10-Q

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 June 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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post 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	☐  (Do not check if a smaller reporting entity)	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 August 10, 2018, 9,013,421 shares of the registrant’s Common Stock were outstanding.

INDEX

PART I – FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets at June 30, 2018 and December 31, 2017	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 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	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	39
Item 6.	Exhibits	40
SIGNATURES		42

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)

	June 30,		December 31,
	2018		2017
ASSETS
Current assets:
Cash and cash equivalents	$	1,863,217	$	10,163,208
Accounts receivable (net of allowance for bad debts of $228,165 and $155,872 at June 30, 2018 and December 31, 2017)		446,027		488,613
Inventory		2,101,017		2,817,112
Prepaid expenses and other current assets		919,543		467,783
Total current assets		5,329,804		13,936,716
Property and equipment, net		303,206		438,621
Goodwill		—		27,186,620
Other intangible assets, net		44,802,230		46,152,577
Other assets		76,827		990,015
Total assets	$	50,512,067	$	88,704,549
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,201,239	$	1,088,271
Accrued expenses		4,499,875		5,955,518
Total current liabilities		8,701,114		7,043,789
Deferred income taxes		2,700,681		5,292,291
Common stock warrant liability		74		1,600
Total liabilities		11,401,869		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 2,957 and 6,055 shares outstanding at June 30, 2018 and December 31, 2017, respectively		30		61
Series C convertible preferred stock, $0.01 par value; 187,772 shares issued and 95,388 shares outstanding at June 30, 2018 and December 31, 2017		954		954
Series D convertible preferred stock, $0.01 par value; 6,000 shares issued and 4,750  and zero shares outstanding at June 30, 2018 and December 31, 2017		48		—
Common stock, $0.01 par value; 275,000,000 shares authorized at June 30, 2018 and December 31, 2017;  3,610,009 and 2,063,808 shares issued and outstanding at June 30, 2018 and December 31, 2017		36,100		20,640
Additional paid-in capital		424,158,496		411,104,568
Accumulated deficit		(385,085,430)		(334,759,354)
Total stockholders’ equity		39,110,198		76,366,869
Total liabilities and stockholders’ equity	$	50,512,067	$	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 June 30,				Six Months Ended June 30,
		2018		2017		2018		2017
Product sales	$	633,554	$	93,060	$	1,574,985	$	133,100
Other revenue		19,815		—		28,382		—
Total revenue		653,369		93,060		1,603,367		133,100
Cost of revenue		634,774		54,472		1,463,731		83,995
Gross profit		18,595		38,588		139,636		49,105
Operating expenses:
Selling, general and administrative		6,710,518		5,560,787		16,756,075		11,489,773
Research and development		2,439,337		1,352,075		5,126,856		2,476,488
Goodwill impairment		27,186,620		—		27,186,620		—
Total operating expenses		36,336,475		6,912,862		49,069,551		13,966,261
Operating loss		(36,317,880)		(6,874,274)		(48,929,915)		(13,917,156)
Other income (expense):
Interest income		263		—		674		100
Interest expense		—		—		(2,735)		—
Change in value of warrant liability		369		34,395		1,494		(288,735)
Other, net		(142,145)		(298)		(144,416)		(1,198)
Loss before income taxes		(36,459,393)		(6,840,177)		(49,074,898)		(14,206,989)
Income tax benefit		1,208,560		—		2,590,613		—
Net loss	$	(35,250,833)	$	(6,840,177)	$	(46,484,285)	$	(14,206,989)
Adjustment for convertible preferred stock and warrants		(3,841,790)		—		(3,841,790)		—
Net loss attributable to common shareholders		(39,092,623)		(6,840,177)		(50,326,075)		(14,206,989)
Net loss per share—basic and diluted	$	(15.78)	$	(13.68)	$	(22.14)	$	(32.13)
Shares used to compute basic and diluted net loss per share		2,477,910		500,114		2,273,160		442,191

See accompanying notes to condensed consolidated financial statements.

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RESHAPE LIFESCIENCES INC.

Condensed Consolidated Statements of Cash Flows 

(Unaudited)

	Six Months Ended June 30,
	2018		2017
Cash flows from operating activities:
Net loss	$	(46,484,285)	$	(14,206,989)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		142,442		67,653
Deferred income taxes		(2,591,610)		—
Stock-based compensation		1,550,360		2,866,100
Impairment of goodwill		27,186,620		—
Amortization of intangible assets		1,350,347		1,194
Change in value of warrant liability		(1,494)		288,735
Warrant inducement expense		146,245		—
Change in operating assets and liabilities:
Accounts receivable		42,586		34,309
Inventory		716,095		272,270
Prepaid expenses and other current assets		(451,760)		(60,228)
Other assets		913,182		391,806
Accounts payable		3,112,968		(388,575)
Accrued expenses		(1,455,643)		646,913
Net cash used in operating activities		(15,823,947)		(10,086,812)
Cash flows from investing activities:
Acquisitions, net of cash acquired		—		(1,848,720)
Purchases of property and equipment		(7,027)		(5,300)
Net cash used in investing activities		(7,027)		(1,854,020)
Cash flows from financing activities:
Proceeds from warrants exercised		488,250		3,334,176
Proceeds from sale of common stock and warrants for purchase of common stock		2,909,656		6,468,148
Proceeds from sale of convertible preferred stock		6,000,000		12,531,000
Preferred stock redemption in financing transaction		(500,000)		—
Common and preferred stock financing costs		(1,366,923)		(2,505,244)
Net cash provided by financing activities		7,530,983		19,828,080
Net (decrease) increase in cash and cash equivalents		(8,299,991)		7,887,248
Cash and cash equivalents:
Beginning of period		10,163,208		3,310,787
End of period	$	1,863,217	$	11,198,035
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	$	51,331	$	12,531,000

See accompanying notes to condensed consolidated financial statements.

5

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 technology to treat obesity and metabolic diseases. 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.

Risks and Uncertainties

The Company is focused on the design, development and commercialization of transformative technology to treat obesity and metabolic diseases and its 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. 

We have a limited operating history and the Company's products require approval from the U.S. Food and Drug Administration (FDA) or corresponding foreign regulatory agencies prior to commercial sales. On January 14, 2015, the vBloc® System, our initial product, which we now refer to as ReShape vBloc, received U.S. Food and Drug Administration (FDA) approval for vBloc Therapy, delivered via the ReShape vBloc.  vBloc Therapy is delivered via a pacemaker-like device that helps patients feel full and eat less by intermittently blocking hunger signals on the vagus nerve.  Our therapy limits the expansion of the stomach, helps control hunger sensations between meals, reduces the frequency and intensity of stomach contractions and produces a feeling of early and prolonged fullness.

On May 22, 2017 the Company acquired the Gastric Vest System (ReShape Vest) through the acquisition of BarioSurg, Inc. The ReShape Vest is an investigational, minimally invasive, laparoscopically implanted medical device being studied for weight loss in obese and morbidly obese patients. The ReShape Vest wraps around the stomach after it has been rearranged into a banana-like shape using sutures, emulating the effect of conventional weight-loss surgery, and is intended to enable gastric volume reduction without permanently changing patient anatomy.

On October 2, 2017 the Company acquired ReShape Medical, a privately-held medical technology company that develops, manufactures and markets 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 medical device industry is characterized by frequent and extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often difficult to predict, and the outcome may be uncertain until the court has entered final judgment and all appeals are exhausted. The Company’s competitors may assert that its products or the use of the Company’s products are covered by U.S. or foreign patents held by them.

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The Company’s activities are subject to significant risks and uncertainties, including the ability to obtain additional financing, and there can be no assurance that the Company will be successful in obtaining additional financing on favorable terms, or at all. If adequate funds are not available, the Company may have to further reduce its cost structure until financing is obtained and/or delay development or commercialization of products or license to third parties the rights to commercialize products or technologies that the Company would otherwise seek to commercialize.

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 “Reverse Stock Split”). As a result of the 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 Reverse Stock Split were rounded up to the nearest whole share. As a result of the 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 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 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 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 the Reverse Stock Split for all periods presented herein.

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.

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. 

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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.

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 for the three and six months 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

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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 June 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 six months ended June 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.

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.

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The following table sets forth the computation of basic and diluted net loss per share for the three and six months ended June 30, 2018 and 2017:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Numerator:
Net loss	$	(35,250,833)	$	(6,840,177)	$	(46,484,285)	$	(14,206,989)
Adjustment for convertible preferred stock and warrants		(3,841,790)		—		(3,841,790)		—
Net loss attributable to common shareholders		(39,092,623)		(6,840,177)		(50,326,075)		(14,206,989)
Denominator for basic and diluted net loss per share:
Weighted-average common shares outstanding		2,477,910		500,114		2,273,160		442,191
Net loss per share—basic and diluted	$	(15.78)	$	(13.68)	$	(22.14)	$	(32.13)

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

	June 30,
	2018	2017
Stock options outstanding	611,122	81,689
Common shares underlying convertible preferred stock	3,146,345	333,394
Warrants to purchase common stock	3,981,358	202,223

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 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. Early adoption is permitted. Management is evaluating the standard's impact on the consolidated financial statements.

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

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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.

There have been no other significant changes in recent accounting pronouncements during the six months ended June 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.

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 $750,000. 

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 8, 2018, the Company completed a registered direct offering priced at-the-market of 374,572 shares of its common stock, at a purchase price per share of $3.92, for gross proceeds of approximately $1.47 million. Additionally, the Company issued to the investors unregistered warrants to purchase up to 280,929 shares of common stock, at a purchase price per warrant of $0.125, for gross proceeds of approximately $0.03 million. The placement agent fees and other offering expenses were approximately $200,000.

On June 21, 2018 the Company completed a registered direct offering priced at-the-market of 469,490 shares of its common stock, at a purchase price per share of $3.07, for gross proceeds of approximately $1.44 million. Additionally, the Company issued to the investors unregistered warrants to purchase up to 469,490 shares of common stock, at a purchase price per warrant of $0.125, for gross proceeds of approximately $0.06 million. 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 priced at-the-market of 1,241,382 shares of its common stock, at a purchase price per share of $2.05, for gross proceeds of approximately $2.55 million. Additionally, the Company issued to the investors unregistered warrants to purchase up to 1,241,382 shares of common stock, at a purchase price per warrant of $0.125, for gross proceeds of approximately $0.15 million. The placement agent fees and other offering expenses were approximately $205,000. For additional details, see Note 13-Subsequent Events.

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On August 3, 2018, the Company completed a registered direct offering of 1,000,000 shares of its common stock, at a purchase price per share of $0.60, for gross proceeds of approximately $0.6 million. Additionally, the Company issued to the investors unregistered warrants to purchase up to 1,000,000 shares of common stock. The placement agent fees and other offering expenses were approximately $350,000.  For additional details, see Note 13-Subsequent Events.

As of June 30, 2018, the Company had $1.9 million of cash and cash equivalents available to fund its operations.

The Company’s anticipated operations include plans to (i) expand the controlled commercial launch of vBloc Therapy, delivered via the vBloc System, (ii) continue development of the ReShape Vest, (iii) seek opportunities to leverage the Company’s intellectual property portfolio and custom development services to provide third party sales and licensing opportunities, and (iv) 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. 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) 92,000 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 333,334 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.

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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 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)  157,116 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 1,251,814 shares of common stock upon the December 19, 2017 approval of the Company's stockholders under Nasdaq rules, of which 553,334 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

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determination of deferred tax assets acquired is preliminary and is based on information that was available at the time the consolidated condensed 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, for the quarter ended June 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		(326,656)		—		3,544,155
Covenant not to compete	3		75,884		(27,403)		—		48,481
Developed technology	12		18,451,360		(1,153,208)		—		17,298,152
Customer relationships	5		3,753,533		(563,030)		—		3,190,503
Total		$	46,872,527	$	(2,070,297)	$	—	$	44,802,230

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

Year ending December 31,
2018 (remaining)	$	1,350,349
2019		2,700,696
2020		2,685,940
2021		2,675,401
2022		2,487,722
Thereafter		12,181,183
	$	24,081,291

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 our future operating results decline significantly, we may be exposed to additional impairment losses that could be material (for additional discussion of this risk, see “Item 1A. Risk Factors – 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 June 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
	June 30, 2018			December 31, 2017
Risk-free interest rates		2.11	%		1.76	%
Expected life		6	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. There was $1.0 million and $674,000 of long-term inventory, primarily consisting of raw materials, as of June 30, 2018 and December 31, 2017, respectively.  The Company has an inventory reserve of $1.9 million at June 30, 2018 related to excess quantities of ReShape vBloc inventory components, resulting in a zero net book value in long-term inventory as of that date.

Current inventory consists of the following as of:

	June 30,		December 31,
	2018		2017
Raw materials	$	680,383	$	707,919
Work-in-process		1,027,214		1,494,278
Finished goods		393,420		614,915
Inventory	$	2,101,017	$	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.

With the acquisition of BarioSurg, the Company also leases space in Lake Forest, California under an operating lease with monthly base rent of approximately $2,200 per month through September 30, 2018.

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 June 30, 2018 and 2017 was $195,000 and $62,000, and for the six months ended June 30, 2018 was $391,000 and $121,000, respectively. At June 30, 2018, future minimum payments for the Company are as follows:

Year ending December 31,
2018 (remaining)	$	292,577
2019		419,082
2020		319,262
2021		327,949
2022		165,061
	$	1,523,931

Clinical Trials

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. Clinical trial costs are expensed as incurred.

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.

Litigation

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 names 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 contains 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 relate to the increase in the number

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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 1,093,450 shares of our common stock (the “Option Grants”).  In the complaint, the plaintiff contends 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 seeks 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.  On April 17, 2017, we filed a motion to dismiss the complaint based on the plaintiff’s failure to satisfy Delaware’s demand requirement for a derivative action and failure to state a valid claim.  The court denied the motion to dismiss on November 30, 2017.  While the Company continues to believe that the allegations in the complaint are without merit, the parties are currently negotiating the terms of a settlement of this matter.  During the quarter ended June 30, 2018, the Company has recorded an accrued liability and legal expense for $190,000 representing a probable and currently estimable settlement amount for this matter.

On April 20, 2017, Fulfillium, Inc. filed a Complaint against ReShape Medical, Inc. (which the Company acquired in October 2017 and is now a wholly-owned subsidiary of the Company) in the United States District Court for the District of Delaware, which alleged misappropriation of trade secrets and infringement of two United States Patents.  On July 28, 2017, ReShape Medical moved to dismiss both the misappropriation of trade secret claim and the claims of patent infringement, and to transfer the litigation to the United States 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 United States District Court for the Central District of California.  Fulfillium  twice amended its Complaint, and ReShape Medical filed amended Answers. 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 claims for lack of subject matter jurisdiction and terminated the case. On July 20, 2018, Fulfillium filed a new Complaint against ReShape Medical LLC and ReShape Lifesciences, Inc. in the Central District of California asserting infringement of three U.S. patents; a response is due on August 15, 2018.  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 to have all claims of both of the originally asserted Fulfillium patents canceled as unpatentable over various combinations of prior art. The Company intends to vigorously defend itself against Fulfillium, Inc.’s claims.  We currently are unable to estimate a loss or range of loss for this matter.

On July 12, 2018, Alpha Capital Anstalt (“Alpha”) filed a lawsuit against the Company in the United States 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 and 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, 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 $3.00 per share, rather than the $11.25 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. 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 lawsuit against the Company in the United States District Court for the Southern District of New York, which Complaint makes substantially the same claims and seeks 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 $1.35 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. 

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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 Ended June 30, 2018								Three Months Ended June 30, 2017
	U.S.		OUS *		Total Revenues		% of Total Revenues		U.S.		OUS *		Total Revenues		% of Total Revenues
ReShape vBloc product	$	—	$	—	$	—		0.0%	$	93,060	$	—	$	93,060		100.0%
ReShape Balloon product		372,233		261,320		633,553		97.0%		—		—		—		0.0%
Other		19,816		—		19,816		3.0%		—		—		—		0.0%
Total	$	392,049	$	261,320	$	653,369		100.0%	$	93,060	$	—	$	93,060		100.0%

	Six Months Ended June 30, 2018								Six Months Ended June 30, 2017
	U.S.		OUS *		Total Revenues		% of Total Revenues		U.S.		OUS *		Total Revenues		% of Total Revenues
ReShape vBloc product	$	148,420	$	—	$	148,420		9.3%	$	133,100	$	—	$	133,100		100.0%
ReShape Balloon product		1,015,607		408,758		1,424,365		88.8%		—		—		—		0.0%
Other		30,582		—		30,582		1.9%		—		—		—		0.0%
Total	$	1,194,609	$	408,758	$	1,603,367		100.0%	$	133,100	$	—	$	133,100		100.0%

*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:

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· 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.

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 June 30, 2018, and December 31, 2017, accounts receivable totaled $466,027 and $488,613, respectively.  For the three months ended June 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 June 30, 2018 and December 31, 2017, the Company deferred $191,400 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.

