UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~Form 10-K~~

Form

10-K

(Mark one)

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2019~~ 2020

~~☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

◻	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 or organization)	(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)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol	Name of Each Exchange on which Registered
Common stock, $0.001 par value per share	RSLS	OTCQB Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻ No ☒

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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth 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 ☒ Smaller reporting company ☒ Emerging growth company ◻~~


Large accelerated filer ◻	Accelerated filer ◻
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ◻

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ◻ No ☒

At June 28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based upon the closing price of a share of the registrant’s common stock as reported by the OTCQB Market on that date was $590,058.

AsAt June 30, 2020, the last business day of ~~April~~the ~~28,~~registrant’s ~~2020~~most recently completed second fiscal quarter, 5the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant,~~477,574 shares~~ based upon the closing price of a share of the registrant’s ~~Common~~common ~~Stock~~stock ~~were~~as ~~outstanding~~reported by the OTCQB Market on that date was $1,769,725.

As of March 8, 2021, 6,166,554 shares of the registrant’s Common Stock were outstanding.

Documents Incorporated by Reference

Portions of the registrant's proxy statement for the 2020 Annual Meeting of Stockholders (to be filed within 120 days of December 31, 2019) are incorporated by reference into Part III, as indicated hereinNone.

Table of Contents

RESHAPE LIFESCIENCES INC.

FORM 10-K

TABLE OF CONTENTS

PART I
Item 1.	Business	1
Item 1A.	Risk Factors	12
Item 1B.	Unresolved Staff Comments	27
Item 2.	Properties	27
Item 3.	Legal Proceedings	28
Item 4.	Mine Safety Disclosures	28
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	28
Item 6.	Selected Financial Data	28
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 8.	Financial Statements and Supplementary Data	40
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	76
Item 9A.	Controls and Procedures	76
Item 9B.	Other Information	76
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	77
Item 11.	Executive Compensation	77
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	77
Item 13.	Certain Relationships and Related Transactions, and Director Independence	78
Item 14.	Principal Accounting Fees and Services	78
PART IV
Item 15.	Exhibits, Financial Statement Schedules	78
Item 16.	Form 10-K Summary	78
EXHIBITS		79
SIGNATURES		84


PART I

Item 1.	Business	1
Item 1A.	Risk Factors	14
Item 1B.	Unresolved Staff Comments	34
Item 2.	Properties	34
Item 3.	Legal Proceedings	34
Item 4.	Mine Safety Disclosures	34

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	34
Item 6.	Selected Financial Data	35
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 8.	Financial Statements and Supplementary Data	46
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	78
Item 9A.	Controls and Procedures	78
Item 9B.	Other Information	78

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	79
Item 11.	Executive Compensation	81
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	83
Item 13.	Certain Relationships and Related Transactions, and Director Independence	84
Item 14.	Principal Accounting Fees and Services	85

PART IV

Item 15.	Exhibits, Financial Statement Schedules	86
Item 16.	Form 10-K Summary	86

EXHIBITS		87

SIGNATURES		92

Registered Trademarks and Trademark Applications: In the United States we have registered trademarks for LAP-BAND^®, LAP-BAND AP^®, LAP BAND SYSTEM^®, RAPIDPORT^®, RESHAPE^® and RESHAPE MEDICAL^®, each registered with the United States Patent and Trademark Office, and trademark applications for RESHAPE VEST, and RESHAPE LIFESCIENCES. In addition, some or all of the marks LAP-BAND, LAP-BAND AP, LAP-BAND SYSTEM, RAPIDPORT, RESHAPE, RESHAPE MEDICAL, RESHAPE VEST, and RESHAPE LIFESCIENCES are the subject of either a trademark registration or an application for registration in Australia, Canada, the European Community, Mexico, Saudi Arabia, South Korea, and the United Arab Emirates. We believe that we have common law trademark rights to RESHAPE VEST. This Annual Report on Form 10-K contains other trade names and trademarks and service marks of ReShape Lifesciences and of other companies.

Table of Contents

ITEM 1. BUSINESS

Our Company

~~The~~ReShape ~~Company~~Lifesciences Inc. is a ~~developer~~premier ofglobal ~~minimally~~weight-loss ~~invasive~~solutions ~~medical~~company, ~~devices~~offering ~~that~~an ~~advance~~integrated ~~bariatric surgery to treat obesity and metabolic diseases. Our current~~ portfolio ~~includes~~of ~~the~~proven ~~LAP-BAND®~~products ~~Adjustable Gastric Banding System~~ and ~~the~~services ~~ReShape~~that ~~VestTM,~~manage ~~an investigational device, to help treat more patients with obesity. Our vision is to be recognized as a leading medical technology company focused on the design, development~~ and ~~commercialization of transformative technology to~~ treat obesity and associated metabolic ~~diseases~~disease.

Our ~~Product~~current ~~Portfolio~~ portfolio includes the FDA-approved LAP-BAND® system, which provides minimally invasive, long-term treatment of obesity and is an alternative to more invasive and extreme surgical stapling procedures such as the gastric bypass or sleeve gastrectomy. The recently launched ReShapeCareTM virtual health coaching program is a novel reimbursed telehealth weight-management program that supports healthy lifestyle changes for all medically managed weight-loss patients, not just the LAP-BAND, further expanding our reach and market opportunity. The ReShape VestTM system is an investigational (outside the U.S.) minimally invasive, laparoscopically implanted medical device that wraps around the stomach, emulating the gastric volume reduction effect of conventional weight-loss surgery. It helps enable rapid weight loss in obese and morbidly obese patients without permanently changing patient anatomy. The Diabetes Bloc-Stim Neuromodulation is a technology under development as a new treatment for type 2 diabetes mellitus. ReShape’s Diabetes Bloc-Stim Neuromodulation is expected to use bioelectronics to manage blood glucose in treatment of diabetes and individualized 24/7 glucose control. Additional products and accessories from the Company facilitate alternative gastric surgical procedures and ongoing product support for healthcare practitioners and patients (adjustments, etc.).

~~Lap-Band~~Proposed ~~System~~ Merger with Obalon Therapeutics, Inc.

~~The~~On ~~Lap-Band~~January 19, ~~System~~2021, ~~which~~ we ~~acquired~~entered ~~from~~into ~~Apollo~~an ~~Endosurgery,~~Agreement ~~Inc.~~and Plan of Merger (the “~~Apollo~~Merger Agreement”), inwith ~~December~~Obalon ~~2018~~Therapeutics, Inc., isa ~~designed~~Delaware tocorporation ~~provide~~(“Obalon”), ~~minimally invasive long-term treatment of severe obesity~~ and isOptimus anMerger ~~alternative to more invasive surgical stapling procedures such as the gastric bypass or sleeve gastrectomy~~Sub, Inc., ~~The~~a ~~Lap-Band~~Delaware ~~System~~corporation isand ana ~~adjustable saline~~wholly-~~filled~~owned ~~silicone~~subsidiary ~~band~~of ~~that~~Obalon is(“Merger ~~laparoscopically~~Sub”), ~~placed~~pursuant ~~around~~to ~~the~~which ~~upper~~Merger ~~part~~Sub ofwill ~~the~~merge ~~stomach~~with ~~through~~and ainto ~~small incision~~ReShape, ~~creating~~with aReShape ~~small~~as ~~pouch at~~ the ~~top~~surviving ofcorporation ~~the stomach, which slows the passage of food~~ and ~~creates~~ a ~~sensation~~wholly-owned subsidiary of ~~fullness.~~Obalon ~~The procedure can normally be performed as an outpatient procedure, where~~ (the ~~patient~~“Merger”). isAs ~~able~~a toresult ~~go home the day~~ of the ~~procedure~~Merger, ~~without~~Obalon ~~the~~will ~~need~~be ~~for~~renamed an“ReShape ~~overnight hospital stay~~Lifesciences Inc. ”

The Lap-Band System has been in use in Europe since 1993 and received the CE mark in 1997. FDA approval for the Lap-Band System in the U.S. was obtained in 2001 and the Lap-Band System has been approved in many countries around the world. More than 1,000,000 Lap-Band Systems have been sold worldwide.

~~The~~Subject ~~Lap-Band~~to ~~System~~the ~~was~~terms ~~approved~~and ~~for~~conditions ~~use~~of inthe Merger Agreement, at the ~~U.S.~~closing ~~for~~of ~~patients~~the ~~with~~Merger, ~~a Body~~each ~~Mass~~outstanding ~~Index~~share of ReShape common stock and series B convertible preferred stock will be converted into the right to receive shares of common stock of Obalon (“~~BMI~~Obalon Shares”) ~~greater~~based ~~than~~on orthe ~~equal~~exchange ratio set forth in the Merger Agreement. Upon completion of the Merger, ReShape stockholders will own approximately 51% of the combined company’s outstanding common stock and Obalon stockholders will own approximately 49%, subject to 40the orterms aof ~~BMI~~the ~~greater~~Merger ~~than~~Agreement. orObalon ~~equal~~will, at the effective time of the Merger, assume the outstanding warrants and series C convertible preferred stock of ReShape, subject to 30the terms of the Merger Agreement. All outstanding stock options of ReShape will be cancelled and terminated at the effective time of the Merger without any right to receive any consideration. No fractional shares will be issued in connection with ~~one~~the orMerger ~~more~~and ~~obesity-related~~Obalon ~~comorbid~~will ~~conditions~~pay cash in lieu of any such fractional shares. The Merger is intended to qualify for federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended.

~~The~~Consummation ~~Lap-Band~~of ~~System~~the ~~has~~Merger ~~been~~is subject to ~~more~~certain ~~than~~closing ~~400~~conditions, ~~peer-reviewed~~including, ~~publications~~among other things, approval by the stockholders of ReShape and ~~extensive~~Obalon ~~real-world~~and ~~experience.~~the ~~Adjustable~~NASDAQ ~~gastric~~Stock ~~banding~~Market’s ~~using~~approval of (i) the ~~Lap-Band~~Listing ~~System~~of ~~has~~Additional ~~been~~Shares ~~reported~~Notice covering the Obalon Shares to be ~~significantly~~issued ~~safer~~in ~~than~~the ~~gastric~~Merger ~~bypass~~and ~~while~~(ii) the ~~statistically~~continued ~~producing~~listing of the ~~same~~combined ~~weight~~company ~~loss~~following ~~five~~completion ~~years~~of ~~after~~the ~~surgery~~Merger ~~when~~((i) and ~~accompanied~~(ii) together, bythe an“NASDAQ ~~appropriate~~Approvals”). ~~post-operative~~Pursuant ~~follow-up~~to ~~and~~the ~~adjustment~~Merger ~~protocol.~~Agreement, ~~Studies~~ReShape ~~have~~has ~~reported~~agreed ~~sustained~~to ~~resolution~~exercise orits ~~improvement~~reasonable inbest ~~type 2~~efforts ~~diabetes,~~to ~~gastroesophageal~~take ~~reflux,~~all ~~obstructive~~necessary ~~sleep~~steps ~~apnea,~~to ~~asthma~~obtain the NASDAQ Approvals following the execution of the Merger Agreement, ~~arthritis~~which may include procuring additional equity or debt investments, ~~hypertension~~financings ~~and~~or other ~~pre-existing~~capital ~~obesity~~raising ~~related~~efforts. ~~comorbidities~~The ~~following~~Merger ~~gastric~~Agreement ~~banding~~contains specified termination rights for both ReShape and Obalon. ~~The~~If ~~gastric~~Obalon ~~banding~~terminates ~~surgical~~the ~~procedure~~Merger isAgreement ~~generally~~as ~~reimbursed~~a byresult ~~most~~of ~~payors~~ReShape’s breach of its covenant to use its reasonable best efforts to obtain the NASDAQ Approvals, or if either party terminates the Merger Agreement because the NASDAQ Approvals have not been obtained within 30 days following the later of the Obalon Stockholders’ Meeting and ~~insurance~~the ~~programs~~ReShape ~~that~~Stockholders’ ~~cover~~Meeting, ~~bariatric~~then ~~surgery~~ReShape will be required to pay Obalon a $1. 0 million termination fee, which amount has been deposited with a third-party escrow agent.

~~Benefits.~~See “Part I—Item ~~Lap-Band~~1A ~~System~~Risk ~~offers~~Factors” ~~the~~for ~~following~~a ~~benefits:~~ discussion of certain risks related to the Merger.

~~· Minimally Invasive. The Lap-Band System does not change anatomy and is removable or reversible.~~

~~· Lifestyle Enhancing. The Lap-Band System helps patients lose weight and live a more comfortable life and potentially reduces co-morbidities from excess weight.~~1

·Table ~~Durable~~of ~~Weight Loss. The Lap-Band System offers a sustainable solution that helps patients achieve long-term success.~~Contents

~~ReShape~~Our ~~Vest~~ Product Portfolio

~~The~~Lap-Band ReShape Vest is an investigational, minimally invasive, laparoscopically implanted medical device being studied for weight loss in morbidly obese adults with a BMI of at least 35. The device wraps around the stomach, emulating the effect of conventional weight loss surgery, and is intended to enable gastric volume reduction. This device is designed to restrict the intake of food and provide the feeling of fullness without cutting or permanently removing portions of the stomach, or bypassing any portion of the gastrointestinal tract. The implantation of the device mimics a traditional weight‑loss surgery, it is anatomy sparing and may not require vitamin supplementation. System

1 The Lap-Band system, which we acquired from Apollo Endosurgery, Inc. (“Apollo”), in December 2018, is designed to provide minimally invasive long-term treatment of severe obesity and is an alternative to more invasive surgical stapling procedures such as the gastric bypass or sleeve gastrectomy. The Lap-Band system is an adjustable saline-filled silicone band that is laparoscopically placed around the upper part of the stomach through a small incision, creating a small pouch at the top of the stomach, which slows the passage of food and creates a sensation of fullness. The procedure can normally be performed as an outpatient procedure and patients can go home the day of the procedure without the need for an overnight hospital stay.

