuance of stock from RSUs | — | — | | — | — | — | — | — | ||||||||||||||
Exercise of warrants | — | — | | — | | — | — | | ||||||||||||||
Balance June 30, 2023 | | $ | — | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
Six Months Ended June 30, 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 | | $ | — | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | ( | ( | ||||||||||||||
Issuance of common stock pursuant to reverse stock split | — | — | | — | — | — | — | — | ||||||||||||||
Stock compensation | — | — | — | — | | — | — | | ||||||||||||||
Common stock purchased | — | — | | | | — | — | | ||||||||||||||
Equity issuance costs | — | — | — | | — | — | | |||||||||||||||
Issuance of stock from RSUs | — | — | | — | — | — | — | — | ||||||||||||||
Exercise of warrants | — | — | | | | — | — | | ||||||||||||||
Balance June 30, 2023 | | $ | — | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
Three Months Ended June 30, 2022 | ||||||||||||||||||||||
Series C Convertible | Additional | Accumulated | Total | |||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||
Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit | Income (Loss) |
| Equity | |||||||||
Balance March 31, 2022 | | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | ( | ( | ||||||||||||||
Stock compensation | — | — | — | — | | — | — | | ||||||||||||||
Issuance of stock from RSUs | — | — | | — | — | — | — | — | ||||||||||||||
Exercise of warrants | — | — | | — | | — | — | | ||||||||||||||
Balance June 30, 2022 | | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
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 | | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | | | ||||||||||||||
Stock compensation | — | — | — | — | | — | — | | ||||||||||||||
Issuance of stock from RSUs | — | — | | — | — | — | — | — | ||||||||||||||
Exercise of warrants | | — | | — | — | | ||||||||||||||||
Balance June 30, 2022 | | $ | — | | $ | — | $ | | $ | ( | $ | ( | $ | | ||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
6
RESHAPE LIFESCIENCES INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(dollars in thousands)
Six Months Ended June 30, | ||||||
2023 | 2022 | |||||
Cash flows from operating activities: |
| |||||
Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||
Depreciation expense |
| |
| | ||
Amortization of intangible assets | | | ||||
(Gain) Loss on disposal of assets, net | ( | | ||||
Stock-based compensation | | | ||||
Bad debt expense | | ( | ||||
Provision for inventory excess and obsolescence | | | ||||
Deferred income tax | ( | — | ||||
Gain on changes in fair value of liability warrants | ( | — | ||||
Offering cost | | — | ||||
Other noncash items | | ( | ||||
Change in operating assets and liabilities, net of business combination: |
|
| ||||
Accounts and other receivables |
| |
| | ||
Inventory |
| |
| ( | ||
Prepaid expenses and other current assets |
| ( |
| | ||
Accounts payable and accrued liabilities | ( | | ||||
Warranty liability |
| ( |
| ( | ||
Other |
| ( |
| — | ||
Net cash used in operating activities | ( | ( | ||||
Cash flows from investing activities: | ||||||
Capital expenditures | ( | ( | ||||
Proceeds from sale of capital assets | | | ||||
Cash (used in) provided by investing activities: | ( | | ||||
Cash flows from financing activities: | ||||||
Proceeds from sale and issuance of securities | | — | ||||
Proceeds from warrants exercised | — | | ||||
Net cash provided by financing activities | | | ||||
Effect of currency exchange rate changes on cash and cash equivalents |
| ( |
| | ||
Net increase (decrease) in cash, cash equivalents and restricted cash |
| |
| ( | ||
Cash, cash equivalents and restricted cash at beginning of period | | | ||||
Cash, cash equivalents and restricted cash at end of period | $ | | $ | | ||
Supplemental disclosure: | ||||||
Cash paid for income taxes | $ | — | $ | — | ||
Cash paid for interest | — | — | ||||
Noncash investing and financing activities: | ||||||
Capital expenditures accruals | $ | — | $ | | ||
See accompanying notes to Condensed Consolidated Financial Statements.
7
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, 2022, filed on April 17, 2023. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") have been condensed or omitted.
In the opinion of management, the interim consolidated condensed financial statements reflect all adjustments considered necessary for a fair statement of the interim periods. All such adjustments are of a normal, recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.
Reverse Stock Split and Merger Exchange Ratio
On December 23, 2022, at the commencement of trading, the Company effected a -for-50 reverse stock split. Accordingly, all share and per share amounts for the periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the reverse stock split. No fractional shares were issued in connection with the reverse stock split.
Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 4 to its audited consolidated financial statements for the year ended December 31, 2022, which are included in the Company’s Annual Report on Form 10-K which was filed with the SEC on April 17, 2023.
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 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.
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 7 regarding fair value measurements and inputs of warrants.
8
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, | ||||
| 2023 |
| 2022 | |
Stock options |
| |
| |
Unvested restricted stock units | | | ||
Convertible preferred stock | | | ||
Warrants |
| |
| |
Recent Accounting Pronouncements
New accounting standards adopted are discussed below.
