rsls_Current_Folio_10Q

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 September 30, 2018

 

OR

 

 

 

 

 

 

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

 

For the transition period from            to

 

Commission file number: 1-33818

 


 

RESHAPE LIFESCIENCES INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware

48-1293684

(State or other jurisdiction
of incorporation)

(IRS Employer
Identification No.)

 

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

 

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

 


 

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, or a smaller reporting 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 whether the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards 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 November 8, 2018, 955,889  shares of the registrant’s Common Stock were outstanding.

 

 

 

 


 

Table of Contents

 

 

INDEX

 

 

 

 

PART I – FINANCIAL INFORMATION 

 

 

 

Item 1. 

Condensed Consolidated Financial Statements (unaudited)

3

 

Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017

3

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017

4

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2. 

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

28

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4. 

Controls and Procedures

38

 

 

PART II – OTHER INFORMATION 

 

 

 

Item 1. 

Legal Proceedings

39

Item 1A. 

Risk Factors

40

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3. 

Defaults Upon Senior Securities

43

Item 4. 

Mine Safety Disclosures

43

Item 5. 

Other Information

43

Item 6. 

Exhibits

43

SIGNATURES 

45

 

Registered Trademarks and Trademark Applications: In the United States we have registered trademarks for vBLOC®, ENTEROMEDICS®, MAESTRO®,  RESHAPE®, RESHAPE DUO®, and RESHAPE MEDICAL®,  each registered with the United States Patent and Trademark Office, and trademark applications for RESHAPE vBLOC, RESHAPE VEST, RESHAPE LIFESCIENCES AND DESIGN, and RESHAPE BALLOON & COLOR DESIGN. In addition, some or all of the marks vBLOC, ENTEROMEDICS, MAESTRO, MAESTRO SYSTEM ORCHESTRATING OBESITY SOLUTIONS, vBLOC POWER TO CHOOSE, vBLOC POWER TO CHOOSE AND DESIGN, RESHAPE, RESHAPE DUO, and RESHAPE MEDICAL are the subject of either a trademark registration or application for registration in Australia, Brazil, Canada, China, the European Community, India, Kuwait, Mexico, Saudi Arabia, Switzerland and the United Arab Emirates. We believe that we have common law trademark rights to RESHAPE VEST. This Quarterly Report on Form 10-Q may contain other trade names and trademarks and service marks of ReShape Lifesciences and of other companies.

 

 

 

 

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PART I – FINANCIAL INFORMATION

 

ITEM 1.        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

RESHAPE LIFESCIENCES INC.

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2018

    

2017

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

472,873

 

$

10,163,208

Accounts receivable (net of allowance for bad debts of $228,165 and $155,872 at September 30, 2018 and December 31, 2017)

 

 

532,095

 

 

488,613

Inventory

 

 

1,057,753

 

 

2,817,112

Prepaid expenses and other current assets

 

 

601,115

 

 

467,783

Total current assets

 

 

2,663,836

 

 

13,936,716

Property and equipment, net

 

 

181,192

 

 

438,621

Goodwill

 

 

 —

 

 

27,186,620

Other intangible assets, net

 

 

44,127,057

 

 

46,152,577

Other assets

 

 

81,757

 

 

990,015

Total assets

 

$

47,053,842

 

$

88,704,549

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

4,427,824

 

$

1,088,271

Accrued expenses

 

 

4,408,655

 

 

5,955,518

Total current liabilities

 

 

8,836,479

 

 

7,043,789

 

 

 

 

 

 

 

Deferred income taxes

 

 

2,168,761

 

 

5,292,291

Common stock warrant liability

 

 

74

 

 

1,600

Total liabilities

 

 

11,005,314

 

 

12,337,680

Commitments and contingencies (Note 7)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

  Preferred stock, 5,000,000 shares authorized:

 

 

 

 

 

 

Series B convertible preferred stock, $0.01 par value; 20,000 shares issued and 159 and 6,055 shares outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

 2

 

 

61

Series C convertible preferred stock, $0.01 par value; 187,772 shares issued and 95,388 shares outstanding at September 30, 2018 and December 31, 2017

 

 

954

 

 

954

Series D convertible preferred stock, $0.01 par value; 6,000 shares issued and 537  and zero shares outstanding at September 30, 2018 and December 31, 2017

 

 

 5

 

 

 —

Common stock, $0.01 par value; 275,000,000 shares authorized at September 30, 2018 and December 31, 2017;  599,525 and 14,742 shares issued and outstanding at September 30, 2018 and December 31, 2017

 

 

5,995

 

 

147

Additional paid-in capital

 

 

428,263,550

 

 

411,125,061

Accumulated deficit

 

 

(392,221,978)

 

 

(334,759,354)

Total stockholders’ equity

 

 

36,048,528

 

 

76,366,869

Total liabilities and stockholders’ equity

 

$

47,053,842

 

$

88,704,549

 

See accompanying notes to condensed consolidated financial statements.

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RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

    

 

2018

    

 

2017

    

 

2018

    

 

2017

 

Product sales

 

$

335,949

 

$

110,020

 

$

1,910,934

 

$

243,120

 

Service and other revenue

 

 

14,287

 

 

250,000

 

 

42,669

 

 

250,000

 

 Total revenue

 

 

350,236

 

 

360,020

 

 

1,953,603

 

 

493,120

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

263,928

 

 

214,511

 

 

1,727,659

 

 

298,506

 

Gross profit

 

 

86,308

 

 

145,509

 

 

225,944

 

 

194,614

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

6,378,056

 

 

4,595,538

 

 

23,134,131

 

 

16,085,311

 

Research and development

 

 

1,252,242

 

 

1,109,641

 

 

6,379,098

 

 

3,586,129

 

Goodwill impairment

 

 

 —

 

 

 —

 

 

27,186,620

 

 

 —

 

Total operating expenses

 

 

7,630,298

 

 

5,705,179

 

 

56,699,849

 

 

19,671,440

 

Operating loss

 

 

(7,543,990)

 

 

(5,559,670)

 

 

(56,473,905)

 

 

(19,476,826)

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

217

 

 

 —

 

 

891

 

 

100

 

Interest expense

 

 

1,233

 

 

 —

 

 

(1,502)

 

 

 —

 

Warrants expense

 

 

 —

 

 

(4,438,149)

 

 

 —

 

 

(4,438,149)

 

Change in value of warrant liability

 

 

 —

 

 

5,047

 

 

1,494

 

 

(283,688)

 

Other, net

 

 

7,085

 

 

(904)

 

 

(137,331)

 

 

(2,102)

 

Loss before income taxes

 

 

(7,535,455)

 

 

(9,993,676)

 

 

(56,610,353)

 

 

(24,200,665)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

 

531,057

 

 

 —

 

 

3,121,670

 

 

 —

 

Net loss

 

$

(7,004,398)

 

$

(9,993,676)

 

$

(53,488,683)

 

$

(24,200,665)

 

Adjustment for convertible preferred stock and warrants

 

 

(132,151)

 

 

 —

 

 

(3,973,941)

 

 

 —

 

Net loss attributable to common shareholders

 

 

(7,136,549)

 

 

(9,993,676)

 

 

(57,462,624)

 

 

(24,200,665)

 

Net loss per share—basic and diluted

 

$

(27.46)

 

$

(2,215.89)

 

$

(582.45)

 

$

(6,696.37)

 

Shares used to compute basic and diluted net loss per share

 

 

259,912

 

 

4,510

 

 

98,657

 

 

3,614

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Cash Flows 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

 

2018

 

2017

 

Cash flows from operating activities:

 

 

 

    

 

 

    

Net loss

 

$

(53,488,683)

 

$

(24,200,665)

 

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

 

 

 

 

 

 

 

Depreciation

 

 

264,456

 

 

113,831

 

Deferred income taxes

 

 

(3,123,530)

 

 

 —

 

Stock-based compensation

 

 

2,306,853

 

 

3,483,451

 

           Warrants issued to former holders of convertible notes

 

 

 —

 

 

4,438,149

 

           Impairment of goodwill

 

 

27,186,620

 

 

 —

 

Amortization of intangible assets

 

 

2,025,521

 

 

44,777

 

Change in value of warrant liability

 

 

(1,526)

 

 

283,688

 

Warrant inducement expense

 

 

146,245

 

 

 —

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(43,482)

 