~~Table~~The ofLap-Band ~~Contents~~ system has been in use in Europe since 1993 and received the CE mark in 1997 and approved in Australia in 1994, by the TGA. FDA approved the Lap-Band system for use the U.S. in 2001. The Lap-Band system has been approved in 21 countries and more than 1,000,000 Lap-Band systems have been sold worldwide.

InThe aLap-Band ~~small~~system ~~pilot~~was ~~study~~approved ~~conducted~~for ~~outside~~use in the ~~United~~U.S. ~~States,~~for ~~at 12 months, ReShape Vest~~ patients ~~demonstrated~~with a ~~mean~~Body ~~percent~~Mass ~~excess~~Index ~~weight loss~~ (“~~%EWL~~BMI”) ofgreater ~~85%~~than ~~and~~or aequal ~~mean~~to ~~percent~~40 ~~total~~or ~~body~~a ~~weight~~BMI ~~loss~~greater ofthan ~~30.2%, an~~or ~~average~~equal ~~waist~~to ~~circumference~~30 ~~reduction~~with ofone ~~approximately~~or 15more ~~inches,~~obesity-related ancomorbidity ~~average drop in HbA1c (Hemoglobin A1c) of 2~~conditions.1 ~~points, an average decrease of systolic blood pressure of 13mmHg, and an average increase in HDL “good cholesterol” of 29 mg/dl.~~

~~Benefits.~~ The ~~ReShape~~Lap-Band ~~Vest,~~system ~~once~~has ~~approved~~been ~~for~~subject ~~sale,~~to ~~would~~more ~~offer~~than an400 ~~additional~~peer-reviewed ~~weight~~publications ~~loss~~and ~~solution~~extensive ~~that~~real-world ~~emulates~~experience. Adjustable gastric banding using the ~~effect~~Lap-Band ofsystem ~~conventional~~has been reported to be significantly safer than gastric bypass while statistically producing the same weight loss five years after surgery ~~through~~when aaccompanied ~~procedure~~by ~~that~~an isappropriate ~~minimally~~post-operative ~~invasive~~follow-up and ~~anatomy~~adjustment ~~sparing~~protocol. ~~The~~Studies ~~ReShape~~have ~~Vest~~reported ~~potentially~~sustained ~~offers~~resolution ~~the~~or improvement in type 2 diabetes, gastroesophageal reflux, obstructive sleep apnea, asthma, arthritis, hypertension and other pre-existing obesity related comorbidities following ~~benefits:~~ gastric banding. The gastric banding surgical procedure is generally reimbursed by most payors and insurance programs that cover bariatric surgery.

~~· Minimizes Changes to Normal Anatomy~~Benefits. ~~The~~Lap-Band ~~ReShape~~system ~~Vest~~offers ~~emulates~~ the ~~effects~~following ~~of conventional weight‑loss surgery without stapling, cutting or removing any portion of the stomach.~~benefits:

·● ~~Permanent~~Minimally ~~Physical Restriction of the Stomach~~Invasive. The ~~stomach~~Lap-Band ~~has~~system ~~the~~does ~~capacity~~not tochange ~~expand~~anatomy ~~over~~and ~~time~~is ~~through~~removable ~~overeating.~~or ~~The ReShape Vest provides physical restriction that maintains the reshaped stomach at a consistent size, as long as the device remains in the patient~~reversible.

·● ~~Removable/Reversible~~Lifestyle Enhancing. The ~~ReShape~~Lap-Band ~~Vest~~system ishelps ~~designed~~patients tolose beweight ~~removed~~and ~~laparoscopically,~~live ~~permitting~~a ~~the~~more ~~removal~~comfortable oflife ~~the~~and ~~device~~potentially atreduces aco-morbidities ~~later~~from ~~time,~~excess ~~if that is desired~~weight.

·● ~~Allows~~Durable ~~Normal~~Weight ~~Ingestion and Digestion of Foods Found in a Typical, Healthy Diet~~Loss. The ~~ReShape~~Lap-Band ~~Vest~~system ~~leaves~~offers ~~the digestive anatomy largely unaltered, hence patients are able to maintain~~ a ~~more~~sustainable ~~consistent~~solution ~~nutritional~~that ~~balance~~helps ~~compared with conventional bariatric surgical approaches. This feature allows~~ patients toachieve ~~affect~~long-term ~~positive changes in their eating behavior in a non‑forced and potentially more consistent way~~success.

The ReShape Vest is being evaluated in a pivotal clinical investigation in Belgium, Czech Republic, Spain and The Netherlands. Enrollment of 95 subjects to this non-randomized clinical investigation and completion of 12-month follow-up is planned for the fourth quarter of 2021. We are expecting to receive CE Mark by the third quarter of 2022. ReShapeCare

~~Our~~ReShapeCare ~~Strategic~~is ~~Focus~~ a HIPAA-compliant, virtual coaching program delivered through our innovative app which enhances behavior change through engagement. ReShapeCare is prescribed by a patient’s physician and may be covered by insurance for up 26 visits per reimbursement year.

~~Develop~~The program is based on four established dimensions of successful behavior change—sleep, nutrition, exercise, stress—and ~~Commercialize~~is designed to provide flexible structure and support from a ~~Differentiated~~live ~~Portfolio~~certified ofhealth ~~Products/Therapies~~ coach in a manner that is simple and practical.

AnClinical ~~overarching~~studies ~~strategy~~prove ~~for~~that ~~our~~online ~~company~~health iscoaching leads to ~~develop~~higher ~~and~~patient ~~commercialize a product~~satisfaction, ~~program~~more ~~and~~successful ~~services~~weight ~~portfolio~~loss ~~that~~outcomes, isand ~~differentiated~~improvements ~~from~~in ~~our~~metabolic ~~competition~~health byand ~~offering~~enhances ~~transformative~~quality ~~technologies that consists~~ of alife. ~~selection~~ReShapeCare ofis ~~patient-friendly,~~appropriate ~~non-anatomy~~for ~~changing,~~all ~~lifestyle~~weight ~~enhancing~~loss ~~products~~patients, ~~programs~~medical ~~and services that provide alternatives to traditional bariatric surgery that help patients achieve durable~~ weight loss. ~~With~~patients, ~~the~~and ~~Lap~~pre-~~Band® Program,~~ ~~accessories~~ and ~~the~~post-surgical ~~ReShape~~bariatric ~~VestTM (if approved for commercial use), we believe we have two compelling and~~ patients.

2 The program is designed to ReShape the patient’s life through better sleep, nutrition, exercise, and stress management. Patients get paired with a ReShapeCare certified health coach who will be with them every step of the way through their journey, including through daily text messaging or live phone or video calls. The web and mobile app make it easy to increase positive actions and awareness by receiving daily educational content, personalized exercise, and progress reports. This program creates an atmosphere of community with social support from peers and by joining group sessions. When it comes to nutrition, patients can utilize an easy-to-follow, personalized nutrition plan with a

~~Table of Contents~~ 2

~~differentiated~~Table ~~medical devices. We believe that we are well positioned for the existing market and can serve more~~ of ~~the overweight and obese population with our solutions and thereby help expand the addressable market for obesity.~~ Contents

~~Drive~~recipe ~~the~~library ~~Adoption~~and ofrestaurant ~~Our~~guide. ~~Portfolio~~Tracking ~~through~~your ~~Obesity~~food ~~Therapy~~is ~~Experts~~as easy as taking a snapshot from your phone and ~~Patient~~sending ~~Ambassadors~~ it to your coach. Patients can connect their own devices to automatically track sleep, stress, and weight. This real-time health data can be used to optimize the program to get the best possible results.

Our clinical development strategy is to collaborate closely with regulatory bodies, healthcare providers, obesity therapy lifestyle experts and others involved in the obesity management process, patients and their advocates and scientific experts. We have established relationships with obesity therapy experts and healthcare providers, including physicians and hospitals, and have identified Lap-Band patient ambassadors and we believe these individuals will be important in promoting patient awareness and gaining widespread adoption of the Lap-Band, it’s accessories and the ReShape Vest.

~~Expand~~The ReShape Vest is an investigational, minimally invasive, laparoscopically implanted medical device being studied for weight loss in morbidly obese adults with a BMI of at least 35. The device wraps around the stomach, emulating the effect of conventional weight loss surgery, and ~~Protect~~is ~~Our~~intended ~~Intellectual~~to ~~Property~~enable ~~Position~~ gastric volume reduction. This device is designed to restrict the intake of food and provide the feeling of fullness without cutting or permanently removing portions of the stomach, or bypassing any portion of the gastrointestinal tract. The implantation of the device mimics a traditional weight-loss surgery, it is anatomy sparing and may not require vitamin supplementation.

WeIn ~~believe~~a ~~that~~small ~~our~~pilot ~~issued~~study ~~patents~~conducted ~~and~~outside ~~our~~the ~~patent~~United ~~applications~~States, ~~encompass~~at 12 months, ReShape Vest patients demonstrated a ~~broad~~mean ~~platform~~percent excess weight loss of ~~therapies~~85% ~~focused~~and ona ~~obesity,~~mean ~~diabetes,~~percent ~~hypertension~~total ~~and~~body ~~other~~weight ~~gastrointestinal~~loss ~~disorders~~of 30.2%, Wean ~~intend~~average towaist ~~continue~~circumference toreduction ~~pursue~~of ~~further~~approximately ~~intellectual~~15 ~~property~~inches, ~~protection~~an ~~through~~average Udrop in HbA1c (Hemoglobin A1c) of 2.S.1 points, an average decrease of systolic blood pressure of 13mmHg, and ~~foreign~~an ~~patent~~average ~~applications~~increase in HDL “good cholesterol” of 29 mg/dl.

~~Alternative~~Benefits. ~~Weight~~The ~~Loss~~ReShape ~~Solutions~~ Vest, once approved for sale, would offer an additional weight loss solution that emulates the effect of conventional weight loss surgery through a procedure that is minimally invasive and anatomy sparing. The ReShape Vest potentially offers the following benefits:

If● weMinimizes ~~are~~Changes ~~able~~ to ~~commercialize~~Normal ~~the~~Anatomy. The ReShape Vest, weemulates ~~believe~~the ~~that~~effects weof ~~will~~conventional ~~be able to offer two distinct~~ weight -loss ~~treatment~~surgery ~~solutions~~without ~~that~~stapling, ~~may~~cutting beor ~~selected~~removing byany ~~the~~portion ~~physician depending on the severity~~ of the ~~patient’s BMI or condition~~stomach. ~~Together, the Lap-Band and ReShape Vest provide a minimally-invasive continuum of care for bariatric patients and their care providers.~~

~~Our~~● ~~Market~~ Permanent Physical Restriction of the Stomach. The stomach has the capacity to expand over time through overeating. The ReShape Vest provides physical restriction that maintains the reshaped stomach at a consistent size, as long as the device remains in the patient.

● Removable/Reversible. The ~~Obesity~~ReShape ~~and~~Vest ~~Metabolic~~is ~~Disease~~designed ~~Epidemic~~ to be removed laparoscopically, permitting the removal of the device at a later time, if that is desired.

~~Obesity~~● isAllows aNormal ~~disease~~Ingestion ~~that~~and ~~has~~Digestion ~~been~~of ~~increasing~~Foods atFound anin ~~alarming~~a ~~rate~~Typical, ~~with~~Healthy ~~significant~~Diet. ~~medical~~The ~~repercussions~~ReShape ~~and~~Vest ~~associated~~leaves ~~economic~~the ~~costs.~~digestive ~~The~~anatomy ~~World~~largely ~~Health~~unaltered, ~~Organization~~hence ~~(“WHO”)~~patients ~~currently~~are ~~estimates~~able ~~that~~to maintain a more ~~than~~consistent 2nutritional balance compared with conventional bariatric surgical approaches.~~1 billion~~ ~~adults,~~This ~~approximately~~feature ~~30%~~allows ofpatients ~~the~~to ~~global~~affect ~~population,~~positive ~~are~~changes ~~overweight.~~in ~~The~~their ~~global~~eating ~~economic~~behavior ~~impact~~in ofa ~~obesity~~non-forced isand potentially more consistent way.

3 Evaluation of the ReShape Vest has been underway in a pivotal clinical investigation with a planned 95-subject enrollment in Belgium, Czech Republic, Spain and The Netherlands. Enrollment had been completed in Spain shortly before the COVID-19 pandemic affected Spain and the rest of Europe. This pandemic has impacted our ability to complete enrollment in the remaining countries and impeded clinical follow up with enrolled patients of the Spanish cite. Considering the unpredictability of and efforts to control this pandemic through 2021, we are continuing to work with identified clinical sites to determine when we will resume enrollment and subsequent filing for CE certification.