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Based on the application of these standards, stock-based compensation expense for stock-based awards for nonemployees for the three and six months ended June 30, 2018 was $0 and $3,000 and for the three and six months ended June 30, 2017, was $0 and $142,000, respectively. These amounts were allocated to operating expenses follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Selling, general and administrative	$	770,034	$	595,853	$	1,452,263	$	2,813,053
Research and development		39,974		23,847		98,097		53,047
Total	$	810,008	$	619,700	$	1,550,360	$	2,866,100

As of June 30, 2018 there was approximately $8.5 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 2.95 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 six months ended June 30, 2018 and 2017:

	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
Risk-free interest rates	2.85%	1.90%-1.98%	2.85%	1.90%-2.34%
Expected life	6.25 years	6.25 years	6.25 years	6.00 years-10.00 years
Expected dividends	0%	0%	0%	0%
Expected volatility	121.52%	90.93%	121.52%	90.93%-131.24%

Option activity under the Plan for the six months ended June 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	397,635	168,717	$	130.20	$	—
Options granted	(398,373)	398,373		9.62
Options exercised	—	—		—
Options cancelled	7,064	(7,064)		25.71
Balance, June 30, 2018	6,326	560,026	$	49.59	$	—

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	—	86,647	$	56.25	$	—
Shares reserved	—	—		—
Options granted	—	—		—
Options exercised	—	—		—
Options cancelled	—	(35,460)		30.75
Balance, June 30, 2018	—	51,187	$	74.01	$	—

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(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 12.54 shares of common stock, and 2017 Warrants to purchase 12.54 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 157,327 shares of common stock.

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 29 shares of common stock at a conversion price of $34.50 per share, and one seven-year warrant to purchase 29 shares of common stock at an initial exercise price of $34.50 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 June 30, 2018, 2,957 shares of the Series B Preferred Stock were outstanding.

On August 16, 2017, the Company also issued warrants to purchase an aggregate of 171,667 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

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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 533,334 shares of common stock at an initial conversion price of $11.25 per share and the warrants have a one-year term and are exercisable for 2,333,334 shares of common stock at an initial exercise price of $11.25 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 374,572 shares of the Company’s common stock, at a purchase price of $3.92 per share. Concurrently with the offering, the Company also sold unregistered warrants exercisable for an aggregate of 280,929 shares of common stock, which represents 75% of the shares of common stock sold in the registered direct offering, for a purchase price of $0.125 per warrant and with an exercise price of $3.93 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 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 469,490 shares of the Company’s common stock at a purchase price of $3.07 per share. Concurrently with the offering the Company also sold unregistered warrants exercisable for an aggregate of 469,490 shares of common stock, which represents 100% of the shares of common stock sold in the registered direct offering, for a purchase price of $0.125 per warrant and with an exercise price of $3.08 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.

(11)  Warrants

Stock warrant activity for the six months ended June 30, 2018 is as follows:

		Weighted
		Average
	Common	Exercise
	Shares	Price
Balance, December 31, 2017	953,889		52.65
Granted	3,132,777		3.09
Exercised	(105,000)		4.65
Cancelled	(308)		17,955.00
Balance, June 30, 2018	3,981,358	$	6.25

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(12) Income Taxes

On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act, was enacted into law in the United States, resulting in significant changes from previous tax law.   We have adopted ASU 2018-05, which allows for the recording of provisional amounts during a measurement period not to extend beyond one year of the enactment date since the 2017 Tax Act was passed.  As a result of the 2017 Tax Act, NOLs generated in taxable years ending after December 31, 2017 have an indefinite carryforward period.  The Company continues to evaluate the extent that deductible temporary differences are expected to reverse and generate an indefinite-lived NOL and the related impact on the valuation allowance.  The accounting for the valuation allowance is, therefore, considered to be incomplete due to the forthcoming guidance and the Company’s ongoing analysis of final year-end data and tax positions. There were no adjustments made in the first and second quarter with respect to the estimates made for the 2017 Tax Act.  We also anticipate additional IRS guidance relative to the impacts of the Tax Act will be forthcoming throughout 2018.

We recorded an income tax benefit of $1.2 million and $2.6 million in the three and six months ended June 30, 2018, respectively.  This amount reflects the tax impact of net operating losses generated in first six months of 2018 which have an indefinite carryover period.  A portion of these net operating losses are supported by expected taxable income from the reversal of indefinite life intangibles, such that they are more likely than not to be realized.

(13)  Subsequent Events

July 2018 Financing Transaction

On July 10, 2018, the Company entered into securities purchase agreements with institutional and accredited investors for the sale by the Company of 1,241,382 shares of the Company’s common stock, par value $0.01 per share, at a purchase price of $2.05 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 1,241,382 shares of common stock, which represents 100% of the shares of common stock sold in the registered direct offering, for a purchase price of $0.125 per warrant and with an exercise price of $2.06 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.

The offering closed on July 12, 2018. The net proceeds from the transactions were approximately $2.35 million after deducting placement agent fees and other transaction expenses.

August 2018 Financing Transaction

On August 2, 2018, the Company entered into securities purchase agreements with institutional and accredited investors for the sale by the Company of 1,000,000 shares of the Company’s common stock at a purchase price of $0.60 per share in a registered direct offering. Concurrently with the registered direct offering, and pursuant to the securities purchase agreements, the Company also issued unregistered warrants exercisable for an aggregate of 1,000,000 shares of common stock, which represents 100% of the shares of common stock sold in the registered direct offering with an exercise price of $1.10 per share. Subject to certain ownership limitations, the warrants are exercisable beginning six months after issuance. The warrants will expire on the 5.5-year anniversary of the date of issuance.

The offering closed on August 3, 2018. The net proceeds from the transactions were approximately $550,000 after deducting placement agent fees and other transaction expenses.

Terminated Underwritten Public Offering

On August 10, 2018, the Company announced that the underwriting agreement, dated August 7, 2018 (the “Underwriting Agreement”), between the Company and H.C. Wainwright & Co., LLC (the “Underwriter”), relating to the Company’s previously announced underwritten public offering of shares of the Company’s common stock, was terminated by the Underwriter in accordance with its terms due to Nasdaq’s determination that the offering was not a public offering under the Nasdaq rules, and therefore could not be completed without shareholder approval. As a result of the termination of the Underwriting Agreement, no shares of common stock were issued in the underwritten public offering. As a result of the Company’s announcement of the offering, the conversion price of the Company’s outstanding shares of series B convertible preferred stock and series D convertible preferred stock, and the exercise price of the warrants to purchase

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common stock issued in connection therewith, was reduced to $0.085 in accordance with their terms. At the close of business on August 10, 2018, and taking into account the conversion by certain holders of shares of the Company’s outstanding series B convertible preferred stock and series D convertible preferred stock into shares of common stock at a conversion price of $0.085 per share, the Company had the following securities outstanding:

•  33,548,621 shares of our common stock;

•  37,376,917 shares of our common stock issuable upon conversion of 3,177.04 shares of series D convertible preferred stock;

•  635,920 shares of our common stock issuable upon conversion of 95,388 shares of series C convertible preferred stock;

•  7,541,177 shares of our common stock issuable upon conversion of 641 shares of series B convertible preferred stock;

•  6,379,636 shares of our common stock issuable upon the exercise of warrants, with exercise prices ranging from $0.085 to $33,000;

•  603,725 shares of common stock issuable upon the exercise of options, with exercise prices ranging from $3.52 to $478,170; and

•  437,880 shares of our common stock reserved for future issuance under our Second Amended and Restated 2003 Stock Incentive Plan.

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

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

Except for the historical information contained herein, the matters discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements that involve risks and uncertainties. In some cases, these statements may be identified by terminology such as "may," "will," "should," "expects," "could," "intends," "might," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue," or the negative of such terms and other comparable terminology. These statements involve known and unknown risks and uncertainties that may cause our results, level of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to such differences include, among others, those discussed in the "Risk Factors" section included in Item 1A of our Annual Report on Form 10-K filed on April 2, 2018 as updated by those discussed in the “Risk Factors” section included in Part II, Item 1.A of this Quarterly Report on Form 10-Q.

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

Overview

We are a medical technology company focused on the design, development and commercialization of transformative technology 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.  We were incorporated in Minnesota on December 19, 2002 as "EnteroMedics Inc." and later reincorporated in Delaware on July 22, 2004.   In October 2017 we changed our name to "ReShape Lifesciences Inc."

On January 14, 2015, the vBloc® System, our initial product, which we now refer to as ReShape vBloc, received U.S. Food and Drug Administration (FDA) approval for vBloc Therapy, delivered via the ReShape vBloc, for the treatment of adult patients with obesity who have a Body Mass Index (BMI) of at least 40 to 45 kg/m2, or a BMI of at least 35 to 39.9 kg/m2 with a related health condition such as high blood pressure or high cholesterol levels, and who have tried to lose weight in a supervised weight management program and failed within the past five years   vBloc Therapy is delivered via a pacemaker-like device that helps patients feel full and eat less by intermittently blocking hunger signals on the vagus

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nerve.  Our therapy limits the expansion of the stomach, helps control hunger sensations between meals, reduces the frequency and intensity of stomach contractions and produces a feeling of early and prolonged fullness. In 2015 we began a controlled commercial launch of the ReShape vBloc at select surgical centers in the United States and had our first commercial sales. During 2015, we initiated a controlled expansion of our commercial operations and began building a sales force, which, in 2015 and 2016, called directly on key opinion leaders and bariatric surgeons at commercially-driven surgical centers that met our certification criteria. Additionally, beginning in 2016, through a distribution agreement with Academy Medical, LLC, U.S. Department of Veterans Affairs (VA) medical facilities began to offer the ReShape vBloc as a treatment option for veterans, at little to no cost to veterans in accordance with their veteran healthcare benefits.  Our goal for the ReShape vBloc remains broad coverage and reimbursement for vBloc Therapy. We believe that the most significant barrier to adoption for patients who want vBloc Therapy has been cost and lack of payer coverage.  

On May 22, 2017, we acquired the Gastric Vest System™, which we now refer to as the ReShape Vest, through our acquisition of BarioSurg.  The ReShape Vest System is an investigational, minimally invasive, laparoscopically implanted medical device being studied for weight loss in morbidly obese patients. The device wraps around the stomach, emulating the effect of conventional weight-loss surgery, and is intended to enable gastric volume reduction without permanently changing patient anatomy.  The acquisition was completed under the terms of a merger agreement pursuant to which BarioSurg became a wholly-owned subsidiary of our company.  The aggregate merger consideration we paid for all of the outstanding shares of capital stock and outstanding options of BarioSurg was: (i) 92,000 shares of our common stock, (ii) 1.0 million shares of our newly created conditional convertible preferred stock, which shares converted into 333,333 shares of our common stock upon the post-closing approval of our stockholders in accordance with the Nasdaq Stock Market Rules, and (iii) $2 million in cash.

On October 2, 2017, we acquired ReShape Medical, Inc., a privately-held medical technology company that develops, manufactures and markets the ReShape® Integrated Dual Balloon, which now we refer to as the ReShape Balloon, an FDA-approved, minimally invasive intragastric balloon designed to treat obesity patients with a BMI between 30 and 40, with at least one related comorbidity.  The aggregate merger consideration we paid for all of the outstanding shares of capital stock and securities convertible into shares of capital stock of ReShape Medical was: (i) approximately 160,000 shares of our common stock, (ii) 187,772 shares of newly created series C convertible preferred stock, which shares became convertible into approximately 1.3 million shares of common stock upon the post-closing approval of our stockholders in accordance with the Nasdaq Stock Market Rules, and (iii) approximately $5 million in cash.   The ReShape Balloon provides a new option for individuals who have not succeeded at diet and exercise alone, and do not want or do not qualify for bariatric surgery. Two connected balloons are placed into the stomach during a short, outpatient endoscopic procedure. The balloons remain in the stomach for six months and are then removed endoscopically. During balloon treatment, and for six more months following removal of the balloons, the patient receives access to nutritional counseling and access to exclusive tools to help them achieve their weight loss goals. The ReShape Balloon was approved by the FDA in July of 2015 and has had CE-marking in Europe since 2011.

We have a limited operating history and our ReShape vBloc and ReShape Balloon products only recently received U.S. Food and Drug Administration (FDA) approval to sell our product in the United States. Since our formation and until the 2017 acquisitions of BarioSurg and ReShape Medical, we have devoted substantially all of our resources to the development and commercialization of the vBloc System.   With the addition of the ReShape Balloon product from ReShape Medical and if we are able to commercialize the ReShape Vest acquired from BarioSurg, we believe we will be able to offer three distinct approaches to treating obesity that may be selected by the physician, depending on the severity of the patient's BMI or related co-morbidities.  Together, we believe the ReShape Vest, ReShape vBloc and the ReShape Balloon provide a minimally-invasive continuum of care for bariatric patients and their providers.

The following financing transactions occurred in 2017 and mid 2018 to fund the Company's operations and acquisitions:

· On January 23, 2017, we 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 approximately $2.5 million.

· During 2017, common stock warrants for 37,312 shares of common stock were exercised by warrant holders with proceeds to the Company of $3.3 million.

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· On August 16, 2017, we closed an underwritten public offering consisting of units of Series B Convertible Preferred Stock and warrants to purchase common stock.  Gross proceeds of the offering were $20.0 million, prior to deducting underwriting discounts and commissions and offering expenses of approximately $2.0 million.

· On April 3, 2018 we closed a registered direct offering of shares of series D convertible preferred stock and warrants to purchase shares of common stock for net proceeds of approximately $5.1 million, after deducting placement agent fees and other offering expenses.

· On May 24, 2018, we closed a transaction with an institutional investor pursuant to which the investor exercised a portion of its outstanding warrants to purchase common stock in exchange for Company reducing the exercise price of the January 2017 and April 2018 warrants to the closing price of the Company’s common stock on the date of the agreement, raising net proceeds of approximately $0.5 million after deducting placement agent fees and other offering expenses.

· On June 7, 2018 we closed a registered direct offering of shares of 374,572 shares of common stock and unregistered warrants to purchase shares of common stock for a net proceeds of approximately $1.3 million, after deducting placement agent fees and other offering expenses.

· On June 19, 2018 we closed a registered direct offering of 469,490 shares of common stock and unregistered warrants to purchase shares of common stock for net proceeds of approximately $800,000, after deducting placement agent fees and other offering expenses, including $500,000 that we used to redeem a portion of our outstanding shares of series D convertible preferred stock.

· On July 12, 2018 we closed a registered direct offering of 1,241,382 shares common stock and unregistered warrants to purchase shares of common stock for net proceeds of approximately $2.35 million, after deducting placement agent fees and other offering expenses.

· On August 3, 2018, we closed a registered direct offering of 1,000,000 shares of common stock and unregistered warrants to purchase shares of common stock for net proceeds of approximately $550,000, after deducting placement agent fees and other offering expenses.

We currently are not generating revenue from operations that is significant relative to our level of operating expenses, and we do not anticipate generating revenue sufficient to offset operating costs in the short-term to mid-term. We have financed our operations to date principally through the sale of equity securities, debt financing and interest earned on investments. Our history of operating losses, limited cash resources and lack of certainty regarding obtaining significant third-party reimbursement for ReShape vBloc or timing thereof, raise substantial doubt about our ability to continue as a going concern absent a strengthening of our cash position. As of June 30, 2018, we had $1.9 million of cash and cash equivalents to fund our operations. This cash balance was supplemented with approximately $2.9 million from registered direct offerings of securities that closed on July 12, 2018 and August 3, 2018 (see Note 13 – Subsequent Events).

Our anticipated operations include plans to (i) continue development of the ReShape Vest, (ii) seek opportunities to leverage our intellectual property portfolio and custom development services to provide third party sales and licensing opportunities, and (iii) explore and capitalize on synergistic opportunities to expand our portfolio and offer future minimally invasive treatments and therapies in the obesity continuum of care. We believe that we have the flexibility to manage the growth of our expenditures and operations depending on the amount of available cash flows, which could include reducing expenditures for marketing, clinical and product development activities.   However, we will ultimately need to achieve sufficient revenues from product sales and obtain additional debt or equity financing in addition to the proceeds from this offering to support our operations.

Financial Overview

Sales Revenue

We received FDA approval on January 14, 2015 for vBloc Therapy, delivered via the vBloc System, and began a controlled commercial launch at select surgical centers in the United States. We had our first commercial sales within the United States in 2015 and we recognized $292,000 in revenue.  During the year ended December 31, 2016, we recognized $787,000 in revenue.  During 2017 we recognized $1.3 million in revenue, which included $692,000 from fourth quarter ReShape Balloon sales as a result of the October 2, 2017 acquisition of ReShape Medical.   

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Any revenue from initial sales of a new product in the United States or internationally is difficult to predict and in any event will only modestly reduce our continued losses resulting from our research and development and other activities.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of compensation for executive, finance, market development and administrative personnel, including stock-based compensation. Other significant expenses include professional services and consulting fees, costs associated with attending medical conferences and trade shows, other professional fees for legal services, including legal services associated with our efforts to obtain and maintain broad protection for the intellectual property related to our products, reimbursement development, and accounting services, cash management fees, consulting fees and travel expenses. 

