Table of Contents
`
`UNITED STATES
`SECURITIES AND EXCHANGE COMMISSION
`Washington, D.C. 20549
`
`
`
`Form 10-Q
`
` ☒
`
` ☐
`
`QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
`For the quarterly period ended March 31, 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
`(IRS Employer
`of incorporation)
`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
`☐
`☐ (Do not check if a smaller reporting entity)
`Non-accelerated filer
`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. ☐
`
`Accelerated Filer
`Smaller Reporting Company
`
`☐
`☒
`
`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 April 30, 2018, 33,583,781 shares of the registrant’s Common Stock were outstanding.
`
`Fulfillium Exhibit 2007, Page 1
`ReShape v. Fulfillium
`Case IPR2018-00958
`
`

`

`Table of Contents
`
`INDEX
`
`PART I – FINANCIAL INFORMATION
`
`Item 1.
`
`Item 2.
`
`Item 3.
`Item 4.
`
`Condensed Consolidated Financial Statements (unaudited)
`Condensed Consolidated Balance Sheets at March 31, 2018 and December 31,
`2017
`Condensed Consolidated Statements of Operations for the three months ended
`March 31, 2018 and 2017
`Condensed Consolidated Statements of Cash Flows for the three months ended
`March 31, 2018 and 2017
`Notes to Condensed Consolidated Financial Statements
`Management’s Discussion and Analysis of Financial Condition and Results of
`Operations
`Quantitative and Qualitative Disclosures About Market Risk
`Controls and Procedures
`
`PART II – OTHER INFORMATION
`
`Legal Proceedings
`Item 1.
`Item 1A. Risk Factors
`Item 2.
`Unregistered Sales of Equity Securities and Use of Proceeds
`Item 3.
`Defaults Upon Senior Securities
`Item 4.
`Mine Safety Disclosures
`Item 5.
`Other Information
`Item 6.
`Exhibits
`SIGNATURES
`
`3
`
`3
`
`4
`
`5
`6
`
`23
`29
`30
`
`31
`32
`34
`34
`34
`34
`35
`36
`
`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 VEST, RESHAPE VBLOC,
`RESHAPE BALLOON vBLOC POWER TO CHOOSE and VBLOC POWER TO CHOOSE AND 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, RESHAPE
`MEDICAL and RESHAPE LIFESCIENCES 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 or the United
`Arab Emirates. We believe that we have common law trademark rights to GASTRIC VEST. This Quarterly Report on Form
`10-Q contains other trade names and trademarks and service marks of ReShape Lifesciences and of other companies.
`
`2
`
`Fulfillium Exhibit 2007, Page 2
`ReShape v. Fulfillium
`Case IPR2018-00958
`
`

`

`Table of Contents
`
` PART I – FINANCIAL INFORMATION
`
` ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
`
`RESHAPE LIFESCIENCES INC.
`Condensed Consolidated Balance Sheets
`(Unaudited)
`
`
`
`
`
`ASSETS
`
`Current assets:
`Cash and cash equivalents
`Accounts receivable (net of allowance for bad debts of $155,872 at March 31, 2018
`and December 31, 2017)
`Inventory
`Prepaid expenses and other current assets
`Total current assets
`Property and equipment, net
`Goodwill
`Other intangible assets, net
`Other assets
`Total assets
`
`LIABILITIES AND STOCKHOLDERS’ EQUITY
`Current liabilities:
`Accounts payable
`Accrued expenses
`Total current liabilities
`
`Deferred income taxes
`Common stock warrant liability
`Total liabilities
`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 6,055
`and zero shares outstanding at March 31, 2018 and December 31, 2017, respectively
`Series C convertible preferred stock, $0.01 par value; 187,772 shares issued and
`95,388 shares outstanding at March 31, 2018 and December 31, 2017
`Common stock, $0.01 par value; 275,000,000 shares authorized at March 31, 2018
`and December 31, 2017; 30,957,113 shares issued and outstanding at
`March 31, 2018 and December 31, 2017
`Additional paid-in capital
`Accumulated deficit
`Total stockholders’ equity
`Total liabilities and stockholders’ equity
`
`
`
`
`
`61
`
`954
`
`
`
`
`
`61
`
`954
`
`
`
`309,571
`
`309,571
`
`
` 410,815,637
` 411,556,015
`
`
`(334,759,354)
`
`(345,992,803)
`
`
`76,366,869
`
`65,873,798
`
` $
`78,567,900 $
`88,704,549
`
`
`
`See accompanying notes to condensed consolidated financial statements.
`
`3
`
`
`
`
`
`December 31,
`2017
`
`
`
`
`
`
`
` $
`
`March 31,
`2018
`
`
`
`
`
`
`
`841,643 $
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
` $
`
`
`
`
` $
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`962,357
`
`2,795,332
`
`723,074
`
`5,322,406
`
`349,277
`
`27,186,620
`
`45,477,404
`
`232,193
`78,567,900 $
`
`
`
`
`2,917,798 $
`5,865,623
`
`8,783,421
`
`
`
`3,910,238
`
`443
`
`12,694,102
`
`
`
`
`
`
`
`
`10,163,208
`
`488,613
`2,817,112
`467,783
`13,936,716
`438,621
`27,186,620
`46,152,577
`990,015
`88,704,549
`
`1,088,271
`5,955,518
`7,043,789
`
`5,292,291
`1,600
`12,337,680
`
`
`
`
`
`
`
`
`
`
`Fulfillium Exhibit 2007, Page 3
`ReShape v. Fulfillium
`Case IPR2018-00958
`
`