~~Table~~Diabetes ofBloc-Stim ~~Contents~~ Neuromodulation Device

~~approximately~~The ~~$2.0~~ReShape ~~trillion,~~Diabetes orBloc-Stim ~~approximately~~Neuromodulation is a technology under development as a new treatment for type 2~~.8%~~ ofdiabetes ~~global~~mellitus ~~GDP~~(T2DM). ~~Healthcare~~It ~~costs~~combines ~~for~~ReShape ~~severely~~Lifesciences’ orproprietary ~~morbidly~~Vagus ~~obese~~Nerve ~~adults~~Block ~~are~~(vBloc) ~~81%~~technology ~~higher~~platform ~~than~~in ~~for~~combination ~~healthy~~with ~~weight~~Vagus ~~adults~~nerve stimulation. This new dual Vagus nerve neuromodulation selectively modulates vagal block and ~~obesity~~stimulation to the liver and pancreas to manage blood glucose. ReShape’s Diabetes Bloc-Stim Neuromodulation is ~~responsible~~expected ~~for~~to 5%use bioelectronics to manage blood glucose in treatment of ~~deaths~~diabetes ~~worldwide~~and individualized 24/7 glucose control. WeThe ~~believe~~goal ~~our~~is ~~product~~to ~~and~~reduce ~~programs~~costs of treatment and ~~product~~complications ~~candidates~~that ~~could~~arise ~~address~~from apoorly ~~$1.64~~controlled ~~billion~~blood ~~per~~glucose ~~year~~and ~~global~~non-compliance ~~surgical~~to ~~device~~T2DM ~~market~~medication.

We believe that this epidemic will continue to grow worldwide given dietary trends in developed nations that favor highly processed sugars, larger meals and fattier foods, as well as increasingly sedentary lifestyles. Despite the growing obesity rate, increasing public interest in the obesity epidemic and significant medical repercussions and economic costs associated with obesity, there continues to be a significant unmet need for effective treatments. 3

~~The~~Table ~~United~~of ~~States Market~~ Contents

~~Obesity~~ReShape’s ~~has~~Diabetes ~~been~~Bloc-Stim ~~identified~~Neuromodulation bytechnology ~~the U.S. Surgeon General as the fastest growing cause of disease and death in the United States, and according to a 2014 McKinsey Report~~ is ~~the leading cause of preventable death~~ in ~~the~~preclinical Udevelopment.S. ~~Currently,~~It ithas isdemonstrated ~~estimated~~safety ~~that approximately 160 million American adults are overweight or obese, 74 million American adults are overweight, 78 million American adults are obese or severely obese,~~ and 24efficacy ~~million~~through ~~American~~experiments ~~adults~~in ~~are~~diabetic ~~morbidly~~swine ~~obese.~~utilizing ItPhase isI ~~estimated~~funding ~~that if obesity rates stay consistent, 51% of the U.S. population will be obese by 2030. According to data~~ from ~~the~~an ~~U.S.~~NIH ~~Department~~Small ofBusiness ~~Health~~Innovation ~~and~~Research ~~Human Services, almost 80% of adults with a BMI above 30 have comorbidity, and almost 40% have two or more of these comorbidities~~Grant. According to The Obesity Society and the CDC, obesity is associated with many significant weight‑related comorbidities including Type 2 diabetes, high blood‑pressure, sleep apnea, certain cancers, high cholesterol, coronary artery disease, osteoarthritis and stroke. According to the American Cancer Society, 572,000 Americans die of cancer each year, over one‑third of which are linked to excess body weight, poor nutrition and/or physical inactivity. Over 75% of hypertension cases are directly linked to obesity, and more than 90% of the approximately 28 million U.S. adults with Type 2 diabetes are overweight or have obesity.

~~Currently,~~Our ~~medical~~Strategic costs associated with obesity in the U.S. are estimated to be up to $210.0 billion per year and nearly 21% of medical costs in the U.S. can be attributed to obesity. Approximately $1.5 billion was spent in 2015 alone in the U.S. on approximately 200,000 bariatric surgical procedures to treat obesity. By 2025, it is estimated that up to $3.8 billion will be spent in the U.S. on approximately 800,000 bariatric surgical procedures to treat obesity. Researchers estimate that if obesity trends continue, obesity-related medical costs could rise by another $44‑$66 billion each year in the U.S. by 2030. The medical costs paid by third‑party payers for people who are obese were $2,741 per year, or 42% higher than those of people who are normal weight and the average cost to employers is $6,627 to $8,067 per year per obese employee (BMI of 35 to 40 and higher). Focus

~~Current~~Develop ~~Treatment~~and ~~Options~~Commercialize ~~and~~a ~~Their~~Differentiated ~~Limitations~~ Portfolio of Products/Therapies

WeAn ~~believe~~overarching ~~existing~~strategy ~~bariatric~~for ~~surgery~~our company is to develop and ~~endoscopic~~commercialize ~~procedural~~a ~~options~~product, ~~for~~program ~~the~~and ~~treatment~~services portfolio that is differentiated from our competition by offering transformative technologies that consists of ~~obesity~~a ~~have~~selection ~~seen~~of ~~limited~~patient-friendly, ~~adoption~~non-anatomy changing, lifestyle enhancing products, programs and services that provide alternatives to ~~date~~traditional bariatric surgery that help patients achieve durable weight loss. With the Lap-Band system, ~~with~~accessories, ~~approximately~~ReShapeCare 1%virtual ofcoaching program, and the ~~obese~~ReShape ~~population~~Vest ~~qualifying~~and ~~for~~Diabetes ~~treatment~~Bloc-Stim ~~actually~~Neuromodulation ~~seeking~~(if ~~treatment~~approved for commercial use), ~~due~~we tobelieve ~~patient~~we ~~concerns~~have multiple compelling and ~~potential~~differentiated ~~side~~medical ~~effects~~devices. ~~including~~We ~~permanently~~believe ~~altered~~that ~~anatomy~~we are well positioned for the existing market and ~~morbidity~~can serve more of the overweight and obese population with our solutions and thereby help expand the addressable market for obesity.

cid:image001.jpg@01D70B70.AF55D6C0

~~The~~Drive ~~principal~~the ~~treatment~~Adoption ~~alternatives~~of ~~available~~Our ~~today~~Portfolio ~~for~~through ~~obesity~~Obesity ~~include:~~ Therapy Experts and Patient Ambassadors

·Our ~~Behavioral~~clinical ~~modification.~~development ~~Behavioral~~strategy ~~modification,~~is ~~which~~to ~~includes~~collaborate ~~diet~~closely ~~and~~with ~~exercise~~regulatory bodies, ishealthcare anproviders, ~~important~~obesity ~~component~~therapy lifestyle experts and others involved in the ~~treatment~~obesity ofmanagement process, patients and their advocates and scientific experts. We have established relationships with obesity; ~~however~~therapy experts and healthcare providers, ~~most~~including ~~obese~~physicians ~~patients~~and ~~find~~hospitals, itand ~~difficult~~have toidentified ~~achieve~~Lap-Band patient ambassadors and ~~maintain~~we ~~significant~~believe ~~weight~~these ~~loss~~individuals ~~with~~will abe ~~regimen~~important in promoting patient awareness and gaining widespread adoption of ~~diet~~the Lap-Band, it’s accessories, ReShapeCare and ~~exercise~~the ~~alone~~ReShape Vest. Additionally, with these relationships we believe we will be able to expand the awareness of the Diabetes Bloc-Stim Neuromodulation technology to patients with type 2 diabetes mellitus.

·Expand ~~Pharmaceutical therapy. Pharmaceutical therapies often represent a first option in the treatment of obese patients but carry significant safety risks~~ and ~~may~~Protect ~~present~~Our ~~troublesome~~Intellectual ~~side~~Property ~~effects and compliance issues.~~Position

·We ~~Bariatric~~believe ~~Surgery~~that ~~and~~our ~~Endoscopic~~issued ~~Procedures.~~patents ~~In more severe cases of obesity, patients may pursue more aggressive surgical treatment options such as sleeve gastrectomy~~ and ~~gastric~~our ~~bypass.~~patent ~~These~~applications ~~procedures~~encompass ~~promote~~a ~~weight~~broad ~~loss~~platform byof ~~surgically~~therapies ~~restricting~~focused ~~the~~on ~~stomach’s capacity and outlet size. While largely effective~~obesity, ~~these procedures generally result in major lifestyle changes~~diabetes, ~~including~~hypertension ~~dietary restrictions~~ and ~~food~~other ~~intolerances,~~gastrointestinal ~~and~~disorders. ~~they~~We ~~may~~intend ~~present~~to ~~substantial~~continue ~~side~~to ~~effects~~pursue ~~and~~further ~~carry~~intellectual ~~short‑~~property ~~and~~protection ~~long‑term~~through ~~safety~~U.S. and ~~side~~foreign ~~effect~~patent ~~risks that have limited their adoption~~applications.

4 Alternative Weight Loss Solutions

~~Table~~ReShapeCare, ofprovides ~~Contents~~ a weight loss solution through behavioral changes, improving the patients’ sleep, nutrition, exercise and stress. ReShapeCare is appropriate for all weight loss patients, medical weight loss patients, and pre- and post-surgical bariatric patients.

~~Our~~If ~~Research~~we ~~and~~are ~~Development~~ able to commercialize the ReShape Vest, we believe that we will be able to offer three distinct weight loss treatment solutions that may be selected by the physician depending on the severity of the patient’s BMI or

~~Current R&D Focus~~ 4

WeTable ~~have an experienced research and development team, including clinical, regulatory affairs and quality assurance, comprised~~ of ~~scientists and mechanical engineers with significant clinical knowledge and expertise. Our research and development efforts are focused in the following major areas:~~ Contents

·condition. ~~supporting~~Together, the ~~current~~ Lap-Band, ~~System;~~ReShapeCare and ReShape Vest provide a minimally-invasive continuum of care for bariatric patients and their care providers.

·Our ~~expanding and improving current on Lap-Band portfolio;~~Market

·The ~~testing~~Obesity and ~~developing~~Metabolic ~~the~~Disease ~~ReShape Vest.~~Epidemic

WeObesity ~~have~~is ~~spent~~ a disease that has been increasing at an alarming rate with significant ~~portion~~medical repercussions and associated economic costs. The World Health Organization (“WHO”) currently estimates that more than 2.1 billion adults, approximately 30% of ~~our~~the ~~capital~~global ~~resources~~population, onare ~~research~~overweight. ~~and~~The ~~development~~global economic impact of obesity is approximately $2.0 ~~Our~~trillion, ~~research~~or approximately 2.8% of global GDP. Healthcare costs for severely or morbidly obese adults are 81% higher than for healthy weight adults and ~~development~~obesity ~~expenses~~is ~~from~~responsible ~~continuing~~for ~~operations~~5% ~~were~~of $3deaths worldwide.1 ~~million~~We inbelieve ~~2019~~our product and programs and product candidates could address a $51.764 ~~million~~billion inper ~~2018~~year global surgical device market.

~~Our~~We ~~Competition~~believe that this epidemic will continue to grow worldwide given dietary trends in developed nations that favor highly processed sugars, larger meals and fattier foods, as well as increasingly sedentary lifestyles. Despite the growing obesity rate, increasing public interest in the obesity epidemic and significant medical repercussions and economic costs associated with obesity, there continues to be a significant unmet need for effective treatments.

The ~~market~~United ~~for~~States obesity treatments is competitive, subject to technological change and significantly affected by new product development. Our primary competition in the obesity treatment market is currently from bariatric surgical and endoscopic procedures. Market

~~Our~~Obesity ~~Lap-Band~~has ~~System~~been ~~competes~~identified by the U.S. Surgeon General as the fastest growing cause of disease and death in the United States, and weaccording ~~expect~~to ~~that~~a ~~our~~2014 ~~ReShape~~McKinsey ~~Vest~~Report ~~System~~is ~~will~~the ~~compete,~~leading ~~with~~cause ~~surgical~~of ~~obesity~~preventable ~~procedures~~death in the U.S. Currently, ~~including~~it ~~gastric~~is ~~bypass~~estimated that approximately 160 million American adults are overweight or obese, ~~gastric~~74 ~~balloons~~million American adults are overweight, ~~sleeve~~78 ~~gastrectomy~~million American adults are obese or severely obese, and ~~the~~24 ~~endoscopic~~million ~~sleeve~~American adults are morbidly obese. ~~These~~It ~~current~~is ~~surgical~~estimated ~~procedures~~that ~~are~~if ~~performed~~obesity inrates ~~less~~stay ~~than~~consistent, 151% of ~~all~~the ~~eligible~~U.S. population will be obese ~~patients~~by ~~today~~2030. ~~Current~~According ~~manufacturers~~to data from the U.S. Department of ~~gastric~~Health ~~balloon~~and Human Services, almost 80% of adults with a BMI above 30 have comorbidity, and ~~suturing~~almost ~~products~~40% ~~that~~have ~~are~~two ~~approved~~or inmore of these comorbidities. According to The Obesity Society and the ~~United~~CDC, ~~States~~obesity ~~include~~is ~~Apollo~~associated ~~(ORBERA~~with ~~Intragastric~~many ~~Balloon~~significant ~~System~~weight-related ~~and~~comorbidities ~~OverStitch~~including ~~Endoscopic~~Type 2 ~~Suturing~~diabetes, ~~System)~~high blood-pressure, sleep apnea, certain cancers, high cholesterol, coronary artery disease, osteoarthritis and ~~Obalon~~stroke. ~~Therapeutics~~According to the American Cancer Society, ~~Inc~~572,000 Americans die of cancer each year, over one-third of which are linked to excess body weight, poor nutrition and/or physical inactivity. ~~(Obalon~~Over ~~Balloon~~75% ~~System)~~of hypertension cases are directly linked to obesity, and more than 90% of the approximately 28 million U.S. adults with Type 2 diabetes are overweight or have obesity.