 

(189,365)

 

Inventory

 

 

1,759,359

 

 

(257,157)

 

Prepaid expenses and other current assets

 

 

(133,332)

 

 

224,151

 

Other assets

 

 

908,258

 

 

443,033

 

Accounts payable

 

 

3,339,553

 

 

(788,186)

 

Accrued expenses

 

 

(1,546,834)

 

 

675,829

 

Net cash used in operating activities

 

 

(20,400,522)

 

 

(15,728,464)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

 —

 

 

(1,848,720)

 

Purchases of property and equipment

 

 

(7,027)

 

 

(108,625)

 

Net cash used in investing activities

 

 

(7,027)

 

 

(1,957,345)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from warrants exercised

 

 

501,836

 

 

3,334,176

 

Proceeds from sale of common stock and warrants for purchase of common stock

 

 

6,735,662

 

 

6,468,148

 

Proceeds from sale of convertible preferred stock

 

 

6,000,000

 

 

32,531,000

 

Preferred stock redemption in financing transaction

 

 

(500,000)

 

 

 —

 

Common and preferred stock financing costs

 

 

(2,020,284)

 

 

(4,525,005)

 

Net cash provided by financing activities

 

 

10,717,214

 

 

37,808,319

 

Net (decrease) increase in cash and cash equivalents

 

 

(9,690,335)

 

 

20,122,510

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Beginning of period

 

 

10,163,208

 

 

3,310,787

 

End of period

 

$

472,873

 

$

23,433,297

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

Issuance of convertible preferred shares and common shares for acquisitions

 

$

 —

 

$

26,258,963

 

Conversion of convertible preferred shares to common stock

 

$

10,858,735

 

$

21,528,000

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

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ReShape Lifesciences Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

(1)  Summary of Significant Accounting Policies

 

Description of Business

ReShape Lifesciences Inc. (the Company) is focused on the design, development and commercialization of transformative technologies to treat obesity and metabolic diseases. Our growing and differentiated product portfolio is utilized by bariatric surgeons, general surgeons, and gastroenterologists. We believe obesity is a global epidemic and that the majority of patients need treatment options that are anatomy friendly and provide for weight loss and comorbidity improvements along with long-term, ongoing obesity support and prevention.

The Company was incorporated in the state of Minnesota on December 19, 2002, originally as two separate legal entities, Alpha Medical, Inc. and Beta Medical, Inc., both of which were owned 100% by a common stockholder. Effective October 1, 2003, the two entities were combined and the combined entity changed its name to EnteroMedics Inc. The Company reincorporated in Delaware on July 22, 2004. The Company has devoted substantially all of its resources to recruiting personnel, developing its product technology, obtaining patents to protect its intellectual property, commercialization activities and raising capital and has commenced commercial operations in the United States deriving revenues from its primary business activity in 2015 with the vBloc System (ReShape vBloc). On May 22, 2017, the Company acquired BarioSurg, Inc. (BarioSurg), a company developing the Gastric Vest System (ReShape Vest) and on October 2, 2017 it acquired ReShape Medical, Inc. (ReShape Medical), a company that develops, manufactures and markets a minimally invasive intragastric balloon (ReShape Balloon) designed to treat certain obesity patients. ReShape Medical LLC became a wholly-owned subsidiary of the Company on October 2, 2017 and its balance sheet and statement operations for the period October 2, 2017 through December 31, 2017 are included with the Company's 2017 consolidated financial statements.  Subsequent to the acquisition of ReShape Medical, the Company changed its name to ReShape Lifesciences Inc. and relocated its headquarters from St. Paul, Minnesota to San Clemente, California.

 

 

Basis of Presentation

 

The Company has prepared the accompanying condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The Company’s fiscal year ends on December 31.

 

The accompanying condensed consolidated financial statements and notes thereto are unaudited. In the opinion of the Company’s management, these statements include all adjustments, which are of a normal recurring nature, necessary to present a fair presentation. Interim results are not necessarily indicative of results for a full year. The condensed consolidated balance sheet as of December 31, 2017 was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The information included in this Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

After the close of market on June 1, 2018, the Company effected a 1-for-15 reverse split of the Company’s outstanding common stock (the “June Reverse Stock Split”). As a result of the June Reverse Stock Split, each 15 shares of issued and outstanding common stock and equivalents was converted into one share of common stock. Any fractional shares of common stock resulting from the June Reverse Stock Split were rounded up to the nearest whole share. As a result of the June Reverse Stock Split, proportional adjustments were made to the number of shares of common stock issuable upon exercise or conversion, and the per share exercise or conversion price, of the Company’s outstanding warrants, stock options and convertible preferred stock, in each case in accordance with their terms. The June Reverse Stock Split did not reduce the number of authorized shares of common stock and preferred stock of the Company. Therefore, the effect of the June Reverse Stock Split was to increase the number of shares of common stock and preferred stock available for issuance relative to the number of shares issued and outstanding. The June Reverse Stock Split did not alter the par value of the common stock or preferred stock or modify any voting rights or other terms of the common stock or any series of preferred stock.

 

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After the close of market on November 7, 2018, the Company effected a 1-for-140 reverse split of the Company’s outstanding common stock (the “November Reverse Stock Split”). As a result of the November Reverse Stock Split, each 140 shares of issued and outstanding common stock and equivalents was converted into one share of common stock. Any fractional shares of common stock resulting from the November Reverse Stock Split were rounded up to the nearest whole share. As a result of the November Reverse Stock Split, proportional adjustments were made to the number of shares of common stock issuable upon exercise or conversion, and the per share exercise or conversion price, of the Company’s outstanding warrants, stock options and convertible preferred stock, in each case in accordance with their terms. The November Reverse Stock Split did not reduce the number of authorized shares of common stock and preferred stock of the Company. Therefore, the effect of the November Reverse Stock Split was to increase the number of shares of common stock and preferred stock available for issuance relative to the number of shares issued and outstanding. The November Reverse Stock Split did not alter the par value of the common stock or preferred stock or modify any voting rights or other terms of the common stock or any series of preferred stock.

 

All share and per-share amounts have been retroactively adjusted to reflect both the June Reverse Stock Split and the November Reverse Stock Split for all periods presented herein.

 

 

 

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation.

 

Fair Value of Financial Instruments

 

Carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities approximate fair value due to their short maturities.  Certain of the Company’s common stock warrants are required to be reported at fair value. The fair values of common stock warrants and investments in debt and equity securities, if any, are disclosed in Note 5 – Fair Value Measurements. 

 

Common Stock Warrant Liability

 

Common stock warrants that were issued in connection with the July 8, 2015 public offering (the Series A Warrants) are classified as a liability in the condensed consolidated balance sheets. The fair value of these common stock warrants is re-measured at each financial reporting period and immediately before exercise, with any changes in fair value being recognized as a component of other income (expense) in the condensed consolidated statements of operations.

 

Cash and Cash Equivalents

 

The Company considers highly liquid investments generally with maturities of 90 days or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. The Company’s cash equivalents are primarily in money market funds and certificates of deposit. The Company deposits its cash and cash equivalents in high-quality credit institutions.

 

Inventory

 

The Company accounts for inventory at the lower of cost or market and records any long-term inventory as other assets in the condensed consolidated balance sheets. The Company establishes inventory reserves for obsolescence based upon projected sales and for defect based upon specific identification of defective or unsalable units.

 

 

 

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Property and Equipment, Net

 

Property and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is computed using the straight-line method over their estimated useful lives of five to seven years for furniture and equipment and three to five years for computer hardware and software. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful life or the term of the lease. Upon retirement or sale, the cost and related accumulated depreciation or amortization are removed from the condensed consolidated balance sheets and the resulting gain or loss is reflected in the condensed consolidated statements of operations. Repairs and maintenance are expensed as incurred.

 

Impairment of Long-Lived Assets, Intangible Assets and Goodwill

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

For goodwill and indefinite-lived intangible assets, in-process research and development, the Company reviews for impairment annually and upon the occurrence of certain events as required by Accounting Standards Codification ("ASC") Topic 350, "Intangibles - Goodwill and Other." Goodwill and indefinite-lived intangible assets are tested at least annually for impairment and more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company reviews goodwill for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company is able to determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would conclude that goodwill is not impaired.  If the carrying amount of the reporting unit exceeds the estimated fair value of the reporting unit, a non-cash goodwill impairment loss is recognized as an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized will not exceed the total amount of goodwill allocated to that reporting unit.