`

`RESHAPE LIFESCIENCES INC.
`Condensed Consolidated Statements of Operations
`(Unaudited)
`
`Table of Contents
`
`
`
`
`Product sales
`Other revenue
` Total revenue
`
`Cost of revenue
`Gross profit
`Operating expenses:
`Selling, general and administrative
`Research and development
`Total operating expenses
`Operating loss
`Other income (expense):
`Interest income
`Interest expense
`Change in value of warrant liability
`Other, net
`Income (loss) before income taxes
`
`Income tax benefit
`Net loss
`Net loss per share—basic and diluted
`Shares used to compute basic and diluted net loss per share
`
`
`
`
` $
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`1,382,053
`
`
` $ (11,233,449)
`(0.36)
` $
`
`30,957,113
`
`
`828,958
`121,040
`
`10,046,694
`2,687,535
`12,734,229
`(12,613,189)
`
`
`411
`(1,823)
`1,157
`(2,058)
`(12,615,502)
`
`
`Three Months Ended March 31,
`
`2018
`2017
`
`
`941,431
` $
`40,040
`8,567
`
` —
`949,998
`
`40,040
`
`
`
`29,523
`
`10,517
`
`
`
`
`
`
`
`100
`
` —
`
`(323,130)
`
`
`(900)
`
`
`(7,366,812)
`
`
`
`
`
` —
`
` $ (7,366,812)
` $
`(1.27)
`
`5,788,282
`
`
`
`
`
`
`
`5,928,986
`1,124,413
`7,053,399
`(7,042,882)
`
`
`
`
`
`
`
`
`
`
`
`
`See accompanying notes to condensed consolidated financial statements.
`
` 4
`
`
`
`Fulfillium Exhibit 2007, Page 4
`ReShape v. Fulfillium
`Case IPR2018-00958
`
`

`

`Table of Contents
`
`
`RESHAPE LIFESCIENCES INC.
`Condensed Consolidated Statements of Cash Flows
`(Unaudited)
`
`
`
`
`Cash flows from operating activities:
`Net loss
`Adjustments to reconcile net loss to net cash used in operating activities:
`Depreciation
`Deferred income taxes
`Stock-based compensation
`Amortization of intangible assets
`Change in value of warrant liability
`Change in operating assets and liabilities:
`Accounts receivable
`Inventory
`Prepaid expenses and other current assets
`Other assets
`Accounts payable
`Accrued expenses
`Net cash used in operating activities
`Cash flows from investing activities:
`Purchases of property and equipment
`Net cash used in investing activities
`Cash flows from financing activities:
`Proceeds from warrants exercised
`Proceeds from sale of common stock and warrants for purchase of common
`stock
`Proceeds from sale of convertible preferred stock
`Common stock financing costs
`Net cash provided by financing activities
`Net increase in cash and cash equivalents
`Cash and cash equivalents:
`Beginning of period
`End of period
`Noncash investing and financing activities:
`Conversion of convertible preferred shares to common stock
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Three Months Ended March 31,
`
`2018
`2017
`
`
`
`
`
`$ (11,233,449) $ (7,366,812)
`
`
`
`
`
`89,344
`
`29,122
`
`(1,382,053)
`
` —
`
`740,378
`
`2,246,400
`
`675,173
`
` —
`
`(1,157)
`
`323,130
`
`
`
`
`
`(473,744)
`
`75,539
`
`21,780
`
`86,650
`
`(255,291)
`
`74,867
`
`757,813
`
`435,063
`
`1,829,527
`
`(778,109)
`
`(89,886)
`
`432,492
`
`(9,321,565)
`
`(4,441,658)
`
`
`
`
`
` —
`
` —
`
` —
`
` —
`
`
`
`
`
` —
`
`3,318,013
`
`
`
`
`
`
`
`
`$
`
`$
`
`
`
`6,468,148
` —
`12,531,000
` —
`(2,505,244)
`
` —
` 19,811,917
` —
` 15,370,259
`(9,321,565)
`
`
`
`
`3,310,787
`10,163,208
`841,643 $ 18,681,046
`
`
`
` — $ 12,531,000
`
`See accompanying notes to condensed consolidated financial statements.
`
`
`5
`
`
`
`
`
`Fulfillium Exhibit 2007, Page 5
`ReShape v. Fulfillium
`Case IPR2018-00958
`
`