Also included are the costs of promotional units periodically provided to select customers at no charge in order to introduce them to our product and to enhance our ability to collect commercial data of vBloc Therapy.

Research and Development Expenses

Our research and development expenses primarily consist of engineering, product development, quality assurance and clinical and regulatory expenses, incurred in the development of our three products, ReShape vBloc, ReShape Vest and the ReShape Balloon Rechargeable System. Research and development expenses also include employee compensation, including stock-based compensation, consulting services, outside services, materials, 2018 expenses related to the vBloc Now program, clinical trial expenses, including supplies, devices, explants and revisions, depreciation and travel. We expense research and development costs as they are incurred.

Results of Operations

Comparison of the Three Months Ended June 30, 2018 and 2017

Sales Revenue.   Sales were $653,000 for the three months ended June 30, 2018 compared with $93,000 for the three months ended June 30, 2017.  The increase in sales revenue was primarily due to $634,000 of ReShape Balloon sales resulting from the acquisition of ReShape Medical in October of 2017.  Partially offsetting this increase, sales of ReShape vBloc decreased from eight units in the second quarter of 2017 to none during the second quarter of 2018.   

Cost of Revenue. Cost of revenue was $635,000 for the three months ended June 30, 2018, compared to $54,000 for the three months ended June 30, 2017. The increase was due to the acquisition of the Reshape Balloon business in October 2017 and the related increased sales.    The Company's gross margin percentage was 2.8% for the three months ended June 30, 2018 as compared to 41.5% in the prior year period due to the lower margins earned on balloons than on vBloc unit sales in the prior year.  Low margins in the current year was the result of significant discounting on ReShape Balloon sales during the first six months of 2018.

Selling,  General and Administrative Expenses.  Selling, general and administrative expenses were $6.7 million for the three months ended June 30, 2018 compared with $5.6 million for the three months ended June 30, 2017. The $1.2 million or 20.7% increase was the result of a $595,000 increase in payroll-related expenses due to higher headcount related to the acquisition of Reshape Medical, a $190,000 legal accrual, a $175,000 increase in stock based compensation expense, an increase of $674,000 from amortization of intangible assets recorded with the 2017 acquisitions of BarioSurg, Inc. and ReShape Medical, Inc., an increase of $494,000 for supplies, and an increase of $214,000 in occupancy, communications, and shipping expenses.  Partially offsetting the increases were decreases of $1 million for legal, marketing, accounting, advertising and other professional services, $183,000 in production overhead allocation, and $61,000 in severance costs.

Research and Development Expenses.  Research and development expenses increased to $2.4 million for the three months ended June 30, 2018 from $1.4 million for the three months ended June 30, 2017. The increase of $1.1 million, or 80.4%, was driven by approximately $430,000 of headcount related expenses related to increased staffing related to the 2017 acquisitions, $450,000 in professional fees related to continued product development activities, and $160,000 for supply costs related to product development.

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Goodwill Impairment.  Based on an impairment analysis of our goodwill and intangible assets performed during the quarter ended June 30, 2018, we have recorded an impairment loss of $27.2 million for the three and six months ended June 30, 2018, eliminating all goodwill balances related to the two acquisitions completed in 2017.  There was no impairment charge recorded relative to the definite and indefinite lived intangible assets.

Comparison of the Six Months Ended June 30, 2018 and 2017

Sales Revenue.   Sales were $1.6 million for the six months ended June 30, 2018 compared with $133,000 for the six months ended June 30, 2017.  The increase in sales revenue was due to $1.4 million of ReShape Balloon sales resulting from the acquisition of ReShape Medical in October of 2017.  In addition, sales of ReShape vBloc units decreased from fourteen units during the first six months of 2017 to nine units during the first six months of 2018.   

Cost of Revenue. Cost of revenue was $1.5 million for the six months ended June 30, 2018, compared to $84,000 for the six months ended June 30, 2017. The increase was due to the acquisition of the Reshape Balloon business in October 2017 and the related increased sales.    The Company's gross margin percentage was 8.7% for the six months ended June 30, 2018 as compared to 36.9% in the prior year period due to the lower margins earned on ReShape Balloon than on vBloc unit sales. Low margins in the current year was the result of significant discounting on ReShape Balloon sales during 2018.

Selling,  General and Administrative Expenses.  Selling, general and administrative expenses were $16.8 million for the six months ended June 30, 2018 compared with $11.5 million and for the six months ended June 30, 2017. The $5.3 million or 45.8% increase included a $2.3 million increase in payroll-related expenses, including approximately $423,000 in severance costs related to the reduction in workforce initiated in March 2018.  These payroll-related increases were partially offset by approximately $1.4 million in non-cash stock compensation expense, and a $300,000 decrease in legal, marketing, accounting, advertising and other professional services.  Other increases during the second quarter of 2018 included (a) a $1.3 million increase related to the recording of a reserve for excess ReShape vBloc inventory components, (b) an increase of $1.4 million from amortization of intangible assets recorded with the 2017 acquisitions of BarioSurg, Inc. and ReShape Medical, Inc., (c) an increase of $770,000 for supplies, (d) an increase of $559,000 in occupancy, communications, and shipping expenses, (e) an accrual for legal expenses of $190,000 and (f) an increase of $301,000 in travel expenses.

Research and Development Expenses.  Research and development expenses increased to $5.1 million for the six months ended June 30, 2018 from $2.5 million for the six months ended June 30, 2017. The increase of $2.6 million, or 107%, was driven by approximately $866,000 of headcount costs related to the acquisitions in 2017 of ReShape Medical, $363,000 of expenses related to the 57 ReShape vBloc units implanted in the first six months of 2018 for the vBloc Now program and $943,000 in professional fees related to continued product development activities, including the ReShape Vest, as well as $765,000 related to the clinical trial activity primarily on the ReShape Vest. 

Goodwill Impairment.  Based on an impairment analysis of our goodwill and intangible assets performed during the quarter ended June 30, 2018, we have recorded an impairment loss of $27.2 million for the three and six months ended June 30, 2018, eliminating all goodwill balances related to the two acquisitions completed in 2017.  There was no impairment charge recorded relative to the definite and indefinite lived intangible assets.

Liquidity and Capital Resources

As of June 30, 2018, we had $1.9 million in cash bank deposits.  While we had no short-term money market funds or other investments at June 30, 2018, we periodically invest in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Company or other government agency. These money market funds seek to preserve the value of the investment at $1.00 per share; however, it is possible to lose money investing in these funds. Periodically, we invest cash in excess of immediate requirements in accordance with our investment policy, primarily with a view to liquidity and capital preservation. At times, such deposits may be in excess of insured limits. We have not experienced any losses on our deposits of cash and cash equivalents.

We have financed our operations to date principally through the sale of equity securities, debt financing and interest earned on investments.    On January 23, 2017, we received $19.0 million in gross proceeds, prior to deducting offering expenses of $2.5 million, at the closing of an underwritten public offering of units in order to fund our future operations.  On August 16, 2017, the Company closed an underwritten public offering consisting of units of Series B Convertible Preferred Stock and warrants to purchase common stock.  Gross proceeds of the offering were $20.0 million,

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prior to deducting underwriting discounts and commissions and offering expenses of approximately $2.0 million.  Both public offerings were undertaken to fund future operations and acquisitions.

On April 3, 2018, we closed a registered direct offering of shares of series D convertible preferred stock and warrants to purchase shares of common stock with proceeds of approximately $5.1 million, after deducting placement agent fees and other offering expenses.   On May 24, 2018, we closed a transaction with an institutional investor pursuant to which the investor exercised all of its outstanding warrants to purchase common stock in exchange for Company reducing the exercise price of the January 2017 and April 2018 warrants to the closing price of the Company’s common stock on the date of the agreement, raising net proceeds of approximately $0.5 million after deducting placement agent fees and other offering expenses.  On June 7, 2018 we closed a registered direct offering of shares of 374,572 shares of common stock and unregistered warrants to purchase shares of common stock for a net proceeds of approximately $1.3 million, after deducting placement agent fees and other offering expenses. On June 19, 2018 we closed a registered direct offering of 469,490 shares of common stock and unregistered warrants to purchase shares of common stock for net proceeds of approximately $800,000, after deducting placement agent fees and other offering expenses, including $500,000 that we used to redeem a portion of our outstanding shares of series D convertible preferred stock. On July 12, 2018 we closed a registered direct offering of 1,241,385 shares common stock and unregistered warrants to purchase shares of common stock for net proceeds of approximately $2.35 million, after deducting placement agent fees and other offering expenses.

On August 3, 2018, we closed a registered direct offering of 1,000,000 shares of common stock and unregistered warrants to purchase shares of common stock for net proceeds of approximately $550,000, after deducting placement agent fees and other offering expenses.

Our anticipated operations include plans to (i) expand the controlled commercial launch of vBloc Therapy, delivered via the vBloc System, (ii) continue development of the Gastric Vest,  (iii) seek opportunities to leverage the Company's intellectual property portfolio and custom development services to provide third party sales and licensing opportunities, and (iv) explore and capitalize on synergistic opportunities to expand our portfolio and offer future minimally invasive treatments and therapies in the obesity continuum of care. We believe that we have 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.   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 transactions to obtain additional funding or expand its product line to continue the development of, and to successfully commercialize, the ReShape Balloon, the vBloc System and the Gastric Vest.  While the acquisition of ReShape Medical does provide incremental revenues to the Company, the cost to further develop and commercialize the ReShape Balloon is expected to significantly exceed revenues for the foreseeable future. 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. 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.

Net Cash Used in Operating Activities

Net cash used by operating activities was $15.8 million during the six months ended June 30, 2018 and net cash used by operating activities was $10.1 million for the same period in 2017.  The increase in cash usage of $5.7 million was primarily due higher research and development and SG&A spending. 

Net Cash Used in Investing Activities

Net cash used in investing activities was $7,027 and $1.9 million for the six months ended June 30, 2018 and 2017, primarily due to the BarioSurg acquisition last year.

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Net Cash Provided by Financing Activities

Net cash provided by financing activities was $7.5 million and $19.8 million for the six months ended June 30, 2018 and 2017, respectively. Net cash provided by financing activities for the six months ended June 30, 2018 was due to $8.9 million in gross proceeds from the issuance equity securities during the second quarter of 2018 related to proceeds from sales of common stock and warrants, exercises of warrants and conversions of preferred stock, as well as sales of convertible preferred stock, partially offset by financing costs of $1.4 million.  Net cash provided by financing activities for the six months ended June 30, 2017 was due to $19.0 million in gross proceeds from the issuance equity securities on January 23, 2017, along with $3.3 million in proceeds from the exercise of common stock warrants.  Partially offsetting these 2017 amounts were $2.5 million of expenses related to the equity offerings.   

Operating Capital and Capital Expenditure Requirements

For the six months ended June 30, 2018 and 2017, we recognized $1.6 million and $133,000 in revenue, respectively. We anticipate that we will continue to incur net losses for the next several years as we develop our products, commercialize our products, develop the corporate infrastructure required to sell our products, operate as a publicly-traded company and pursue additional applications for our technology platform.

We have financed our operations to date principally through the sale of equity securities, debt financing and interest earned on investments. On January 23, 2017, we received $19.0 million in gross proceeds, prior to deducting offering expenses of $2.5 million, at the closing of an underwritten public offering of units consisting of common stock, convertible preferred stock and common stock warrants in order to fund our operations.  On August 16, 2017, the Company closed an underwritten public offering consisting of units of Series B Convertible Preferred Stock and warrants to purchase common stock.  Gross proceeds of the offering were $20.0 million, prior to deducting underwriting discounts and commissions and offering expenses of approximately $2.0 million.  During the six months ended June 30, 2018, we received approximately $8.9 million of proceeds through sales of common stock and warrants, sale of convertible preferred stock, and proceeds from exercise of warrants.

As of June 30, 2018, the Company had $1.9 million of cash and cash equivalents to fund its operations. This cash balance included proceeds from the financing transactions detailed herein and approximately $1.6 million of revenue year to date from sales of the ReShape vBloc and Reshape Dual Balloon products.

Obtaining funds through the warrant holders' exercise of outstanding common stock warrants or the sale of additional equity and debt securities may result in dilution to our stockholders. If we raise additional funds through the issuance of debt securities, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. The sale of additional equity may require us to obtain approval from our stockholders to increase the number of shares of common stock we have authorized under our certificate of incorporation. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay, or eliminate some, or all, of our planned research, development and commercialization activities, which could materially harm our business. In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to products or proprietary technologies, or grant licenses on terms that are not favorable.

Our forecast of the period of time through which our financial resources will be adequate to support our operations, the costs to complete development of products and the cost to commercialize our products are forward-looking statements and involve risks and uncertainties, and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in in Item 1A of our Annual Report on Form 10-K filed on April 2, 2018.

Because of the numerous risks and uncertainties associated with the development of medical devices, such as our vBloc System, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to complete the development of the products and successfully deliver a commercial product to the market. Our future capital requirements will depend on many factors, including, but not limited to, the following:

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· the cost and timing of establishing sales, marketing and distribution capabilities;

· the cost of establishing clinical and commercial supplies of our vBloc System, the ReShape Balloon and any other products that we may develop, including the Gastric Vest;

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· the rate of market acceptance of our vBloc System and vBloc Therapy, the ReShape Balloon and any other product candidates, including the Gastric Vest;

· the cost of filing and prosecuting patent applications and defending and enforcing our patent and other intellectual property rights;

· the cost of defending, in litigation or otherwise, any claims that we infringe third-party patent or other intellectual property rights;

· the effect of competing products and market developments;

· the cost of explanting clinical devices;

· the terms and timing of any collaborative, licensing or other arrangements that we may establish;

· any revenue generated by sales of our vBloc System, the ReShape Balloon or our future products, including the Gastric Vest;

· the scope, rate of progress, results and cost of our clinical trials and other research and development activities;

· the cost and timing of obtaining any further required regulatory approvals; and

· the extent to which we invest in products and technologies.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities and expenses, as well as related disclosure of contingent assets and liabilities. In many cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experiences and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.

During the six months ended June 30, 2018 there were no material changes to our significant accounting policies which are fully described in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017. 

Off-Balance Sheet Arrangements

As of June 30, 2018, we did not have any off-balance sheet arrangements.

Recent Accounting Pronouncements

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, 2018using 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 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 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 Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for a public business

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entity. Early adoption is permitted. Management is evaluating the standard's impact on the consolidated financial statements.

In March 2016, FASB issued Improvements to Employee Share-Based Payment Accounting, ASU No. 2016-09, which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, the estimation of forfeitures, shares withheld for taxes and classification of shares withheld for taxes on the statement of cash flows. As part of the adoption of this guidance the Company has elected to account for forfeitures of share-based awards as they occur.  The Company prospectively adopted ASU 2016-09 as required on January 1, 2017 and the adoption did not have a material effect on its consolidated financial statements. 

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.

There have been no other significant changes in recent accounting pronouncements during the six months ended June 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.

ITEM  3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is confined to our cash and cash equivalents. As of June 30, 2018, we had $1.9 million in cash and cash equivalents. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. To achieve our goals, we may maintain a portfolio of cash equivalents and investments in a variety of securities of high credit quality. The securities in our investment portfolio, if any, are not leveraged, are classified as either available for sale or held-to-maturity and are, due to their very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our cash equivalents, we do not believe that an increase in market rates would have any material negative impact on the value of our investment portfolio. We have no investments denominated in foreign currencies and therefore our investments are not subject to foreign currency exchange risk.

ITEM  4.       CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), defines the term “disclosure controls and procedures” as those controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

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Based on their evaluation as of June 30, 2018, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective as of June 30, 2018 due to the material weakness in internal control over financial reporting related to the design of internal controls over accounting for acquisition-related deferred income taxes.

Notwithstanding the material weakness in our internal control over financial reporting, we have concluded that the consolidated financial statements and other financial information included in our annual and quarterly filings fairly present in all material respects our financial condition, results of operations and cash flows as of, and for, the periods presented.

Material Weakness Remediation Activities

To remediate the material weakness in our internal control over financial reporting described above, we have engaged our external income tax service provider to specifically analyze deferred income tax attributes of acquisitions and other significant transactions and to perform such analysis as promptly as possible after such transactions.  In addition, we have engaged our external income tax service provider to analyze our deferred income tax assets and liabilities as of June 30, 2018.  Once these processes have been in operation for a sufficient period of time for our management to conclude that the material weakness has been fully remediated and our internal controls over financial reporting are effective, we will consider this material weakness fully addressed.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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 names 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 contains 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 relate 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 1,093,450 shares of our common stock (the “Option Grants”).  In the complaint, the plaintiff contends 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 seeks 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.  On April 17, 2017, we filed a motion to dismiss the complaint based on the plaintiff’s failure to satisfy Delaware’s demand requirement for a derivative action and failure to state a valid claim.  The court denied the motion to dismiss on November 30, 2017.  While the Company continues to believe that the allegations in the complaint are without merit, the parties are currently negotiating the terms of a settlement of this matter.  During the quarter ended June 30, 2018, the Company has recorded an accrued liability and legal expense for $190,000 representing a probable and currently estimable settlement amount for this matter.