In June 2016, the FASB issued Accounting Standards Update (“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 became effective on January 1, 2023 and did not have a material impact to the 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 June 30, 2023, the Company had net working capital of approximately $
The Company’s anticipated operations include plans to (i) grow sales and operations of the Company with the Lap-Band product line both domestically and internationally as well as to obtain cost savings synergies, (ii) introduce to the market place ReShapeCare and ReShape Marketplace as an extension, (iii) marketing efforts to increase brand recognition, create customer awareness and increase the patient demand, (iv) continue development of the Diabetes Bloc-Stem Neuromodulation (DBSN) device, (v) seek opportunities to leverage our intellectual property portfolio and custom development services to provide third-party sales and licensing opportunities, and (vi) explore and capitalize on synergistic opportunities to expand our portfolio and offer future minimally invasive treatments and therapies in the obesity continuum of care, including Lap-Band 2.0. The Company believes that it has the flexibility to manage the growth of its expenditures and operations depending on the amount of available cash flows, which could include reducing expenditures for marketing, clinical and product development activities.
The Company may be required to raise additional capital, however, there can be no assurance as to whether additional financing will be available on terms acceptable to the Company, if at all. If sufficient funds on acceptable terms are not available when needed, it would have a negative impact on the Company’s financial condition and could force the Company to delay, limit, reduce, or terminate product development or future commercialization efforts or grant rights to develop and market product candidates or testing products that the Company would otherwise plan to develop.
Therefore, the plans cannot be deemed probable of being implemented. As a result, the Company’s plans do not alleviate substantial doubt about our ability to continue as a going concern.
9
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
The impact of COVID-19 has subsided substantially in the U.S. but continues to result in reduced activity levels outside of the U.S., such as continued restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes or places of business.
(3) Supplemental Balance Sheet Information
Components of selected captions in the condensed consolidated balance sheets consisted of the following:
Inventory:
June 30, | December 31, | |||||
2023 |
| 2022 | ||||
Raw materials | $ | | $ | | ||
Sub-assemblies | | | ||||
Finished goods |
| |
| | ||
Total inventory | $ | | $ | | ||
Prepaid expenses and other current assets:
June 30, | December 31, | |||||
2023 |
| 2022 | ||||
Prepaid insurance | $ | | $ | | ||
Patents | | — | ||||
Prepaid advertising and marketing | | | ||||
Taxes | | — | ||||
Other current assets | | | ||||
Total prepaid expenses and other current assets | $ | | $ | | ||
Accrued and other liabilities:
June 30, | December 31, | |||||
2023 |
| 2022 | ||||
Payroll and benefits | $ | | $ | | ||
Accrued legal settlements | | | ||||
Customer deposits | | | ||||
Taxes | | | ||||
Accrued professional | | | ||||
Other liabilities |
| |
| | ||
Total accrued and other liabilities | $ | | $ | | ||
10
(4) Intangible Assets
The Company’s finite-lived intangible assets consists of developed technology, and trademarks and tradenames. The estimated useful lives of these finite-lived intangible assets is
June 30, 2023 | |||||||||||
| Weighted Average Useful Life (years) |
| Gross Carrying Amount |
| Accumulated Amortization |
| Net Book Value | ||||
Finite-lived intangible assets: | |||||||||||
Developed technology | $ | $ | ( | $ | |||||||
Trademarks/Tradenames | ( | ||||||||||
Total | $ | $ | ( | $ | |||||||
December 31, 2022 | |||||||||||
| Weighted Average Useful Life (years) |
| Gross Carrying Amount |
| Accumulated Amortization |
| Net Book Value | ||||
Finite-lived intangible assets: | |||||||||||
Developed technology | $ | $ | ( | $ | |||||||
Trademarks/Tradenames | ( | ||||||||||
Total | $ | $ | ( | $ | |||||||
(5) Leases
The Company has a noncancelable operating lease for office and warehouse space in San Clemente, which was extended by
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 $
11
Supplemental information related to operating leases is as follows:
June 30 | December 31, | |||||
Balance Sheet information | 2023 | 2022 | ||||
Operating lease ROU assets | $ | | $ | | ||
Operating lease liabilities, current portion | $ | | $ | | ||
Operating lease liabilities, long-term portion | | — | ||||
Total operating lease liabilities | $ | | $ | | ||
Cash flow information for the six months ended June 30, | 2023 | 2022 | ||||
Cash paid for amounts included in the measurement of operating leases liabilities | $ | | $ | | ||
Maturities of operating lease liabilities were as follows:
2023 | | |||
2024 | | |||
2025 | | |||
2026 | | |||
Total lease payments | | |||
Less: imputed interest | | |||
Total lease liabilities | $ | | ||
Weighted-average remaining lease term at end of period (in years) | ||||
Weighted-average discount rate at end of period | % |
(6) Equity
Common Stock Issued Related to Restricted Stock Units
During the three months ended June 30, 2023 and 2022, the Company issued
12
April Securities Offering
On April 20, 2023, the Company entered into a Securities Purchase Agreement with a certain institutional investor, pursuant to which the Company agreed to issue and sell to the Investor in a registered direct offering (i)
In connection with the Offering, the Company also agreed that certain existing warrants to purchase up to an aggregate of
The Company’s exclusive placement agent in connection with the Offering, Maxim Group LLC, received a cash fee equal to
The offering closed April 24, 2023.