`

`Table of Contents
`
`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 recently 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
`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 acquisition of and results of operations for ReShape Medical beginning
`October 2, 2017 are included in these condensed consolidated financial statements.
`
`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.
`
`
`
`6
`
`Fulfillium Exhibit 2007, Page 6
`ReShape v. Fulfillium
`Case IPR2018-00958
`
`

`

`Table of Contents
`
`
`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.
`
`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 subsidiary. 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 4 – Goodwill
`and Other Intangible Assets.
`
`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.
`
`
`
`
`7
`
`Fulfillium Exhibit 2007, Page 7
`ReShape v. Fulfillium
`Case IPR2018-00958
`
`

`

`Table of Contents
`
`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 and amortization. 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 as a basis for determining whether it is necessary to
`perform the two-step goodwill impairment test. 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 a reporting unit is zero or negative, the second step of the impairment test is performed to measure the
`amount of impairment loss, if any, when it is more likely than not that a goodwill impairment exists. The Company did not
`record any losses for impairment during the quarter year ended March 31, 2018. See Note 13 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 March 31, 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.
`
`Medical Device Excise Tax
`
`
`The Company is required to pay a quarterly Medical Device Tax which is a part of the Affordable Care Act, which
`imposes a 2.3% excise tax on the sale of certain medical devices, including ReShape vBloc and the ReShape Balloon, by
`device manufacturers, producers or importers (The Medical Device Tax). The excise tax was effective on sales of devices
`made after December 31, 2012. The Company records the Medical Device Tax as an operating expense in the
`
`
`
`8
`
`Fulfillium Exhibit 2007, Page 8
`ReShape v. Fulfillium
`Case IPR2018-00958
`
`

`

`Table of Contents
`
`condensed consolidated statements of operations, which totaled $1,363 for 2015. A moratorium was placed on the Medical
`Device Tax for 2016 and 2017, and consequently, the Company was not required to pay the Medical Device Tax in 2016 and
`2017. In January 2018, the moratorium was extended to 2018 and 2019.
`
`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 months ended March 31, 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 fair value method is applied to all share-based payment awards issued to employees and where appropriate,
`nonemployees, unless another source of literature applies. All option grants are expensed on a straight-line basis over the
`vesting period.
`
`Net Loss Per Share
`
`
`Three Months Ended
`March 31,
`
`
`2017
`
`
`
`
`
`(7,366,812)
`
`5,788,282
`(1.27)
`
`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.
`
`The following table sets forth the computation of basic and diluted net loss per share for the three months ended March
`31, 2018 and 2017:
`
`
`
`Numerator:
`Net loss
`Denominator for basic and diluted net loss per share:
`Weighted-average common shares outstanding
`Net loss per share—basic and diluted
`
`
`2018
`
`
`
`
`
`
`
` $ (11,233,449)
`
`
`
`
`30,957,113
`
` $
`(0.36)
`
`
` $
`
`
` $
`
`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:
`
`
`
`
`Stock options outstanding
`Common shares underlying convertible preferred stock
`Warrants to purchase common stock
`
`9
`
`
`
`
`
`March 31,
`
`2018
`
`
`3,431,600
`
` 12,172,725
` 14,303,715
`
`
`2017
`
`19,840
` —
`55,044
`
`Fulfillium Exhibit 2007, Page 9
`ReShape v. Fulfillium
`Case IPR2018-00958
`
`

`

`Table of Contents
`
`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 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 for further discussion.
`
`In February 2016 FASB issued Accounting Standards Update 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 entity. Early adoption is permitted. Management is evaluating the standard's impact on the
`consolidated financial statements.
`
`In January 2017 FASB issued Accounting Standards Update 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. The adoption of this standard is not expected to have a material
`impact to the Company's consolidated financial statements.
`In March 2018, FASB issued ASU 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 three months ended
`March 31, 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.
`
`
`
`
`
`
`
`10
`
`Fulfillium Exhibit 2007, Page 10
`ReShape v. Fulfillium
`Case IPR2018-00958
`
`

`

`Table of Contents
`
`(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 significant relative to
`its level of operating expenses, and does not anticipate generating revenue sufficient to offset operating costs in the short-
`term to mid-term. The Company has financed its operations to date principally through the sale of equity securities, debt
`financing and interest earned on investments. The Company’s history of operating losses, limited cash resources and lack of
`certainty regarding obtaining significant third-party reimbursement for the vBloc System or timing thereof, raise substantial
`doubt about our ability to continue as a going concern absent a strengthening of our cash position.
`
`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