On April 20, 2017, Fulfillium, Inc. filed a Complaint against ReShape Medical, Inc. (which the Company acquired in October 2017 and is now a wholly-owned subsidiary of the Company) in the United States District Court for the District of Delaware, which alleged misappropriation of trade secrets and infringement of two United States Patents.  On July 28, 2017, ReShape Medical moved to dismiss both the misappropriation of trade secret claim and the claims of patent infringement, and to transfer the litigation to the United States 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 United States District Court for the Central District of California.  Fulfillium  twice amended its Complaint, and ReShape Medical filed amended Answers. 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 claims for lack of subject matter jurisdiction and terminated the case. On July 20, 2018, Fulfillium filed a new Complaint against ReShape Medical LLC and ReShape Lifesciences, Inc. in the Central District of California asserting infringement of three U.S. patents; a response is due on August 15, 2018.  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 to have all claims of both of the originally asserted Fulfillium patents canceled as unpatentable over various combinations of prior art. The Company intends to vigorously defend itself against Fulfillium, Inc.’s claims.  We currently are unable to estimate a loss or range of loss for this matter.

On July 12, 2018, Alpha Capital Anstalt (“Alpha”) filed a lawsuit against the Company in the United States 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 and 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, 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 $3.00 per share, rather than the $11.25 per share to which the Company actually adjusted such conversion price and exercise price, in connection with its

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registered direct offering of series D convertible preferred stock and warrants to purchase common stock that it completed and announced in April 2018. 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 lawsuit against the Company in the United States District Court for the Southern District of New York, which Complaint makes substantially the same claims and seeks 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 $1.35 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.

ITEM  1A.    RISK FACTORS

Except for the addition of the risk factor shown below, there have been no material changes to the risk factors set forth in Item 1.A Risk Factors our Annual Report on Form 10-K filed on April 2, 2018.

If we are unable to either substantially improve our operating results or obtain additional financing in the future, we will be unable to continue as a going concern.

Our independent registered public accounting firm’s report on our December 31, 2017 audited financial statements includes an explanatory paragraph referring to our ability to continue as a going concern. The proceeds from any future financings that we may be able to obtain, if any, together with our other available cash, may not be sufficient to fund our operating expenses, capital expenditures and other cash requirements. Should we be unable to obtain adequate financing or generate sufficient revenue in the future, our business, result of operations, liquidity and financial condition would be materially and adversely harmed, and we would be unable to continue as a going concern. These events and circumstances could have a material adverse effect on our ability to raise additional capital and on the market value of our common stock and the warrants offered hereby. Moreover, should we experience a cash shortage that requires us to curtail or cease our operations, or should we be unable to continue as a going concern, you could lose all or part of your investments in our securities.

We currently are not generating revenue from operations that is significant relative to our level of operating expenses, and we do not anticipate generating revenue sufficient to offset operating costs in the short-term to mid-term. We have financed our operations to date principally through the sale of equity securities, debt financing and interest earned on investments. Our history of operating losses, limited cash resources and lack of certainty regarding obtaining significant third-party reimbursement for our products or timing thereof, raise substantial doubt about our ability to continue as a going concern absent a strengthening of our cash position. As of June 30, 2018, we had $1.9 million of cash and cash equivalents.  On April 3, 2018, we completed a registered direct offering of shares of series D convertible preferred stock and a warrant to purchase shares of common stock resulting in net proceeds of approximately $5.1 million. In addition, from June 12, 2018 through August 3, 2018 we completed four registered direct offering of shares of the Company’s common stock and warrants to purchase shares of common stock resulting in net proceeds of approximately $4.6 million. We expect our current cash and cash equivalents to fund our operations through September 2018.

Our anticipated operations include plans to (i) expand the controlled commercial launch of ReShape vBloc Therapy, delivered via ReShape vBloc, (ii) continue development of the ReShape Vest, (iii) seek opportunities to leverage our intellectual property portfolio and custom development services to provide third party sales and licensing opportunities, and (iv) explore and capitalize on synergistic opportunities to expand our portfolio and offer future minimally invasive treatments and therapies in the obesity continuum of care. We believe that we have the flexibility to manage the growth of our expenditures and operations depending on the amount of available cash flows, which could include reducing expenditures for marketing, clinical and product development activities.   However, we will ultimately need to achieve

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sufficient revenues from product sales and obtain additional debt or equity financing in addition to the proceeds from this offering to support our operations.

During the second quarter of 2018 we were required to record a non-cash goodwill impairment loss, which significantly impacted our results of operations, and we may be exposed to additional impairment losses that could be material.

We conduct our annual goodwill impairment analysis for our businesses 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 and, given the decline which indicated a potential impairment of some or all of the Company’s goodwill, requiring the Company to perform an impairment analysis that included valuing all the tangible and intangible assets of the business.  We performed an impairment analysis during the second quarter of 2018 resulting in a write-off of our goodwill of approximately $27.2 million which had a material adverse effect on our results of operations. In the future, we may have additional indicators of potential impairment requiring us to record an impairment loss, which could also have a material adverse effect on our results of operations.

We are implementing a restructuring and reduction in force that may limit our ability to continue our development, commercialization and sales activities.

On March 28, 2018, we approved a restructuring and reduction in force plan of approximately 26% of our workforce, which was implemented beginning on March 28, 2018. We expect to substantially complete the restructuring in the 3rd quarter of fiscal 2018, which ends on September 30, 2018. This reduction in force was a part of our cost reduction efforts as previously announced on March 20, 2018.

We estimate we will incur approximately $500,000 of cash expenditures in connection with the restructuring, substantially all of which relate to severance costs. After reviewing the integration of the two acquisitions from 2017, we have also implemented a cost-reduction program to streamline expenditures in connection with the ReShape Vest development and clinical trial efforts. We plan to reduce the direct-to-consumer marketing efforts and concentrate our focus on areas that might be expected to support the eventual reimbursement of our products. The total restructuring expense is expected to be lower than the cash restructuring costs primarily due to the reversal of previously recognized non-cash stock-based compensation expense related to awards that will not vest as a result of the restructuring plan. This restructuring and reduction in force may limit our ability to continue our development, commercialization and sales activities, which could negatively impact our revenue, business and financial prospects.

We have a significant number of outstanding warrants, options and shares of convertible preferred stock, some of which contain full-ratchet anti-dilution protection, which may cause significant dilution to our stockholders, have a material adverse impact on the market price of our common stock and make it more difficult for us to raise funds through future equity offerings.

As of August 10, 2018, we had outstanding 33,548,621 shares of common stock. In addition, as of that date we had outstanding warrants to acquire 6,379,636 shares of common stock, options to acquire 603,725 shares of common stock and shares of convertible preferred stock convertible into an aggregate of 45,554,014 shares of common stock. The issuance of shares of common stock upon the exercise of warrants or options or conversion of preferred stock would dilute the percentage ownership interest of all stockholders, might dilute the book value per share of our common stock and would increase the number of our publicly traded shares, which could depress the market price of our common stock.

In addition, a substantial number of our outstanding warrants and shares of convertible preferred stock contain so-called full-ratchet anti-dilution provisions which, subject to limited exceptions, would reduce the exercise price of the warrants (but not increase the number of shares issuable) and reduce the conversion price of the convertible preferred stock (and increase the number of shares issuable) in the event that we in the future issue common stock, or securities convertible into or exercisable to purchase common stock, at a lower price per share, to such lower price. Of our outstanding warrants as of August 10, 2018, warrants exercisable to purchase 3,042,892 shares of common stock contained a full-ratchet anti-dilution provision, and shares of convertible preferred stock convertible into 44,918,094 shares of common stock at a conversion price of $0.085 per share contained a full-ratchet anti-dilution provision. These anti-dilution provisions were triggered in connection several tranches of financings during June, July, and August 2018 with our registered direct offerings and the announcement of our underwritten public offering of shares of common stock on August 7, 2018 at a

37

public offering price of $0.085 that was terminated on August 10, 2018, resulting in the exercise and conversion prices at August 10, 2018 to be adjusted to $0.085. These full ratchet anti-dilution provisions would be further triggered by the future issuances by us of shares of our common stock or common stock equivalents at a price per share below the then-exercise price of the warrants and the then-conversion price of the convertible preferred stock, subject to limited exceptions.

In addition to the dilutive effects described above, the perceived risk of dilution as a result of the significant number of outstanding warrants, options and shares of convertible preferred stock may cause our common stockholders to be more inclined to sell their shares, which would contribute to a downward movement in the price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our common stock price could encourage investors to engage in short sales of our common stock, which could further contribute to price declines in our common stock. The fact that our stockholders, warrant holders and option holders can sell substantial amounts of our common stock in the public market, whether or not sales have occurred or are occurring, as well as the existence of full-ratchet anti-dilution provisions in a substantial number of our outstanding warrants and shares of convertible preferred stock, could make it more difficult for us to raise additional funds through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate, or at all.

The U.S. Food and Drug Administration (FDA) has published an announcement to alert health care providers of unanticipated deaths involving the ReShape Balloon, which may substantially harm our business and our ability to continue to commercialize the ReShape Balloon in the United States.

On August 10, 2017, the FDA published an announcement to alert health care providers of five reports of unanticipated deaths that occurred within one month of the placement of an intragastric balloon, one of which involved the ReShape Balloon. The announcement indicated that the root cause or incidence of patient death in these cases had not been found and the FDA was not able to definitively attribute the deaths to the balloon devices or their respective insertion procedures.  The announcement also indicated that the FDA had received an additional report of a death related to potential complications associated with an esophageal perforation related to the ReShape Balloon. On June 4, 2018, the FDA published an update to that announcement and identified an additional five reports of unanticipated deaths in patients with liquid-filled intragastric balloons since the August 10, 2017 announcement, one of which related to a patient implanted with a ReShape Balloon. Since 2016, the FDA has received reports of a total of 12 deaths that occurred in patients with liquid-filled intragastric balloon systems worldwide. Seven of these 12 deaths were patients in the U.S., three of which were with the ReShape Balloon. Seventy-nine serious adverse events have been reported to the FDA’s MAUDE database. 

If these adverse events occur more frequently or other serious adverse effects are detected in liquid-filled intragastric balloons, the ReShape Balloon product may be subject to adverse FDA action or additional communications from the FDA, which could harm our business. The FDA has required labeling changes for ReShape Balloon and in the future, could require additional labeling changes or could change its approval, or, could withdraw its approval or take other actions.  In addition, we believe that the FDA announcement has negatively impacted, and may continue to negatively impact, our sales of the ReShape Balloon, which could have an adverse effect on our business, results of operations, liquidity and financial condition.

The FDA declared our response letter regarding a recently issued Form 483 inadequate to correct the cited deficiencies. If our subsequent response letter is not accepted, we may be subject to a warning letter or other FDA enforcement action.

In December 2017, following an inspection of our St. Paul, Minnesota facility, the FDA issued us a Form 483. The Form 483 identified seven observations in relation to the ReShape vBloc Therapy, many of which related to improper or deficient quality and/or safety procedures, including, but not limited to: (i) failure to adequately validate the silicone over-molding of the lead electrode; (ii) manufacture of printed circuit boards (PCBs) using a non-validated process that resulted in the PCBs being assembled into finished devices, 20 of which were distributed (6 of the 20 were implanted in patients, and 14 were recalled); (iii) failure to properly document root causes, correction, corrective action, and acknowledgement by supplier in connection with a CAPA procedure; (iv) incomplete risk analysis, which was not updated in connection with the PCB malfunctions; and (v) failure to submit MDRs to FDA within the required timeline (MDRs are mandatory when manufacturers and importers become aware of information that reasonably suggests that one of their marketed devices may have caused or contributed to a death or serious injury or has malfunctioned and the malfunction of the device or a similar device that they market would be likely to cause or contribute to a death or serious injury if the malfunction were to recur. Manufacturers must send reports of such deaths, serious injuries and malfunctions to the FDA.).

38

We submitted a Response Letter to FDA to address and identify a plan of correction for the cited deficiencies. On June 13, 2018, we received a letter from FDA notifying us that our responses in our Response Letter were inadequate and that the vBloc was, as a result, adulterated. FDA provided 30 days for us to correct the remaining violations. Our failure to adequately do so could result in a number of serious enforcement actions, including:

• warning letters, fines, injunctions, consent decrees and civil penalties;

• unanticipated expenditures, repair, replacement, refunds, recall or seizure of our products;

• operating restrictions, partial suspension or total shutdown of production, and prohibition on further sales of our product;

• the FDA’s refusal of our requests for 510(k) clearance or premarket approval of new products, new intended uses or modifications to existing products;

• the FDA’s refusal to issue certificates to foreign governments needed to export products for sale in other countries;

• withdrawing 510(k) clearance or premarket approvals that have already been granted; and

• criminal prosecution.

We may be subject to fines, restrictions or prohibitions on sales, or other penalties for failure to maintain licenses in certain states.

Certain of our licenses in states in which we currently conduct our business (including Arizona, Alabama, South Carolina, Iowa, and Louisiana) are expired, and we may not maintain required licenses in every state in which we conduct business. As a result, we could be subject to fines, restrictions or prohibitions on its sales, or other penalties under applicable state laws, which could adversely affect our business and results of operations.  

ITEM  2.       UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

Other than as previously reported in our Current Reports on Form 8-K filed on June 8, 2018 and June 21, 2018, during the period covered by this report, we did not sell any securities which were not registered under the Securities Act of 1933, as amended.

Uses of Proceeds from Sale of Registered Securities

None.

Purchases of Equity Securities

None.

ITEM  3.       DEFAULTS UPON SENIOR SECURITIES

None.

ITEM  4.       MINE SAFETY DISCLOSURES

Not applicable.

ITEM  5.       OTHER INFORMATION

None.

39

ITEM  6.       EXHIBITS 

Exhibit Numbers	Description of Document
1.1	Placement Agent Agreement dated as of April 2, 2018 between ReShape Lifesciences Inc. and Ladenburg Thalmann Co. Inc. (incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 3, 2018).
3.1	Certificate of Designation of Preferences, Rights and Limitations of Series D Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 3, 2018).
3.2	Certificate of Amendment to Sixth Amended and Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 1, 2018)
4.1	Form of Common Stock Purchase Warrant issued by ReShape Lifesciences Inc. on April 3, 2018 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 3, 2018).
4.2	Form of Common Stock Purchase Warrant issued in connection with Securities Purchase Agreement dated June 7, 2018 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 8, 2018)
4.3	Form of Placement Agent Warrant issued in connection with Securities Purchase Agreement dated June 7, 2018 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 8, 2018)
4.4	Form of Common Stock Purchase Warrant issued in connection with Securities Purchase Agreement dated June 19, 2018 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2018)
4.5	Form of Placement Agent Warrant issued in connection with Securities Purchase Agreement dated June 19, 2018 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2018)
10.1	Form of Securities Purchase Agreement, dated April 2, 2018, by and between ReShape Lifesciences Inc. and the Purchasers (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 3, 2018).
10.2	Form of letter agreement, dated May 24, 2018, between ReShape Lifesciences Inc. and the holder named therein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 25, 2018)
10.3	Second Amended and Restated 2003 Stock Incentive Plan, as amended on May 23, 2018 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 25, 2018)
10.4	Form of Securities Purchase Agreement, dated June 7, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 8, 2018)

40

Exhibit Numbers	Description of Document
10.5	Form of Securities Purchase Agreement, dated June 19, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2018)
31.1**	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101**	Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2018, formatted in Extensible Business Reporting Language: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Loss, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements.

**Filed herewith.

41

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	RESHAPE LIFESCIENCES INC.
	BY:	/S/ DAN W. GLADNEY
		Dan W. Gladney
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)
	BY:	/S/ SCOTT P. YOUNGSTROM
		Scott P. Youngstrom
		Chief Financial
		Officer and Senior Vice President, Finance
		(Principal Financial and Accounting Officer)
Dated: August 20, 2018

42

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Dan W. Gladney, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of ReShape Lifesciences Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/S/ DAN W. GLADNEY

Dan W. Gladney

Chairman, President and Chief Executive Officer

Date:  August 20, 2018

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Scott P. Youngstrom certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of ReShape Lifesciences Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Scott P. Youngstrom

Scott P. Youngstrom

Chief Financial Officer, Senior Vice President,  Finance

Date:  August 20, 2018 

EX-32.1

Exhibit 32.1

CERTIFICATION

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Dan W. Gladney, in his capacity as Chief Executive Officer of ReShape Lifesciences Inc., hereby certifies that, to the best of his knowledge:

1. The Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 to which this Certification is attached as Exhibit 32.1 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of ReShape Lifesciences Inc. as of, and for, the periods covered by the Report.