The Company recorded $27.2 million for goodwill impairment losses during the quarter ended June 30, 2018.  See Note 4 for additional information.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance for deferred income tax assets is recorded when it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The Company has provided a full valuation allowance against the net deferred tax assets, excluding indefinite-lived deferred tax assets and liabilities, as of September 30, 2018 and December 31, 2017. The Company’s policy is to classify interest and penalties related to income taxes as income tax expense in the condensed consolidated statements of operations.

 

Comprehensive Loss

 

Comprehensive loss is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investment owners and distributions to owners. There was no difference from reported net loss for the three and nine months ended September 30, 2018 and 2017.

 

Research and Development Expenses

 

Research and development expenses are charged to expense as incurred. Research and development expenses include, but are not limited to, product development, clinical trial expenses, including supplies, devices, explants and revisions, quality assurance, regulatory expenses, payroll and other personnel expenses, materials and consulting costs.

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Patent Costs

Costs associated with the submission of a patent application are expensed as incurred given the uncertainty of the patents resulting in probable future economic benefits to the Company. 

Stock-Based Compensation

 

The Company recognized stock-based compensation expense associated with stock options and other stock-based awards in accordance with the authoritative guidance for stock-based compensation. The cost of a stock-based award is measured at the grant date based on the estimated fair value of the award, and is recognized as expense on a straight-line basis over the requisite service period of the award. The fair value of stock options is estimated using the Black-Scholes option valuation model, which requires the input of subjective assumptions, including price volatility of the underlying stock, risk-free interest rate, dividend yield, and expected life of the option.

 

 

 

Net Loss Per Share

 

Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is based on the weighted-average common shares outstanding during the period plus dilutive potential common shares calculated using the treasury stock method. Such potentially dilutive shares are excluded when the effect would be to reduce a net loss per share. The Company’s potential dilutive shares, which include outstanding common stock options and warrants, have not been included in the computation of diluted net loss per share for all periods as the result would be anti-dilutive. In addition, earnings per share calculations include the effects of anti-dilution adjustments to warrant exercise prices and convertible preferred stock conversion prices on the net loss attributable to common shareholders.

 

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:

 

 

 

 

 

 

 

 

 

September 30, 

 

 

 

2018

 

2017

 

Stock options outstanding

 

4,177

 

634

 

Common shares underlying convertible preferred stock

 

115,061

 

4,661

 

Warrants to purchase common stock

 

94,875

 

6,814

 

 

Segment Reporting

Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker ("CODM") in deciding how to allocate resources and in assessing performance. Our CODM is the Chief Executive Officer.

Under the provisions of Accounting Standards Codification (“ASC”) 280, Segment Reporting, we have determined that we have one operating segment related to the design, development and commercialization of transformative technology to treat obesity and metabolic diseases. The CODM evaluates operating performance and allocates resources on a total portfolio basis.  

 

Recently Issued or Adopted Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The standard’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted the standard on January 1, 2018 using the modified retrospective method applied to those contracts which were not completed as of December 31, 2017. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior-period amounts have not been retrospectively adjusted and continue to be reported in accordance with Topic

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605, Revenue Recognition. Based upon the Company’s contracts which were not completed as of December 31, 2017, the Company was not required to make an adjustment to the opening balance of retained earnings as of January 1, 2018. See Note 8 – Revenue Recognition for further discussion.

In February 2016 FASB issued ASU No. 2016-02 Leases (Topic 842) that changes the recognition of lease assets and lease liabilities by lessees for those leases classified as operating lease. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for a public business entity. The Company intends to adopt the standard as required January 1, 2019 using the modified retrospective method and, in so doing, expects to record operating lease right-of-use assets and liabilities on its consolidated balance sheet on the date of adoption.  The Company expects that the impact on its consolidated statement of operations will be immaterial with respect to its current lease obligations.

In January 2017 FASB issued ASU No. 2017-04 Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment. Under the amendments in this update an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments in this Update are required for public business entities in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted the standard during the second quarter of 2018. Please refer to Note 4 – Goodwill and Other Intangible Assets for further discussion.

In March 2018, FASB issued ASU No. 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.  The ASU updates the income tax accounting in U.S. GAAP to reflect the SEC interpretive guidance released on December 22, 2017, when the legislation referred to as the Tax Cuts and Jobs Act (the "2017 Tax Act") was signed into law.  We have adopted this ASU, as further discussed in Note 12 – Income Taxes.

On August 17, 2018, the Securities and Exchange Commission (SEC) issued a final rule 22 that amended certain of its disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded.  The final rule was issued as part of the SEC Division of Corporation Finance’s overall effort to improve the effectiveness of the SEC’s financial reporting requirements and to implement certain elements of the Fixing America’s Surface Transportation Act.  The Company believes that the impact of the new rule will be that the Company will be required to include a consolidated statement of shareholder’s equity with its interim financial statements beginning with the quarter ending March 31, 2019.

There have been no other significant changes in recent accounting pronouncements during the nine months ended September 30, 2018 as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

(2)  Liquidity and Management’s Plans

 

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company currently is not generating revenue from operations that is sufficient relative to its level of operating expenses for at least the next several years. The Company has financed its operations to date principally through the sale of equity securities and debt financing. The Company’s history of operating losses, limited cash resources and lack of certainty regarding obtaining significant third-party reimbursement for its product portfolio, raise substantial doubt about its ability to continue as a going concern absent a strengthening of its cash position.

 

During the nine months ended September 30, 2018, the Company completed a number of financing transactions involving issuance of equity instruments.  These financing transactions are summarized below.  See Footnote 10 “Stock Sales” for further information:

 

·

On April 3, 2018, the Company completed a registered direct offering of 6,000 shares of series D convertible preferred stock and a warrant to purchase shares of common stock for gross proceeds of $6.0 million, prior to deducting underwriting discounts and commissions and offering expenses of $900,000. 

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·

On May 24, 2018, the Company entered into an agreement with an institutional investor pursuant to which the investor exercised all of its outstanding warrants to purchase common stock of the Company that were issued by the Company in January 2017 and some of its warrants to purchase common stock of the Company that were issued in April 2018 in exchange for Company’s agreement to reduce the exercise price of the warrants to the closing price of the Company’s common stock on the date of the agreement. This resulted in gross proceeds to the Company of $488,250, prior to deducting placement agent fees and other offering expenses of $39,000.

 

·

On June 9, 2018, the Company completed a registered direct offering of common shares priced at-the-market for gross proceeds of approximately $1.47 million. Additionally, the Company issued to the investors unregistered warrants to purchase shares of common stock for gross proceeds of approximately $30,000. The placement agent fees and other offering expenses were approximately $200,000.

 

·

On June 21, 2018 the Company completed a registered direct offering of common shares of common stock for gross proceeds of approximately $1.44 million. Additionally, the Company issued to the investors unregistered warrants to purchase shares of common stock for gross proceeds of approximately $60,000. The placement agent fees and other offering expenses were approximately $200,000. We used $500,000 of the proceeds to redeem a portion of the outstanding shares of our series D convertible preferred stock.

 

·

On July 12, 2018, the Company completed a registered direct offering of common for gross proceeds of approximately $2.55 million. Additionally, the Company issued to the investors unregistered warrants to purchase shares of common stock for gross proceeds of approximately $150,000. The placement agent fees and other offering expenses were approximately $205,000.  

 

·

On August 3, 2018, the Company completed a registered direct offering of common shares for gross proceeds of approximately $600,000. Additionally, the Company issued to the investors unregistered warrants to purchase shares of common stock. The placement agent fees and other offering expenses were approximately $350,000.

 

·

On September 20, 2018, the Company closed an offering of shares of common stock and unregistered warrants to purchase shares of common stock for gross proceeds of approximately $526,000.  Placement agent fees and other offering expenses were approximately $125,000.

