ReShape Lifesciences (RSLS) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This part provides the unaudited condensed consolidated financial statements and management's analysis of financial condition and operations Item 1. Condensed Consolidated Financial Statements (unaudited) This section presents Obalon Therapeutics' unaudited consolidated financial statements and accompanying notes Condensed Consolidated Balance Sheets This section details the company's financial position, including assets, liabilities, and equity, for the specified periods Condensed Consolidated Balance Sheets (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | | :-------------------------- | :----------- | :----------- | | Assets | | | | Cash and cash equivalents | $5,514 | $14,055 | | Accounts receivable, net | — | 285 | | Inventory | — | 1,936 | | Total current assets | 9,031 | 18,235 | | Total assets | 11,962 | 20,393 | | Liabilities & Equity | | | | Total current liabilities | 5,050 | 3,977 | | Total liabilities | 6,040 | 4,544 | | Total stockholders' equity | 5,922 | 15,849 | | Total liabilities and stockholders' equity | $11,962 | $20,393 | - Total assets decreased by approximately $8.4 million (41.3%) from $20.4 million at December 31, 2019, to $12.0 million at September 30, 2020, primarily due to a significant reduction in cash and cash equivalents[7] - Cash and cash equivalents decreased by $8.5 million (60.8%) from $14.1 million at December 31, 2019, to $5.5 million at September 30, 2020[7] - Total stockholders' equity decreased by $9.9 million (62.6%) from $15.8 million at December 31, 2019, to $5.9 million at September 30, 2020[7] Condensed Consolidated Statements of Operations and Comprehensive Loss This section presents the company's financial performance, including revenue, expenses, and net loss, for the specified periods Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $44 | $333 | $1,527 | $2,494 | | Cost of revenue | 41 | 412 | 1,005 | 2,323 | | Gross profit (deficit) | 3 | (79) | 522 | 171 | | Research and development | 271 | 1,174 | 2,293 | 5,401 | | Selling, general and administrative | 1,291 | 2,489 | 7,546 | 13,025 | | Asset impairment and other charges | — | — | 1,310 | — | | Total operating expenses | 1,562 | 3,663 | 11,149 | 18,426 | | Loss from operations | (1,559) | (3,742) | (10,627) | (18,255) | | Net loss and comprehensive loss | $(1,560) | $(3,706) | $(11,009) | $(18,763) | | Net loss per share, basic and diluted | $(0.20) | $(0.61) | $(1.42) | $(5.07) | - Revenue for the three months ended September 30, 2020, decreased by $0.3 million (86.5%) to $44,000 compared to $0.3 million in the prior year, primarily due to the suspension of commercial operations[9][144] - Net loss for the nine months ended September 30, 2020, was $11.0 million, a decrease from $18.8 million in the prior year, driven by significant reductions in operating expenses[9][121] - Asset impairment and other charges of $1.3 million were recognized for the nine months ended September 30, 2020, related to the shift in business strategy[9][155] Condensed Consolidated Statements of Stockholders' Equity This section outlines changes in stockholders' equity, including common stock, paid-in capital, and accumulated deficit, for the periods presented Condensed Consolidated Statements of Stockholders' Equity (in thousands, except shares) | Metric | Dec 31, 2019 | Mar 31, 2020 | Jun 30, 2020 | Sep 30, 2020 | | :-------------------------- | :----------- | :----------- | :----------- | :----------- | | Common stock (shares) | 7,724,100 | 7,731,633 | 7,731,633 | 7,770,698 | | Common stock (amount) | $8 | $8 | $8 | $8 | | Additional paid-in capital | $188,271 | $188,755 | $189,049 | $189,353 | | Accumulated deficit | $(172,430) | $(177,691) | $(181,879) | $(183,439) | | Total stockholders' equity | $15,849 | $11,072 | $7,178 | $5,922 | - Accumulated deficit increased from $172.4 million at December 31, 2019, to $183.4 million at September 30, 2020, reflecting ongoing net losses[12][26][122] - Total stockholders' equity decreased significantly from $15.8 million at December 31, 2019, to $5.9 million at September 30, 2020, primarily due to net losses[12] Condensed Consolidated Statements of Cash Flows This section details the company's cash inflows and outflows from operating, investing, and financing activities for the specified periods Condensed Consolidated Statements of Cash Flows (in thousands) | Activity | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------ | :-------------------------- | :-------------------------- | | Net cash used in operating activities | $(8,854) | $(17,987) | | Net cash (used in) provided by investing activities | (117) | 2,506 | | Net cash provided by financing activities | 430 | 13,674 | | Net decrease in cash and cash equivalents | $(8,541) | $(1,807) | | Cash and cash equivalents at end of period | $5,514 | $19,380 | - Net cash used in operating activities decreased by $9.1 million (50.5%) to $8.9 million for the nine months ended September 30, 2020, primarily due to a lower net loss and non-cash charges[18][171][172] - Net cash provided by financing activities decreased by $13.2 million (96.5%) to $0.4 million for the nine months ended September 30, 2020, mainly from the PPP loan, compared to significant equity issuances and loan activities in the prior year[18][175][176] Notes to Unaudited Interim Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the unaudited interim condensed consolidated financial statements 1. Organization and Basis of Presentation This section describes the company's business, its financial condition, and the basis for preparing the interim consolidated financial statements - Obalon Therapeutics, Inc. is a medical device company focused on developing and commercializing the Obalon® balloon system for obesity treatment, which is the first and only FDA-approved swallowable, gas-filled intragastric balloon[20] - The company has incurred operating losses and negative cash flows since inception, with an accumulated deficit of $183.4 million as of September 30, 2020[26] - Due to the COVID-19 pandemic, the company suspended commercial operations, shut down retail centers, halted manufacturing, and significantly reduced personnel, raising substantial doubt about its ability to continue as a going concern[27][28] - The company has shifted its strategy to focus on pursuing third-party payor reimbursement for the Obalon Balloon System and evaluating other strategic options[28] 2. Summary of Significant Accounting Policies This section outlines the key accounting principles and methods used in preparing the financial statements - No significant changes to accounting policies occurred during the nine months ended September 30, 2020, compared to the 2019 Annual Report on Form 10-K[29] - The company recognized $0.1 million in inventory impairment charges for the nine months ended September 30, 2020, due to excess inventory not expected for clinical trials, reclassifying remaining inventory to other current and long-term assets[38] - An impairment analysis on long-lived assets resulted in $1.2 million in impairment charges for the nine months ended September 30, 2020, following the shift from a retail treatment center model to a reimbursement model[40] - The company adopted ASU 2018-13, Fair Value Measurement, effective for fiscal years beginning after December 15, 2019, which did not have a material impact on its financial statements[45] 3. Fair Value Measurements This section details the valuation methods and classifications of financial assets and liabilities measured at fair value Fair Value Measurements at September 30, 2020 (in thousands) | Asset/Liability | Balance | Level 1 | Level 2 | Level 3 | | :---------------------- | :------ | :------ | :------ | :------ | | Cash | $433 | $433 | $— | $— | | Money market funds | 5,081 | 5,081 | — | — | | Total assets | $5,514 | $5,514 | $— | $— | | Cash settled equity awards | $7 | $— | $— | $7 | - The company's Level 1 assets (cash and money market funds) are valued based on publicly available quoted market prices[51] - Cash-settled equity awards are measured at fair value using the Black-Scholes option pricing model, categorized as Level 3 inputs[52] 4. Net Loss per Share This section presents the calculation of basic and diluted net loss per common share for the periods presented Net Loss per Share (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net loss | $(1,560) | $(3,706) | $(11,009) | $(18,763) | | Weighted-average common shares outstanding | 7,728,639 | 6,061,248 | 7,727,494 | 3,700,538 | | Net loss per share, basic and diluted | $(0.20) | $(0.61) | $(1.42) | $(5.07) | - Diluted net loss per share is the same as basic net loss per common share due to the company's net loss position, making potentially dilutive securities anti-dilutive[41] 5. Balance Sheet Details This section provides disaggregated information for specific balance sheet accounts, including inventory