February Public Offering of Common Stock and Warrants
On February 8, 2023, the Company closed a public offering of
Gross proceeds, before deducting underwriting discounts and commissions and estimated offering expenses, are approximately $
The Company also granted the underwriters an option to purchase an additional
(7) Warrants
On April 24, 2023, the Company completed a securities purchase offering in which
In addition,
13
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
As part of the terms of the offering the Company issued
On February 8, 2023, the Company completed a public offering in which
Cash Exercise | Cashless Exercise | |||||
Stock Price | $ | $ | ||||
Exercise Price | $ | $ | ||||
Term (years) | ||||||
Volatility | ||||||
Risk Free Rate | ||||||
Dividend Yield | ||||||
The following table presents the changes in the fair value of warrant liabilities:
Common Stock | |||
Purchase Warrants | |||
Fair value as of February 8, 2023 (issuance date) | $ | | |
Fair value of liability warrants in excess of proceeds, at issuance | ( | ||
Exercises of liability warrants | ( | ||
Gain on changes in fair value of liability warrants | ( | ||
Fair value as of June 30, 2023 | $ | | |
In addition,
As part of the terms of the offering the Company issued
14
(8) Revenue Disaggregation and Operating Segments
The Company conducts operations worldwide and has sales in the following regions: United States, Australia, Europe and Rest of World. For the three and six months ended June 30, 2023 and 2022, the Company primarily only sold the Lap-Band system. The following table presents the Company’s revenue disaggregated by geography:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
United States | $ | | $ | | $ | | $ | | ||||
Australia | | | | | ||||||||
Europe | | | | | ||||||||
Rest of world | | | | | ||||||||
Total revenue | $ | | $ | | $ | $ | ||||||
Operating Segments
The Company conducts operations worldwide and is managed in the following geographical regions: United States, Australia, Europe and 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 and six months ended June 30, 2023 and 2022. During the three and six months ended June 30, 2023 and 2022, there was minimal revenue for ReShapeCare. There was
(9) Income Taxes
During the three months ended June 30, 2023 and 2022, the Company recorded income tax expense of $
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 valuation allowance at both June 30, 2023 and December 31, 2022.
15
(10) Stock-based Compensation
Stock-based compensation expense related to stock options and RSUs issued under the ReShape Lifesciences Inc. Second Amended and Restated 2003 Stock Incentive Plan (the “Plan”) for the three and six months ended June 30, 2023 and 2022 were as follows:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||
Sales and marketing | $ | | $ | | $ | | $ | | ||||
General and administrative | | | | | ||||||||
Research and development | | | | | ||||||||
Total stock-based compensation expense | $ | | $ | | $ | | $ | | ||||
Stock Options
A summary of the status of the Company’s stock options as of June 30, 2023, and changes during the six months ended June 30, 2023 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, 2022 |
| | | $ | — | |||||
Options granted |
| — | — | |||||||
Options exercised |
| — | — | |||||||
Options cancelled |
| ( | | |||||||
Outstanding at June 30, 2023 |
| | | $ | — | |||||
Exercisable at June 30, 2023 | | | — | |||||||
Vested and expected to vest at June 30, 2023 | | | — | |||||||
There was
Stock option awards outstanding under the Company’s incentive plans have been granted at exercise prices that are equal to the market value of its common stock on the date of grant. Such options generally vest over a period of
Expected Term – The estimate of expected term is based on the historical exercise behavior of grantees, as well as the contractual life of the options granted.
Expected Volatility – The expected volatility factor is based on the volatility of the Company’s common stock 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.
16
Restricted Stock Units
A summary of the Company’s unvested RSUs award activity for the six months ended June 30, 2023, is as follows:
Weighted | |||||
Average | |||||
| Grant Date | ||||
Shares | Fair Value | ||||
Unvested RSUs at December 31, 2022 |
| | $ | | |
Granted |
| — | — | ||
Vested (1) |
| ( | | ||
Cancelled/Forfeited |
| — | — | ||
Non-vested RSUs at June 30, 2023 |
| | | ||
| (1) | At June 30, 2023, there were |
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 June 30, 2023 was $
(11) 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 $
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.
17
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 ReShapeCare virtual health coaching program, the ReShape Marketplace, the Obalon Balloon System, and the Diabetes Bloc-Stim Neuromodulation device, a technology under development as a new treatment for type 2 diabetes mellitus. There has been no revenue recorded for the Obalon Balloon System, and there has been no revenue recorded for the Diabetes Bloc-Stim Neuromodulation as this product is still in the development stage.
Recent Developments
On March 13, 2023 we entered into a lease for approximately 5,038 square feet of office/warehouse space at 18 Technology Drive, Suite 110, Irvine, California 92618 and relocated our 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 and commenced on May 1, 2023.