By:	/S/ DAN W. GLADNEY
	Dan W. Gladney
	Chairman, President and Chief Executive Officer

Date:  August 20, 2018

EX-32.2

Exhibit 32.2

CERTIFICATION

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Scott P. Youngstrom, in his capacity as Chief Financial Officer of ReShape Lifesciences Inc., hereby certifies that, to the best of his knowledge:

1. The Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 to which this Certification is attached as Exhibit 32.2 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of ReShape Lifesciences Inc. as of, and for, the periods covered by the Report.

By:	/s/ Scott P. Youngstrom
	Scott P. Youngstrom
	Chief Financial Officer, Senior Vice President,  Finance

Date:  August 20, 2018

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2018	Aug. 10, 2018
Document And Entity Information
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2018
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q2
Entity Registrant Name	ReShape Lifesciences Inc.
Entity Central Index Key	0001371217
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		9,013,421

XML

Condensed Consolidated Balance Sheets - USD ($)	Jun. 30, 2018	Dec. 31, 2017
Current assets:
Cash and cash equivalents	$ 1,863,217	$ 10,163,208
Accounts receivable (net of allowance for bad debts of $228,165 and $155,872 at June 30, 2018 and December 31, 2017)	446,027	488,613
Inventory	2,101,017	2,817,112
Prepaid expenses and other current assets	919,543	467,783
Total current assets	5,329,804	13,936,716
Property and equipment, net	303,206	438,621
Goodwill		27,186,620
Other intangible assets, net	44,802,230	46,152,577
Other assets	76,827	990,015
Total assets	50,512,067	88,704,549
Current liabilities:
Accounts payable	4,201,239	1,088,271
Accrued expenses	4,499,875	5,955,518
Total current liabilities	8,701,114	7,043,789
Deferred income taxes	2,700,681	5,292,291
Common stock warrant liability	74	1,600
Total liabilities	11,401,869	12,337,680
Commitments and contingencies (Note 7)
Stockholders’ equity:
Common stock, $0.01 par value; 275,000,000 shares authorized at June 30, 2018 and December 31, 2017; 3,610,009 and 2,063,808 shares issued and outstanding at June 30, 2018 and December 31, 2017	36,100	20,640
Additional paid-in capital	424,158,496	411,104,568
Accumulated deficit	(385,085,430)	(334,759,354)
Total stockholders’ equity	39,110,198	76,366,869
Total liabilities and stockholders' equity	50,512,067	88,704,549
Series B convertible preferred stock
Stockholders’ equity:
Preferred stock, 5,000,000 shares authorized:	30	61
Series C convertible preferred stock
Stockholders’ equity:
Preferred stock, 5,000,000 shares authorized:	954	$ 954
Series D Convertible Preferred Stock
Stockholders’ equity:
Preferred stock, 5,000,000 shares authorized:	$ 48

XML

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)	6 Months Ended	12 Months Ended
	Jun. 30, 2018	Dec. 31, 2017
Net of allowance for bad debts	$ 228,165	$ 155,872
Preferred stock, authorized	5,000,000	5,000,000
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	275,000,000	275,000,000
Common stock, shares issued	3,610,009	2,063,808
Common stock, shares outstanding	3,610,009	2,063,808
Series B convertible preferred stock
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, issued	20,000	20,000
Preferred stock, outstanding	2,957	6,055
Series C convertible preferred stock
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, issued	187,772	187,772
Preferred stock, outstanding	95,388	95,388
Series D Convertible Preferred Stock
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, issued	6,000	6,000
Preferred stock, outstanding	4,750	0

XML

Condensed Consolidated Statements of Operations - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Total revenue	$ 653,369	$ 93,060	$ 1,603,367	$ 133,100
Cost of revenue	634,774	54,472	1,463,731	83,995
Gross profit	18,595	38,588	139,636	49,105
Operating expenses:
Selling, general and administrative	6,710,518	5,560,787	16,756,075	11,489,773
Research and development	2,439,337	1,352,075	5,126,856	2,476,488
Goodwill impairment	27,186,620		27,186,620
Total operating expenses	36,336,475	6,912,862	49,069,551	13,966,261
Operating loss	(36,317,880)	(6,874,274)	(48,929,915)	(13,917,156)
Other income (expense):
Interest income	263		674	100
Interest expense			(2,735)
Change in value of warrant liability	369	34,395	1,494	(288,735)
Other, net	(142,145)	(298)	(144,416)	(1,198)
Loss before income taxes	(36,459,393)	(6,840,177)	(49,074,898)	(14,206,989)
Income tax benefit	1,208,560		2,590,613
Net loss	(35,250,833)	(6,840,177)	(46,484,285)	(14,206,989)
Adjustment for convertible preferred stock and warrants	(3,841,790)		(3,841,790)
Net loss attributable to common shareholders	$ (39,092,623)	$ (6,840,177)	$ (50,326,075)	$ (14,206,989)
Net loss per share-basic and diluted	$ (15.78)	$ (13.68)	$ (22.14)	$ (32.13)
Shares used to compute basic and diluted net loss per share	2,477,910	500,114	2,273,160	442,191
Product
Total revenue	$ 633,554	$ 93,060	$ 1,574,985	$ 133,100
Other
Total revenue	$ 19,815		$ 28,382

XML

Condensed Consolidated Statements of Cash Flows - USD ($)	6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017
Cash flows from operating activities:
Net loss	$ (46,484,285)	$ (14,206,989)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	142,442	67,653
Deferred income taxes	(2,591,610)
Stock-based compensation	1,550,360	2,866,100
Impairment of goodwill	27,186,620
Amortization of intangible assets	1,350,347	1,194
Change in value of warrant liability	(1,494)	288,735
Warrant inducement expense	146,245
Change in operating assets and liabilities:
Accounts receivable	42,586	34,309
Inventory	716,095	272,270
Prepaid expenses and other current assets	(451,760)	(60,228)
Other assets	913,182	391,806
Accounts payable	3,112,968	(388,575)
Accrued expenses	(1,455,643)	646,913
Net cash used in operating activities	(15,823,947)	(10,086,812)
Cash flows from investing activities:
Acquisitions, net of cash acquired		(1,848,720)
Purchases of property and equipment	(7,027)	(5,300)
Net cash used in investing activities	(7,027)	(1,854,020)
Cash flows from financing activities:
Proceeds from warrants exercised	488,250	3,334,176
Proceeds from sale of common stock and warrants for purchase of common stock	2,909,656	6,468,148
Proceeds from sale of convertible preferred stock	6,000,000	12,531,000
Preferred stock redemption in financing transaction	(500,000)
Common and preferred stock financing costs	(1,366,923)	(2,505,244)
Net cash provided by financing activities	7,530,983	19,828,080
Net (decrease) increase in cash and cash equivalents	(8,299,991)	7,887,248
Cash and cash equivalents:
Beginning of period	10,163,208	3,310,787
End of period	1,863,217	11,198,035
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	$ 51,331	$ 12,531,000

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2018

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

(1)  Summary of Significant Accounting Policies

Description of Business

ReShape Lifesciences Inc. (the Company) is focused on the design, development and commercialization of transformative technology to treat obesity and metabolic diseases. 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.

Risks and Uncertainties

The Company is focused on the design, development and commercialization of transformative technology to treat obesity and metabolic diseases and its 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. 

We have a limited operating history and the Company's products require approval from the U.S. Food and Drug Administration (FDA) or corresponding foreign regulatory agencies prior to commercial sales. On January 14, 2015, the vBloc® System, our initial product, which we now refer to as ReShape vBloc, received U.S. Food and Drug Administration (FDA) approval for vBloc Therapy, delivered via the ReShape vBloc.  vBloc Therapy is delivered via a pacemaker-like device that helps patients feel full and eat less by intermittently blocking hunger signals on the vagus nerve.  Our therapy limits the expansion of the stomach, helps control hunger sensations between meals, reduces the frequency and intensity of stomach contractions and produces a feeling of early and prolonged fullness.

On May 22, 2017 the Company acquired the Gastric Vest System (ReShape Vest) through the acquisition of BarioSurg, Inc. The ReShape Vest is an investigational, minimally invasive, laparoscopically implanted medical device being studied for weight loss in obese and morbidly obese patients. The ReShape Vest wraps around the stomach after it has been rearranged into a banana-like shape using sutures, emulating the effect of conventional weight-loss surgery, and is intended to enable gastric volume reduction without permanently changing patient anatomy.

On October 2, 2017 the Company acquired ReShape Medical, a privately-held medical technology company that develops, manufactures and markets 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 medical device industry is characterized by frequent and extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often difficult to predict, and the outcome may be uncertain until the court has entered final judgment and all appeals are exhausted. The Company’s competitors may assert that its products or the use of the Company’s products are covered by U.S. or foreign patents held by them.

The Company’s activities are subject to significant risks and uncertainties, including the ability to obtain additional financing, and there can be no assurance that the Company will be successful in obtaining additional financing on favorable terms, or at all. If adequate funds are not available, the Company may have to further reduce its cost structure until financing is obtained and/or delay development or commercialization of products or license to third parties the rights to commercialize products or technologies that the Company would otherwise seek to commercialize.

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 “Reverse Stock Split”). As a result of the 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 Reverse Stock Split were rounded up to the nearest whole share. As a result of the 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 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 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 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 the Reverse Stock Split for all periods presented herein.

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. 

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.

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 for the three and six months 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 June 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 six months ended June 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. 

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 computation of basic and diluted net loss per share for the three and six months ended June 30, 2018 and 2017:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Numerator:
Net loss	$	(35,250,833)	$	(6,840,177)	$	(46,484,285)	$	(14,206,989)
Adjustment for convertible preferred stock and warrants		(3,841,790)		—		(3,841,790)		—
Net loss attributable to common shareholders		(39,092,623)		(6,840,177)		(50,326,075)		(14,206,989)
Denominator for basic and diluted net loss per share:
Weighted-average common shares outstanding		2,477,910		500,114		2,273,160		442,191
Net loss per share—basic and diluted	$	(15.78)	$	(13.68)	$	(22.14)	$	(32.13)

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

	June 30,
	2018	2017
Stock options outstanding	611,122	81,689
Common shares underlying convertible preferred stock	3,146,345	333,394
Warrants to purchase common stock	3,981,358	202,223

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 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. Early adoption is permitted. Management is evaluating the standard's impact on the consolidated financial statements.

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.

There have been no other significant changes in recent accounting pronouncements during the six months ended June 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.

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Liquidity and Management's Plans

6 Months Ended

Jun. 30, 2018

Liquidity and Management's Plans

Liquidity and Management's Plans

(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.

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 $750,000. 

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 8, 2018, the Company completed a registered direct offering priced at-the-market of 374,572 shares of its common stock, at a purchase price per share of $3.92, for gross proceeds of approximately $1.47 million. Additionally, the Company issued to the investors unregistered warrants to purchase up to 280,929 shares of common stock, at a purchase price per warrant of $0.125, for gross proceeds of approximately $0.03 million. The placement agent fees and other offering expenses were approximately $200,000.

On June 21, 2018 the Company completed a registered direct offering priced at-the-market of 469,490 shares of its common stock, at a purchase price per share of $3.07, for gross proceeds of approximately $1.44 million. Additionally, the Company issued to the investors unregistered warrants to purchase up to 469,490 shares of common stock, at a purchase price per warrant of $0.125, for gross proceeds of approximately $0.06 million. 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 priced at-the-market of 1,241,382 shares of its common stock, at a purchase price per share of $2.05, for gross proceeds of approximately $2.55 million. Additionally, the Company issued to the investors unregistered warrants to purchase up to 1,241,382 shares of common stock, at a purchase price per warrant of $0.125, for gross proceeds of approximately $0.15 million. The placement agent fees and other offering expenses were approximately $205,000.  For additional details, see Note 13-Subsequent Events.

On August 3, 2018, the Company completed a registered direct offering of 1,000,000 shares of its common stock, at a purchase price per share of $0.60, for gross proceeds of approximately $0.6 million. Additionally, the Company issued to the investors unregistered warrants to purchase up to 1,000,000 shares of common stock. The placement agent fees and other offering expenses were approximately $350,000.  For additional details, see Note 13-Subsequent Events.

As of June 30, 2018, the Company had $1.9 million of cash and cash equivalents available to fund its operations.

The Company’s anticipated operations include plans to (i) expand the controlled commercial launch of vBloc Therapy, delivered via the vBloc System, (ii) continue development of the ReShape Vest, (iii) seek opportunities to leverage the Company’s intellectual property portfolio and custom development services to provide third party sales and licensing opportunities, and (iv) 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. 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.

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Acquisitions

6 Months Ended

Jun. 30, 2018

Acquisitions

Acquisitions

(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) 92,000 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 333,334 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 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)  157,116 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 1,251,814 shares of common stock upon the December 19, 2017 approval of the Company's stockholders under Nasdaq rules, of which 553,334 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 consolidated condensed 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.

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Goodwill and Other Intangible Assets

6 Months Ended

Jun. 30, 2018

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

(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, for the quarter ended June 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		(326,656)		—		3,544,155
Covenant not to compete	3		75,884		(27,403)		—		48,481
Developed technology	12		18,451,360		(1,153,208)		—		17,298,152
Customer relationships	5		3,753,533		(563,030)		—		3,190,503
Total		$	46,872,527	$	(2,070,297)	$	—	$	44,802,230

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

Year ending December 31,
2018 (remaining)	$	1,350,349
2019		2,700,696
2020		2,685,940
2021		2,675,401
2022		2,487,722
Thereafter		12,181,183
	$	24,081,291

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 our future operating results decline significantly, we may be exposed to additional impairment losses that could be material (for additional discussion of this risk, see “Item 1A. Risk Factors – During the second quarter of 2018 we were required to record a non-cash goodwill impairment loss.”)

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Fair Value Measurements

6 Months Ended

Jun. 30, 2018

Fair Value Measurements

Fair Value Measurements

(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 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 June 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
	June 30, 2018			December 31, 2017
Risk-free interest rates		2.11	%		1.76	%
Expected life		6	months		12	months
Expected dividends		—	%		—	%
Expected volatility		129.68	%		193.28	%
Fair value	$	74		$	1,600

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Inventory

6 Months Ended

Jun. 30, 2018

Inventory

Inventory

(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. There was $1.0 million and $674,000 of long-term inventory, primarily consisting of raw materials, as of June 30, 2018 and December 31, 2017, respectively.  The Company has an inventory reserve of $1.9 million at June 30, 2018 related to excess quantities of ReShape vBloc inventory components, resulting in a zero net book value in long-term inventory as of that date.

Current inventory consists of the following as of:

	June 30,		December 31,
	2018		2017
Raw materials	$	680,383	$	707,919
Work-in-process		1,027,214		1,494,278
Finished goods		393,420		614,915
Inventory	$	2,101,017	$	2,817,112

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2018

Commitments and Contingencies

Commitments and Contingencies

(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.  

With the acquisition of BarioSurg, the Company also leases space in Lake Forest, California under an operating lease with monthly base rent of approximately $2,200 per month through September 30, 2018.

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 June 30, 2018 and 2017 was $195,000 and $62,000, and for the six months ended June 30, 2018 was $391,000 and $121,000, respectively. At June 30, 2018, future minimum payments for the Company are as follows:

Year ending December 31,
2018 (remaining)	$	292,577
2019		419,082
2020		319,262
2021		327,949
2022		165,061
	$	1,523,931

Clinical Trials

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. Clinical trial costs are expensed as incurred.

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.

Litigation

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 names 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 contains 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 relate 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 1,093,450 shares of our common stock (the “Option Grants”).  In the complaint, the plaintiff contends 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 seeks 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.  On April 17, 2017, we filed a motion to dismiss the complaint based on the plaintiff’s failure to satisfy Delaware’s demand requirement for a derivative action and failure to state a valid claim.  The court denied the motion to dismiss on November 30, 2017.  While the Company continues to believe that the allegations in the complaint are without merit, the parties are currently negotiating the terms of a settlement of this matter.  During the quarter ended June 30, 2018, the Company has recorded an accrued liability and legal expense for $190,000 representing a probable and currently estimable settlement amount for this matter.

On April 20, 2017, Fulfillium, Inc. filed a Complaint against ReShape Medical, Inc. (which the Company acquired in October 2017 and is now a wholly-owned subsidiary of the Company) in the United States District Court for the District of Delaware, which alleged misappropriation of trade secrets and infringement of two United States Patents.  On July 28, 2017, ReShape Medical moved to dismiss both the misappropriation of trade secret claim and the claims of patent infringement, and to transfer the litigation to the United States 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 United States District Court for the Central District of California.  Fulfillium  twice amended its Complaint, and ReShape Medical filed amended Answers. 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 claims for lack of subject matter jurisdiction and terminated the case. On July 20, 2018, Fulfillium filed a new Complaint against ReShape Medical LLC and ReShape Lifesciences, Inc. in the Central District of California asserting infringement of three U.S. patents; a response is due on August 15, 2018.  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 to have all claims of both of the originally asserted Fulfillium patents canceled as unpatentable over various combinations of prior art. The Company intends to vigorously defend itself against Fulfillium, Inc.’s claims.  We currently are unable to estimate a loss or range of loss for this matter.