and other current assets and liabilities Inventory (in thousands) | Category | Sep 30, 2020 | Dec 31, 2019 | | :--------------- | :----------- | :----------- | | Raw materials | $— | $1,835 | | Work in process | — | 12 | | Finished goods | — | 89 | | Total | $— | $1,936 | - Inventory was reclassified to other current and long-term assets as of September 30, 2020, with an impairment charge of $0.1 million, as the company plans to use it for clinical trials rather than sales[61] Other Current Assets (in thousands) | Category | Sep 30, 2020 | Dec 31, 2019 | | :-------------------- | :----------- | :----------- | | Prepaid expenses | $186 | $1,890 | | Insurance receivable | 3,150 | — | | Manufacturing use assets | 166 | — | | Other assets | 15 | 69 | | Total | $3,517 | $1,959 | - Other current assets significantly increased due to a $3.15 million insurance receivable related to a settlement accrual[62][100] Other Current Liabilities (in thousands) | Category | Sep 30, 2020 | Dec 31, 2019 | | :-------------------------- | :----------- | :----------- | | Accrued legal and professional fees | $111 | $412 | | Accrued customer incentives | — | 198 | | Returns reserve liability | — | 315 | | Settlement accrual | 3,150 | — | | Other accrued expenses | 206 | 492 | | Total | $3,634 | $1,524 | - Other current liabilities increased by $2.1 million, primarily due to a $3.15 million settlement accrual, partially offset by decreases in other accrued expenses[65][100] 6. Loan This section describes the details of the Paycheck Protection Program loan received by the company - On April 22, 2020, the company received a $0.4 million unsecured loan under the Paycheck Protection Program (PPP) with a 1% interest rate and maturity date of April 22, 2022[67][68] - Loan payments may be deferred until August 2021, or until the SBA remits loan forgiveness, for which the company had not applied as of September 30, 2020[68] - Proceeds from the PPP Loan have been used to retain employees, maintain payroll, and make lease and utility payments, with no assurance of full or partial forgiveness[69][70] 7. Stock-Based Compensation This section details the nature and amount of stock-based compensation expense recognized by the company Total Non-Cash Stock-Based Compensation (in thousands) | Category | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Cost of revenue | $— | $5 | $1 | $(21) | | Research and development | 73 | 158 | 230 | 568 | | Selling, general and administrative | 186 | 496 | 790 | 1,753 | | Total | $259 | $659 | $1,021 | $2,300 | - Total non-cash stock-based compensation decreased by $1.3 million for the nine months ended September 30, 2020, compared to the prior year, primarily due to reduced operations and personnel[72][154] - As of September 30, 2020, unrecognized stock-based compensation expense for options was approximately $0.8 million, expected to be recognized over a weighted-average term of 2.5 years[72] 8. Stockholders' Equity This section provides details on changes in common stock, warrants, and equity incentive plans affecting stockholders' equity - On August 11, 2020, the company issued a warrant to Blue Ox Healthcare Partners, LLC, to purchase up to 100,000 shares of common stock at an exercise price of $0.8285, in exchange for consulting services focused on securing reimbursement agreements[77] - In August 2019, the company completed a public offering, selling common stock and warrants, generating approximately $15.4 million in gross proceeds[80] - In February 2020, the company entered into a new purchase agreement with Lincoln Park Capital Fund, LLC, committing to purchase up to $15.0 million of common stock over 36 months, but no shares had been sold as of September 30, 2020, due to adverse market conditions[82][83][85] Common Stock Reserved for Future Issuance as of September 30, 2020 | Category | Shares | | :------------------------------------------ | :------- | | Stock options issued and outstanding | 1,100,137 | | Warrants issued and outstanding | 3,371,875 | | Authorized for future option and award grants | 163,512 | | Authorized for future issuance under ESPP | 190,222 | | Total | 4,825,746 | 9. Income Taxes This section discusses the company's income tax provision and the treatment of deferred tax assets - The company did not record an income tax provision for the three and nine months ended September 30, 2020 and 2019[87] - U.S. federal and California deferred tax assets from net operating losses are fully