18
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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Revenue | $ | 2,254 | 100.0 | % | $ | 2,892 | 100.0 | % | $ | 4,541 | 100.0 | % | $ | 5,332 | 100.0 | % | |||||||
Cost of revenue | 1,060 | 47.0 | % | 1,009 | 34.9 | % | 2,123 | 46.8 | % | 2,231 | 41.8 | % | |||||||||||
Gross profit | 1,194 | 53.0 | % | 1,883 | 65.1 | % | 2,418 | 53.2 | % | 3,101 | 58.2 | % | |||||||||||
Operating expenses: | |||||||||||||||||||||||
Sales and marketing | 2,177 | 96.6 | % | 4,636 | 160.3 | % | 4,359 | 96.0 | % | 9,330 | 175.0 | % | |||||||||||
General and administrative | 2,445 | 108.5 | % | 5,363 | 185.4 | % | 6,667 | 146.8 | % | 9,254 | 173.6 | % | |||||||||||
Research and development | 581 | 25.8 | % | 747 | 25.8 | % | 1,033 | 22.7 | % | 1,492 | 28.0 | % | |||||||||||
(Gain) loss on disposal of assets, net | (33) | (1.5) | % | 381 | 13.2 | % | (33) | (0.7) | % | 381 | 7.1 | % | |||||||||||
Total operating expenses | 5,170 | 229.4 | % | 11,127 | 384.7 | % | 12,026 | 264.8 | % | 20,457 | 383.7 | % | |||||||||||
Operating loss | (3,976) | (176.4) | % | (9,244) | (319.6) | % | (9,608) | (211.6) | % | (17,356) | (325.5) | % | |||||||||||
Other expense (income), net: | |||||||||||||||||||||||
Interest income, net | (9) | (0.4) | % | (14) | (0.5) | % | (4) | (0.1) | % | (15) | (0.3) | % | |||||||||||
Gain on changes in fair value of liability warrants | (472) | (20.9) | % | - | - | % | (3,438) | (75.7) | % | — | — | % | |||||||||||
Gain on foreign currency exchange, net | — | — | % | 204 | 7.1 | % | (21) | (0.5) | % | 188 | 3.5 | % | |||||||||||
Other | (6) | (0.3) | % | 1 | — | % | (8) | (0.2) | % | (9) | (0.2) | % | |||||||||||
Loss before income tax provision | (3,489) | (154.8) | % | (9,435) | (326.2) | % | (6,137) | (135.1) | % | (17,520) | (328.5) | % | |||||||||||
Income tax expense | 4 | 0.2 | % | 9 | 0.3 | % | 18 | 0.4 | % | 39 | 0.7 | % | |||||||||||
Net loss | $ | (3,493) | (155.0) | % | $ | (9,444) | (326.6) | % | $ | (6,155) | (135.6) | % | $ | (17,559) | (329.3) | % | |||||||
Non-GAAP Disclosures
In addition to the financial information prepared in conformity with GAAP, we provide certain historical non-GAAP financial information. Management believes that these non-GAAP financial measures assist investors in making comparisons of period-to-period operating results.
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.
19
The following table contains a reconciliation of GAAP net loss to Adjusted EBITDA net loss attributable to common stockholders for the three and six months ended June 30, 2023 and 2022 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||
GAAP net loss | $ | (3,493) | $ | (9,444) | $ | (6,155) | $ | (17,559) | |||
Adjustments: | |||||||||||
Interest income, net | (9) | (14) | (4) | (15) | |||||||
Income tax benefit | 4 | 9 | 18 | 39 | |||||||
Depreciation and amortization | 49 | 545 | 97 | 1,095 | |||||||
Stock-based compensation expense | 217 | 770 | 440 | 1,489 | |||||||
(Gain) Loss on disposal of assets, net | (33) | 381 | (33) | — | |||||||
Gain on changes in fair value of liability warrants | (472) | — | (3,438) | — | |||||||
Adjusted EBITDA | $ | (3,737) | $ | (7,753) | $ | (9,075) | $ | (14,951) | |||
Comparison of Results of Operations
Three months ended June 30, 2023 and June 30, 2022
Revenue. The following table summarizes our unaudited revenue by geographic location based on the location of customers for the three months ended June 30, 2023 and 2022, 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 June 30, | Amount | Percentage | |||||||||||||||
2023 | 2022 | Change | Change | ||||||||||||||
United States | $ | 1,929 | 85.6 | % | $ | 2,308 | 79.8 | % | $ | (379) | (16.4) | % | |||||
Australia | 123 | 5.5 | % | 188 | 6.5 | % | (65) | (34.6) | % | ||||||||
Europe | 193 | 8.6 | % | 389 | 13.5 | % | (196) | (50.4) | % | ||||||||
Rest of world | 9 | 0.3 | % | 7 | 0 | % | 2 | 28.6 | % | ||||||||
Total revenue | $ | 2,254 | 100.0 | % | $ | 2,892 | 100.0 | % | $ | (638) | (22.1) | % | |||||
Revenue totaled $2.3 million for the three months ended June 30, 2023, which represents a contraction of 22.1%, or $0.6 million compared to the same period in 2022. The primary reason is due to a decrease in sales throughout the US and Europe. During the three months ended June 30, 2023, the Company focused on its new strategies for marketing through a targeted digital media campaign near bariatric surgical centers, while reducing costs and increasing efficiencies. Our expectation is during the second half of 2023 these efforts will come to fruition and revenue will grow through the remainder of 2023, as we continue to focus on increasing the demand for the Lap-Band system and our recently launched three new sizes of calibration tubes.