On July 12, 2018, Alpha Capital Anstalt (“Alpha”) filed a lawsuit against the Company in the United States 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 and 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, 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 $3.00 per share, rather than the $11.25 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. 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 lawsuit against the Company in the United States District Court for the Southern District of New York, which Complaint makes substantially the same claims and seeks 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 $1.35 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.

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Revenue Recognition

6 Months Ended

Jun. 30, 2018

Revenue Recognition

Revenue Recognition

(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 Ended June 30, 2018								Three Months Ended June 30, 2017
	U.S.		OUS *		Total Revenues		% of Total Revenues		U.S.		OUS *		Total Revenues		% of Total Revenues
ReShape vBloc product	$	—	$	—	$	—		0.0%	$	93,060	$	—	$	93,060		100.0%
ReShape Balloon product		372,233		261,320		633,553		97.0%		—		—		—		0.0%
Other		19,816		—		19,816		3.0%		—		—		—		0.0%
Total	$	392,049	$	261,320	$	653,369		100.0%	$	93,060	$	—	$	93,060		100.0%

	Six Months Ended June 30, 2018								Six Months Ended June 30, 2017
	U.S.		OUS *		Total Revenues		% of Total Revenues		U.S.		OUS *		Total Revenues		% of Total Revenues
ReShape vBloc product	$	148,420	$	—	$	148,420		9.3%	$	133,100	$	—	$	133,100		100.0%
ReShape Balloon product		1,015,607		408,758		1,424,365		88.8%		—		—		—		0.0%
Other		30,582		—		30,582		1.9%		—		—		—		0.0%
Total	$	1,194,609	$	408,758	$	1,603,367		100.0%	$	133,100	$	—	$	133,100		100.0%

*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.

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 June 30, 2018, and December 31, 2017, accounts receivable totaled $466,027 and $488,613, respectively.  For the three months ended June 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 June 30, 2018 and December 31, 2017, the Company deferred $191,400 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.

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Stock-based Compensation

6 Months Ended

Jun. 30, 2018

Stock-based Compensation

Stock-based Compensation

(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 six months ended June 30, 2018 was $0 and $3,000 and for the three and six months ended June 30, 2017, was $0 and $142,000, respectively. These amounts were allocated to operating expenses follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Selling, general and administrative	$	770,034	$	595,853	$	1,452,263	$	2,813,053
Research and development		39,974		23,847		98,097		53,047
Total	$	810,008	$	619,700	$	1,550,360	$	2,866,100

As of June 30, 2018 there was approximately $8.5 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 2.95 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 six months ended June 30, 2018 and 2017:

	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
Risk-free interest rates	2.85%	1.90%-1.98%	2.85%	1.90%-2.34%
Expected life	6.25 years	6.25 years	6.25 years	6.00 years-10.00 years
Expected dividends	0%	0%	0%	0%
Expected volatility	121.52%	90.93%	121.52%	90.93%-131.24%

Option activity under the Plan for the six months ended June 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	397,635	168,717	$	130.20	$	—
Options granted	(398,373)	398,373		9.62
Options exercised	—	—		—
Options cancelled	7,064	(7,064)		25.71
Balance, June 30, 2018	6,326	560,026	$	49.59	$	—

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	—	86,647	$	56.25	$	—
Shares reserved	—	—		—
Options granted	—	—		—
Options exercised	—	—		—
Options cancelled	—	(35,460)		30.75
Balance, June 30, 2018	—	51,187	$	74.01	$	—

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Stock Sales

6 Months Ended

Jun. 30, 2018

Stock Sales

Stock Sales

(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 12.54 shares of common stock, and 2017 Warrants to purchase 12.54 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 157,327 shares of common stock.

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 29 shares of common stock at a conversion price of $34.50 per share, and one seven-year warrant to purchase 29 shares of common stock at an initial exercise price of $34.50 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 June 30, 2018, 2,957 shares of the Series B Preferred Stock were outstanding.

On August 16, 2017, the Company also issued warrants to purchase an aggregate of 171,667 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 533,334 shares of common stock at an initial conversion price of $11.25 per share and the warrants have a one-year term and are exercisable for 2,333,334 shares of common stock at an initial exercise price of $11.25 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 374,572 shares of the Company’s common stock, at a purchase price of $3.92 per share. Concurrently with the offering, the Company also sold unregistered warrants exercisable for an aggregate of 280,929 shares of common stock, which represents 75% of the shares of common stock sold in the registered direct offering, for a purchase price of $0.125 per warrant and with an exercise price of $3.93 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 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 469,490 shares of the Company’s common stock at a purchase price of $3.07 per share. Concurrently with the offering the Company also sold unregistered warrants exercisable for an aggregate of 469,490 shares of common stock, which represents 100% of the shares of common stock sold in the registered direct offering, for a purchase price of $0.125 per warrant and with an exercise price of $3.08 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.

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Warrants

6 Months Ended

Jun. 30, 2018

Warrants

Warrants

(11)  Warrants

Stock warrant activity for the six months ended June 30, 2018 is as follows:

		Weighted
		Average
	Common	Exercise
	Shares	Price
Balance, December 31, 2017	953,889		52.65
Granted	3,132,777		3.09
Exercised	(105,000)		4.65
Cancelled	(308)		17,955.00
Balance, June 30, 2018	3,981,358	$	6.25

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Income Taxes

6 Months Ended

Jun. 30, 2018

Income Taxes

Income Taxes

(12) Income Taxes

On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act, was enacted into law in the United States, resulting in significant changes from previous tax law.   We have adopted ASU 2018-05, which allows for the recording of provisional amounts during a measurement period not to extend beyond one year of the enactment date since the 2017 Tax Act was passed.  As a result of the 2017 Tax Act, NOLs generated in taxable years ending after December 31, 2017 have an indefinite carryforward period.  The Company continues to evaluate the extent that deductible temporary differences are expected to reverse and generate an indefinite-lived NOL and the related impact on the valuation allowance.  The accounting for the valuation allowance is, therefore, considered to be incomplete due to the forthcoming guidance and the Company’s ongoing analysis of final year-end data and tax positions. There were no adjustments made in the first and second quarter with respect to the estimates made for the 2017 Tax Act.  We also anticipate additional IRS guidance relative to the impacts of the Tax Act will be forthcoming throughout 2018.

We recorded an income tax benefit of $1.2 million and $2.6 million in the three and six months ended June 30, 2018, respectively.  This amount reflects the tax impact of net operating losses generated in first six months of 2018 which have an indefinite carryover period.  A portion of these net operating losses are supported by expected taxable income from the reversal of indefinite life intangibles, such that they are more likely than not to be realized.

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Subsequent Events

6 Months Ended

Jun. 30, 2018

Subsequent Events

Subsequent Events

(13)  Subsequent Events

July 2018 Financing Transaction

On July 10, 2018, the Company entered into securities purchase agreements with institutional and accredited investors for the sale by the Company of 1,241,382 shares of the Company’s common stock, par value $0.01 per share, at a purchase price of $2.05 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 1,241,382 shares of common stock, which represents 100% of the shares of common stock sold in the registered direct offering, for a purchase price of $0.125 per warrant and with an exercise price of $2.06 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.

The offering closed on July 12, 2018. The net proceeds from the transactions were approximately $2.35 million after deducting placement agent fees and other transaction expenses.

August 2018 Financing Transaction

On August 2, 2018, the Company entered into securities purchase agreements with institutional and accredited investors for the sale by the Company of 1,000,000 shares of the Company’s common stock at a purchase price of $0.60 per share in a registered direct offering. Concurrently with the registered direct offering, and pursuant to the securities purchase agreements, the Company also issued unregistered warrants exercisable for an aggregate of 1,000,000 shares of common stock, which represents 100% of the shares of common stock sold in the registered direct offering with an exercise price of $1.10 per share. Subject to certain ownership limitations, the warrants are exercisable beginning six months after issuance. The warrants will expire on the 5.5-year anniversary of the date of issuance.

The offering closed on August 3, 2018. The net proceeds from the transactions were approximately $550,000 after deducting placement agent fees and other transaction expenses.

Terminated Underwritten Public Offering

On August 10, 2018, the Company announced that the underwriting agreement, dated August 7, 2018 (the “Underwriting Agreement”), between the Company and H.C. Wainwright & Co., LLC (the “Underwriter”), relating to the Company’s previously announced underwritten public offering of shares of the Company’s common stock, was terminated by the Underwriter in accordance with its terms due to Nasdaq’s determination that the offering was not a public offering under the Nasdaq rules, and therefore could not be completed without shareholder approval. As a result of the termination of the Underwriting Agreement, no shares of common stock were issued in the underwritten public offering. As a result of the Company’s announcement of the offering, the conversion price of the Company’s outstanding shares of series B convertible preferred stock and series D convertible preferred stock, and the exercise price of the warrants to purchase common stock issued in connection therewith, was reduced to $0.085 in accordance with their terms. At the close of business on August 10, 2018, and taking into account the conversion by certain holders of shares of the Company’s outstanding series B convertible preferred stock and series D convertible preferred stock into shares of common stock at a conversion price of $0.085 per share, the Company had the following securities outstanding:

•  33,548,621 shares of our common stock;

•  37,376,917 shares of our common stock issuable upon conversion of 3,177.04 shares of series D convertible preferred stock;

•  635,920 shares of our common stock issuable upon conversion of 95,388 shares of series C convertible preferred stock;

•  7,541,177 shares of our common stock issuable upon conversion of 641 shares of series B convertible preferred stock;

•  6,379,636 shares of our common stock issuable upon the exercise of warrants, with exercise prices ranging from $0.085 to $33,000; 

•  603,725 shares of common stock issuable upon the exercise of options, with exercise prices ranging from $3.52 to $478,170; and

•  437,880 shares of our common stock reserved for future issuance under our Second Amended and Restated 2003 Stock Incentive Plan.

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2018

Summary of Significant Accounting Policies

Description of Business

Description of Business

ReShape Lifesciences Inc. (the Company) is focused on the design, development and commercialization of transformative technology to treat obesity and metabolic diseases. 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.

Risks and Uncertainties

Risks and Uncertainties

The Company is focused on the design, development and commercialization of transformative technology to treat obesity and metabolic diseases and its 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. 

We have a limited operating history and the Company's products require approval from the U.S. Food and Drug Administration (FDA) or corresponding foreign regulatory agencies prior to commercial sales. On January 14, 2015, the vBloc® System, our initial product, which we now refer to as ReShape vBloc, received U.S. Food and Drug Administration (FDA) approval for vBloc Therapy, delivered via the ReShape vBloc.  vBloc Therapy is delivered via a pacemaker-like device that helps patients feel full and eat less by intermittently blocking hunger signals on the vagus nerve.  Our therapy limits the expansion of the stomach, helps control hunger sensations between meals, reduces the frequency and intensity of stomach contractions and produces a feeling of early and prolonged fullness.

On May 22, 2017 the Company acquired the Gastric Vest System (ReShape Vest) through the acquisition of BarioSurg, Inc. The ReShape Vest is an investigational, minimally invasive, laparoscopically implanted medical device being studied for weight loss in obese and morbidly obese patients. The ReShape Vest wraps around the stomach after it has been rearranged into a banana-like shape using sutures, emulating the effect of conventional weight-loss surgery, and is intended to enable gastric volume reduction without permanently changing patient anatomy.

On October 2, 2017 the Company acquired ReShape Medical, a privately-held medical technology company that develops, manufactures and markets 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 medical device industry is characterized by frequent and extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often difficult to predict, and the outcome may be uncertain until the court has entered final judgment and all appeals are exhausted. The Company’s competitors may assert that its products or the use of the Company’s products are covered by U.S. or foreign patents held by them.

The Company’s activities are subject to significant risks and uncertainties, including the ability to obtain additional financing, and there can be no assurance that the Company will be successful in obtaining additional financing on favorable terms, or at all. If adequate funds are not available, the Company may have to further reduce its cost structure until financing is obtained and/or delay development or commercialization of products or license to third parties the rights to commercialize products or technologies that the Company would otherwise seek to commercialize.

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 “Reverse Stock Split”). As a result of the 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 Reverse Stock Split were rounded up to the nearest whole share. As a result of the 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 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 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 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 the Reverse Stock Split for all periods presented herein.

Basis of Presentation

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. 

Use of Estimates

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

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

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 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

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

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.

Property and Equipment, Net

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

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 for the three and six months ended June 30, 2018.  See Note 4 for additional information.

Income Taxes

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 June 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

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 six months ended June 30, 2018 and 2017.

Research and Development Expenses

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. 

Patent Costs

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

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

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 computation of basic and diluted net loss per share for the three and six months ended June 30, 2018 and 2017:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Numerator:
Net loss	$	(35,250,833)	$	(6,840,177)	$	(46,484,285)	$	(14,206,989)
Adjustment for convertible preferred stock and warrants		(3,841,790)		—		(3,841,790)		—
Net loss attributable to common shareholders		(39,092,623)		(6,840,177)		(50,326,075)		(14,206,989)
Denominator for basic and diluted net loss per share:
Weighted-average common shares outstanding		2,477,910		500,114		2,273,160		442,191
Net loss per share—basic and diluted	$	(15.78)	$	(13.68)	$	(22.14)	$	(32.13)

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

	June 30,
	2018	2017
Stock options outstanding	611,122	81,689
Common shares underlying convertible preferred stock	3,146,345	333,394
Warrants to purchase common stock	3,981,358	202,223

Segment Reporting

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

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 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. Early adoption is permitted. Management is evaluating the standard's impact on the consolidated financial statements.

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.

There have been no other significant changes in recent accounting pronouncements during the six months ended June 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.

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Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2018

Summary of Significant Accounting Policies

Computation of Basic and Diluted Net Loss per Share

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Numerator:
Net loss	$	(35,250,833)	$	(6,840,177)	$	(46,484,285)	$	(14,206,989)
Adjustment for convertible preferred stock and warrants		(3,841,790)		—		(3,841,790)		—
Net loss attributable to common shareholders		(39,092,623)		(6,840,177)		(50,326,075)		(14,206,989)
Denominator for basic and diluted net loss per share:
Weighted-average common shares outstanding		2,477,910		500,114		2,273,160		442,191
Net loss per share—basic and diluted	$	(15.78)	$	(13.68)	$	(22.14)	$	(32.13)

Antidilutive Securities

	June 30,
	2018	2017
Stock options outstanding	611,122	81,689
Common shares underlying convertible preferred stock	3,146,345	333,394
Warrants to purchase common stock	3,981,358	202,223

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Acquisitions (Tables)

6 Months Ended

Jun. 30, 2018

BarioSurg

Schedule of allocation of purchase price

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

ReShape Medical, Inc

Schedule of allocation of purchase price

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

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Goodwill and Other Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2018

Goodwill and Other Intangible Assets

Schedule of Finite-Lived intangible assets excluding goodwill

The following table summarizes the activity of intangible assets, excluding goodwill, for the quarter ended June 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		(326,656)		—		3,544,155
Covenant not to compete	3		75,884		(27,403)		—		48,481
Developed technology	12		18,451,360		(1,153,208)		—		17,298,152
Customer relationships	5		3,753,533		(563,030)		—		3,190,503
Total		$	46,872,527	$	(2,070,297)	$	—	$	44,802,230

Schedule of future amortization of Finite-Lived intangible assets

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

Year ending December 31,
2018 (remaining)	$	1,350,349
2019		2,700,696
2020		2,685,940
2021		2,675,401
2022		2,487,722
Thereafter		12,181,183
	$	24,081,291

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Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2018

Fair Value Measurements

Fair Value Calculated Using Valuation Model

		Series A Warrants
	June 30, 2018			December 31, 2017
Risk-free interest rates		2.11	%		1.76	%
Expected life		6	months		12	months
Expected dividends		—	%		—	%
Expected volatility		129.68	%		193.28	%
Fair value	$	74		$	1,600

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Inventory (Tables)

6 Months Ended

Jun. 30, 2018

Inventory

Schedule of current Inventory

	June 30,		December 31,
	2018		2017
Raw materials	$	680,383	$	707,919
Work-in-process		1,027,214		1,494,278
Finished goods		393,420		614,915
Inventory	$	2,101,017	$	2,817,112

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Commitments and Contingencies (Tables)

6 Months Ended

Jun. 30, 2018

Commitments and Contingencies

Future Minimum Lease Payments

Year ending December 31,
2018 (remaining)	$	292,577
2019		419,082
2020		319,262
2021		327,949
2022		165,061
	$	1,523,931

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Revenue Recognition (Tables)

6 Months Ended

Jun. 30, 2018

Revenue Recognition

Schedule of disaggregation of revenue by product and geography

	Three Months Ended June 30, 2018								Three Months Ended June 30, 2017
	U.S.		OUS *		Total Revenues		% of Total Revenues		U.S.		OUS *		Total Revenues		% of Total Revenues
ReShape vBloc product	$	—	$	—	$	—		0.0%	$	93,060	$	—	$	93,060		100.0%
ReShape Balloon product		372,233		261,320		633,553		97.0%		—		—		—		0.0%
Other		19,816		—		19,816		3.0%		—		—		—		0.0%
Total	$	392,049	$	261,320	$	653,369		100.0%	$	93,060	$	—	$	93,060		100.0%