reserved due to the unlikelihood of realization[87] 10. Commitments and Contingencies This section outlines the company's contractual obligations, lease commitments, and legal proceedings - The company terminated leases for two retail treatment centers in Sacramento and San Diego in April and May 2020, respectively, due to a shift in strategy[88] - The company has not paid rent for its Orange County lease or Carlsbad headquarters since April 2020, resulting in a demand letter and an unlawful detainer action from the Carlsbad landlord for over $113,000[88][190] - A $0.4 million charge was recorded to fully write off the Orange County right-of-use asset as the center will not be functioning[89] Future Minimum Annual Lease Payments as of September 30, 2020 (in thousands) | Year | Operating Leases | Finance Leases | | :----------- | :--------------- | :------------- | | Remainder of 2020 | $351 | $6 | | 2021 | 564 | 24 | | 2022 | 219 | — | | 2023 | 105 | — | | 2024 | 108 | — | | 2025 | 37 | — | | Total undiscounted | $1,384 | $30 | - The company reached a settlement in a securities class action lawsuit for $3.15 million, which is expected to be covered by insurance policies, and recorded a corresponding settlement accrual and insurance receivable[99][100] 11. Variable Interest Entity This section explains the company's consolidation of a professional corporation as a variable interest entity - The company consolidated a professional corporation (PC) operating a weight loss treatment center as a variable interest entity (VIE) because the PC's equity investment was insufficient, and the company was the sole funding source and provided daily oversight[101][102] - For the nine months ended September 30, 2020, the PC recognized $0.3 million of deferred revenue from prepaid services, fully presented in the company's consolidated balance sheet[103] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting strategic shifts and liquidity OVERVIEW This section provides a high-level summary of the company's business, strategic changes, and current financial challenges - Obalon Therapeutics is a medical device company focused on the Obalon Balloon System, an FDA-approved swallowable, gas-filled intragastric balloon for weight loss in obese adults[110][111] - The company suspended all new patient treatments, closed retail centers, halted manufacturing, and terminated its international distributor agreement due to the COVID-19 pandemic and economic uncertainty[117][118] - The company is shifting its strategy to pursue third-party payor reimbursement for the Obalon Balloon System, believing it could significantly expand market opportunity, and is exploring other strategic alternatives[119][120] - As of September 30, 2020, the company had an accumulated deficit of $183.4 million and faces substantial doubt about its ability to continue as a going concern[122][123] - The company received Nasdaq delisting notices for failing to meet minimum stockholders' equity ($7.2 million vs. $10.0 million) and minimum bid price ($1.00) requirements[124][126] COMPONENTS OF OUR RESULTS OF OPERATIONS This section explains the key drivers and trends impacting the company's revenue, cost of revenue, and operating expenses - Revenue for the nine months ended September 30, 2020, primarily resulted from reversing reserves related to customer incentive programs and returns, following the termination of all commercial operations[131] - The company does not expect meaningful revenue in the foreseeable future due to the suspension of retail treatment centers, manufacturing, and shipments[132] - Cost of revenue is expected to be higher than revenue in the foreseeable future as the company focuses on reimbursement activities over commercial sales[134] - Research and development (R&D) expenses are expected to be lower than historical averages due to suspended business operations but will continue for post-approval studies and clinical data for reimbursement[137] - Selling, general and administrative (SG&A) expenses significantly decreased in Q2 2020 due to reduced operations and personnel, and are expected to remain lower[141] - Impairment expense was recognized for inventory and long-lived assets in Q2 2020 due to the shift away from the Obalon-branded retail center model[142] RESULTS OF OPERATIONS This section provides a detailed analysis of the company's financial performance, including revenue, expenses, and net loss Key Financial Results (in