Cost of Goods Sold and Gross Profit. The following table summarizes our unaudited cost of revenue and gross profit for the three months ended June 30, 2023 and 2022, as well as the percentage compared to total revenue and amount of change and percentage of change (dollars in thousands):
Three Months Ended June 30, | Amount | Percentage | |||||||||||||||
2023 | 2022 | Change | Change | ||||||||||||||
Revenue | $ | 2,254 | 100.0 | % | $ | 2,892 | 100.0 | % | $ | (638) | (22.1) | % | |||||
Cost of revenue | 1,060 | 47.0 | % | 1,009 | 34.9 | % | 51 | 5.1 | % | ||||||||
Gross profit | $ | 1,194 | 53.0 | % | $ | 1,883 | 65.1 | % | $ | (689) | (36.6) | % | |||||
Gross Profit. Gross profit for the three months ended June 30, 2023 was $1.2 million, compared to $1.9 million for the same period in 2022, a decrease of $0.7 million. Gross profit as a percentage of total revenue for the three months ended June 30, 2023, was 53.0% compared to 65.1% for the same period in 2022. The decrease in gross profit percentage is due to the decrease in sales with related overhead costs remaining consistent.
20
Operating Expense. The following table summarizes our unaudited operating expenses for the three months ended June 30, 2023 and 2022, as well as the percentage of total revenue and the amount of change and percentage of change (dollars in thousands):
Three Months Ended June 30, | Amount | Percentage | |||||||||||||||
2023 | 2022 | Change | Change | ||||||||||||||
Sales and marketing | $ | 2,177 | 96.6 | % | $ | 4,636 | 160.3 | % | $ | (2,459) | (53.0) | % | |||||
General and administrative | 2,445 | 108.5 | % | 5,363 | 185.5 | % | (2,918) | (54.4) | % | ||||||||
Research and development | 581 | 25.8 | % | 747 | 25.8 | % | (166) | (22.2) | % | ||||||||
(Gain) loss on disposal of assets, net | (33) | (1.5) | % | 381 | 13.2 | % | (414) | (108.7) | % | ||||||||
Total operating expenses | $ | 5,170 | 229.4 | % | $ | 11,127 | 384.8 | % | $ | (5,957) | (53.5) | % | |||||
Sales and Marketing Expense. Sales and marketing expenses for the three months ended June 30, 2023, decreased by $2.5 million, or 53.0%, to $2.2 million, compared to $4.6 million for the same period in 2022. The decrease is primarily due to a decrease of $1.6 million in advertising and marketing expenses, as the Company has reevaluated its marketing approach and has moved to a targeted digital marketing campaign, resulting in a reduction of costs. We also had a reduction in payroll expenditure, including commissions and travel of $0.6 million, due to changes in sales personnel and lower sales. There was also a reduction in stock based compensation expenses of $0.1 million. We also had a reduction in consulting related services of $0.1 million.
General and Administrative Expense. General and administrative expenses for the three months ended June 30, 2023, decreased by $2.9 million, or 54.4%, to approximately $2.5 million, compared to $5.4 million for the same period in 2022. The decrease is primarily due to a reduction in legal related expenses of $1.9 million, due to the Company recording $2.0 million in litigation losses during the three months ended June 30, 2022. In addition, the Company had a reduction in stock based compensation expense of $0.4 million and a reduction in payroll related expenditures of $0.4 million, due to changes within personnel. We had a decrease in intangible asset amortization, as we impaired our finite intangible assets during the fourth quarter of 2022. We also had a decrease in rent and insurance of $0.2 million due to the lease of our Carlsbad, CA location expiring.
Research and Development Expense. Research and development expenses for the three months ended June 30, 2023, decreased by $0.2 million, or 22.2%, to $0.6 million, compared to approximately $0.8 million for the same period in 2022. The decrease is primarily due to a decrease of $0.1 million in payroll expenses and a reduction of $0.1 million in consulting and clinical related expenses, including depreciation of assets.
(Gain) Loss on Disposal of Assets, Net. Loss on disposal of assets decreased by approximately $0.4 million for the three months ended June 30, 2023, compared to the same period in the prior year. During the three months ended June 30, 2022, the Company disposed of $0.4 million of assets that were acquired from the merger with Obalon and during the three months ended June 30, 2023, we sold approximately $30 thousand of fully depreciated assets during our relocation from San Clemente, CA to Irvine, CA.
