(4)Acquisition

Lap-Band Product Line Assets

On December 17, 2018, the Company acquired from Apollo Endosurgery, Inc. (“Apollo”) substantially all of the assets exclusively related to Apollo’s Lap-Band product line and Apollo acquired from the Company substantially all of the assets exclusively related to the Company’s ReShape Balloon product line (“Asset Purchase Agreement”). In addition to the transfer to Apollo of the ReShape Balloon product line assets, the Company was required to pay Apollo cash consideration of $17.0 million, of which $10.0 million was paid at the closing of the transaction, $2.0 million was paid on the first anniversary of the closing date in December 2019, $2.0 million is payable on the second anniversary of the closing date and $3.0 million is payable on the third anniversary of the closing date. Pursuant to a transition services agreement, supply agreement and distribution agreement, Apollo served as the Company’s distributor of the Lap-Band product in select countries outside of the United States through December 2019, and will manufacture the Lap-Band product for the Company for up to two years, and provide other specified services.

The Company evaluated the Lap-Band product line asset acquisition under the guidance of ASU 2017-01, “Clarifying the Definition of a Business” and concluded that the group of assets acquired did not meet the definition of a business. Accordingly, the Lap-Band product line asset purchase was accounted for as an asset acquisition and the assets acquired were recorded at their relative fair values during the fourth quarter of 2018. The disposal of the Reshape Balloon product line assets has been accounted for as a discontinued operation.

The total transaction cost for the assets acquired was comprised of the net present value of the consideration transferred plus the transaction costs. The Company determined that the ReShape Balloon product line assets transferred as part of the Lap-Band product line purchase transaction had no value, as management’s projections of the ReShape Balloon product line as of the transaction date indicated negative cash flows. See Note 5 for additional information regarding the sale to Apollo of the Reshape Balloon product line and Note 10 for additional information regarding the asset purchase consideration payable.


Asset purchase consideration paid at closing	$	10,000
Aggregate asset purchase consideration payable		7,000
Adjustment to net present value of asset purchase consideration payable		(703)
Present value of asset purchase consideration		16,297
Asset purchase transaction costs		500
Fair value of ReShape Balloon product line assets transferred		—
Total transaction cost	$	16,797

Under the asset acquisition method of accounting, the total transaction cost is allocated to the relative fair values of the assets acquired. The table below represents the allocation of the relative fair values of the Lap-Band product line tangible and intangible assets acquired as of the December 17, 2018 acquisition date.


Developed technology/know-how	$	14,362
Trademarks		955
Inventory		994
Fixed assets		486
Total transaction cost	$	16,797

Apollo retained all other working capital associated with the Lap-Band product line, including accounts receivable, accounts payable and certain accrued and other liabilities arising from operations before the closing of the Apollo transaction, and there was no transfer of workforce. The Lap-Band related fixed assets were written off during 2019, as the Company does not plan to take possession of the assets. Prior to the fixed assets being written off they were included within other assets on the consolidated balance sheets.

The Company used the income approach valuation technique to measure the fair value of the intangible assets, based on the present value of their future economic benefits reflecting current market expectations. Specifically, the developed technology/know-how was valued using a multi-period excess earnings method and the relief from royalty method was used to value the trademark. The assumptions used in these fair value measurements are not observable in active markets and thus represent Level 3 fair value measurements.