 

On October 2, 2018, we entered into a sales agreement with H.C. Wainwright & Co., LLC to act as our sales agent with respect to the issuance and sale of up to $15,000,000 of our shares of common stock from time to time in an at-the-market public offering.  Sales of the shares through Wainwright under the sales agreement may be made directly on the Nasdaq Capital Market, on any other existing trading market for the shares, to or through a market maker or through an electronic communications network, or by any other method permitted by law. In addition, if expressly authorized by us, Wainwright may also sell the shares in privately negotiated transactions. Wainwright is not required to sell any specific number or dollar amount of shares, but acts as a sales agent using commercially reasonable efforts consistent with its normal trading and sales practices, on mutually agreed terms between Wainwright and the Company. The shares in the at-the-market offering are sold and issued pursuant to our shelf registration statement on Form S-3 (File No. 333-225083), which was previously declared effective by the Securities and Exchange Commission, and a related prospectus. We have agreed to pay Wainwright in cash, upon each sale of shares pursuant to the sales agreement, a commission equal to 8.0% of the gross proceeds from each sale of shares and an additional management fee equal to 1.0% of the gross proceeds from the sale of shares pursuant to the sales agreement. Since entering into the sales agreement and through November 13, 2018, we sold an aggregate of 2,453,137 shares of common stock under the sales agreement at an average selling price of approximately $3.58 per share, which resulted in gross proceeds of approximately $8.8 million and net proceeds of approximately $7.8 million after payment of the sales agent commission and fees and other offering costs. For additional details, see Footnote 13 “Subsequent Events.”

 

As of September 30, 2018, the Company had $473,000 of cash and cash equivalents available to fund its operations.

 

The Company’s anticipated operations include plans to (i) continue to support clinical trial activities and development of the ReShape Vest, (ii) seek opportunities to leverage the Company’s intellectual property portfolio and

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custom development services to provide third party sales and licensing opportunities, (iii) continue to support and develop markets and technology related to the ReShape Balloon, (iv) continue to support the combination block/stimulation vBloc technology that can assist with type 2 diabetes, and (v) explore and capitalize on synergistic opportunities to expand our portfolio and offer future minimally invasive treatments and therapies in the obesity continuum of care. The Company believes that it has the flexibility to manage the growth of its expenditures and operations depending on the amount of available cash flows, which could include reducing expenditures for marketing, clinical and product development activities.   The Company has additionally committed to reducing its operating spending to conserve resources. However, the Company will ultimately need to achieve sufficient revenues from product sales and obtain additional debt or equity financing to support its operations.

 

Management is currently pursuing various funding options, including seeking additional equity financing as well as a strategic merger or other transaction to obtain additional funding. As of August 10, 2018, the Company’s public float exceeded $75 million, based on the number of shares of our common stock held by non-affiliates outstanding on August 10, 2018 and the highest closing price of our common stock within the 60 days prior to August 10, 2018. Therefore, the Company is no longer subject to General Instruction I.B.6 of Form S-3, which limits the aggregate market value of the securities sold by or on behalf of the registrant during the 12-month period immediately prior to and including the date of the sale to no more than one-third of all common voting and nonvoting equity held by non-affiliates of the registrant. The Company will reevaluate its public float at the time it files its annual report on Form 10-K for the fiscal year ending December 31, 2018 to determine if it will become subject to General Instruction I.B.6 at that time. While there can be no assurance that the Company will be successful in its efforts, the Company has a long history of raising equity financing to fund its development activities, though such equity financing has been more challenging to obtain in 2018 than it was in 2017.  Should the Company be unable to obtain adequate financing in the near term, the Company’s business, result of operations, liquidity and financial condition would be materially and negatively affected, and the Company would be unable to continue as a going concern. Additionally, there can be no assurance that, assuming the Company is able to strengthen its cash position, it will achieve sufficient revenue or profitable operations to continue as a going concern.

 

 

(3)  Acquisitions

BarioSurg, Inc.

On May 22, 2017, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") to acquire all of the ownership interests of BarioSurg, Inc. ("BarioSurg"), a company developing the Gastric Vest System (which we now refer to as the “ReShape Vest”), an investigational, minimally invasive, laparoscopically implanted medical device being studied for weight loss in obese and morbidly obese patients. 

The consideration paid by the Company for all of the outstanding shares of capital stock and outstanding options of BarioSurg consisted of: (i) 658 shares of common stock, par value $0.01 per share, of the Company ("Company Common Stock"), (ii) 1.0 million shares of newly created conditional convertible preferred stock, par value $0.01 per share, of the Company ("Company Preferred Stock"), which shares were converted into 2,381 shares of Company Common Stock on October 25, 2017 upon the post-closing approval of the Company's stockholders in accordance with the Nasdaq Stock Market Rules, and (iii) $2.0 million in cash.  The total consideration paid by the Company, preliminarily valued at $28.3 million, includes: (a) $2.0 million in cash paid from our existing cash balances and (b) $26.3 million from the issuance of Company Common Stock and Company Preferred Stock.  The preliminary valuation of the Company Common Stock and Company Preferred Stock took into account (i) the conversion ratio of the Company Preferred Stock, (ii) the closing prices of our common stock on the Nasdaq Stock Market on the date the transaction was announced and the three trading days following the announcement, and (iii) a 19% discount for lack of marketability related to the shares issued in the transaction.

The purchase price consideration of $28.3 million does not include expenses for legal, accounting, audit, valuation and other services that were incurred after the May 22, 2017 acquisition date and were expensed as incurred.

The following table summarizes the fair values of the assets acquired and liabilities assumed as a result of the BarioSurg acquisition.  The excess of the cost of the acquisition over the fair value of assets acquired was recorded as goodwill.  During the second quarter of 2018, the Company finalized the fair value adjustments associated with the

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BarioSurg transaction. There were no adjustments made to the recorded fair values as a result of completing our accounting for the transaction.

 

 

 

 

Cash

 

$

151,280

Property and equipment

 

 

3,000

Goodwill

 

 

14,004,573

In Process Research & Development

 

 

20,720,939

Trademarks/tradenames

 

 

1,090,363

Covenant not to compete

 

 

75,884

Other assets

 

 

5,826

Current liabilities assumed

 

 

(186,000)

Deferred income tax liability

 

 

(7,606,902)

 Net assets acquired

 

$

28,258,963

We believe that the amount of goodwill relative to identifiable intangible assets relates to several factors, including (i) potential synergies related to market opportunities for multiple product offerings, (ii) future technology, and (iii) initial relationships and awareness of the ReShape Vest.

In-process research and development (“IPR&D”) consists of the ReShape Vest, which has not yet been clinically tested in the United States and has not yet been approved by the FDA.  Acquired IPR&D assets are initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts.  The value assigned to IPR&D was determined by estimating the net cash flows from the ReShape Vest development project and discounting the net cash flows to their present value.  During the development period, this asset will not be amortized as charges to earnings; instead, this asset will be subject to periodic impairment testing.  Upon successful completion of the development process for the acquired IPR&D, the asset would then be considered a finite-lived intangible asset and amortization will commence.  Trademarks/tradenames were valued using the relief from royalty method and are being amortized over a 10-year period.  The covenant not to compete is being amortized over a three-year period.  The values of these intangible assets are considered Level 3 measurements.

ReShape Medical, Inc.

On October 2, 2017 the Company acquired ReShape Medical, Inc., a privately-held medical technology company that develops, manufactures and markets the ReShape® Dual Weight Loss Balloon, an FDA and CE marked approved, minimally invasive intragastric balloon designed to treat obesity patients with a body mass index (BMI) between 30 and 40, with one or more related comorbid conditions.

The consideration paid by the Company for ReShape Medical consisted of: (i)  1,123 shares of Company Common Stock, par value $0.01 per share, (ii) 187,772 shares of series C convertible preferred stock (which became convertible into 8,942 shares of common stock upon the December 19, 2017 approval of the Company's stockholders under Nasdaq rules, of which 3,953 shares of common stock were automatically converted on that date), and (iii) approximately $5.0 million in cash, which amount was immediately used to pay ReShape Medical's outstanding senior secured indebtedness and certain transaction expenses of ReShape Medical.

The total consideration paid by the Company, preliminarily valued at $39.0 million, includes: (a) $5.0 million in cash paid from our existing cash balances and (b) $34.0 million from the issuance of the common stock and the series C convertible preferred stock.  The preliminary valuation of the common stock and series C convertible preferred stock took into account (i) the conversion ratio of the series C convertible preferred stock, (ii) the closing price of our common stock on the Nasdaq Stock Market on the date the transaction was announced, and (iii) a 20% discount for lack of marketability related to the shares issued in the transaction. 