InCurrently, ~~June~~medical ~~2016~~costs associated with obesity in the U.S. are estimated to be up to $210.0 billion per year and nearly 21% of medical costs in the U.S. can be attributed to obesity. Approximately $1.5 billion was spent in 2015 alone in the U.S. on approximately 200,000 ~~Aspire~~bariatric ~~Bariatrics~~surgical procedures to treat obesity. By 2025, ~~Inc~~it is estimated that up to $3.8 billion ~~received~~will ~~FDA~~be ~~approval~~spent ~~for~~in the ~~Aspire~~U.S. ~~Assist®~~on ~~System~~approximately 800,000 anbariatric ~~endoscopic~~surgical ~~alternative~~procedures to ~~weight~~treat ~~loss~~obesity. ~~surgery~~Researchers ~~for~~estimate ~~people~~that ~~with~~if ~~moderate~~obesity totrends ~~severe~~continue, obesity-related medical costs could rise by another $44-$66 billion each year in the U.S. Weby 2030. The medical costs paid by third-party payers for people who are ~~also~~obese ~~aware~~were ~~that~~$2,741 GIper ~~Dynamics~~year, ~~Inc.~~or ~~has~~42% ~~received~~higher ~~approvals~~than inthose ~~various~~of ~~international~~people ~~countries~~who are normal weight and the average cost to ~~sell~~employers ~~its~~is ~~EndoBarrier~~$6,627 ~~Gastrointestinal~~to ~~Liner.~~$8,067 per year per obese employee (BMI of 35 to 40 and higher).

WeCurrent ~~also~~Treatment ~~compete~~Options ~~against the manufacturers of pharmaceuticals that are directed at treating obesity~~ and ~~the~~Their 99% of obese patients eligible for surgery that are not willing to pursue a surgical option. We are aware of a number of drugs that are approved for long-term treatment of obesity in the United States: Orlistat, marketed by Roche as Xenical and GlaxoSmithKline as Alli, Belviq marketed by Arena Pharmaceuticals, Inc., Qsymia, marketed by VIVUS, Inc. and Contrave, marketed by Orexigen Therapeutics, Inc. In addition, we are aware of a pivotal trial for GELESIS100 that is being conducted by Gelesis, Inc. Limitations

InWe ~~addition~~believe toexisting ~~competition~~bariatric ~~from~~surgery ~~surgical~~and ~~obesity~~endoscopic ~~procedures,~~procedural weoptions ~~compete with several private early-stage companies developing neurostimulation devices~~ for ~~application to~~ the ~~gastric region and related nerves for the~~ treatment of obesity. ~~Further,~~have weseen ~~know~~limited ofadoption two intragastric balloon companies either in clinical trials or working toward clinical trials in the U.S: Spatz3 Adjustable Balloon and Allurion Technology’s Elipse Balloon. These companies may prove to ~~be significant competitors~~date, ~~particularly through collaborative arrangements~~ with ~~large~~approximately ~~and~~1% ~~established~~of ~~companies. They~~the ~~also~~obese ~~compete~~population ~~with~~qualifying usfor intreatment ~~recruiting~~actually ~~and~~seeking ~~retaining qualified scientific and management personnel~~treatment, ~~establishing~~due ~~clinical~~to ~~trial~~patient ~~sites~~concerns and ~~subject~~potential ~~registration~~side ~~for~~effects ~~clinical~~including ~~trials,~~permanently asaltered ~~well~~anatomy ~~as in acquiring technologies~~ and ~~technology licenses complementary to our programs or advantageous to our business~~morbidity.

WeThe ~~believe that the~~ principal ~~competitive~~treatment ~~factors~~alternatives inavailable ~~our~~today ~~market~~for obesity include:

·● ~~acceptance~~Behavioral bymodification. ~~healthcare~~Behavioral ~~professionals~~modification, ~~patients~~which includes diet and ~~payers~~exercise, is an important component in the treatment of obesity; however, most obese patients find it difficult to achieve and maintain significant weight loss with a regimen of diet and exercise alone.

·● ~~published~~Pharmaceutical ~~rates~~therapy. Pharmaceutical therapies often represent a first option in the treatment of obese patients but carry significant safety risks and ~~efficacy;~~may present troublesome side effects and compliance issues.

~~· reliability and high-quality performance;~~5

5 Table of Contents

~~Table~~● Bariatric Surgery and Endoscopic Procedures. In more severe cases of ~~Contents~~ obesity, patients may pursue more aggressive surgical treatment options such as sleeve gastrectomy and gastric bypass. These procedures promote weight loss by surgically restricting the stomach’s capacity and outlet size. While largely effective, these procedures generally result in major lifestyle changes, including dietary restrictions and food intolerances, and they may present substantial side effects and carry short- and long-term safety and side effect risks that have limited their adoption.

·Our ~~effectiveness~~Research ~~at controlling comorbidities such as diabetes~~ and ~~hypertension;~~Development

·Current ~~invasiveness~~R&D ~~and~~Focus ~~the inherent reversibility of the procedure or device;~~

·We ~~cost~~have an experienced research and ~~average~~development ~~selling~~team, ~~price~~including ofclinical, ~~products~~regulatory affairs and ~~relative~~quality ~~rates~~assurance, comprised of ~~reimbursement;~~scientists and mechanical engineers with significant clinical knowledge and expertise. Our research and development efforts are focused in the following major areas:

·● ~~effective~~supporting ~~marketing,~~the ~~training,~~current ~~education,~~Lap-Band ~~sales and distribution~~system;

·● ~~regulatory~~expanding and ~~reimbursement~~improving ~~expertise~~on the Lap-Band portfolio;

·● ~~technological~~gaining ~~leadership~~clinical ~~and~~evidence ~~superiority;~~to ~~and~~the efficacy of the ReShape Vest;

·● ~~speed~~testing ofand ~~product~~developing ~~innovation~~the ~~and~~Diabetes ~~time~~Bloc-Stim toNeuromodulation ~~market.~~device; and

~~Many~~● ofsuction ~~our competitors are larger than we are~~ and ~~are~~calibration ~~either~~tubing ~~publicly-traded~~line orfor ~~are~~gastric ~~divisions of publicly-traded companies,~~ and ~~they~~bariatric ~~enjoy several competitive advantages over us, including:~~ surgeries.

·We ~~stronger~~have ~~name~~spent ~~recognition;~~a significant portion of our capital resources on research and development. Our research and development expenses were $3.5 million in 2020 and $3.1 million in 2019.

·Our ~~existing~~Competition ~~relations with healthcare professionals, customers and third-party payers;~~

·The ~~established~~market ~~distribution~~for ~~networks;~~obesity treatments is competitive, subject to technological change and significantly affected by new product development. Our primary competition in the obesity treatment market is currently from bariatric surgical and endoscopic procedures.

·Our ~~significant~~Lap-Band ~~experience~~system incompetes, ~~research~~ and ~~development~~we expect that our ReShape Vest system will compete, ~~manufacturing~~with surgical obesity procedures, ~~preclinical~~including ~~testing~~gastric bypass, ~~clinical~~gastric ~~trials~~balloons, ~~obtaining~~sleeve ~~regulatory~~gastrectomy ~~approvals,~~and ~~obtaining~~the ~~reimbursement~~endoscopic sleeve. These current surgical procedures are performed in less than 1% of all eligible obese patients today. Current manufacturers of gastric balloon and ~~marketing~~suturing products that are approved ~~products;~~in the United States include Apollo (ORBERA Intragastric Balloon System and OverStitch Endoscopic Suturing System) and Obalon Therapeutics, Inc. (Obalon Balloon System).

·In ~~greater~~June ~~financial~~2016, ~~and~~Aspire ~~human~~Bariatrics, ~~resources~~Inc. received FDA approval for the Aspire Assist® System, an endoscopic alternative to weight loss surgery for people with moderate to severe obesity. We are also aware that GI Dynamics, Inc. has received approvals in various international countries to sell its EndoBarrier Gastrointestinal Liner.

AsWe aalso ~~result,~~compete weagainst ~~cannot~~the ~~assure~~manufacturers ~~you~~of pharmaceuticals that weare ~~will~~directed beat ~~able~~treating obesity and the 99% of obese patients eligible for surgery that are not willing to ~~compete~~pursue ~~effectively~~a ~~against~~surgical ~~these~~option. ~~companies~~We orare ~~their~~aware ~~products~~of a number of drugs that are approved for long-term treatment of obesity in the United States: Orlistat, marketed by Roche as Xenical and GlaxoSmithKline as Alli, Belviq marketed by Arena Pharmaceuticals, Inc., Qsymia, marketed by VIVUS, Inc. and Contrave, marketed by Orexigen Therapeutics, Inc. In addition, we are aware of a pivotal trial for GELESIS100 that is being conducted by Gelesis, Inc.

~~Market~~In ~~Opportunity~~addition to competition from surgical obesity procedures, we compete with several private early-stage companies developing neurostimulation devices for application to the gastric region and related nerves for the treatment of obesity. Further, we know of two intragastric balloon companies either in clinical trials or working toward clinical trials in the U.S: Spatz3 Adjustable Balloon and Allurion Technology’s Elipse Balloon. These companies may prove to be significant competitors, particularly through collaborative arrangements with large and established companies. They

Given the limitations of behavioral modification, pharmaceutical therapy and traditional bariatric surgical approaches, we believe there is a substantial need for patient-friendly, safer, effective and durable solutions that: 6

·Table ~~provide~~of ~~proven, long-term weight loss;~~Contents

·also ~~preserve~~compete ~~normal~~with ~~anatomy;~~us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and subject registration for clinical trials, as well as in acquiring technologies and technology licenses complementary to our programs or advantageous to our business.

·We ~~are~~believe ~~“non-punitive” in~~ that ~~they~~the ~~support~~principal ~~continued~~competitive ~~ingestion~~factors ~~and digestion of foods and micronutrients such as vitamins and minerals found~~ in aour ~~typical,~~market ~~healthy~~include: ~~diet while allowing the user to modify his or her eating behavior appropriately without inducing punitive physical restrictions that physically force a limitation of food intake;~~

·● ~~diminish~~acceptance ~~undesirable~~by ~~side-effects~~healthcare professionals, patients and payers;

·● ~~minimize~~published ~~the~~rates ~~risks~~ of ~~re-operations,~~safety ~~malnutrition~~ and ~~mortality~~efficacy; ~~and~~

·● ~~reduce~~reliability ~~the~~and ~~natural~~high-quality ~~hunger drive of patients.~~performance;

~~Our~~● ~~Intellectual~~effectiveness ~~Property~~ at controlling comorbidities such as diabetes and hypertension;

In● ~~order~~invasiveness ~~to remain competitive, we must develop~~ and ~~maintain protection of~~ the ~~proprietary~~inherent ~~aspects~~reversibility of ~~our~~the ~~technologies.~~procedure Weor ~~rely on a combination of patents, trademarks, trade secret laws and confidentiality and invention~~ device;

6 ● cost and average selling price of products and relative rates of reimbursement;

~~Table~~● ofeffective ~~Contents~~ marketing, training, education, sales and distribution;

~~assignment~~● ~~agreements~~regulatory ~~to protect our intellectual property rights. Our patent applications may not result in issued patents~~ and ~~our~~reimbursement patents may not be sufficiently broad to protect our technology. Any patents issued to us may be challenged by third parties as being invalid or unenforceable, or third parties may independently develop similar or competing technology that does not infringe our patents. The laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. expertise;

~~Lap-Band~~ ● technological leadership and superiority; and

As● speed of ~~December~~product ~~31,~~innovation ~~2019, we had 94 total U.S.~~ and ~~foreign~~time ~~patents and patent applications related~~ to ~~our Lap-Band System~~market. The international patents and patent applications are in regions including Germany, France, Spain, the United Kingdom, Mexico, Canada, Italy, the Netherlands, Portugal, Ireland, Belgium, Poland, Australia, and South Korea. The issued patents expire between the years 2020 and 2031.

