ReShape Lifesciences (RSLS) - 2023 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) This section presents ReShape Lifesciences Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, with accompanying notes, for the periods ended June 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (dollars in thousands): | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $4,567 | $3,855 | | Total current assets | $10,544 | $9,911 | | Total assets | $11,852 | $11,142 | | Total current liabilities | $4,404 | $7,481 | | Total liabilities | $5,114 | $7,481 | | Total stockholders' equity | $6,738 | $3,661 | - Total assets increased by $710 thousand, and total stockholders' equity nearly doubled, while total liabilities decreased by $2,367 thousand from December 31, 2022, to June 30, 2023[13] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (Three Months Ended June 30, dollars in thousands): | Metric | 2023 | 2022 | Change ($k) | Change (%) | | :-------------------------------- | :--- | :--- | :---------- | :--------- | | Revenue | $2,254 | $2,892 | $(638) | (22.1)% | | Gross profit | $1,194 | $1,883 | $(689) | (36.6)% | | Operating loss | $(3,976) | $(9,244) | $5,268 | (57.0)% | | Net loss | $(3,493) | $(9,444) | $5,951 | (63.0)% | | Net loss per share - basic and diluted | $(1.08) | $(24.45) | $23.37 | (95.6)% | Condensed Consolidated Statements of Operations (Six Months Ended June 30, dollars in thousands): | Metric | 2023 | 2022 | Change ($k) | Change (%) | | :-------------------------------- | :--- | :--- | :---------- | :--------- | | Revenue | $4,541 | $5,332 | $(791) | (14.8)% | | Gross profit | $2,418 | $3,101 | $(683) | (22.0)% | | Operating loss | $(9,608) | $(17,356) | $7,748 | (44.6)% | | Net loss | $(6,155) | $(17,559) | $11,404 | (64.9)% | | Net loss per share - basic and diluted | $(2.48) | $(46.37) | $43.89 | (94.7)% | - The company significantly reduced its net loss for both the three and six months ended June 30, 2023, primarily due to a substantial decrease in operating expenses[15] Condensed Consolidated Statements of Comprehensive Loss Condensed Consolidated Statements of Comprehensive Loss (dollars in thousands): | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Net loss | $(3,493) | $(9,444) | | Foreign currency translation adjustments | $(2) | $(1) | | Comprehensive loss | $(3,495) | $(9,445) | | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------- | :------------------------------- | :------------------------------- | | Net loss | $(6,155) | $(17,559) | | Foreign currency translation adjustments | $(7) | $20 | | Comprehensive loss | $(6,162) | $(17,539) | Condensed Consolidated Statements of Stockholders' Equity - Total stockholders' equity increased from $3,661 thousand at December 31, 2022, to $6,738 thousand at June 30, 2023[19] - Key activities contributing to the increase in stockholders' equity for the six months ended June 30, 2023, include $7,812 thousand from the exercise of warrants and $894 thousand from common stock purchased, partially offset by a net loss of $6,155 thousand[19] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Six Months Ended June 30, dollars in thousands): | Activity | 2023 | 2022 | | :-------------------------------- | :--- | :--- | | Net cash used in operating activities | $(11,723) | $(13,800) | | Net cash (used in) provided by investing activities | $(10) | $20 | | Net cash provided by financing activities | $12,451 | $2,489 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $712 | $(11,271) | - Net cash provided by financing activities significantly increased to $12.5 million in the first six months of 2023, primarily due to proceeds from public offerings, leading to a net increase in cash, cash equivalents, and restricted cash of $712 thousand, a reversal from a net decrease of $11.3 million in the prior year[21][111] Notes to Condensed Consolidated Financial Statements - The company's financial statements are prepared on a going concern basis, but management acknowledges substantial doubt about its ability to continue as a going concern for more than twelve months due to insufficient revenue to offset operating costs[33][36][37] - Amortization expenses for finite-lived intangible assets decreased significantly from $0.9 million for the six months ended June 30, 2022, to $22 thousand for the same period in 2023[42] - The company completed two public offerings in February and April 2023, raising approximately $12.7 million in gross proceeds, primarily for growth strategies, working capital, and general corporate purposes[49][53][54] - Revenue is primarily derived from the Lap-Band system, with minimal revenue from ReShapeCare and no revenue from the Obalon Balloon System or the developing Diabetes Bloc-Stim Neuromodulation (DBSN) device[64] - The company paid a $1.35 million judgment and the first $275,000 installment of attorneys' fees related to a lawsuit with Cowen and Company, LLC, with $400,000 of attorneys' fees remaining accrued as of June 30, 2023[73] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses the company's financial condition, operational results, revenue trends, expense management, and liquidity for the three and six months ended June 30, 2023, compared to the prior year Overview - ReShape Lifesciences is a global weight-loss solutions company offering products like the Lap-Band System, ReShapeCare, ReShape Marketplace, Obalon Balloon System, and the developing Diabetes Bloc-Stim Neuromodulation (DBSN) device[80] - The Obalon Balloon System and DBSN device currently generate no revenue, with DBSN still in the development stage[80] Recent Developments - On March 13, 2023, the company relocated its principal executive offices to Irvine, California, under a new 36-month lease commencing May 1, 2023[81] Results of Operations - Three Months Ended June 30, 2023 and 2022 Revenue by Geographic Location (Three Months Ended June 30, dollars in thousands): | Region | 2023 | 2022 | Change ($k) | Change (%) | | :------------- | :--- | :--- | :---------- | :--------- | | United States | $1,929 | $2,308 | $(379) | (16.4)% | | Australia | $123 | $188 | $(65) | (34.6)% | | Europe | $193 | $389 | $(196) | (50.4)% | | Rest of world | $9 | $7 | $2 | 28.6% | | Total revenue | $2,254 | $2,892 | $(638) | (22.1)% | - Gross profit decreased by $0.7 million (36.6%) to $1.2 million, with the gross profit percentage declining from 65.1% to 53.0% due to decreased sales and consistent