The purchase price consideration of $39.0 million does not include expenses for legal, accounting, audit, valuation and other services that were incurred after the October 2, 2017 acquisition date and were expensed as incurred.

The transaction was accounted for as a business combination and the following table summarizes the estimated fair values of the assets acquired and liabilities assumed as a result of the ReShape Medical acquisition.  The excess of the cost of the acquisition over the fair value of assets acquired was recorded as goodwill.  The assessment of fair value and the determination of deferred tax assets acquired is preliminary and is based on information that was available at the time the

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condensed consolidated financial statements were prepared.  Accordingly, the allocation of purchase price related to the acquired intangible assets is preliminary and, therefore, subject to adjustment in future periods.

 

 

 

 

 

Cash

 

$

617,229

Accounts receivable

 

 

385,690

Inventory

 

 

1,095,975

Prepaid expenses and other current assets

 

 

173,743

Property and equipment

 

 

303,291

Goodwill

 

 

13,182,047

Developed technology

 

 

18,451,360

Trademarks/tradenames

 

 

2,780,448

Customer relationships

 

 

3,753,533

Other assets

 

 

77,058

Current liabilities assumed

 

 

(1,837,941)

 Net assets acquired

 

$

38,982,433

 

We believe that the amount of goodwill relative to identifiable intangible assets relates to several factors including (i) potential synergies related to market opportunities for multiple product offerings, (ii) future technology, and (iii) intact workforce.

Developed technology consists of the ReShape® Dual Weight Loss Balloon (the ReShape Balloon), an FDA-approved, minimally invasive intragastric balloon designed to treat obesity patients with a body mass index (BMI) between 30 and 40, with one or more related comorbid conditions.  The acquired developed technology assets are valued by estimating cash flows using an income approach and they are amortized over a 12-year period, consistent with the remaining lives of the technology's key patents.  Trademarks/tradenames are valued using the relief from royalty method and are being amortized over a 10-year period.  Customer relationships are valued using the with-and-without method under the income approach and are being amortized over 5 years.  The values of these intangible assets are considered Level 3 measurements.

 

(4)     Goodwill and Other Intangible Assets

Allocations of purchase prices related to the acquisitions of BarioSurg and ReShape Medical during the year ended December 31, 2017 resulted in the recording of $27.2 million of goodwill and $46.9 million of other intangible assets.

The following table summarizes the activity of intangible assets, excluding goodwill, as of September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Useful Life (years)

 

Gross Carrying Amount

 

Accumulated Amortization

 

Impairment

 

Net Book Value

In Process Research & Development

 

indefinite

 

$

20,720,939

 

$

 —

 

$

 —

 

$

20,720,939

Trademarks/Tradenames

 

10

 

 

3,870,811

 

 

(423,426)

 

 

 —

 

 

3,447,385

Covenant not to compete

 

3

 

 

75,884

 

 

(33,726)

 

 

 —

 

 

42,158

Developed technology

 

12

 

 

18,451,360

 

 

(1,537,611)

 

 

 —

 

 

16,913,749

Customer relationships

 

5

 

 

3,753,533

 

 

(750,707)

 

 

 —

 

 

3,002,826

 Total

 

 

 

$

46,872,527

 

$

(2,745,470)

 

$

 —

 

$

44,127,057

 

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The following table summarizes the expected future amortization of intangible assets as of September 30, 2018:

  

 

 

 

 

Year ending December 31, 

    

 

    

2018 (remaining)

 

$

675,176

2019

 

 

2,700,696

2020

 

 

2,685,940

2021

 

 

2,675,401

2022

 

 

2,487,722

Thereafter

 

 

12,181,183

 

 

$

23,406,118

 

Evaluation of Goodwill for Impairment

The Company conducts its annual goodwill impairment analysis for its business during the fourth quarter of each year or when circumstances suggest that an indicator for impairment may be present.  Subsequent to the Company’s registered direct securities offering on April 3, 2018, the price of the Company’s common stock declined significantly. Management determined that this event was an indicator of potential impairment as the magnitude of the decline indicated that the net equity of the Company may be in excess of its fair market value.  As a result of the identification of this impairment indicator, the Company performed an impairment analysis that included valuing the business.  

The analysis of potential impairment of goodwill requires the Company to compare the estimated fair value at each of its reporting units to its carrying amount, including goodwill. The carrying amount of the reporting units must be adjusted first for any impairments of other definite or indefinite lived assets; accordingly the first step in performing the goodwill impairment analysis is to determine if other assets are impaired. The Company performed a qualitative impairment analysis on indefinite lived intangible assets, and assessed the recoverability of definite lived assets. The Company did not identify any impairments of indefinite or definite lived assets, other than goodwill, as a result the performance of these analyses.

If the carrying amount of the reporting unit exceeds the estimated fair value of the reporting unit, a non-cash goodwill impairment loss is recognized as an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

 

The determination of the fair value of the reporting units and the allocation of that value to individual assets and liabilities within those reporting units requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the selection of appropriate peer group companies, control premiums appropriate for acquisitions in the industries in which the Company competes, the discount rate, terminal growth rates, and forecasts of revenue, operating income, and capital expenditures.

The Company has one reporting unit and is operating in one segment. Additionally, for the purpose of assessing the recovery of definite lived assets, the Company has one asset group which includes all assets of the Company. The Company conducted its goodwill impairment analysis during the second quarter of 2018 and determined that the carrying value of the reporting unit exceeded the fair value.  Accordingly, the Company recorded a goodwill impairment charge of $27.2 million, reducing goodwill balances to zero, which was recorded within goodwill impairment in the Consolidated Statements of Operations during the quarter ended June 30, 2018. The fair market value of the reporting unit was determined under an income approach using discounted cash flows. Fair value calculated using a discounted cash flow analysis is classified within level 3 of the fair value hierarchy and requires several assumptions including risk adjusted discount rates and financial forecasts. 

If the Company’s future operating results decline significantly, it may be exposed to additional impairment losses that could be material.  During the second quarter of 2018 we were required to record a non-cash goodwill impairment loss.

 

(5)  Fair Value Measurements

Fair value of financial assets and liabilities is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy has been

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established that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

 

·

Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

·

Level 2—Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or model-derived valuations for which all significant inputs are observable, either directly or indirectly.

 

·

Level 3—Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.

 

The Company’s assets that are measured at fair value on a recurring basis are classified within Level 1 or Level 2 of the fair value hierarchy. The Company does not hold any recurring assets that are measured at fair value using Level 3 inputs.

 

The Company did not hold any short-term investments classified as available for sale or held to maturity as of September 30, 2018 and December 31, 2017.

 

The fair value of the Company’s common stock warrant liability is calculated using a Black-Scholes valuation model and is classified as Level 2 in the fair value hierarchy. The fair values are presented below along with the valuation assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

Series A Warrants

 

 

    

September 30, 2018

    

December 31, 2017

    

Risk-free interest rates

 

 

2.11

%  

 

1.76

%  

Expected life

 

 

 3

months

 

12

months

Expected dividends

 

 

 —

%  

 

 —

%  

Expected volatility

 

 

129.68

%  

 

193.28

%  

Fair value

 

$

74

 

$

1,600

 

 

 

 

 

(6)  Inventory

 

The Company accounts for inventory at the lower of cost or market and records any long-term inventory as other assets in the condensed consolidated balance sheets.  As of September 30, 2018 and December 31, 2017, the net book value of long-term inventory was zero and $674,000, respectively.

 

During the three and nine-months ended September 30, 2018, the Company wrote-down the values of ReShape vBloc inventories by $1.3 million and $2.6 million, respectively, due to excess quantities of ReShape vBloc inventory components.  The Company records inventory write-downs to selling, general and administrative expense.

 

Current inventory consists of the following as of:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2018

    

2017

Raw materials

 

$

148,224

 

$

707,919

Work-in-process

 

 

428,085

 

 

1,494,278

Finished goods

 

 

481,444

 

 

614,915

Inventory

 

$

1,057,753

 

$

2,817,112

 

 

 

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(7)  Commitments and Contingencies

 

Operating Leases

 

The Company rents office, warehouse and laboratory facilities in St. Paul, Minnesota, under an operating lease, which was originally set to expire on September 30, 2015. On August 25, 2015, the Company entered into an amendment extending the term of the operating lease for three years until September 30, 2018, with monthly base rent ranging from $18,925 to $20,345.  As of October 1, 2018, the Company has continued to occupy this facility on a month-to-month basis.