Six months ended June 30, 2023 and June 30, 2022
Revenue. The following table summarizes our unaudited revenue by geographic location based on the location of customers for the six months ended June 30, 2023 and 2022, as well as the percentage of each location to total revenue and the amount of change and percentage of change (dollars in thousands):
Six Months Ended June 30, | Amount | Percentage | |||||||||||||||
2023 | 2022 | Change | Change | ||||||||||||||
United States | $ | 3,742 | 82.4 | % | $ | 4,152 | 77.9 | % | $ | (410) | (9.9) | % | |||||
Australia | 280 | 6.2 | % | 369 | 6.9 | % | (89) | (24.1) | % | ||||||||
Europe | 497 | 10.9 | % | 803 | 15.0 | % | (306) | (38.1) | % | ||||||||
Rest of world | 22 | 0.5 | % | 8 | 0.2 | % | 14 | 175.0 | % | ||||||||
Total revenue | $ | 4,541 | 100.0 | % | $ | 5,332 | 100.0 | % | $ | (791) | (14.8) | % | |||||
Revenue totaled $4.5 million for the six months ended June 30, 2023, which represents a contraction of 14.8%, or $0.8 million compared to the same period in 2022. The primary reason is due to a decrease in sales throughout the US
21
and Europe. During the six months ended June 30, 2023, the Company focused on its new strategies for marketing through a targeted digital media campaign near bariatric surgical centers, while reducing costs and increasing efficiencies. Our expectation is during the second half of 2023 these efforts will come to fruition and revenue will grow through the remainder of 2023, as we continue to focus on increasing the demand for the Lap-Band system and our fully launched three new sizes of calibration tubes.
Cost of Goods Sold and Gross Profit. The following table summarizes our unaudited cost of revenue and gross profit for the six months ended June 30, 2023 and 2022, as well as the percentage compared to total revenue and amount of change and percentage of change (dollars in thousands):
Six Months Ended June 30, | Amount | Percentage | |||||||||||||||
2023 | 2022 | Change | Change | ||||||||||||||
Revenue | $ | 4,541 | 100.0 | % | $ | 5,332 | 100.0 | % | $ | (791) | (14.8) | % | |||||
Cost of revenue | 2,123 | 46.8 | % | 2,231 | 41.8 | % | (108) | (4.8) | % | ||||||||
Gross profit | $ | 2,418 | 53.2 | % | $ | 3,101 | 58.2 | % | $ | (683) | (22.0) | % | |||||
Gross Profit. Gross profit for the six months ended June 30, 2023 was $2.4 million, compared to $3.1 million for the same period in 2022, a decrease of $0.7 million. Gross profit as a percentage of total revenue for the six months ended June 30, 2023, was 53.2% compared to 58.2% for the same period in 2022. The decrease in gross profit percentage is due to the decrease in sales and additional fixed costs.
Operating Expense. The following table summarizes our unaudited operating expenses for the six months ended June 30, 2023 and 2022, as well as the percentage of total revenue and the amount of change and percentage of change (dollars in thousands):
Six Months Ended June 30, | Amount | Percentage | |||||||||||||||
2023 | 2022 | Change | Change | ||||||||||||||
Sales and marketing | $ | 4,359 | 96.0 | % | $ | 9,330 | 175.0 | % | $ | (4,971) | (53.3) | % | |||||
General and administrative | 6,667 | 146.8 | % | 9,254 | 173.6 | % | (2,587) | (28.0) | % | ||||||||
Research and development | 1,033 | 22.7 | % | 1,492 | 28.0 | % | (459) | (30.8) | % | ||||||||
(Gain) loss on disposal of assets, net | (33) | (0.7) | % | 381.0 | 7.1 | % | (414) | (108.7) | % | ||||||||
Total operating expenses | $ | 12,026 | 264.8 | % | $ | 20,457 | 383.7 | % | $ | (8,431) | (41.2) | % | |||||
Sales and Marketing Expense. Sales and marketing expenses for the six months ended June 30, 2023, decreased by $5.0 million, or 53.3%, to approximately $4.3 million, compared to $9.3 million for the same period in 2022. The decrease is primarily due to a decrease of $4.0 million in advertising and marketing expenses, as the Company has reevaluated its marketing approach and has moved to a targeted digital marketing campaign, resulting in a significant reduction of costs. We also had reductions in payroll expenditures, including commissions, travel and stock based compensation of $1.0 million, due to changes in sales personnel and lower sales.
General and Administrative Expense. General and administrative expenses for the six months ended June 30, 2023, decreased by $2.6 million, or 28.0%, to approximately $6.7 million, compared to $9.3 million for the same period in 2022. The decrease is primarily due to a reduction in legal related expenses of $1.7 million, due to the Company recording $2.0 million in litigation losses during the three months ended June 30, 2022. In addition, the Company had a reduction in stock based compensation expense of $0.8 million and a reduction in payroll related expenditures of $0.6 million, due to changes within personnel. We had a decrease in intangible asset amortization of $0.9 million, as we impaired our finite intangible assets during the fourth quarter. We also had a decrease in rent and insurance of $0.4 million due to the lease of our Carlsbad, CA location expiring. This was offset by an increase in audit and professional services of approximately $1.9 million, primarily due to the offerings we completed in February 2023 and April 2023.