thousands) | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $44 | $333 | $1,527 | $2,494 | | Cost of revenue | 41 | 412 | 1,005 | 2,323 | | Gross profit (deficit) | 3 | (79) | 522 | 171 | | Research and development | 271 | 1,174 | 2,293 | 5,401 | | Selling, general and administrative | 1,291 | 2,489 | 7,546 | 13,025 | | Asset impairment and other charges | — | — | 1,310 | — | | Net loss | $(1,560) | $(3,706) | $(11,009) | $(18,763) | - Revenue decreased by $0.3 million (86.5%) for the three months ended September 30, 2020, and by $1.0 million (40.3%) for the nine months, primarily due to the suspension of commercial operations[144][151] - R&D expenses decreased by $0.9 million (76.7%) for the three months and $3.1 million (57.4%) for the nine months, driven by significant reductions in operations and personnel due to COVID-19[146][153] - SG&A expenses decreased by $1.2 million (48.2%) for the three months and $5.5 million (42.2%) for the nine months, mainly due to reduced payroll, facility costs, and marketing, partially offset by consulting fees[147][148][154] - Asset impairment expenses increased by $1.3 million for the nine months ended September 30, 2020, due to charges related to inventory and long-lived assets from the business strategy shift[155] LIQUIDITY AND CAPITAL RESOURCES This section assesses the company's ability to meet its short-term and long-term financial obligations and its capital-raising efforts - As of September 30, 2020, the company had $5.5 million in cash and cash equivalents and an accumulated deficit of $183.4 million[158] - The company believes current cash and cash equivalents are sufficient to fund operations through the end of 2020, but substantial doubt exists about its ability to continue as a going concern beyond that[159][162] - The company's ability to continue as a going concern depends on raising additional capital or engaging in strategic alternatives, with a high likelihood of liquidation or bankruptcy if unsuccessful[123][160] - In April 2020, the company received a $0.4 million PPP Loan, which has been used for payroll, lease, and utility payments, with no assurance of forgiveness[163][164] - A public offering in August 2019 generated approximately $14.7 million in net proceeds from the sale of common stock and warrants[166] - A new purchase agreement with Lincoln Park Capital Fund in February 2020 allows for the sale of up to $15.0 million of common stock, but no shares have been sold as of September 30, 2020, due to adverse market conditions[167][169] CASH FLOWS This section analyzes the company's cash generation and usage from operating, investing, and financing activities Summary of Net Cash Flow Activity (in thousands) | Activity | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------ | :-------------------------- | :-------------------------- | | Operating activities | $(8,854) | $(17,987) | | Investing activities | (117) | 2,506 | | Financing activities | 430 | 13,674 | | Net decrease in cash and cash equivalents | $(8,541) | $(1,807) | - Net cash used in operating activities decreased by $9.1 million (50.5%) to $8.9 million for the nine months ended September 30, 2020, primarily due to a lower net loss and non-cash charges[171][172] - Net cash provided by financing activities decreased by $13.2 million (96.5%) to $0.4 million for the nine months ended September 30, 2020, mainly from the PPP loan, compared to significant equity issuances and loan activities in the prior year[175][176] OFF-BALANCE SHEET ARRANGEMENTS This section confirms the absence of off-balance sheet arrangements that could materially impact the company's financial position - The company currently has no off-balance sheet arrangements, such as structured finance, special purpose entities, or variable interest entities[177] CRITICAL ACCOUNTING POLICIES AND ESTIMATES This section identifies accounting policies and estimates requiring significant management judgment that could materially affect financial results - Critical accounting policies include revenue recognition, accrued research and development costs, stock-based compensation expense, and income taxes, which involve significant management judgments and estimates[178][179] - There have been no significant changes in critical accounting policies and estimates compared to the 2019 Annual Report on Form 10-K[180] RECENT ACCOUNTING PRONOUNCEMENTS This section discusses the impact of recently issued accounting standards on the company's financial statements - No new accounting