	Six Months Ended June 30, 2018								Six Months Ended June 30, 2017
	U.S.		OUS *		Total Revenues		% of Total Revenues		U.S.		OUS *		Total Revenues		% of Total Revenues
ReShape vBloc product	$	148,420	$	—	$	148,420		9.3%	$	133,100	$	—	$	133,100		100.0%
ReShape Balloon product		1,015,607		408,758		1,424,365		88.8%		—		—		—		0.0%
Other		30,582		—		30,582		1.9%		—		—		—		0.0%
Total	$	1,194,609	$	408,758	$	1,603,367		100.0%	$	133,100	$	—	$	133,100		100.0%

XML

Stock-based Compensation (Tables)

6 Months Ended

Jun. 30, 2018

Summary of Operating Expenses and Employee and Nonemployees

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Selling, general and administrative	$	770,034	$	595,853	$	1,452,263	$	2,813,053
Research and development		39,974		23,847		98,097		53,047
Total	$	810,008	$	619,700	$	1,550,360	$	2,866,100

Stock Option Valuation Assumptions

	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
Risk-free interest rates	2.85%	1.90%-1.98%	2.85%	1.90%-2.34%
Expected life	6.25 years	6.25 years	6.25 years	6.00 years-10.00 years
Expected dividends	0%	0%	0%	0%
Expected volatility	121.52%	90.93%	121.52%	90.93%-131.24%

Summary of Stock Option Activity

		Outstanding Options
	Shares				Aggregate
	Available For	Number of	Weighted-Average		Intrinsic
	Grant	Shares	Exercise Price		Value
Balance, December 31, 2017	—	86,647	$	56.25	$	—
Shares reserved	—	—		—
Options granted	—	—		—
Options exercised	—	—		—
Options cancelled	—	(35,460)		30.75
Balance, June 30, 2018	—	51,187	$	74.01	$	—

Stock Incentive Plan 2003

Summary of Stock Option Activity

		Outstanding Options
	Shares				Aggregate
	Available For	Number of	Weighted-Average		Intrinsic
	Grant	Shares	Exercise Price		Value
Balance, December 31, 2017	397,635	168,717	$	130.20	$	—
Options granted	(398,373)	398,373		9.62
Options exercised	—	—		—
Options cancelled	7,064	(7,064)		25.71
Balance, June 30, 2018	6,326	560,026	$	49.59	$	—

XML

Warrants (Tables)

6 Months Ended

Jun. 30, 2018

Warrants

Stock Warrants Activity

		Weighted
		Average
	Common	Exercise
	Shares	Price
Balance, December 31, 2017	953,889		52.65
Granted	3,132,777		3.09
Exercised	(105,000)		4.65
Cancelled	(308)		17,955.00
Balance, June 30, 2018	3,981,358	$	6.25

XML

Summary of Significant Accounting Policies (Details)			3 Months Ended	6 Months Ended
	Jun. 01, 2018	Oct. 02, 2017 item	Jun. 30, 2018 USD ($)	Jun. 30, 2018 USD ($) segment entity	Dec. 31, 2017 USD ($)
Schedule Of Significant Accounting Policies [Line Items]
Number of legal entities | entity				2
Reverse Stock Split	0.067
Cash Equivalents Maturity Period Maximum				90 days
Goodwill and Intangible Asset Impairment | $			$ 27,200,000	$ 27,200,000
Revenue related to rebate incentives | $			$ 191,400	$ 191,400	$ 0
Number of operating segments | segment				1
ReShape Medical, Inc
Schedule Of Significant Accounting Policies [Line Items]
Minimum Number Of Obesity Related Or Comorbid Conditions		1
Minimum | ReShape Medical, Inc
Schedule Of Significant Accounting Policies [Line Items]
Body Mass Index Value		30
Maximum | ReShape Medical, Inc
Schedule Of Significant Accounting Policies [Line Items]
Body Mass Index Value		40
Furniture and Fixtures | Minimum
Schedule Of Significant Accounting Policies [Line Items]
Property and equipment estimated useful lives				5 years
Furniture and Fixtures | Maximum
Schedule Of Significant Accounting Policies [Line Items]
Property and equipment estimated useful lives				7 years
Computer hardware and software | Minimum
Schedule Of Significant Accounting Policies [Line Items]
Property and equipment estimated useful lives				3 years
Computer hardware and software | Maximum
Schedule Of Significant Accounting Policies [Line Items]
Property and equipment estimated useful lives				5 years
Alpha Medical, Inc.
Schedule Of Significant Accounting Policies [Line Items]
Ownership percentage of an entity combined to form the Company			100.00%	100.00%
Beta Medical, Inc.
Schedule Of Significant Accounting Policies [Line Items]
Ownership percentage of an entity combined to form the Company			100.00%	100.00%

XML

Summary of Significant Accounting Policies - Basic and Diluted Net Loss Per Share (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Numerator:
Net loss	$ (35,250,833)	$ (6,840,177)	$ (46,484,285)	$ (14,206,989)
Adjustment for convertible preferred stock and warrants	(3,841,790)		(3,841,790)
Net loss attributable to common shareholders	$ (39,092,623)	$ (6,840,177)	$ (50,326,075)	$ (14,206,989)
Denominator for basic and diluted net loss per share:
Weighted-average common shares outstanding	2,477,910	500,114	2,273,160	442,191
Net loss per share-basic and diluted	$ (15.78)	$ (13.68)	$ (22.14)	$ (32.13)

XML

Summary of Significant Accounting Policies - Additional Information (Details) - shares	6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017
Stock options outstanding
Anti-dilutive Securities
Anti-dilutive as of end of each period	611,122	81,689
Common shares underlying convertible preferred stock
Anti-dilutive Securities
Anti-dilutive as of end of each period	3,146,345	333,394
Warrants to purchase common stock
Anti-dilutive Securities
Anti-dilutive as of end of each period	3,981,358	202,223

XML

Liquidity and Management's Plans (Details) - USD ($)													3 Months Ended		6 Months Ended
	Aug. 10, 2018	Aug. 03, 2018	Aug. 02, 2018	Jul. 12, 2018	Jul. 10, 2018	Jun. 21, 2018	Jun. 19, 2018	Jun. 08, 2018	Jun. 07, 2018	May 24, 2018	Apr. 03, 2018	Jan. 23, 2017	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2017	Aug. 16, 2017	Dec. 31, 2016
Liquidity and Managements Plans [Line Items]
Common stock shares issued (in shares)						469,490	469,490	374,572	374,572
Gross proceeds before deducting estimate offering expenses						$ 1,440,000		$ 1,470,000				$ 19,000,000
Underwriting discounts and commissions and offering expenses						200,000		200,000		$ 39,000					$ 1,366,923	$ 2,505,244
Consideration received						$ 60,000		$ 30,000		$ 488,250
Adjustment of Warrants Granted for Services															146,245
Share Price						$ 3.07	$ 3.07	$ 3.92	$ 3.92
Class of Warrant or Right, Number of Securities Called by Warrants or Rights							469,490		280,929									171,667
Class of Warrant or Right, Exercise Price of Warrants or Rights							$ 3.08		$ 3.93
Warrant Price						$ 0.125	$ 0.125	$ 0.125	$ 0.125
Redemption of convertible preferred stock						$ 500,000									500,000
Cash and cash equivalents													$ 1,863,217	$ 11,198,035	1,863,217	11,198,035	$ 10,163,208		$ 3,310,787
Revenues													653,369	93,060	1,603,367	133,100
Product
Liquidity and Managements Plans [Line Items]
Revenues													$ 633,554	$ 93,060	$ 1,574,985	$ 133,100
Maximum
Liquidity and Managements Plans [Line Items]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights						469,490		280,929
Series D Convertible Preferred Stock
Liquidity and Managements Plans [Line Items]
Common stock shares issued (in shares)											6,000
Gross proceeds before deducting estimate offering expenses											$ 6,000,000
Underwriting discounts and commissions and offering expenses											$ 750,000
Class of Warrant or Right, Number of Securities Called by Warrants or Rights											2,333,334
Class of Warrant or Right, Exercise Price of Warrants or Rights											$ 11.25
Subsequent Event
Liquidity and Managements Plans [Line Items]
Common stock shares issued (in shares)	33,548,621	1,000,000	1,000,000	1,241,382	1,241,382
Gross proceeds before deducting estimate offering expenses		$ 600,000		$ 2,550,000
Underwriting discounts and commissions and offering expenses				205,000
Consideration received		$ 350,000		$ 150,000
Share Price		$ 0.60	$ 0.60	$ 2.05	$ 2.05
Class of Warrant or Right, Number of Securities Called by Warrants or Rights			1,000,000		1,241,382
Class of Warrant or Right, Exercise Price of Warrants or Rights			$ 1.10		$ 2.06
Warrant Price				$ 0.125	$ 0.125
Redemption of convertible preferred stock		$ 550,000		$ 2,350,000
Highest closing price of our common stock	60 days
Subsequent Event | Maximum
Liquidity and Managements Plans [Line Items]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights		1,000,000		1,241,382
Subsequent Event | Minimum
Liquidity and Managements Plans [Line Items]
Entity Public Float	$ 75,000,000
Subsequent Event | Series D Convertible Preferred Stock
Liquidity and Managements Plans [Line Items]
Common stock shares issued (in shares)	37,376,917

XML

Acquisition (Details)				6 Months Ended
	Dec. 19, 2017 shares	Oct. 02, 2017 USD ($) item $ / shares shares	May 22, 2017 USD ($) $ / shares shares	Jun. 30, 2018 USD ($) $ / shares	Dec. 31, 2017 USD ($) $ / shares
Acquisition
Common stock, par value | $ / shares				$ 0.01	$ 0.01
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract]
Goodwill					$ 27,186,620
Amortization period				3 years
Trademarks/tradenames
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract]
Amortization period				10 years
Covenant not to compete
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract]
Amortization period				3 years
Developed technology
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract]
Amortization period				12 years
Customer relationships
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract]
Amortization period				5 years
Series C convertible preferred stock
Acquisition
Preferred stock, par value | $ / shares				$ 0.01	$ 0.01
BarioSurg
Acquisition
Conversion of convertible preferred shares to common stock | shares			333,334
Cash consideration			$ 2,000,000
Total consideration			28,300,000
Value of equity consideration			$ 26,300,000
Number of trading days			3 days
Discount for lack of marketability (in percentage)			19.00%
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract]
Cash				$ 151,280
Property and equipment				3,000
Goodwill				14,004,573
Other assets				5,826
Current liabilities assumed				(186,000)
Deferred income tax liability				(7,606,902)
Net assets acquired				28,258,963
BarioSurg | In Process Research & Development
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract]
Intangible assets				20,720,939
BarioSurg | Trademarks/tradenames
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract]
Intangible assets				1,090,363
BarioSurg | Covenant not to compete
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract]
Intangible assets				75,884
BarioSurg | Common Stock
Acquisition
Number of shares issued | shares			92,000
Common stock, par value | $ / shares			$ 0.01
BarioSurg | Conditional convertible preferred stock
Acquisition
Number of shares issued | shares			1,000,000
Preferred stock, par value | $ / shares			$ 0.01
ReShape Medical, Inc
Acquisition
Number of shares issued | shares	1,251,814
Conversion of convertible preferred shares to common stock | shares		553,334
Cash consideration		$ 5,000,000
Total consideration		39,000,000
Value of equity consideration		$ 34,000,000
Discount for lack of marketability (in percentage)		20.00%
Minimum number of obesity or related comorbid conditions | item		1
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract]
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
Other assets				77,058
Current liabilities assumed				(1,837,941)
Net assets acquired				38,982,433
Weighted Average Useful Life		12 years
ReShape Medical, Inc | Minimum
Acquisition
BMI index | item		30
ReShape Medical, Inc | Maximum
Acquisition
BMI index | item		40
ReShape Medical, Inc | Trademarks/tradenames
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract]
Intangible assets				2,780,448
Amortization period		10 years
ReShape Medical, Inc | Developed technology
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract]
Intangible assets				18,451,360
ReShape Medical, Inc | Customer relationships
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract]
Intangible assets				$ 3,753,533
Amortization period		5 years
ReShape Medical, Inc | Common Stock
Acquisition
Number of shares issued | shares		157,116
Common stock, par value | $ / shares		$ 0.01
ReShape Medical, Inc | Series C convertible preferred stock
Acquisition
Number of shares issued | shares		187,772

XML

Goodwill and Other Intangible Assets (Details)	3 Months Ended	6 Months Ended
	Jun. 30, 2018 USD ($)	Jun. 30, 2018 USD ($) segment item	Dec. 31, 2017 USD ($)
Summary of intangible assets excluding goodwill
Goodwill			$ 27,186,620
Other intangible assets, net	$ 44,802,230	$ 44,802,230	$ 46,152,577
Useful Life (years)		3 years
Gross Carrying Amount	46,872,527	$ 46,872,527
Accumulated amortization	(2,070,297)	(2,070,297)
Finite-Lived Intangible Assets, Net, Total	44,802,230	$ 44,802,230
Number of Reporting Units | item		1
Number of Operating Segments | segment		1
Number of asset group | item		1
Goodwill impairment	27,186,620	$ 27,186,620
Level 3
Summary of intangible assets excluding goodwill
Goodwill	0	0
In Process Research & Development
Summary of intangible assets excluding goodwill
Gross Carrying Amount	20,720,939	20,720,939
Finite-Lived Intangible Assets, Net, Total	20,720,939	$ 20,720,939
Trademarks/tradenames
Summary of intangible assets excluding goodwill
Useful Life (years)		10 years
Gross Carrying Amount	3,870,811	$ 3,870,811
Accumulated amortization	(326,656)	(326,656)
Finite-Lived Intangible Assets, Net, Total	3,544,155	$ 3,544,155
Covenant not to compete
Summary of intangible assets excluding goodwill
Useful Life (years)		3 years
Gross Carrying Amount	75,884	$ 75,884
Accumulated amortization	(27,403)	(27,403)
Finite-Lived Intangible Assets, Net, Total	48,481	$ 48,481
Developed technology
Summary of intangible assets excluding goodwill
Useful Life (years)		12 years
Gross Carrying Amount	18,451,360	$ 18,451,360
Accumulated amortization	(1,153,208)	(1,153,208)
Finite-Lived Intangible Assets, Net, Total	17,298,152	$ 17,298,152
Customer relationships
Summary of intangible assets excluding goodwill
Useful Life (years)		5 years
Gross Carrying Amount	3,753,533	$ 3,753,533
Accumulated amortization	(563,030)	(563,030)
Finite-Lived Intangible Assets, Net, Total	$ 3,190,503	$ 3,190,503

XML

Goodwill and Other Intangible Assets - Expected Amortization (Details)	Jun. 30, 2018 USD ($)
Goodwill and Other Intangible Assets
2018 (remaining)	$ 1,350,349
2019	2,700,696
2020	2,685,940
2021	2,675,401
2022	2,487,722
Thereafter	12,181,183
Total expected amortization of Intangible Assets	$ 24,081,291

XML

Fair Value Measurements (Details) - Warrants Issued July 8, 2015 - USD ($)	6 Months Ended	12 Months Ended
	Jun. 30, 2018	Dec. 31, 2017
Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques [Line Items]
Risk-free interest rates	2.11%	1.76%
Expected life	6 months	12 months
Expected volatility	129.68%	193.28%
Fair value	$ 74	$ 1,600

XML

Inventory (Details) - USD ($)	Jun. 30, 2018	Dec. 31, 2017
Inventory
Long-term inventory	$ 1,000,000	$ 674,000
Inventory reserve	1,900,000
Net book value in long-term inventory	$ 0

XML

Inventory - Additional Information (Details) - USD ($)	Jun. 30, 2018	Dec. 31, 2017
Inventory
Raw materials	$ 680,383	$ 707,919
Work-in-process	1,027,214	1,494,278
Finished goods	393,420	614,915
Inventory	$ 2,101,017	$ 2,817,112