WeMany ~~also~~of ~~have~~our ~~141~~competitors ~~total~~are ~~U.S.~~larger than we are and ~~international~~are ~~trademarks~~either ~~for~~publicly-traded ~~the~~or ~~LAP~~are divisions of publicly-~~BAND~~traded ~~brand~~companies, ~~name.~~ and they enjoy several competitive advantages over us, including:

~~ReShape~~● ~~Vest~~ stronger name recognition;

As● ofexisting ~~December~~relations ~~31,~~with ~~2019,~~healthcare ~~we had four granted U.S. patents and four granted foreign patents in China~~professionals, ~~Israel,~~customers ~~Canada~~ and ~~Australia~~third-party ~~related to our ReShape Vest. The patents expire between the years 2028 and 2038.~~ payers;

We● ~~also~~established ~~have~~distribution ~~U.S. and international trademark applications for the RESHAPE VEST brand name.~~ networks;

~~Sales~~● significant experience in research and ~~Distribution~~development, manufacturing, preclinical testing, clinical trials, obtaining regulatory approvals, obtaining reimbursement and marketing approved products; and

We● ~~market~~greater ~~directly~~financial ~~to patients but sell the Lap-Band System to select surgical centers throughout the U.S.~~ and ~~internationally~~human ~~having patients that would like to treat obesity and its comorbidities~~resources. The surgical centers then sell our product to the patients and implant. Our sales representatives are supported by field clinical experts who are responsible for training, technical support, and other support services at various implant centers. Our sales representatives help implement consumer marketing programs and provide surgical centers and implanting surgeons with educational patient materials.

InAs ~~connection~~a ~~with our acquisition of the Lap-Band System in December 2018~~result, we ~~entered~~cannot ~~into~~assure ayou ~~transition~~that ~~services~~we ~~agreement,~~will ~~supply~~be ~~agreement~~able ~~and distribution agreement with Apollo pursuant~~ to ~~which,~~compete ~~among~~effectively ~~other~~against ~~things,~~these ~~Apollo~~companies ~~will~~or ~~manufacture~~their ~~the Lap-Band product for us for up two years~~products. ~~As of the end of 2019, we took over all of the worldwide distribution of the lap-band Product and Accessories.~~

InMarket ~~order~~Opportunity to support our Lap-Band sales efforts, we have increased the size of our dedicated U.S. sales team from two to six. We have also launched marketing campaigns in several top strategic accounts that allow us to partner with clinics in marketing efforts and use digital and traditional marketing to drive qualified leads to physicians. During 2019, our international sales efforts were through a combination of direct and distributor sales channels, with a focus on top Lap-Band customers in Australia and strategic countries in Europe.

~~Our~~Given ~~Manufacturers~~the limitations of behavioral modification, pharmaceutical therapy and ~~Suppliers~~traditional bariatric surgical approaches, we believe there is a substantial need for patient-friendly, safer, effective and durable solutions that:

We● ~~are~~provide ~~party to a supply agreement with Apollo pursuant to which~~proven, ~~among other things, Apollo will manufacture the Lap~~long-~~Band~~term ~~product~~weight ~~for us for up to two years after our acquisition of the Lap-Band product, which was completed in December 2018.~~ loss;

To● ~~date,~~preserve ~~all~~normal of the materials and components for our products, as well as any related outside services, are procured from qualified suppliers and contract manufacturers in accordance with our proprietary specifications. All of our key manufacturers and suppliers have experience working with commercial implantable device systems, are ISO certified and are regularly audited by various regulatory agencies including the FDA. Our key manufacturers and suppliers have a demonstrated record of compliance with international regulatory requirements. anatomy;

~~Given~~● ~~that~~are we“non-punitive” ~~rely~~in onthat ~~third-party~~they ~~manufacturers~~support ~~and~~continued ~~suppliers~~ingestion ~~for~~and ~~the~~digestion ~~production~~ of ~~our~~foods ~~products,~~and ~~our~~micronutrients ~~ability~~such toas ~~increase~~vitamins ~~production~~and ~~going~~minerals ~~forward~~found ~~will~~in ~~depend~~a ~~upon the experience~~typical, ~~certification~~healthy ~~levels~~diet ~~and~~while ~~large-scale~~allowing ~~production~~the ~~capabilities~~user ofto ~~our~~modify ~~suppliers~~his ~~and~~or ~~manufacturers.~~her ~~Qualified suppliers and contract manufacturers have been and will~~ eating

Table of Contents

~~continue~~behavior toappropriately bewithout ~~selected~~inducing topunitive ~~supply~~physical ~~products~~restrictions onthat aphysically ~~commercial~~force ~~scale~~a ~~according~~limitation ~~to our proprietary specifications. Our FDA approval process required us to name and obtain approval for the suppliers~~ of ~~key~~food ~~components of the Lap-Band System.~~ intake;

~~Many~~● ofdiminish ~~our~~undesirable parts are custom designed and require custom tooling and, as a result, we may not be able to quickly qualify and establish additional or replacement suppliers for the components of our products. Any new approvals of vendors required by the FDA or other regulatory agencies in other international markets for our products as a result of the need to qualify or obtain alternate vendors for any of our components would delay our ability to sell and market our products and could have a material adverse effect on our business. side-effects;

We● ~~believe~~facilitate ~~that~~outpatient ~~our~~surgical current manufacturing and supply arrangements will be adequate to continue our ongoing commercial sales and our ongoing and planned clinical trials. In order to produce our products in the quantities we anticipate to meet future market demand, we will need our manufacturers and suppliers to increase, or scale up, manufacturing production and supply arrangements by a significant factor over the current level of production. There are technical challenges to scaling up manufacturing capacity and developing commercial-scale manufacturing facilities that may require the investment of substantial additional funds by our manufacturers and suppliers and hiring and retaining additional management and technical personnel who have the necessary experience. If our manufacturers or suppliers are unable to do so, we may not be able to meet the requirements to expand the launch of the product in the United States or launch the product internationally or to meet future demand, if at all. We may also represent only a small portion of our suppliers’ or manufacturers’ business and if they become capacity constrained, they may choose to allocate their available resources to other customers that represent a larger portion of their business. If we are unable to obtain a sufficient supply of our product, our revenue, business and financial prospects would be adversely affected. procedures;

~~Government~~● ~~Regulations~~ minimize the risks of re-operations, malnutrition and mortality; and

~~Device~~● ~~Classification~~reduce ~~and~~the ~~Regulations~~ natural hunger drive of patients.

~~United~~Our ~~States~~Intellectual Property

~~Our~~In ~~products~~order ~~and~~to ~~products~~remain ~~under~~competitive, ~~development~~we ~~are~~must ~~regulated~~develop byand maintain protection of the ~~FDA~~proprietary asaspects ~~medical~~of ~~devices~~our ~~under~~technologies. ~~the~~We ~~Federal~~rely ~~Food~~on a combination of patents, ~~Drug~~trademarks, ~~and~~trade ~~Cosmetic~~secret ~~Act~~laws ~~(“FFDCA”)~~and confidentiality and ~~the~~invention ~~regulations~~assignment ~~promulgated~~agreements ~~under~~to ~~the~~protect ~~FFDCA~~our intellectual property rights. ~~Pursuant~~Our topatent ~~the~~applications ~~FFDCA,~~may ~~the~~not ~~FDA~~result ~~regulates~~in ~~the~~issued ~~research,~~patents ~~design,~~and ~~testing,~~our ~~manufacture,~~patents ~~safety,~~may ~~labeling,~~not ~~storage,~~be ~~record~~sufficiently ~~keeping,~~broad ~~advertising,~~to ~~sales~~protect ~~and~~our ~~distribution,~~technology. ~~post-market~~Any ~~adverse~~patents ~~event~~issued ~~reporting,~~to ~~production~~us ~~and~~may ~~advertising~~be ~~and~~challenged ~~promotion~~by ofthird ~~medical~~parties ~~devices~~as inbeing ~~the~~invalid ~~United~~or ~~States.~~unenforceable, ~~Noncompliance~~or ~~with~~third ~~applicable~~parties ~~requirements~~may ~~can~~independently ~~result~~develop insimilar ~~warning~~or ~~letters,~~competing ~~fines,~~technology ~~injunctions,~~that ~~civil~~does ~~penalties,~~not ~~recall~~infringe orour ~~seizure~~patents. The laws of ~~products,~~certain ~~total~~foreign orcountries ~~partial~~do ~~suspension~~not ofprotect ~~production,~~our ~~failure~~intellectual ofproperty rights to the ~~government~~same toextent ~~grant~~as ~~premarket~~do ~~approval~~the ~~for~~laws ~~devices~~of ~~and~~the ~~criminal~~United ~~prosecution~~States.

Medical devices in the United States are classified into one of three classes, Class I, II or III, on the basis of the amount of risk and the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I, low risk, devices are subject to general controls (e.g., labeling and adherence to good manufacturing practices). Class II, intermediate risk, devices are subject to general controls and to special controls (e.g., performance standards, and premarket notification). Generally, Class III devices are those which must receive premarket approval by the FDA to ensure their safety and effectiveness (e.g., lifeLap-sustaining, life-supporting and implantable devices, or new devices which have not been found substantially equivalent to legally marketed devices), and require clinical testing to ensure safety and effectiveness and FDA approval prior to marketing and distribution. The FDA also has the authority to require clinical testing of Class II devices. In both the United States and certain international markets, there have been a number of legislative and regulatory initiatives and changes, such as the Modernization Act and the EU-Medical Device Regulations, which could and have altered the healthcare system in ways that could impact our ability to sell our medical devices profitably. Band

~~The~~As ~~FFDCA provides two basic review procedures for medical devices. Certain products may qualify for a submission authorized by Section 510(k)~~ of ~~the~~December ~~FFDCA~~31, ~~where~~2020, ~~the~~we ~~manufacturer~~had ~~submits~~48 tototal ~~the~~U.S. ~~FDA~~and aforeign ~~premarket~~patents ~~notification~~and ofpatent ~~the~~applications ~~manufacturer’s~~related ~~intention~~ to ~~commence~~our ~~marketing~~Lap-Band ~~the product~~system. The ~~manufacturer~~international ~~must,~~patents ~~among~~and ~~other~~patent ~~things,~~applications ~~establish~~are ~~that~~in ~~the~~regions ~~product~~including toGermany, beFrance, ~~marketed~~Spain, ~~is substantially equivalent to another legally marketed product. Marketing may commence when~~ the ~~FDA~~United ~~issues~~Kingdom, aMexico, ~~letter~~Canada, ~~finding~~Italy, ~~substantial equivalence. If a medical device does not qualify for~~ the ~~510(k)~~Netherlands, ~~procedure~~Portugal, ~~the~~Ireland, ~~manufacturer~~Belgium, ~~must~~Poland, ~~file~~Australia, aand ~~PMA~~South ~~application with the FDA~~Korea. ~~This~~The ~~procedure~~issued ~~requires~~patents ~~more~~expire ~~extensive~~between ~~pre-filing clinical and preclinical testing than~~ the ~~510(k)~~years ~~procedure~~2021 and ~~involves~~2031. ~~a significantly longer~~

8 We also have 48 total U.S. and international trademarks for the LAP-BAND brand name.

~~Table~~ReShape ~~of Contents~~ Vest

~~FDA~~As ~~review~~of ~~process.~~December A31, ~~PMA~~2020, iswe ~~required~~had tofour ~~establish~~granted ~~the~~U.S. ~~safety~~patents and ~~effectiveness~~four ofgranted ~~the~~foreign ~~device~~patents in China, Israel, Canada and aAustralia ~~key~~related ~~component~~to ofour aReShape ~~PMA~~Vest ~~submission~~and is12 pending patents in the ~~pivotal~~U.S. ~~clinical~~and ~~trial~~foreign ~~data,~~countries. asThe ~~discussed~~patents inexpire ~~more~~between ~~detail~~the ~~below.~~years 2028 and 2038.

~~Premarket~~We ~~Approval~~also have U.S. and international trademark applications for the RESHAPE VEST brand name.

Our ReShape vBloc and our Lap-Band System are medical devices that required PMAs from the FDA to market in the United States. The FDA approved ReShape vBloc in January of 2015 and the Lap-Band System in 2001 with post-approval conditions intended to ensure the safety and effectiveness of the devices. Failure to comply with the conditions of approval can result in material adverse enforcement action, including the loss or withdrawal of the approvals. Even after approval of the PMAs, new PMAs or supplemental PMAs will be required for significant modifications to the manufacturing process, labeling, use and design of a device that is approved through the premarket approval process. Premarket approval supplements often require submission of the same type of information as a PMA except that the supplement is limited to information needed to support any changes from the device covered by the original PMA. In addition, holders of an approved PMA are required to submit annual reports to the FDA that include relevant information on the continued use of the device.

The ReShape Vest will be considered a Class III Long Term Implantable (“LTI”) product by the FDA requiring the PMA path. A pivotal trial for the ReShape Vest will likely include approximately 250 implanted patients monitored up to three years. Other implantable devices for the treatment of obesity relied on twelve-month endpoints for the PMA submission with annual follow-up visits up to five years and we expect the pivotal trial for the ReShape Vest to be similar. A U.S. pivotal trial requires FDA Investigational Device Exemption (“IDE”) submission and approval. ReShapeCare

~~Clinical~~As ~~Trials~~of December 31, 2020, we applied for two U.S. trademarks related to the ReShapeCare™ logo and name. The trademarks cover electronic pedometers and electronic day planners for tracking food, body weight, pre-recorded nutritional and fitness; as well as nutritional and medical counseling and services.