overhead costs[91] - Total operating expenses decreased by $5.9 million (53.5%) to $5.2 million, driven by a $2.5 million reduction in sales and marketing expenses (due to a shift to targeted digital marketing) and a $2.9 million reduction in general and administrative expenses (primarily from lower legal and payroll costs)[92][93] Results of Operations - Six Months Ended June 30, 2023 and 2022 Revenue by Geographic Location (Six Months Ended June 30, dollars in thousands): | Region | 2023 | 2022 | Change ($k) | Change (%) | | :------------- | :--- | :--- | :---------- | :--------- | | United States | $3,742 | $4,152 | $(410) | (9.9)% | | Australia | $280 | $369 | $(89) | (24.1)% | | Europe | $497 | $803 | $(306) | (38.1)% | | Rest of world | $22 | $8 | $14 | 175.0% | | Total revenue | $4,541 | $5,332 | $(791) | (14.8)% | - Gross profit decreased by $0.7 million (22.0%) to $2.4 million, with the gross profit percentage declining from 58.2% to 53.2% due to decreased sales and additional fixed costs[99] - Total operating expenses decreased by $8.4 million (41.2%) to $12.0 million, primarily due to a $5.0 million reduction in sales and marketing expenses and a $2.6 million reduction in general and administrative expenses, partially offset by an increase in audit and professional services[100][101] Liquidity and Capital Resources - As of June 30, 2023, the company had net working capital of approximately $6.1 million, with cash and cash equivalents and restricted cash totaling $4.7 million[105] - The company does not generate sufficient revenue to offset operating costs, raising substantial doubt about its ability to continue as a going concern for more than twelve months[105] - Net cash used in operating activities was $11.7 million for the six months ended June 30, 2023, an improvement from $13.8 million in the prior year[107] - Net cash provided by financing activities was $12.5 million for the six months ended June 30, 2023, primarily from public offerings, significantly higher than $2.5 million in the prior year[111] Critical Accounting Policies and Estimates - There have been no significant changes to the company's critical accounting policies and estimates from those discussed in its Annual Report on Form 10-K for the year ended December 31, 2022[116][117] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, ReShape Lifesciences Inc. is not required to provide quantitative and qualitative disclosures about market risk in this report - The company is exempt from providing market risk disclosures due to its status as a smaller reporting company[119] ITEM 4. CONTROLS AND PROCEDURES Management concluded the company's internal control over financial reporting was ineffective as of June 30, 2023, due to material weaknesses, with remediation plans underway - Management concluded that the company's internal control over financial reporting was not effective at a reasonable assurance level as of June 30, 2023[120] - Identified material weaknesses include insufficient internal accounting resources, ineffective management review controls over purchase accounting and income taxes, and segregation of duties conflicts in journal entry processing and IT system access[122][123][124][125] - Remediation plans involve hiring additional accounting personnel, formalizing roles and review responsibilities, designing formal financial close processes, and implementing a formal review of monthly journal entry reports[129] PART II – OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS This section details a legal proceeding where Cowen and Company, LLC was awarded a judgment and attorneys' fees against ReShape Lifesciences Inc., with payments made and remaining fees accrued - A final judgment was issued on May 11, 2023, in favor of Cowen & Company, LLC for $1.35 million plus 9% interest and $675,000 in attorneys' fees[128] - The company has paid the $1.35 million judgment (including interest) and the first $275,000 installment of attorneys' fees, with $400,000 of attorneys' fees accrued as of June 30, 2023[128][130] - The company is not aware of any other pending or threatened litigation that could have a material adverse effect on its business, operating results, or financial condition[130] ITEM 1A. RISK FACTORS There have been no material changes to the risk factors previously disclosed in the company's 2022 Annual Report on Form 10-K - No material changes to the risk factors set forth in Item 1A of the 2022 Annual Report on Form 10-K[132] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company reports no unregistered sales of equity securities, no uses of proceeds from registered securities, and no purchases of equity securities, beyond what is already described in this Form 10-Q - No unregistered sales of equity securities, uses of proceeds from registered securities, or purchases of equity securities, except as described elsewhere in this Form 10-Q[133][134][135] ITEM 3. DEFAULTS UPON SENIOR SECURITIES The company reports no defaults upon senior securities - No defaults upon senior securities[136] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company - This disclosure item is not applicable to ReShape Lifesciences Inc[137] ITEM 5. OTHER INFORMATION No other information is reported under this item - No other information is reported under this item[138] ITEM 6. EXHIBITS This section lists all exhibits filed as part of the Form 10-Q, including forms of common stock purchase warrants, pre-funded warrants, a securities purchase agreement, certifications of executive officers, and the financial statements formatted in Inline XBRL - Key exhibits include forms of Common Stock Purchase Warrant (4.1), Pre-funded Warrant (4.2), and the Securities Purchase Agreement (10.1)[140] - Certifications of the Chief Executive Officer and Chief Financial Officer (31.1, 31.2, 32.1, 32.2) are filed herewith[140] - The financial statements from the Quarterly Report on Form 10-Q are formatted in Inline XBRL (101)[140] SIGNATURES Signatures The report is officially signed on behalf of ReShape Lifesciences Inc. by its President and Chief Executive Officer, Paul F. Hickey, and its Senior Vice President and Chief Financial Officer, Thomas Stankovich, affirming its submission - The report was signed by Paul F. Hickey, President and Chief Executive Officer, and Thomas Stankovich, Senior Vice President and Chief Financial Officer[144] - The report was dated August 7, 2023[144]