 

With the acquisition of BarioSurg, the Company also leased space in Lake Forest, California under an operating lease with monthly base rent of approximately $2,200 per month through September 30, 2018.  This lease was not renewed.

 

With the October 2, 2017 acquisition of ReShape Medical, the Company leases separate office and manufacturing/warehouse space in San Clemente, California.  The operating lease for office space has a term that runs through June 30, 2022 with base rent of approximately $24,600 per month and with annual rent escalations of approximately 3%.  The operating lease for manufacturing/warehouse space has a term that runs through October 31, 2019 with base rent of approximately $10,900 per month.

 

Total rent expense recognized for the three months ended September 30, 2018 and 2017 was $195,000 and $65,000, and for the nine months ended September 30, 2018 was $586,000 and $185,000, respectively. At September 30, 2018, future minimum payments for the Company are as follows:

 

 

 

 

 

Year ending December 31, 

    

 

    

2018 (remaining)

 

$

108,383

2019

 

 

419,082

2020

 

 

319,262

2021

 

 

327,949

2022

 

 

165,061

 

 

$

1,339,737

 

Clinical Trials

Regarding the Company’s European clinical trial for the ReShape Vest, eight investigational sites have been selected and the Company has submitted documentation to all required regulatory authorities seeking approval to commence enrollment.  Full enrollment is targeted for late in the first quarter of 2019 and the trial is expected to run through 2021 and will include approximately 100 participants.  The Company anticipates that it will have enough data to support its CE-marking application in 2021, following a one-year follow-up.  The U.S. ReShape Vest clinical trial is anticipated to commence in the mid-2019 timeframe. 

The Company continues to evaluate the vBloc System in human clinical trials, including the EMPOWER trial and ReCharge trial. Both of these clinical trials require patients to be followed out to 60 months. The Company is required to pay for patient follow up visits only to the extent they occur. In the event a patient does not attend a follow up visit, the Company has no financial obligation. The Company is also required to pay for explants or revisions, including potential conversions of ReCharge control devices to active devices, should a patient request or be required to have one during the course of the clinical trials. The Company has no financial obligation unless an explant, revision or conversion is requested or required.

The Company recognizes expense when incurred with respect to clinical trials.

 

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 could have a material adverse effect on the Company’s business, operating results or financial condition.

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Litigation

Du.  On February 28, 2017, the Company received a class action and derivative complaint filed on February 24, 2017 in U. S. District Court for the District of Delaware by Vinh Du, one of the Company’s shareholders. The complaint named as defendants ReShape Lifesciences, the board of directors and four members of our senior management, namely, Scott Youngstrom, Nick Ansari, Peter DeLange and Paul Hickey, and contained a purported class action claim for breach of fiduciary duty against the board of directors and derivative claims for breach of fiduciary duty against the board of directors and unjust enrichment against our senior management.  The allegations in the complaint related to the increase in the number of shares authorized for grant under our Second Amended and Restated 2003 Stock Incentive Plan (the “Plan”), which was approved by our shareholders at the Special Meeting of Shareholders held on December 12, 2016 (the “Special Meeting”), and to our subsequent grant of stock options on February 8, 2017, to the Company’s Directors and senior management to purchase an aggregate of 521 shares of our common stock (the “Option Grants”).  In the complaint, the plaintiff contended that (i) the number of shares authorized for grant under the Plan, as adjusted by the board of directors after the Special Meeting for the subsequent recapitalization of the Company, resulted from an alleged breach of fiduciary duties by the board of directors, and (ii) our senior management was allegedly unjustly enriched by the subsequent Option Grants.  The plaintiff sought relief in the form of an order rescinding the Plan as approved by the shareholders at the Special Meeting, an order cancelling the Option Grants, and an award to plaintiff for his costs, including fees and disbursements of attorneys, experts and accountants.  The parties have reached an agreement-in-principle concerning the proposed settlement of this matter, which was filed with the court on August 13, 2018. The court has scheduled a hearing for December 17, 2018 to decide if the settlement will be approved. The terms of the settlement require us to (i) rescind and cancel the Option Grants, with the exception of options that were already rescinded when certain individuals left the company in the last fiscal quarter of 2017, (ii) amend the Plan to add a provision establishing the maximum total annual equity compensation for non-employee directors and to seek stockholder approval of this amendment at the Company’s next annual meeting of stockholders, and (iii) proportionally adjust all share reserves and limitations in the Plan (and any other equity compensation plan for the company) in connection with any future split of the company’s stock during the next five years unless otherwise brought to and approved by stockholder vote.  During the quarter ended June 30, 2018, the Company recorded an accrued liability and legal expense for $190,000 representing a probable and currently estimable settlement amount for this matter. 

Fulfillium. On April 20, 2017, Fulfillium, Inc. filed a complaint against ReShape Medical, Inc. (which the Company acquired in October 2017 and which is now a wholly owned subsidiary of the Company) in the U.S. District Court for the District of Delaware, which alleged misappropriation of trade secrets and infringement of two U.S. Patents (“Fulfillium I”).  On July 28, 2017, ReShape Medical moved to dismiss both the trade secret claim and certain aspects of the patent infringement claim, and to transfer the litigation to the U.S. District Court for the Central District of California.  On October 16, 2017, the Court granted ReShape Medical’s motion to dismiss the trade secret and willful infringement claims, and ordered the case transferred to the U.S. District Court for the Central District of California.  Fulfillium twice amended its complaint, narrowing its original trade secret claim and adding further patent infringement claims and additional parties. On June 4, 2018, ReShape Medical filed a motion to dismiss the patent infringement claims for lack of standing, which the Court granted on July 5, 2018.  On August 10, 2018, the Court dismissed without prejudice the trade secret claim for lack of subject matter jurisdiction and terminated the case.  Fulfillium has appealed these dismissals and ReShape Medical has appealed the grant and denial of certain attorney fee awards.  On July 20, 2018, Fulfillium filed a new complaint against ReShape Lifesciences, Inc. (and its wholly owned subsidiary ReShape Medical LLC) in the U.S. District Court for the Central District of California (“Fulfillium II”) reasserting the patent infringement claims asserted in Fulfillium I.  On August 15, 2018, Fulfillium amended its complaint in Fulfillium II to reassert the trade secret misappropriation claim asserted in Fulfillium I against ReShape Medical LLC and others.  On September 7, 2018, Fulfillium filed a complaint in California state court alleging the same trade secret misappropriation claim asserted in both Fulfillium I and Fulfillium II.  On November 7, 2018, the Court dismissed the non-Company parties from Fulfillium II.  On April 20, 2018, ReShape Medical filed Inter Partes Review (“IPR”) petitions with the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office (the “PTAB”) to have all claims of both of the originally asserted Fulfillium patents canceled as unpatentable over various combinations of prior art.  On November 6, 2018, the PTAB denied those petitions.  The Company intends to continue to vigorously defend itself against Fulfillium’s claims.  We currently are unable to estimate a loss or range of loss for this matter.

 

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Alpha and Iroquois.  On July 12, 2018, Alpha Capital Anstalt (“Alpha”) filed a complaint against the Company in the U.S. District Court for the Southern District of New York.  In August 2017, Alpha acquired shares of the Company’s series B convertible preferred stock and warrants to purchase shares of the Company’s common stock in an underwritten public offering. Pursuant to the terms of the series B convertible preferred stock and warrants, the conversion price of the series B convertible preferred stock and exercise price of the warrants was subject to adjustment in the case of, among other things, dilutive issuances of securities by the Company. The complaint alleges breach of contract, claiming that the Company should have adjusted the conversion price of the series B convertible preferred stock and exercise price of the warrants to not less than $420.00 per share, rather than the $1,575.00 per share to which the Company actually adjusted such conversion price and exercise price, in connection with its registered direct offering of series D convertible preferred stock and warrants to purchase common stock that it completed and announced in April 2018.  Alpha seeks declaratory relief, damages of not less than approximately $3.6 million (less the proceeds of actual sales of the Company’s common stock made by Alpha) and attorneys’ fees.  The Company believes the claims alleged are without merit and intends to vigorously protect and defend itself.  However, we are currently unable to estimate a loss or range of loss for this matter.