ADiabetes ~~clinical~~Bloc-Stim ~~trial~~Neuromodulation is almost always required to support a PMA. Clinical trials for a “significant risk” device such as ours require submission to the FDA of an application for an IDE for clinical studies to be conducted within the United States. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. Clinical trials for a significant risk device in the United States may begin once the IDE application is approved by the FDA and by the Institutional Review Boards (“IRBs”) overseeing the clinical trial at the various investigational sites. Device

~~Clinical~~As ~~trials require extensive recordkeeping and detailed reporting requirements. Our clinical trials must be conducted under the oversight~~ of anDecember ~~IRB for each participating clinical trial site and in accordance with applicable regulations and policies including~~31, ~~but not limited to~~2020, ~~the~~we ~~FDA’s~~filed ~~good~~a ~~clinical~~trademark ~~practice~~application ~~IDE~~for ~~requirements~~Bloc-Stim Neuromodulation. ~~We,~~The ~~the~~USPTO ~~trial~~Examiner ~~Data~~is ~~Safety~~reviewing ~~Monitoring Board,~~ the ~~FDA~~application orand provided the ~~IRB~~Company ~~for~~with ~~each site at which~~ a ~~clinical~~disclaimer ~~trial~~being isrequired ~~being~~for ~~performed~~“Neuromodulation”, ~~may~~as ~~suspend~~this a ~~clinical~~standard ~~trial~~requirement ~~at any time~~ for ~~various~~words ~~reasons, including a belief~~ that ~~the~~are ~~risks~~in ~~to study subjects outweigh~~ the ~~anticipated~~standard ~~benefits~~vernacular.

~~Pervasive~~Sales and ~~Continuing~~Distribution ~~U.S. Regulation~~

~~Numerous~~We ~~regulatory~~market ~~requirements~~directly ~~apply~~to patients but sell the Lap-Band system to select surgical centers throughout the U.S. ~~These~~and ~~include:~~ internationally having patients that would like to treat obesity and its comorbidities. The surgical centers then perform the LAP-BAND procedure and are most-commonly reimbursed by leading insurance providers. Alternatively, surgical

· Quality System Regulation, which requires manufacturers to follow design, testing, control, documentation, complaint handling and other quality assurance procedures during the design and manufacturing processes;8

·Table ~~regulations which govern product labels and labeling, prohibit the promotion~~ of ~~products for unapproved or “off-label” uses and impose other restrictions on labeling and promotional activities;~~Contents

·centers ~~medical~~can ~~device~~offer ~~reporting~~the ~~regulations,~~LAP-BAND ~~which~~as ~~require~~a ~~that~~cash-pay ~~manufacturers~~procedure. ~~report~~Our tosales ~~the~~representatives ~~FDA~~are ifsupported ~~their~~by ~~device~~field ~~may~~clinical ~~have~~experts ~~caused~~who orprovide ~~contributed~~training, totechnical asupport, ~~death~~and orother ~~serious~~support ~~injury~~services orat ~~malfunctioned~~various inimplant acenters. ~~way~~Our ~~that~~sales ~~would~~representatives ~~likely~~help ~~cause~~implement orconsumer ~~contribute~~marketing toprograms aand ~~death~~provide orsurgical ~~serious~~centers ~~injury~~and ifimplanting itsurgeons ~~were~~with toeducational ~~recur;~~patient materials.

·In ~~notices~~order to support our Lap-Band sales efforts, we have seven dedicated team members to support the US Region. We have also launched marketing campaigns in several top strategic accounts that allow us to partner with clinics in marketing efforts and use digital and traditional marketing to drive qualified leads to physicians. During 2020, our international sales efforts were through a combination of ~~correction~~direct orand ~~removal~~distributor sales channels, with a focus on top Lap-Band customers in Australia, The Middle East and ~~recall~~strategic ~~regulations;~~countries in Europe.

·Our ~~periodic~~Manufacturers ~~reporting of progress related to clinical trials, post approval studies required as conditions of PMA approval~~ and ~~relevant~~Suppliers ~~changes to information contained within the PMA approval; and~~

9 To date, all of the materials and components for our products, as well as any related outside services, are procured from qualified suppliers and contract manufacturers in accordance with our proprietary specifications. All of our key manufacturers and suppliers have experience working with commercial implantable device systems, are ISO certified and are regularly audited by various regulatory agencies including the FDA. Our key manufacturers and suppliers have a demonstrated record of compliance with international regulatory requirements.

~~Table~~Given that we rely on third-party manufacturers and suppliers for the production of ~~Contents~~ our products, our ability to increase production going forward will depend upon the experience, certification levels and large-scale production capabilities of our suppliers and manufacturers. Qualified suppliers and contract manufacturers have been and will continue to be selected to supply products on a commercial scale according to our proprietary specifications. Our FDA approval process required us to name and obtain approval for the suppliers of key components of the Lap-Band system.

·Many ~~reporting~~of our parts are custom designed and require custom tooling and, as a result, we may not be able to quickly qualify and establish additional or replacement suppliers for the components of ~~transfers~~our products. Any new approvals of ~~value~~vendors ~~and~~required ~~payments~~by the FDA or other regulatory agencies in other international markets for our products as a result of the need to ~~physicians~~qualify or obtain alternate vendors for any of our components would delay our ability to sell and ~~teaching~~market ~~hospitals~~our products and could have a material adverse effect on our business.

~~Advertising~~We believe that our current manufacturing and ~~promotion~~supply ofarrangements ~~medical~~will ~~devices~~be ~~are~~adequate ~~also~~to ~~regulated~~continue byour ongoing commercial sales and our ongoing and planned clinical trials. In order to produce our products in the ~~Federal~~quantities ~~Trade~~we ~~Commission~~anticipate to meet future market demand, we will need our manufacturers and bysuppliers ~~state~~to ~~regulatory~~increase, or scale up, manufacturing production and ~~enforcement~~supply ~~authorities~~arrangements by a significant factor over the current level of production. ~~Recently,~~There ~~some~~are ~~promotional~~technical ~~activities~~challenges ~~for~~to ~~FDA~~scaling up manufacturing capacity and developing commercial-~~regulated~~scale ~~products~~manufacturing ~~have~~facilities ~~resulted~~that inmay ~~enforcement~~require ~~actions~~the ~~brought~~investment ~~under~~of ~~healthcare~~substantial ~~reimbursement~~additional ~~laws~~funds by our manufacturers and ~~consumer~~suppliers ~~protection~~and ~~statutes~~hiring and retaining additional management and technical personnel who have the necessary experience. InIf ~~addition~~our manufacturers or suppliers are unable to do so, ~~under~~we may not be able to meet the ~~federal~~requirements ~~Lanham~~to ~~Act~~expand the launch of the product in the United States or launch the product internationally or to meet future demand, ~~competitors~~if at all. We may also represent only a small portion of our suppliers’ or manufacturers’ business and ~~others~~if ~~can~~they ~~initiate~~become ~~litigation~~capacity ~~relating~~constrained, they may choose to ~~advertising~~allocate ~~claims~~their available resources to other customers that represent a larger portion of their business. If we are unable to obtain a sufficient supply of our product, our revenue, business and financial prospects would be adversely affected.

~~Compliance~~Government with regulatory requirements is enforced through periodic facility inspections by the FDA, which may be unannounced. Because we rely on contract manufacturing sites and service providers, these additional sites are also subject to these FDA inspections. Failure to comply with applicable regulatory requirements can result in enforcement action, which may include any of the following sanctions: Regulations

·Device ~~warning~~Classification ~~letters~~and ~~or untitled letters;~~Regulations

·United ~~fines,~~States ~~injunction and civil penalties;~~

·Our ~~recall~~products orand ~~seizure~~products under development are regulated by the FDA as medical devices under the Federal Food, Drug, and Cosmetic Act (“FFDCA”) and the regulations promulgated under the FFDCA. Pursuant to the FFDCA, the FDA regulates the research, design, testing, manufacture, safety, labeling, storage, record keeping, advertising, sales and distribution, post-market adverse event reporting, production and advertising and promotion of ~~our~~medical ~~products;~~devices in the United States. Noncompliance with applicable requirements can result in warning letters, fines, injunctions, civil

~~· customer notification, or orders for repair, replacement or refund;~~9

·Table ~~operating restrictions, partial suspension or total shutdown~~ of ~~production or clinical trials;~~Contents

·penalties, ~~refusing~~recall ~~our~~or ~~request~~seizure ~~for~~of products, total or partial suspension of production, failure of the government to grant premarket approval offor ~~new~~devices ~~products;~~and criminal prosecution.

·Medical ~~withdrawing~~devices in the United States are classified into one of three classes, Class I, II or III, on the basis of the amount of risk and the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I, low risk, devices are subject to general controls (e.g., labeling and adherence to good manufacturing practices). Class II, intermediate risk, devices are subject to general controls and to special controls (e.g., performance standards, and premarket ~~approvals~~notification). ~~that~~Generally, Class III devices are ~~already~~those ~~granted;~~which must receive premarket approval by the FDA to ensure their safety and effectiveness (e.g., life-sustaining, life-supporting and implantable devices, or new devices), and require clinical testing to validate safety and effectiveness and FDA approval prior to marketing and distribution. The FDA also has the authority to require clinical testing of Class II devices. In both the United States and certain international markets, there have been a number of legislative and regulatory initiatives and changes, such as the Modernization Act and the EU-Medical Device Regulations, which could and have altered the healthcare system in ways that could impact our ability to sell our medical devices profitably.

·The ~~criminal~~FFDCA ~~prosecution~~provides two basic review processes for medical devices. Certain products (Class II) may qualify for a submission authorized by Section 510(k) of the FFDCA, where the manufacturer submits to the FDA a premarket notification of the manufacturer’s intention to commence marketing the product. The manufacturer must, among other things, establish that the product to be marketed is substantially equivalent to another legally marketed product. Marketing may commence when the FDA issues a letter finding the subject device is subject device is substantially equivalent to a legally marketed predicate device. If a medical device does not qualify for the 510(k) procedure (Class III), the manufacturer must file a Premarket Approval Application (“PMA”) with the FDA. This procedure requires more extensive pre-filing clinical and preclinical testing than the 510(k) processes and involves a significantly longer FDA review process. A PMA is required to establish the safety and effectiveness of the device and a key component of a PMA submission is the pivotal clinical trial data, as discussed in more detail below.

~~International~~Premarket ~~Regulations~~Approval

~~International~~The ~~sales~~ReShape ofvBloc® ~~medical~~and ~~devices~~the ~~are~~Lap-Band ~~subject~~system toare ~~foreign~~medical ~~government~~devices ~~regulations,~~that ~~which~~required ~~vary~~a ~~substantially~~PMA submission from ~~country~~the FDA to ~~country~~market in the United States. The ~~time~~FDA ~~required~~approved toReShape ~~obtain~~vBloc ~~approval~~in byJanuary aof ~~foreign~~2015 ~~country~~and ~~may~~the beLap-Band ~~longer~~system orin ~~shorter~~2001 ~~than~~with ~~that~~post-approval ~~required~~conditions ~~for~~intended ~~FDA~~to ~~approval,~~ensure the safety and ~~the~~effectiveness ~~requirements~~of ~~may~~the ~~differ~~devices. ~~The~~Failure ~~primary~~to ~~regulatory~~comply ~~environment~~with inthe ~~Europe~~conditions isof ~~that~~approval ofcan ~~the~~result ~~European~~in ~~Union~~material ~~(“EU”)~~adverse enforcement action, ~~which~~including ~~consists~~the ofloss 27or ~~member~~withdrawal ~~states~~of ~~encompassing~~the ~~nearly~~approvals. ~~all~~Referenced in the ~~major~~FDA ~~countries~~Guidance, inafter ~~Europe.~~a ~~Additional~~device ~~countries~~achieves ~~that~~initial ~~are~~PMA ~~not~~approval, ~~part~~any ofadditional significant modifications to the EUmanufacturing process, ~~but~~labeling, ~~are~~use ~~part~~and design of ~~the~~a ~~European~~device ~~Economic~~requires ~~Area~~a ~~(“EEA”),~~PMA supplement to be submitted and ~~other~~approved ~~countries,~~through ~~such~~the aspremarket ~~Switzerland,~~approval ~~have~~process. ~~voluntarily~~Premarket ~~adopted~~approval ~~laws~~supplements ~~and~~often ~~regulations~~require ~~that~~submission ~~mirror~~of ~~those~~the same type of information as a PMA except that the EUsupplement ~~with~~is ~~respect~~limited to ~~medical~~information ~~devices.~~needed ~~The~~to EUsupport ~~has~~any ~~adopted~~changes ~~Directive~~from ~~90/385/EEC~~the asdevice ~~amended~~covered by ~~2007/47/EC~~the ~~for~~original ~~active~~PMA. ~~implantable~~In ~~medical~~addition, ~~devices~~holders ~~and~~of ~~numerous~~an ~~standards~~approved ~~that~~PMA ~~govern~~are ~~and~~required ~~harmonize~~to submit annual reports to the ~~national~~FDA ~~laws~~that ~~and~~include ~~standards~~relevant ~~regulating~~information on the ~~design,~~continued ~~manufacture,~~use ~~clinical~~of ~~trials~~the device. In September 2018, ~~labeling~~ReShape ~~and~~Lifesciences ~~adverse~~made ~~event~~a ~~reporting~~financial ~~for~~decision ~~medical~~to ~~devices~~stop ~~that~~the ~~are~~manufacturing ~~marketed~~and commercializing the vBloc product line in ~~member~~the ~~states~~US. ~~Medical~~This ~~devices~~business ~~that~~decision ~~comply~~was ~~with~~not ~~the~~related ~~requirements~~to of the ~~national~~safety ~~law~~or efficacy of the ~~member~~device. ~~state~~On inJanuary 27, ~~which~~2021, ~~their~~FDA ~~Notified~~accepted ~~Body~~a isPMA ~~located~~amendment ~~will~~to beformally ~~entitled~~withdraw tothe ~~bear~~vBloc CEPMA. ~~marking~~On February 2, ~~indicating~~2021, ~~that~~FDA accepted the ~~device~~PMA ~~conforms~~amendment tofor ~~applicable~~ReCharge ~~regulatory~~Post ~~requirements,~~Approval Study closure and the study status is marked “Completed” on the FDA Post-Approval Studies webpage. On March 4, ~~accordingly~~2021, ~~can~~FDA beaccepted ~~commercially~~the ~~marketed~~PMA ~~within~~amendment ~~the~~for EUReNew Post Approval Study termination and ~~other~~the ~~countries~~study ~~that~~status ~~recognize~~is ~~this~~marked ~~mark~~“Terminated” ~~for~~on ~~regulatory~~the ~~purposes.~~FDA Post-Approval Studies webpage.