Research and Development Expense. Research and development expenses for the six months ended June 30, 2023, decreased by $0.5 million, or 30.8%, to $1.0 million, compared to $1.5 million for the same period in 2022. The decrease is primarily due to a decrease of $0.2 million in payroll expenses and a reduction of $0.1 million in consulting
22
and clinical related expenses. We also had minor decrease in both stock based compensation expense and depreciation expense.
(Gain) Loss on Disposal of Assets, Net. Loss on disposal of assets decreased by approximately $0.4 million for the three months ended June 30, 2023, compared to the same period in the prior year. During the six months ended June 30, 2022, the Company disposed of $0.4 million of assets that were acquired from the merger with Obalon and during the six months ended June 30, 2023, we sold approximately $30 thousand of fully depreciated assets during our relocation from San Clemente, CA to Irvine, CA.
Liquidity and Capital Resources
The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company currently does not generate revenue sufficient to offset operating costs and anticipates such shortfalls to continue 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 June 30, 2023, the Company had net working capital of approximately $6.1 million, primarily due to cash and cash equivalents and restricted cash of $4.7 million. The Company’s principal source of liquidity as of June 30, 2023, consisted of approximately $4.7 million of cash and cash equivalents and restricted cash, and $2.0 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.
The following table summarizes our change in cash and cash equivalents and restricted cash (in thousands):
Six Months Ended | ||||||
June 30, | ||||||
2023 |
| 2022 | ||||
Net cash used in operating activities | $ | (11,723) | $ | (13,800) | ||
Net cash (used in) provided by investing activates | (10) | 20 | ||||
Net cash provided by financing activities |
| 12,451 |
| 2,489 | ||
Effect of exchange rate changes | (6) | 20 | ||||
Net change in cash and cash equivalents and restricted cash | $ | 712 | $ | (11,271) | ||
Net Cash Used in Operating Activities
Net cash used in operating activities from operations was $11.7 million and $13.8 million for the six months ended June 30, 2023 and 2022, respectively. For the six months ended June 30, 2023, net cash used in operating activities was primarily the result of our net loss of $6.2 million, partially offset by non-cash adjustments for stock-based compensation expense of $0.4 million, non-cash offering cost of $0.3 million and bad debt expense of approximately $0.1 million, offset by a negative cash impact related to gains recognized for changes in fair value of liability warrants of $3.4 million. We show a negative cash impact on accounts payable and accrued liabilities of $2.8 million and prepaid expenses of $0.5 million. This was offset by a positive cash impact on inventory of $0.3 million.
For the six months ended June 30, 2022, net cash used in operating activities was primarily the result of our net loss of $17.6 million, partially offset by non-cash adjustments for stock-based compensation expense of $1.5 million, amortization of intangible assets of $0.9 million, depreciation expense of $0.2 million, provision for excess and obsolete inventory of $0.1 million, and a loss on disposal of assets of $0.4 million, offset by non-cash reduction of expense for bad debt expense of $0.1 million. We show a negative cash impact to inventory of $1.4 million, as the Company is building up its inventory to meet the expected increase in demand due to the direct to consumer marketing campaign, and warranty liability of $0.2 million. This was offset by a positive cash impact to accounts payable and accrued liabilities of $1.5 million, accounts and other receivables of $0.5 million and prepaid expenses of $0.4 million.
23
Net Cash (Used in) Provided by Investing Activities
Net cash (used in) and provided by investing activities for the six months ended June30, 2023 and 2022, was minimal.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $12.5 million for the six months ended June 30, 2023, due to the proceeds received from the public offering completed during February 2023 and April 2023, less costs to complete the transaction.
Net cash provided by financing activities was $2.5 million for the six months ended June 30, 2022, due to the proceeds received from an exercise of warrants from an institutional investor.
Operating Capital and Capital Expenditure Requirements
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. The Company’s anticipated operations include plans to (i) grow sales and operations of the Company with the Lap-Band product line both domestically and internationally as well as to obtain cost savings synergies, (ii) introduce to the market place ReShapeCare and ReShape Marketplace as an extension, (iii) ramp up a focused approach of marketing to increase brand recognition, create customer awareness and increase the patient demand, (iv) continue development of the DBSN device, (v) seek opportunities to leverage our intellectual property portfolio and custom development services to provide third-party sales and licensing opportunities, and (vi) explore and capitalize on synergistic opportunities to expand our portfolio and offer future minimally invasive treatments and therapies in the obesity continuum of care, including Lap-Band 2.0 and the Obalon Balloon System. The Company believes that it has the flexibility to manage the growth of its expenditures and operations depending on the amount of available cash flows, which could include reducing expenditures for marketing, clinical and product development activities.