On July 26, 2018, Iroquois Capital Investment Group, LLC and Iroquois Master Fund, Ltd. filed a complaint against the Company in the U.S. District Court for the Southern District of New York, with substantially the same claims and seeking substantially the same relief as Alpha’s complaint described above, except that Iroquois claims that the conversion price of the series D convertible preferred stock and exercise price of the warrants should have been adjusted to $189.00 per share, and Iroquois is claiming damages estimated to exceed $5 million. The Company believes the claims alleged are without merit and intends to vigorously protect and defend itself.  However, we are currently unable to estimate a loss or range of loss for this matter.

Except as disclosed in the foregoing paragraphs, the Company is not currently a party to any litigation and the Company is not aware of any pending or threatened litigation against it that could have a material adverse effect on the Company’s business, operating results or financial condition. The medical device industry in which the Company operates is characterized by frequent claims and 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.

 

(8) Revenue Recognition

 

Revenue from Product Sales

 

The following table presents the Company’s revenue disaggregated by product and geography, based on management’s assessment of available data: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months September 30, 2018

 

Three Months Ended September 30, 2017

 

    

U.S.

    

OUS *

    

Total Revenues

    

% of Total Revenues

    

U.S.

    

OUS *

    

Total Revenues

    

% of Total Revenues

ReShape vBloc product

 

$

7,925

 

$

 —

 

$

7,925

 

 

2.3%

 

$

110,020

 

$

 —

 

$

110,020

 

 

30.6%

ReShape Balloon product

 

 

215,084

 

 

112,940

 

 

328,024

 

 

93.7%

 

 

 —

 

 

 —

 

 

 —

 

 

0.0%

Other

 

 

14,287

 

 

 —

 

 

14,287

 

 

4.1%

 

 

250,000

 

 

 —

 

 

250,000

 

 

69.4%

 Total

 

$

237,296

 

$

112,940

 

$

350,236

 

 

100.0%

 

$

360,020

 

$

 —

 

$

360,020

 

 

100.0%

 

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Nine Months Ended September 30, 2018

 

Nine Months Ended September 30, 2017

 

    

U.S.

    

OUS *

    

Total Revenues

    

% of Total Revenues

    

U.S.

    

OUS *

    

Total Revenues

    

% of Total Revenues

ReShape vBloc product

 

$

156,345

 

$

 —

 

$

156,345

 

 

8.0%

 

$

243,120

 

$

 —

 

$

243,120

 

 

49.3%

ReShape Balloon product

 

 

1,232,708

 

 

521,881

 

 

1,754,589

 

 

89.8%

 

 

 —

 

 

 —

 

 

 —

 

 

0.0%

Other

 

 

42,669

 

 

 —

 

 

42,669

 

 

2.2%

 

 

250,000

 

 

 —

 

 

250,000

 

 

69.4%

 Total

 

$

1,431,722

 

$

521,881

 

$

1,953,603

 

 

100.0%

 

$

493,120

 

$

 —

 

$

493,120

 

 

118.7%

 

*Outside the United States

 

The Company’s revenue consists primarily of sales of products designed to treat obesity and metabolic diseases. The Company sells its products directly to physicians and medical device distributors using employed sales representatives. Contract terms for unit price, quantity, shipping and payment are governed by sales agreements or invoices which the Company considers to be a customer’s contract in all cases. The unit price is considered the observable stand-alone selling price for the arrangements. Any volume sales discounts are applied evenly to the units sold for purposes of calculating standalone selling price.

 

Under Topic 606, the Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods or services to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.  The Company has elected the accounting policy to exclude sales taxes from revenue.

 

Product sales consist of a single performance obligation that the Company satisfies at a point in time.  The Company recognizes product revenue when the following events have occurred: (a) the Company has transferred physical possession of the products, (b) the Company has a present right to payment, (c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products.   Based on the Company’s historical practices and shipping terms specified in the sales agreements and invoices, these criteria are generally met when the products are:

 

·

implanted in the patient (for ReShape vBloc sales)

·

shipped from the Company’s facilities (“FOB shipping point”, which is the Company’s standard shipping term for US ReShape Balloon sales). For these sales, the Company determined that the customer is able to direct the use of, and obtain substantially all of the benefits from, the products at the time the products are shipped.

·

transferred at port of entry of the destination country (“FOB port of entry”, which is the Company’s standard shipping term for OUS ReShape Balloon sales). International sales occur through a medical device distributor and the Company has determined that the customer is able to direct the use of, and substantially all of the benefits from, the products at the time the products are delivered to the customer in the destination country.

 

The Company’s standard payment terms for its customers are generally 30 to 60 days after the Company satisfies the performance obligations. 

 

All amounts billed to a customer in a sales transaction related to shipping and handling, if any, represent revenues earned for the goods provided, and these amounts have been included in other revenue. Costs related to such shipping and handling billing are classified as cost of sales.

 

Variable Consideration

 

The Company records revenue from customers in an amount that reflects the transaction price it expects to be entitled to after transferring control of those goods or services. From time to time, the Company offers rebate incentives to patients in which the ultimate transaction price is tied to a patient’s weight loss measured over a period of time. The Company estimates the price adjustments using the expected value method, which takes into account historical weight loss metrics for similar patients, based upon clinical and commercial data. Variable consideration is estimated at contract inception only to the extent that it is probable that a significant reversal of revenue will not occur, and updated at the end of each reporting period as additional information becomes available.

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Warranty

 

The Company generally provides one-year warranties against defects in materials and workmanship and will either repair the products or provide replacements at no charge to customers. As they are considered assurance-type warranties, the Company does not account for them as separate performance obligations.  Warranty reserve requirements are based on a specific assessment of the products sold with warranties where a customer asserts a claim for warranty or a product defect. 

 

Contract Balances

 

The Company records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied.  As of September 30, 2018, and December 31, 2017, accounts receivable totaled $532,000 and $489,000, respectively.  For the three and nine months ended September 30, 2018, the Company did not incur material impairment losses with respect to its receivables.

 

The Company defers revenue from product sales subject to the rebate incentives described under Variable Consideration unless it is probable the rebate will not be earned by the patient, which is based upon historical weight loss metrics gathered in clinical and commercial settings. As of September 30, 2018 and December 31, 2017, the Company deferred $185,000 and $0, respectively, of revenue related to rebate incentives, which is reported in accrued expenses.

 

Practical Expedients

 

The Company has elected the practical expedient not to determine whether contacts with customers contain significant financing components.

 

(9)  Stock-based Compensation

 

The fair value method of accounting for share-based payments is applied to all share-based payment awards issued to employees and where appropriate, nonemployees, unless another source of literature applies.

 

 

 

Based on the application of these standards, stock-based compensation expense for stock-based awards for nonemployees for the three and nine months ended September 30, 2018 was $0 and $3,000 and for the three and nine months ended September 30, 2017, was $138,000. These amounts were allocated to operating expenses follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2018

 

2017

 

2018

 

2017

 

Selling, general and administrative

 

$

726,212

 

$

599,767

 

$

2,178,475

 

$

3,412,820

 

Research and development

 

 

30,281

 

 

17,584

 

 

128,378

 

 

70,631

 

Total

 

$

756,493

 

$

617,351

 

$

2,306,853

 

$

3,483,451

 

 

As of September 30, 2018 there was approximately $7.2 million of total unrecognized compensation costs, related to employee unvested stock option awards, which are expected to be recognized over a weighted-average period of 2.7 years.