XML

Commitments and Contingencies (Details)				3 Months Ended		6 Months Ended
	Oct. 02, 2017 USD ($)	Feb. 28, 2017 item shares	Aug. 25, 2015 USD ($)	Jun. 30, 2018 USD ($)	Jun. 30, 2017 USD ($)	Jun. 30, 2018 USD ($)	Jun. 30, 2017 USD ($)	Aug. 10, 2018 $ / shares	Aug. 02, 2018 $ / shares	Jul. 26, 2018 USD ($) $ / shares	Jul. 12, 2018 USD ($) $ / shares	Jul. 10, 2018 $ / shares	Jun. 19, 2018 $ / shares	Jun. 07, 2018 $ / shares	Apr. 30, 2018 $ / shares	Apr. 03, 2018 $ / shares
Loss Contingencies [Line Items]
Operating lease agreement expiration date			Sep. 30, 2018			Sep. 30, 2015
Operating lease agreement term			3 years
Total rent expense | $				$ 195,000	$ 62,000	$ 391,000	$ 121,000
Number of months that require patients to be followed out in clinical trials						60 months
Accrued liability and legal expenses | $				$ 190,000
Class of Warrant or Right, Exercise Price of Warrants or Rights													$ 3.08	$ 3.93
Lake Forest, California
Loss Contingencies [Line Items]
Operating lease agreement expiration date						Sep. 30, 2018
Operating lease, monthly base rent | $						$ 2,200
Series D Convertible Preferred Stock
Loss Contingencies [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights																$ 11.25
Conversion Price Per Share																$ 11.25
Du Litigation
Loss Contingencies [Line Items]
Number of shareholders | item		1
Number of senior management members | item		4
Number of Shares | shares		1,093,450
Alpha Litigation | Series D Convertible Preferred Stock
Loss Contingencies [Line Items]
Conversion Price Per Share															$ 11.25
Alpha Litigation | Warrants 2017
Loss Contingencies [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights															$ 11.25
Subsequent Event
Loss Contingencies [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights									$ 1.10			$ 2.06
Subsequent Event | Iroquois Litigation | Series D Convertible Preferred Stock
Loss Contingencies [Line Items]
Conversion Price Per Share										$ 1.35
Subsequent Event | Iroquois Litigation | Warrants 2017
Loss Contingencies [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights										$ 1.35
Minimum
Loss Contingencies [Line Items]
Operating lease, monthly base rent | $			$ 18,925
Minimum | Subsequent Event | Warrants 2017
Loss Contingencies [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights								$ 0.085
Minimum | Subsequent Event | Alpha Litigation
Loss Contingencies [Line Items]
Loss Contingency, Estimate of Possible Loss | $											$ 3,600,000
Minimum | Subsequent Event | Alpha Litigation | Series B convertible preferred stock
Loss Contingencies [Line Items]
Conversion Price Per Share											$ 3.00
Minimum | Subsequent Event | Alpha Litigation | Warrants 2017
Loss Contingencies [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights											$ 3.00
Minimum | Subsequent Event | Iroquois Litigation
Loss Contingencies [Line Items]
Loss Contingency, Estimate of Possible Loss | $										$ 5,000,000
Maximum
Loss Contingencies [Line Items]
Operating lease, monthly base rent | $			$ 20,345
Maximum | Subsequent Event | Warrants 2017
Loss Contingencies [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights								$ 33,000
ReShape Medical, Inc | Office space
Loss Contingencies [Line Items]
Operating lease agreement expiration date	Jun. 30, 2022
Operating lease, monthly base rent | $	$ 24,600
Annual rent escalations, percentage	3.00%
ReShape Medical, Inc | Manufacturing/warehousing space
Loss Contingencies [Line Items]
Operating lease, monthly base rent | $	$ 10,900

XML

Commitments and Contingencies - Additional Information (Details)	Jun. 30, 2018 USD ($)
Commitments and Contingencies
2018 (remaining)	$ 292,577
2019	419,082
2020	319,262
2021	327,949
2022	165,061
Operating Leases, Future Minimum Payments Due, Total	$ 1,523,931

XML

Revenue Recognition (Details) - USD ($)			3 Months Ended		6 Months Ended
	Jun. 19, 2018	Jun. 07, 2018	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2017
Revenue Recognition
Revenue from Contract with Customer, Including Assessed Tax			$ 653,369,000	$ 93,060,000	$ 1,603,367,000	$ 133,100,000
Percentage of Total Revenue			100.00%	100.00%	100.00%	100.00%
Warrant Term	5 years 6 months	5 years 6 months			1 year
Accounts receivable			$ 466,027		$ 466,027		$ 488,613
Revenue related to rebate incentives			191,400		$ 191,400		$ 0
Minimum
Revenue Recognition
Payment terms of contract with customers					30 days
Maximum
Revenue Recognition
Payment terms of contract with customers					60 days
US
Revenue Recognition
Revenue from Contract with Customer, Including Assessed Tax			392,049,000	$ 93,060,000	$ 1,194,609,000	$ 133,100,000
Outside US
Revenue Recognition
Revenue from Contract with Customer, Including Assessed Tax			$ 261,320,000		408,758,000
ReShape vBloc product [Member]
Revenue Recognition
Revenue from Contract with Customer, Including Assessed Tax				$ 93,060,000	$ 148,420,000	$ 133,100,000
Percentage of Total Revenue			0.00%	100.00%	9.30%	100.00%
ReShape vBloc product [Member] | US
Revenue Recognition
Revenue from Contract with Customer, Including Assessed Tax				$ 93,060,000	$ 148,420,000	$ 133,100,000
ReShape Balloon product [Member]
Revenue Recognition
Revenue from Contract with Customer, Including Assessed Tax			$ 633,553,000		$ 1,424,365,000
Percentage of Total Revenue			97.00%	0.00%	88.80%	0.00%
ReShape Balloon product [Member] | US
Revenue Recognition
Revenue from Contract with Customer, Including Assessed Tax			$ 372,233,000		$ 1,015,607,000
ReShape Balloon product [Member] | Outside US
Revenue Recognition
Revenue from Contract with Customer, Including Assessed Tax			261,320,000		408,758,000
Other
Revenue Recognition
Revenue from Contract with Customer, Including Assessed Tax			$ 19,816,000		$ 30,582,000
Percentage of Total Revenue			3.00%	0.00%	1.90%	0.00%
Other | US
Revenue Recognition
Revenue from Contract with Customer, Including Assessed Tax			$ 19,816,000		$ 30,582,000

XML

Stock-based Compensation - Expense for Stock-Based Awards (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock-based compensation	$ 810,008	$ 619,700	$ 1,550,360	$ 2,866,100
Total unrecognized compensation costs related to non-vested stock options	8,500,000		$ 8,500,000
Total unrecognized compensation costs related to non-vested stock options, weighted-average period of recognition			2 years 11 months 12 days
Selling, general and administrative
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock-based compensation	770,034	595,853	$ 1,452,263	2,813,053
Research and development
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock-based compensation	39,974	23,847	98,097	53,047
Nonemployees
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock-based compensation	$ 0	$ 0	$ 3,000	$ 142,000

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Stock-based Compensation - Estimated Grant-Date Fair Values of Employee Stock Options (Details)	3 Months Ended			6 Months Ended
	Jun. 30, 2018	Mar. 31, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Risk-free interest rates, minimum			1.90%		1.90%
Risk-free interest rates, maximum			1.98%		2.34%
Risk-free interest rates	2.85%			2.85%
Expected life	6 years 3 months		6 years 3 months	6 years 3 months
Expected dividends	0.00%	0.00%	0.00%		0.00%
Expected volatility	121.52%		90.93%	121.52%
Expected volatility, minimum					90.93%
Expected volatility, maximum					131.24%
Minimum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected life					6 years
Maximum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected life					10 years

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Stock-based Compensation - Summary of Stock Option Activity (Details)	6 Months Ended
	Jun. 30, 2018 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Outstanding Options, Number of Shares, Beginning Balance	86,647
Outstanding Options, Number of Shares, Options cancelled	(35,460)
Outstanding Options, Number of Shares, Ending Balance	51,187
Outstanding Options, Weighted-Average Exercise Price, Beginning Balance | $ / shares	$ 56.25
Outstanding Options, Weighted-Average Exercise Price, Options cancelled | $ / shares	30.75
Outstanding Options, Weighted-Average Exercise Price, Ending Balance | $ / shares	$ 74.01
Stock Incentive Plan 2003
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares Available For Grant, Beginning Balance	397,635
Shares Available For Grant, Options granted	(398,373)
Shares Available For Grant, Options cancelled	7,064
Shares Available For Grant, Ending Balance	6,326
Outstanding Options, Number of Shares, Beginning Balance	168,717
Outstanding Options, Number of Shares, Options granted	398,373
Outstanding Options, Number of Shares, Options cancelled	(7,064)
Outstanding Options, Number of Shares, Ending Balance	560,026
Outstanding Options, Weighted-Average Exercise Price, Beginning Balance | $ / shares	$ 130.20
Outstanding Options, Weighted-Average Exercise Price, Options granted | $ / shares	9.62
Outstanding Options, Weighted-Average Exercise Price, Options cancelled | $ / shares	25.71
Outstanding Options, Weighted-Average Exercise Price, Ending Balance | $ / shares	$ 49.59

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Stock Sales (Details)												6 Months Ended
	Jun. 21, 2018 USD ($) $ / shares shares	Jun. 19, 2018 $ / shares shares	Jun. 09, 2018 USD ($)	Jun. 08, 2018 USD ($) $ / shares shares	Jun. 07, 2018 $ / shares shares	May 24, 2018 USD ($)	Apr. 03, 2018 USD ($) $ / shares shares	Aug. 16, 2017 USD ($) item $ / shares shares	Apr. 03, 2017 USD ($)	Jan. 24, 2017 shares	Jan. 23, 2017 USD ($) $ / shares shares	Jun. 30, 2018 USD ($) $ / shares shares	Jun. 30, 2017 USD ($)	Dec. 31, 2017 $ / shares shares
Class of Stock [Line Items]
Gross proceeds before deducting estimate offering expenses | $	$ 1,440,000			$ 1,470,000							$ 19,000,000
Underwriting discounts and commissions and offering expenses | $	$ 200,000			$ 200,000		$ 39,000						$ 1,366,923	$ 2,505,244
Offering costs | $											$ 2,500,000
Beneficial ownership percentage											4.99%
Share Price | $ / shares	$ 3.07	$ 3.07		$ 3.92	$ 3.92
Common stock shares issued (in shares)	469,490	469,490		374,572	374,572
Number of shares of common stock												3,610,009		2,063,808
Common stock, par value | $ / shares												$ 0.01		$ 0.01
Common stock upon the exercise of outstanding warrants		469,490			280,929			171,667
Warrant Term		5 years 6 months			5 years 6 months							1 year
Common stock sold (as a percent)		100.00%			75.00%
Warrant price (in dollars per warrant) | $ / shares	$ 0.125	$ 0.125		$ 0.125	$ 0.125
Net proceeds | $	$ 500,000											$ 500,000
Number of current redemption (in shares)	500
Proceeds from direct offering and IPO | $			$ 1,300,000
Proceeds from direct offering and private placement | $	$ 800,000
Exercise price | $ / shares		$ 3.08			$ 3.93
Consideration received | $	$ 60,000			$ 30,000		$ 488,250
Maximum
Class of Stock [Line Items]
Common stock upon the exercise of outstanding warrants	469,490			280,929
Over-allotment option
Class of Stock [Line Items]
Net proceeds | $								$ 18,000,000
Warrants to purchase common stock | Over-allotment option
Class of Stock [Line Items]
Share Price | $ / shares								$ 1,000
Common stock upon the exercise of outstanding warrants								1
Warrant Term								7 years
Conversion of convertible preferred shares to common stock								29
Exercise price | $ / shares								$ 34.50
Class A Units
Class of Stock [Line Items]
Share Price | $ / shares											$ 5.31
Number of shares of common stock											1
Class A Units | Warrants 2017
Class of Stock [Line Items]
Common stock upon the exercise of outstanding warrants											1
Warrant Term											5 years
Exercise price | $ / shares											$ 5.84
Class B Units
Class of Stock [Line Items]
Share Price | $ / shares											$ 1,000
Shares issued upon conversion (in shares)											12.54
Class B Units | Warrants 2017
Class of Stock [Line Items]
Common stock upon the exercise of outstanding warrants											12.54
Preferred Stock.
Class of Stock [Line Items]
Shares issued upon conversion (in shares)										157,327	157,327
Series B convertible preferred stock
Class of Stock [Line Items]
Number of shares of preferred stock												20,000		20,000
Preferred stock, par value | $ / shares												$ 0.01		$ 0.01
Preferred stock ( in shares)												2,957		6,055
Series B convertible preferred stock | Over-allotment option
Class of Stock [Line Items]
Common stock shares issued (in shares)								20,000
Number of shares of preferred stock								1
Preferred stock, par value | $ / shares								$ 0.01
Shares issued upon conversion (in shares)								29
Conversion Price Per Share | $ / shares								$ 34.50
Number of embedded features | item								2
Series D Convertible Preferred Stock
Class of Stock [Line Items]
Gross proceeds before deducting estimate offering expenses | $							$ 6,000,000
Underwriting discounts and commissions and offering expenses | $							$ 750,000
Common stock shares issued (in shares)							6,000
Number of shares of preferred stock												6,000		6,000
Preferred stock, par value | $ / shares												$ 0.01		$ 0.01
Shares issued upon conversion (in shares)							533,334
Common stock upon the exercise of outstanding warrants							2,333,334
Warrant Term							1 year
Exercise price | $ / shares							$ 11.25
Conversion Price Per Share | $ / shares							$ 11.25
Net proceeds | $									$ 5,100,000
Preferred stock ( in shares)	5,250											4,750		0
Securities Purchase Agreement
Class of Stock [Line Items]
Issuance of common stock | $							$ 6,000,000
Placement agent fees and other offering expenses | $							$ 900,000

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Warrants (Details)	6 Months Ended
	Jun. 30, 2018 $ / shares shares
Warrants
Beginning Balance | shares	953,889
Granted | shares	3,132,777
Exercised | shares	(105,000)
Cancelled | shares	(308)
Ending Balance | shares	3,981,358
Beginning Balance | $ / shares	$ 52.65
Granted | $ / shares	3.09
Exercised | $ / shares	4.65
Cancelled | $ / shares	17,955.00
Ending Balance | $ / shares	$ 6.25

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Income Taxes (Details) - USD ($)	3 Months Ended	6 Months Ended
	Jun. 30, 2018	Jun. 30, 2018
Income Taxes
Income tax benefit	$ (1,208,560)	$ (2,590,613)

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Subsequent Events (Details) - USD ($)												6 Months Ended
	Aug. 10, 2018	Aug. 03, 2018	Aug. 02, 2018	Jul. 12, 2018	Jul. 10, 2018	Jun. 21, 2018	Jun. 19, 2018	Jun. 08, 2018	Jun. 07, 2018	May 24, 2018	Apr. 03, 2018	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2017	Aug. 16, 2017
Stock Issued (in shares)						469,490	469,490	374,572	374,572
Common stock, par value												$ 0.01		$ 0.01
Offer price						$ 3.07	$ 3.07	$ 3.92	$ 3.92
Common stock warrants							469,490		280,929						171,667
Common stock sold (as a percent)							100.00%		75.00%
Warrant price (in dollars per warrant)						$ 0.125	$ 0.125	$ 0.125	$ 0.125
Exercise price							$ 3.08		$ 3.93
Warrant Term							5 years 6 months		5 years 6 months			1 year
Net proceeds						$ 500,000						$ 500,000
Common stock financing costs						$ 200,000		$ 200,000		$ 39,000		$ 1,366,923	$ 2,505,244
Maximum
Common stock warrants						469,490		280,929
Series D Convertible Preferred Stock
Stock Issued (in shares)											6,000
Common stock warrants											2,333,334
Exercise price											$ 11.25
Warrant Term											1 year
Common stock financing costs											$ 750,000
Conversion Price Per Share											$ 11.25
Subsequent Event
Stock Issued (in shares)	33,548,621	1,000,000	1,000,000	1,241,382	1,241,382
Common stock, par value					$ 0.01
Offer price		$ 0.60	$ 0.60	$ 2.05	$ 2.05
Common stock warrants			1,000,000		1,241,382
Common stock sold (as a percent)			100.00%		100.00%
Warrant price (in dollars per warrant)				$ 0.125	$ 0.125
Exercise price			$ 1.10		$ 2.06
Warrant Term			5 years 6 months		5 years 6 months
Net proceeds		$ 550,000		$ 2,350,000
Warrants exercisable			6 months
Common stock financing costs				$ 205,000
Subsequent Event | Stock Incentive Plan 2003
Stock Issued (in shares)	437,880
Subsequent Event | Maximum
Common stock warrants		1,000,000		1,241,382
Subsequent Event | Employees Stock Option Plan
Stock Issued (in shares)	603,725
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Lower Range Limit	$ 3.52
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range, Upper Range Limit	$ 478,170
Subsequent Event | Warrants 2017
Stock Issued (in shares)	6,379,636
Subsequent Event | Warrants 2017 | Minimum
Exercise price	$ 0.085
Subsequent Event | Warrants 2017 | Maximum
Exercise price	$ 33,000
Subsequent Event | Series B convertible preferred stock
Stock Issued (in shares)	7,541,177
Convertible Preferred Stock, Shares Issued upon Conversion	641
Subsequent Event | Series C convertible preferred stock
Stock Issued (in shares)	635,920
Convertible Preferred Stock, Shares Issued upon Conversion	95,388
Subsequent Event | Series D Convertible Preferred Stock
Stock Issued (in shares)	37,376,917
Convertible Preferred Stock, Shares Issued upon Conversion	3,177.04
Subsequent Event | Series B And Series D Convertible Preferred Stock And Exercise Price Of Warrants [Member]
Exercise price	$ 0.085
Subsequent Event | Underwriting agreement
Stock Issued (in shares)	0