The ~~Lap-Band~~ReShape ~~System~~Vest ~~was CE marked in 1997. The method of assessing conformity~~ with ~~applicable~~weight ~~regulatory~~loss ~~requirements~~indication ~~varies~~will ~~depending~~be onconsidered ~~the class of the device, but for our Lap-Band System, the method involved~~ a ~~combination~~Class ofIII ~~self-assessment~~Long ~~and~~Term ~~issuance~~Implantable ofproduct ~~declaration of conformity~~ by the ~~manufacturer~~FDA ofrequiring the ~~safety~~PMA ~~and~~path. ~~performance~~A ofpivotal ~~the~~trial ~~device,~~for ~~and~~the aReShape ~~third-party~~Vest ~~assessment~~will bylikely ainclude ~~Notified~~approximately ~~Body~~250 ofimplanted ~~the~~patients ~~design~~monitored ofup ~~the~~to ~~device~~three ~~and of our quality system~~years. AOther ~~Notified~~implantable ~~Body~~devices isfor ~~a private commercial entity that is designated by~~ the ~~national~~treatment ~~government~~ of aobesity ~~member~~relied ~~state~~on astwelve-month ~~being~~endpoints ~~competent~~for tothe ~~make~~PMA ~~independent~~submission ~~judgments about whether a product complies~~ with ~~applicable~~annual ~~regulatory~~follow-up ~~requirements.~~visits ~~The~~up ~~assessment~~to ~~included,~~five ~~among~~years ~~other~~and ~~things,~~we aexpect ~~clinical evaluation of~~ the ~~conformity~~pivotal oftrial for the ~~device~~ReShape ~~with~~Vest ~~applicable~~to ~~regulatory~~be ~~requirements~~similar. WeA ~~use~~U.S. ~~BSI~~pivotal astrial ~~the~~requires ~~Notified~~FDA ~~Body~~Investigational ~~for~~Device ~~our~~Exemption CE(“IDE”) ~~marking~~submission ~~approval~~and ~~process~~approval.

~~Continued~~Clinical ~~compliance~~Trials with CE marking requirements is enforced through periodic facility inspections by the Notified Body, which may be unannounced. Because we rely on contract manufacturing sites and service providers, these additional sites may also be subject to these Notified Body inspections.

10 A clinical trial is almost always required to support a PMA or certain 510(K) submissions. Clinical trials for a “significant risk” device such as ours require submission to the FDA of an application for an IDE for clinical studies to be conducted within the United States. The IDE application must be supported by appropriate data, such as animal and

~~Table of Contents~~ 10

~~Patient~~Table ~~Privacy~~of ~~Laws~~ Contents

~~United~~laboratory ~~States~~testing ~~and~~results, ~~various~~showing ~~international~~that ~~laws~~it ~~have~~is ~~been~~safe ~~evolving~~ to ~~protect~~test the ~~confidentiality~~device ofin ~~certain~~humans ~~patient~~and ~~health~~that ~~information,~~the ~~including~~testing ~~patient~~protocol ~~medical~~is ~~records~~scientifically sound. ~~These~~In ~~laws restrict~~ the ~~use~~United ~~and~~States, ~~disclosure~~a ofclinical ~~certain~~trial ~~patient~~for ~~health~~a ~~information.~~significant ~~Enforcement~~risk ~~actions,~~device ~~including~~may ~~financial~~begin ~~penalties,~~once ~~related~~the toIDE ~~patient~~application ~~privacy~~is ~~issues~~approved ~~are~~by ~~globally~~the ~~increasing.~~FDA ~~The~~and ~~management~~by ofthe ~~patient~~Institutional ~~data~~Review ~~may~~Boards ~~have~~(“IRBs”) anoverseeing ~~impact~~the ~~on certain~~ clinical ~~research~~trial ~~activities~~at ~~and~~the ~~product~~various ~~design~~investigational ~~considerations~~sites.

~~Employees~~Clinical trials require extensive recordkeeping and detailed reporting. Our clinical trials must be conducted under the oversight of an IRB for each participating clinical trial site and in accordance with applicable regulations and policies including, but not limited to, the FDA’s good clinical practice IDE requirements. ReShape Lifesciences, the trial Data Safety Monitoring Board, the FDA or the IRB for each site at which a clinical trial is being performed may suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits.

AsPervasive ofand ~~December~~Continuing ~~31, 2019, we had 38 employees, all of which were full-time. All of these employees are located in the~~ U.S. Regulation

~~From~~Numerous ~~time~~regulatory torequirements ~~time we also employ independent contractors, consultants and temporary employees to support our operations~~apply. ~~None~~These ~~of our employees are subject to collective bargaining agreements. We have never experienced a work stoppage and believe that our relations with our employees are good.~~ include:

~~Information~~● ~~About~~Quality ~~our~~System ~~Executive~~Regulation, ~~Officers~~which requires manufacturers to follow design, testing, control, documentation, complaint handling and other quality assurance procedures during the design and manufacturing processes;

~~The~~● ~~following~~regulations ~~table~~which ~~sets~~govern ~~forth~~product ~~information~~labels ~~regarding~~and ~~our~~labeling, ~~executive~~prohibit ~~officers~~the aspromotion of ~~March~~products 1,for ~~2020:~~ unapproved or “off-label” uses and impose other restrictions on labeling and promotional activities;

The following table sets forth information regarding our executive officers, including their ages, as of December 31, 2018:
Name	Age	Position
Barton P. Bandy	58	President and Chief Executive Officer
Thomas Stankovich	59	Chief Financial Officer

●

medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur;

~~Barton~~● P.notices Bandy has served as our President and Chief Executive Officer since April 1, 2019. Mr. Bandy has extensive leadership experience in health care and specifically in the obesity and bariatric space. Most recently, Mr. Bandy was President and Chief Executive Officer of ~~BroadSpot~~correction ~~Imaging~~or ~~Corporation,~~removal a developer of medical devices for eye care, since April 2017. From April 2013 to August 2016, Mr. Bandy was President of Wellness at Alphaeon Corporation, where he was responsible for business development, commercial activities, strategy and ~~acquisition~~recall ~~integration. He previously spent 10 years as the senior executive leading the Inamed and Allergan Health Divisions through the launch, growth and transition of the Lap-Band.~~ regulations;

~~Thomas~~● ~~Stankovich~~periodic ~~has~~reporting ~~served~~of asprogress ~~our~~related ~~Chief~~to ~~Financial~~clinical ~~Officer since October 30~~trials, ~~2019.~~post ~~Mr.~~approval ~~Stankovich~~studies ~~has~~required ~~extensive leadership experiences~~ as ~~the~~conditions ~~CFO for multiple public and private healthcare companies. Mr. Stankovich has spent the past nine years as the Global Senior Vice President and Chief Financial Officer~~ of MPPMA ~~Biomedicals,~~approval ~~a life science~~ and ~~molecular~~relevant ~~biology-diagnostics~~changes ~~company. Prior~~ to MPinformation ~~Biomedicals,~~contained ~~Mr.~~within ~~Stankovich served as Chief Financial Officer at Response Genetics where he successfully led~~ the ~~company~~PMA ~~through~~approval; their initial public offering. Additionally, Mr. Stankovich served as Chief Financial Officer for Ribapham Inc., where he also led the company through their initial public offering, which at the time became the second largest ever initial public offering in the biotechnology sector. Mr. Stankovich also held the Chief Financial Officer position at ICN International which later changed its name to Valeant Pharmaceuticals. and

~~Our~~● ~~Corporate~~reporting ~~Information~~of transfers of value and payments to physicians and teaching hospitals.

WeAdvertising ~~were~~and ~~originally~~promotion ~~incorporated~~of inmedical ~~the~~devices ~~state~~are ofalso ~~Minnesota~~regulated inby ~~December~~the ~~2002~~Federal ~~and~~Trade ~~reincorporated~~Commission inand ~~the~~by state ofregulatory ~~Delaware~~and inenforcement ~~July 2004~~authorities. ~~In 2017~~Recently, wesome ~~changed~~promotional ~~our~~activities ~~name~~for ~~from~~FDA-regulated ~~EnteroMedics~~products ~~Inc.~~have toresulted ~~ReShape~~in ~~Lifesciences~~enforcement ~~Inc.~~actions ~~Our~~brought ~~shares~~under ofhealthcare ~~common~~reimbursement ~~stock~~laws ~~trade~~and onconsumer ~~the~~protection ~~OTCQB~~statutes. ~~Market~~In addition, under the ~~symbol~~federal ~~RSLS~~Lanham Act, competitors and others can initiate litigation relating to advertising claims.

WeCompliance ~~file reports and other information~~ with ~~the~~regulatory ~~Securities~~requirements ~~and~~is ~~Exchange~~enforced ~~Commission~~through ~~(“SEC”)~~periodic ~~including~~facility ~~annual~~inspections ~~reports~~by onthe ~~Form 10-K~~FDA, ~~quarterly~~which ~~reports~~may onbe ~~Form~~unannounced. ~~10-Q,~~Because ~~current~~we ~~reports~~rely on ~~Form~~contract ~~8-K~~manufacturing ~~and~~sites ~~proxy or information statements. Those reports~~ and ~~statements~~service ~~as well as all amendments to those documents filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934~~providers, asthese ~~amended~~additional ~~(1)~~sites are ~~available~~also atsubject ~~the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549, (2) may be obtained by sending an electronic message~~ to ~~the~~these ~~SEC~~FDA ~~at publicinfo@sec~~inspections.~~gov~~ orFailure ~~by sending a fax~~ to ~~the~~comply ~~SEC~~with atapplicable ~~1-202-777-1027,~~regulatory ~~(3)~~requirements ~~are~~can ~~available~~result atin ~~the~~enforcement ~~SEC’s internet site (http://www.sec.gov)~~action, which ~~contains~~may ~~reports,~~include ~~proxy~~any ~~and~~of ~~information statements and other information regarding issuers that file electronically with~~ the ~~SEC~~following ~~and~~sanctions: ~~(4) are available free of charge through our website as soon as~~

11 ● warning letters or untitled letters;

~~Table~~● offines, ~~Contents~~ injunction and civil penalties;

~~reasonably~~● ~~practicable~~recall ~~after electronic filing with,~~ or ~~furnishing~~seizure ~~to, the SEC. You may obtain information on the operation~~ of ~~the~~our ~~Public Reference Room by calling the SEC at 1-800-SEC-0330.~~ products;

~~Our~~● ~~principal~~customer ~~executive offices are located at 1001 Calle Amanecer~~notification, ~~San~~or ~~Clemente,~~orders ~~California~~for ~~92673~~repair, ~~and~~replacement ~~our telephone number is (949) 429-6680. Our website address is www.reshapelifesciences.com. The information on,~~ or ~~that may be accessed through, our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered a part of this Annual Report on Form 10-K.~~ refund;

~~ITEM 1A. RISK~~● ~~FACTORS~~ operating restrictions, partial suspension or total shutdown of production or clinical trials;

~~RISK~~● ~~FACTORS~~ refusing our request for premarket approval of new products;

~~Risks~~● ~~Related~~withdrawing topremarket ~~Our~~approvals ~~Business~~that ~~and~~are ~~Industry~~ already granted; and

~~Our acquisition of the assets related to the Lap-Band System from Apollo Endosurgery, Inc. in December 2018 could adversely affect our operations, financial results and financial condition.~~ 11

InTable ~~December 2018, we acquired substantially all~~ of the assets exclusively related to Apollo Endosurgery, Inc.’s Lap-Band product line and Apollo acquired from us substantially all of the assets exclusively related to our ReShape Balloon product line. In addition, we agreed to pay Apollo $17.0 million in cash, of which $10.0 million was paid at the closing of the transaction, $2.0 million was paid 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. Contents

A● ~~successful~~criminal ~~acquisition depends on our ability to identify, negotiate, complete and integrate such acquisition and to obtain any necessary financing~~prosecution. ~~With respect to our acquisition of the Lap-Band product line and any future acquisitions, we may experience:~~

·International ~~difficulties~~Regulations ~~in integrating commercial organizations;~~

·International ~~difficulties~~sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or ~~delays~~shorter than that required for FDA approval/clearance, and the requirements may differ. The primary regulatory environment in ~~realizing~~Europe is that of the ~~anticipated~~European ~~benefits~~Union (“EU”), which consists of 27 member states encompassing nearly all the ~~acquisition;~~major countries in Europe. Additional countries that are not part of the EU, but are part of the European Economic Area (“EEA”), and other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the EU with respect to medical devices. The EU has adopted Directive 90/385/EEC as amended by 2007/47/EC for active implantable medical devices and numerous standards that govern and harmonize the national laws and standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices that are marketed in member states. Medical devices that comply with the requirements of the national law of the member state in which their Notified Body is located will be entitled to bear CE marking, indicating that the device conforms to applicable regulatory requirements, and, accordingly, can be commercially marketed within the EU and other countries that recognize this mark for regulatory purposes.