 

The estimated grant-date fair values of the stock options were calculated using the Black-Scholes valuation model, based on the following assumptions for the three and nine months ended September 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

 

2018

    

2017

    

2018

 

2017

 

Risk-free interest rates

 

N/A

  

1.88%-1.99%

 

2.85%

 

1.88%-2.34%

 

Expected life

 

N/A

 

6.25 years

 

6.25 years

 

6.00 years-10.00 years

 

Expected dividends

 

N/A

 

0%

 

0%

 

0%

 

Expected volatility

 

N/A

 

90.93%

 

121.52%

 

90.93%-131.24%

 

 

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Option activity under the Plan for the nine months ended September 30, 2018 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Outstanding Options

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

 

Aggregate

 

 

Available For

 

Number of

    

Weighted-Average

 

Intrinsic

 

 

Grant

 

Shares 

 

Exercise Price

 

Value

Balance, December 31, 2017

 

2,841

 

1,206

 

$

18,228.00

 

$

 —

Options granted

 

(2,846)

 

2,846

 

 

1,346.80

 

 

 

Options exercised

 

 —

 

 —

 

 

 —

 

 

 

Options cancelled

 

123

 

(123)

 

 

3,619.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2018

 

118

 

3,929

 

$

6,937.00

 

$

 —

In addition to the stock options granted pursuant to the Plan, the Company from time to time grants options to individuals as an inducement to accepting positions as employees (Inducement Grants).  These Inducement Grants are made at the discretion of the board of directors and are issued outside of the Plan.  Inducement Grant activity is summarized below: 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Outstanding Options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

 

Aggregate

 

 

Available For

 

Number of

    

Weighted-Average

 

Intrinsic

 

 

Grant

 

Shares

 

Exercise Price

 

Value

Balance, December 31, 2017

 

 —

 

619

 

$

7,875.00

 

$

 —

Shares reserved

 

 —

 

 —

 

 

 —

 

 

 

Options granted

 

 —

 

 —

 

 

 —

 

 

 

Options exercised

 

 —

 

 —

 

 

 —

 

 

 

Options cancelled

 

 —

 

(371)

 

 

4,305.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2018

 

 —

 

248

 

$

13,234.20

 

$

 —

 

 

(10)  Stock Sales

 

January 2017 Issuance of Common Stock, Convertible Preferred Stock and Warrants

On January 23, 2017, the Company closed an underwritten public offering consisting of units of common stock, convertible preferred stock and warrants to purchase common stock.  Gross proceeds of the offering were $19.0 million, prior to deducting underwriting discounts and commissions and offering expenses of $2.5 million.

The offering was comprised of Class A Units, priced at a public offering price of $5.31 per unit, with each unit consisting of one share of common stock and one five-year warrant (each, a "2017 Warrant") to purchase one share of common stock with an exercise price of $5.84 per share, and Class B Units, priced at a public offering price of $1,000 per unit, with each unit comprised of one share of Series A  Preferred Stock (the Preferred Stock), which was convertible into 0.0896 shares of common stock, and 2017 Warrants to purchase 0.0896 shares of common stock. The conversion price of the Preferred Stock issued in the transaction as well as the exercise price of the 2017 Warrants are fixed priced and do not contain any variable pricing features nor any price based anti-dilutive features apart from customary adjustments for splits and reverse splits of common stock and both have been recorded within Shareholders’ Equity in the condensed consolidated balance sheet.  The Preferred Stock included a beneficial ownership limitation of 4.99%, but had no dividend preference (except to extent dividends are also paid on the common stock), liquidation preference or other preferences over common stock. The securities comprising the units were issued separately in the offering.

On January 23 and January 24, 2017 all shares of Preferred Stock issued in conjunction with the offering were converted by their holders into 1,124 shares of common stock.

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August 2017 Issuance of Convertible Preferred Stock and Warrants

On  August 16, 2017, the Company closed a firm commitment underwritten public offering (the “Offering”) of 20,000 units consisting of one share of Series B Convertible Preferred Stock, par value $0.01 per share (the “Series B Preferred Stock”), which were initially convertible into 0.2071 shares of common stock at a conversion price of $4,830.00 per share, and one seven-year warrant to purchase 0.2071 shares of common stock at an initial exercise price of $4,830.00 per share, at a public offering price of $1,000 per unit.

The net proceeds received by the Company from the sale of the units was approximately $18.0 million, after deducting underwriting discounts and offering expenses.

The Series B Preferred Stock was determined to not be mandatorily redeemable under ASC 480.  Additionally, the Company identified two embedded features within the Series B Preferred Stock: (1) optional conversion by the holder, and (2) redemption in the event of a fundamental change and the Company determined that neither of these embedded features required bifurcation under ASC 815.  Since the Series B Preferred Stock is only redeemable in an ordinary liquidation, upon the occurrence of a fundamental transaction which is solely within the Company’s control, or in circumstances when all common stockholders are entitled to receive the same form of consideration, the Series B Preferred Stock is presented within permanent equity.

The warrants issued with the Series B Preferred Stock were also classified in stockholders’ equity as they are both indexed to the Company’s own stock and meet the scope exception in ASC 815-10-15-74(a) and, accordingly, do not require derivative liability accounting pursuant to ASC 815. The terms of the warrants contain an anti-dilution feature that, if triggered, require the Company to evaluate and account for the value attributable to the reduced warrant exercise price.

As of September 30, 2018, 159 shares of the Series B Preferred Stock remained outstanding.

On August 16, 2017, the Company also issued warrants to purchase an aggregate of 1,227 shares of common stock to certain parties (each, a “Holder”) to the Securities Purchase Agreement (as amended, the “Purchase Agreement”), dated November 4, 2015, between the Company and the other parties named therein, as consideration for the waiver by each of the Holders of their right to participate in future securities offerings by the Company, which rights were granted pursuant to the Purchase Agreement. These warrants are in substantially the same form, and on the same terms as, the warrants issued to the purchasers of the Series B Preferred Stock.

April 2018 Issuance of Convertible Preferred Stock and Warrants

On April 3, 2018 the Company entered into a securities purchase agreement with an institutional investor providing for the purchase and sale in a registered direct offering of shares of series D convertible preferred stock and a warrant to purchase shares of common stock for a purchase price of $6.0 million less approximately $900,000 in placement agent fees and other offering expenses.

The shares of series D convertible preferred stock were initially convertible into an aggregate of 3,810 shares of common stock at an initial conversion price of $1,575.00 per share and the warrants have a one-year term and are exercisable for 16,667 shares of common stock at an initial exercise price of $1,575.00 per share. At the April 3, 2018 closing, the Company received net proceeds of approximately $5.1 million after deducting placement agent fees and other offering expenses.

 

June 9, 2018 Issuance of Common Stock and Warrants

 

On June 7, 2018, the Company entered into securities purchase agreements with certain institutional and accredited investors for the sale by the Company of 2,676 shares of the Company’s common stock, at a purchase price of $548.80 per share. Concurrently with the offering, the Company also sold unregistered warrants exercisable for an aggregate of 2,007 shares of common stock, which represents 75% of the shares of common stock sold in the registered direct offering, for a purchase price of $17.50 per warrant and with an exercise price of $550.20 per share. Subject to certain ownership limitations, the warrants were exercisable upon issuance. The warrants will expire on the 5.5 year anniversary of the date of issuance.

 

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The offering closed on June 9, 2018. The net proceeds from the transactions received by the Company were approximately $1.3 million after deducting placement agent fees and other transaction expenses.

 

June 21, 2018 Issuance of Common Stock and Warrants

 

On June 19, 2018, the Company entered into securities purchase agreements with certain institutional and accredited investors for the sale by the Company of 3,354 shares of the Company’s common stock at a purchase price of $429.80 per share. Concurrently with the offering the Company also sold unregistered warrants exercisable for an aggregate of 3,354 shares of common stock, which represents 100% of the shares of common stock sold in the registered direct offering, for a purchase price of $17.50 per warrant and with an exercise price of $431.20 per share. Subject to certain ownership limitations, the warrants were exercisable upon issuance. The warrants will expire on the 5.5 year anniversary of the date of issuance.

 

The offering closed on June 21, 2018. The Company used $500,000 of the net proceeds of the offering to redeem 500 of the then currently 5,250 outstanding shares of its series D convertible preferred stock, which the Company agreed to as an inducement to obtain the required consent of the holder of series D convertible preferred stock for the Company to complete the offering. The net proceeds from the transactions received by the Company were approximately $800,000 after deducting the proceeds used for the redemption, placement agent fees and other transaction expenses.

 

July 2018 Issuance of Common Stock and Warrants

 

On July 10, 2018, the Company entered into securities purchase agreements with institutional and accredited investors for the sale by the Company of  8,868 shares of the Company’s common stock, par value $0.01 per share, at a purchase price of $287.00 per share in a registered direct offering. Concurrently with the registered direct offering, and pursuant to the securities purchase agreements, the Company also sold unregistered warrants exercisable for an aggregate of 8,868 shares of common stock, which represents 100% of the shares of common stock sold in the registered direct offering, for a purchase price of $17.50 per warrant and with an exercise price of $288.40 per share. Subject to certain ownership limitations, the warrants are exercisable upon issuance. The warrants will expire on the 5.5-year anniversary of the date of issuance.