Because of the numerous risks and uncertainties associated with the development of medical devices, such as our Diabetes Bloc-Stim Neuromodulation, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to complete the development of the Diabetes Bloc-Stim Neuromodulation or other additional products and successfully deliver a commercial product to the market. Our future capital requirements will depend on many factors, including, but not limited to, the following:
| ● | the cost and timing of establishing sales, marketing and distribution capabilities; |
| ● | the cost of establishing clinical and commercial supplies of our Diabetes Bloc-Stim Neuromodulation, and any product candidates; |
| ● | the rate of market acceptance of our Diabetes Bloc-Stim Neuromodulation, and any other product candidates; |
| ● | the cost of filing and prosecuting patent applications and defending and enforcing our patent and other intellectual property rights; |
| ● | the cost of defending, in litigation or otherwise, any claims that we infringe third-party patent or other intellectual property rights; |
| ● | the effect of competing products and market developments; |
| ● | the cost of explanting clinical devices; |
| ● | the terms and timing of any collaborative, licensing or other arrangements that we may establish; |
| ● | any revenue generated by sales of our Lap-Band, ReShapeCare, ReShape Marketplace, Obalon Balloon System, Diabetes Bloc-Stim Neuromodulation or our future products; |
| ● | the scope, rate of progress, results and cost of our clinical trials and other research and development activities; |
24
| ● | the cost and timing of obtaining any further required regulatory approvals; and |
| ● | the extent to which we invest in products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions. |
Critical Accounting Policies and Estimates
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies and estimates which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes from the information discussed therein.
During the six months ended June 30, 2023 there were no material changes to our significant accounting policies above, which are fully described in Note 4 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Recent Accounting Pronouncements
See Note 1 to our condensed consolidated financial statements for a discussion of recent accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide disclosure pursuant to this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), defines the term “disclosure controls and procedures” as those controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. An internal control material weakness is a significant deficiency, or aggregation of deficiencies, that does not reduce to a relatively low level the risk that material misstatements in financial statements will be prevented or detected on a timely basis by employees in the normal course of their work. An internal control significant deficiency, or aggregation of deficiencies, is one that could result in a misstatement of the financial statements that is more than inconsequential. In making its assessment of internal control over financial reporting management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2023, and determined that our internal control over financial reporting was not effective at a reasonable assurance level due to the following material weakness in our internal control over financial reporting:
Control Environment: We had insufficient internal resources with appropriate accounting and finance knowledge and expertise to design, implement, document and operate effective internal controls around our financial reporting process. The insufficient internal resources resulted in misstatements of our revenue recognition, stock based compensation, weighted average share calculation, disclosures of income taxes and expense cut off at period end.
25
Purchase Accounting: The Company did not design and maintain effective management review controls at a sufficient level of precision over the accounting for transactions related to the prepaid D&O insurance policy purchased in connection with the merger transaction in June 2021. This material weakness resulted in certain material corrections to the financial statements and in the restatement of the Company’s financial statements for the annual and interim consolidated financial statements for the year ended December 31, 2021, and the interim consolidated financial statements in the quarters in the year ended December 31, 2022.
Income Taxes: The Company did not design and maintain effective management review controls at a sufficient level of precision over the accounting for income taxes.
Journal entry access and review: The Company did not have effective processes to ensure that all journal entries were properly approved prior to being posted to the general ledger. Furthermore, a segregation of duties conflict is present as certain individuals have the ability to both prepare and post journal entries to the general ledger.
Information technology access and change management: A segregation of duties conflict is present as access and approval rights to the Company’s information technology systems are not reviewed on a timely basis. Furthermore, certain individuals have the ability to develop and deploy changes to production which could create a segregation of duties risk.
We are currently implementing our remediation plan to address the material weaknesses identified above. Such measures include:
| ● | Hiring additional accounting personnel to ensure timely reporting of significant matters. |
| ● | Designing and implementing controls to formalize roles and review responsibilities to align with our team's skills and experience and designing and implementing formalized controls. |
| ● | Designing and implementing formal processes, policies and procedures supporting our financial close process. |
| ● | Design a formal review of a monthly journal entry report to ensure journal entries are appropriately approved within a timely manner. |
Changes in Internal Control over Financial Reporting
Other than in connection with executing upon the continued implementation of the remediation measures referenced above, there have been no changes in our internal controls over financial reporting during the quarter ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. To date, the Company has paid the $1.35 million judgement, including related interest, and the first $275,000 installment of Cowen’s attorneys’ fees. At June 30, 2023, $400 thousand of attorneys’ fees were included as accrued expenses.
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
26
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.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors set forth in Item 1A. “Risk Factors” of our 2022 Annual Report on Form 10-K filed on April 17, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None, except as described above in this Form 10-Q.
Uses of Proceeds from Sale of Registered Securities
None.
Purchases of Equity Securities
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
27
ITEM 6. EXHIBITS
Exhibit No. | Description | ||||||
|---|---|---|---|---|---|---|---|
4.1 | |||||||
4.2 | |||||||
10.1 | |||||||
31.1** | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||
31.2** | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||
32.1** | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||
32.2** | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||
101** | Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2023, formatted in Inline XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements. | ||||||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||||
** | Filed herewith. |
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RESHAPE LIFESCIENCES INC. | |||||
BY: | /S/ paul f. hickey | ||||
Paul F. Hickey | |||||
President and Chief Executive Officer | |||||
(principal executive officer) | |||||
BY: | /S/ thomas stankovich | ||||
Thomas Stankovich | |||||
Senior Vice President and Chief Financial Officer | |||||
(principal financial and accounting officer) | |||||
Dated: August 7, 2023 | |||||
29