pronouncements or changes to existing ones materially impacted the company during the nine months ended September 30, 2020, other than those described in Note 2[181] JOBS ACT ACCOUNTING ELECTION This section clarifies the company's election regarding the extended transition period for new accounting standards under the JOBS Act - The company has elected not to use the extended transition period for complying with new or revised accounting standards provided by the JOBS Act, adopting them on the same dates as other public companies[182] Item 3. Quantitative and Qualitative Disclosure about Market Risk This section confirms the absence of material quantitative and qualitative disclosures regarding market risk for the company - The company has no applicable quantitative and qualitative disclosures about market risk[183] Item 4. Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and procedures and internal control over financial reporting - Management concluded that disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2020[184] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2020[185] PART II. OTHER INFORMATION This part provides additional information beyond the financial statements, including legal proceedings, risk factors, and other disclosures Item 1. Legal Proceedings This section details the company's involvement in a consolidated securities class action lawsuit and its settlement - A securities class action lawsuit, consolidated in July 2018, alleged false and misleading statements and failure to disclose material adverse facts[188] - On June 16, 2020, the parties reached a settlement for $3.15 million, which the company expects to be covered by its insurance policies[188] - A stockholder demand letter in December 2019 asserted similar wrongdoing, leading the board to implement corporate governance updates to avoid litigation[198] Item 1A. Risk Factors This section updates the company's key risks, including ongoing lease obligations, potential Nasdaq delisting, and litigation impacts - The company has ongoing lease obligations for its headquarters and a retail treatment center, with unpaid rent since April 2020, leading to an unlawful detainer action for over $113,000[190] - Nasdaq issued two notifications on August 6, 2020, for non-compliance with the minimum stockholders' equity requirement ($7.2 million vs. $10.0 million) and the minimum bid price requirement (below $1.00 for 30 consecutive business days)[191][192] - Failure to regain Nasdaq compliance could lead to delisting, adversely affecting market liquidity, stock price, and ability to raise additional capital[194] - Securities class action litigation, settled for $3.15 million, could subject the company to substantial costs and divert management resources, negatively impacting business and stock price[197][199] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section confirms that there were no unregistered sales of equity securities or reportable use of proceeds during the period - There were no unregistered sales of equity securities during the period[200] - There was no use of proceeds to report[201] Item 3. Defaults Upon Senior Securities This section states that there are no defaults upon senior securities to report for the period - There are no defaults upon senior securities[202] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company's operations - Mine safety disclosures are not applicable[203] Item 5. Other Information This section confirms that there is no other material information to report for the period - There is no other information to report[204] Item 6. Exhibits This section lists all documents filed as exhibits, including corporate governance, agreements, and certifications - Exhibits include the Restated Certificate of Incorporation, Amended and Restated Bylaws, Form of Warrant, Amended and Restated 2016 Equity Incentive Plan, and a Consulting Agreement with Blue Ox Healthcare Partners, LLC[206] - Certifications from the Principal Executive Officer and Principal Financial Officer pursuant to the Sarbanes-Oxley Act (Sections 302 and 906) are included[206] - XBRL Instance Document and Taxonomy Extension Documents (Schema, Calculation, Definition, Labels, Presentation) are filed[206] SIGNATURES This section contains the official signatures certifying the accuracy and completeness of the report - The report was signed on November 6, 2020, by Andrew Rasdal, President & Chief Executive Officer of Obalon Therapeutics, Inc[211]