·The ~~diversion~~Lap-Band system was CE marked in 1997. The method of assessing conformity with applicable regulatory requirements varies depending on the class of the device, but for our ~~management’s~~Lap-Band ~~time~~system, the method involved a combination issuance of declaration of conformity by the manufacturer of the safety and ~~attention~~performance ~~from~~of the device, and a third-party assessment by a Notified Body of the design of the device and of our quality system. A Notified Body is a private commercial entity that is designated by the national government of a member state as being competent to make independent judgments about whether a product complies with applicable regulatory requirements. The assessment included, among other ~~business~~things, ~~concerns;~~a clinical evaluation of the conformity of the device with applicable regulatory requirements. We use BSI as the Notified Body for our CE marking approval process.

·Continued ~~challenges~~compliance ~~due~~with toCE ~~limited~~marking orrequirements nois ~~direct~~enforced ~~prior~~through ~~experience~~periodic infacility ~~new~~inspections ~~markets~~by orthe ~~countries~~Notified Body, which may be unannounced. Because we rely on contract manufacturing sites and service providers, these additional sites may ~~enter;~~also be subject to these Notified Body inspections.

·Since ~~inability~~the beginning of 2020, the COVID-19 pandemic slowed most of the economy in the European Union. This resulted in many different challenges ranging from notified bodies that were no longer able to ~~successfully~~perform ~~develop~~audits, ~~new~~to ~~products~~manufacturers ~~and~~that ~~services~~were forced to increase their production beyond their existing capabilities or forced to stop their production all together. The original date of application of Regulation (EU) 2017/745 on amedical ~~timely~~device ~~basis~~(MDR) ~~that~~was ~~address~~May ~~our~~26, ~~new~~2020. ~~market~~Due ~~opportunities~~to ~~post~~COVID-~~acquisition;~~19 pandemic the date of application for MDR was postponed to May 26, 2021. The Company will continue to implement changes across our quality systems to become compliant with the new MDR.

·Patient ~~inability~~Privacy toLaws ~~compete effectively against companies already serving the broader market opportunities expected to be available to us post-acquisition;~~

·United ~~unanticipated~~States ~~costs~~and various international laws have been evolving to protect the confidentiality of certain patient health information, including patient medical records. These laws restrict the use and ~~other~~disclosure ~~contingent~~of ~~liabilities;~~certain patient health information. Enforcement actions, including financial penalties, related to patient privacy issues are globally increasing. The management of patient data may have an impact on certain clinical research activities and product design considerations.

·Employees any unforeseen compliance risks and accompanying financial and reputational exposure or loss not uncovered in the due diligence process and which are imputed to our company, such as compliance with federal laws and regulations, the advertising and promotion regulations under the federal Food, Drug and Cosmetic Act, the Anti-kickback Statute, the False Claims Act, the Physician Sunshine Payments Act and other applicable laws.

WeAs ~~have~~of ~~invested~~December 31, ~~and expect to continue to invest~~2020, ~~significant~~we ~~cash~~had ~~and~~37 ~~other resources in connection with our acquisition of the Lap-Band product line~~employees, ~~including~~all ~~our obligation to pay the remaining $5.0 million~~ of ~~the~~which ~~purchase~~were ~~price~~full-time. ~~Our~~All ~~efforts to successfully integrate and continue the commercialization~~ of ~~the~~these ~~Lap-Band~~employees ~~product~~are ~~line~~located ~~will require significant cash expenditures. There can be no assurance that we will be successful~~ in ~~our efforts. Should we be unable to obtain adequate financing or generate sufficient revenue in~~ the ~~future, our business, results of operations, liquidity and financial condition could be materially and adversely harmed~~U. S.

12 From time to time we also employ independent contractors, consultants and temporary employees to support our operations. None of our employees are subject to collective bargaining agreements. We have never experienced a work stoppage and believe that our relations with our employees are good.

~~Table of Contents~~ 12

IfTable ~~we do not achieve the contemplated benefits~~ of ~~our acquisition of the Lap-Band product line, our business and financial condition may be materially impaired.~~ Contents

WeInformation ~~may~~About ~~not achieve the desired benefits from~~ our ~~acquisition~~Executive ofOfficers the Lap-Band product line. For any of the reasons described above and elsewhere in this report and even if we are able to successfully integrate the Lap-Band product line within our company, we may not be able to realize the revenue and other growth that we anticipate from the acquisition in the time frame that we currently expect, and the costs of achieving these benefits may be higher than what we currently expect, because of a number of risks, including, but not limited to:

·The ~~the~~following ~~possibility~~table ~~that~~sets ~~the~~forth ~~acquisition~~information ~~may~~regarding ~~not further~~ our ~~business~~executive ~~strategy~~officers as weof ~~expected;~~March ~~and~~1, 2021:

· the possibility that the revenue from the Lap-Band product line may be lower than we expected.

Name	Age	Position
Barton P. Bandy	60	President and Chief Executive Officer
Thomas Stankovich	60	Senior Vice President and Chief Financial Officer

~~As a result of these risks, we may not achieve the anticipated strategic and financial benefits of the Lap-Band acquisition.~~

IfBarton weP. ~~are~~Bandy ~~unable~~has toserved ~~either~~as ~~substantially~~our ~~improve~~President ~~our~~and ~~operating~~Chief ~~results~~Executive orOfficer ~~obtain~~since ~~additional~~April ~~financing~~1, 2019. Mr. Bandy has extensive leadership experience in health care and specifically in the ~~future~~obesity and bariatric space. Most recently, weMr. Bandy ~~will~~was bePresident ~~unable~~and Chief Executive Officer of BroadSpot Imaging Corporation, a developer of medical devices for eye care, since April 2017. From April 2013 to ~~continue~~August 2016, Mr. Bandy was President of Wellness at Alphaeon Corporation, where he was responsible for business development, commercial activities, strategy and acquisition integration. He previously spent 10 years as athe ~~going~~senior ~~concern~~executive leading the Inamed and Allergan Health Divisions through the launch, growth and transition of the Lap-Band.

~~Our~~Thomas ~~independent~~Stankovich ~~registered~~has ~~public~~served ~~accounting~~as ~~firm’s~~our ~~report~~Chief onFinancial ~~our~~Officer ~~December~~since 31October 30, 2019. ~~audited~~Mr. ~~financial~~Stankovich ~~statements~~has ~~includes~~extensive anleadership ~~explanatory~~experiences ~~paragraph~~as ~~referring~~the toCFO ~~our~~for ~~ability~~multiple topublic ~~continue~~and asprivate ahealthcare ~~going~~companies. ~~concern~~Mr. ~~The~~Stankovich ~~proceeds~~has ~~from~~spent ~~any~~the ~~future~~past ~~financings~~nine ~~that~~years weas ~~may~~the beGlobal ~~able~~Senior toVice ~~obtain,~~President ifand ~~any,~~Chief ~~together~~Financial ~~with~~Officer ~~our~~of ~~other~~MP ~~available cash~~Biomedicals, ~~may~~a ~~not~~life bescience ~~sufficient to fund our operating expenses, capital expenditures~~ and ~~other~~molecular ~~cash~~biology-diagnostics ~~requirements~~company. ~~Should~~Prior ~~we be unable~~ to ~~obtain~~MP ~~adequate~~Biomedicals, ~~financing~~Mr. orStankovich ~~generate~~served ~~sufficient~~as ~~revenue~~Chief inFinancial ~~the~~Officer ~~future,~~at ~~our~~Response ~~business,~~Genetics ~~result~~where ofhe ~~operations,~~successfully ~~liquidity~~led ~~and~~the ~~financial~~company ~~condition~~through ~~would~~their beinitial ~~materially~~public ~~and~~offering. ~~adversely harmed~~Additionally, ~~and~~Mr. weStankovich ~~would~~served beas ~~unable~~Chief toFinancial ~~continue~~Officer asfor aRibapham ~~going concern~~Inc., ~~These~~where ~~events~~he ~~and~~also ~~circumstances~~led ~~could~~the ~~have~~company athrough ~~material~~their ~~adverse~~initial ~~effect~~public onoffering, ~~our~~which ~~ability~~at tothe ~~raise~~time ~~additional~~became ~~capital and on~~ the ~~market~~second ~~value~~largest ofever ~~our~~initial ~~common~~public ~~stock~~offering ~~and~~in the ~~warrants~~biotechnology ~~offered~~sector. ~~thereby~~Mr. ~~Moreover,~~Stankovich ~~should~~also weheld ~~experience~~the aChief ~~cash~~Financial ~~shortage~~Officer ~~that~~position ~~requires~~at usICN toInternational ~~curtail~~which orlater ~~cease~~changed ~~our~~its ~~operations,~~name ~~or should we be unable~~ to ~~continue~~Valeant ~~as a going concern, you could lose all or part of your investments in our securities~~Pharmaceuticals.

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. Our ~~history~~Corporate ofInformation 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. As of December 31, 2019, we had $3.0 million of cash and cash equivalents. We expect our current cash and cash equivalents to fund our operations through the short-term.

~~Our~~We ~~anticipated~~were ~~operations~~originally ~~include~~incorporated ~~plans~~in ~~to (i) integrate~~ the ~~sales~~state ~~and operations~~ of ~~the~~Minnesota ~~Lap-Band~~in ~~product~~December ~~line~~2002 asand ~~well~~reincorporated asin tothe ~~obtain~~state ~~cost~~of ~~savings~~Delaware ~~synergies~~in ~~(ii) continue~~July ~~development~~2004. ofIn ~~the ReShape Vest~~2017, ~~(iii)~~we ~~seek~~changed ~~opportunities to leverage~~ our ~~intellectual~~name ~~property~~from ~~portfolio~~EnteroMedics ~~and~~Inc. ~~custom development services~~ to ~~provide~~ReShape ~~third-party~~Lifesciences 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 careInc. WeOur ~~believe~~shares ~~that we have the flexibility to manage the growth~~ of ~~our~~common ~~expenditures~~stock ~~and~~trade ~~operations depending~~ on the ~~amount~~OTCQB ofMarket ~~available~~under 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~~symbol ~~from this offering to support our operations~~RSLS.

~~Our ReShape~~We ~~Vest~~file ~~product~~reports isand inother information with the ~~early~~Securities ~~stages~~and ofExchange ~~clinical~~Commission ~~evaluation~~(“SEC”) including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy or information statements. IfThose ~~the~~reports ~~clinical~~and ~~trial~~statements isas ~~not~~well ~~successfully~~as ~~completed~~all amendments to those documents filed or ~~any~~furnished ~~required~~pursuant ~~regulatory~~to ~~approvals~~Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (1) are ~~not~~available at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549, (2) may be obtained by sending an electronic message to the SEC at publicinfo@sec.gov or by sending a fax to the SEC at 1-202-777-1027, (3) are available at the ~~ReShape~~SEC’s ~~Vest~~internet ~~may~~site ~~not~~(http://www.sec.gov), bewhich ~~commercialized~~contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC and (4) are available free of charge through our ~~business~~website ~~prospects~~as ~~may~~soon ~~suffer~~as reasonably practicable after electronic filing with, or furnishing to, the SEC.

Our ~~ReShape~~principal ~~Vest~~executive ~~product~~offices isare inlocated ~~the~~at ~~early~~1001 ~~stages~~Calle ofAmanecer, ~~development~~San ~~and~~Clemente, isCalifornia ~~currently~~92673, ~~in the~~and ~~early~~our ~~stages~~telephone ofnumber ~~clinical~~is ~~evaluation~~(949) 429-6680. Our ~~ability~~website toaddress ~~market~~is ~~the~~www.reshapelifesciences.com. ~~ReShape~~The ~~Vest~~information inon, ~~the~~or ~~United~~that ~~States~~may ~~and~~be ~~abroad~~accessed ~~depends~~through, ~~upon~~ our ~~ability~~website tois ~~demonstrate the safety and effectiveness of the product with clinical data to support our requests for regulatory approval. The ReShape Vest may~~ not beincorporated ~~found~~by toreference beinto ~~safe~~this ~~and,~~Annual ~~where~~Report ~~required,~~on ~~effective~~Form in10-K ~~clinical trials~~ and ~~may~~should not ~~ultimately~~ be ~~approved~~considered ~~for~~a ~~marketing~~part byof ~~U.S.~~this orAnnual ~~foreign~~Report ~~regulatory authorities, which would have a negative impact~~ on ~~our~~Form ~~net sales~~10-K.

~~Table of Contents~~ 13

~~There~~Table is no assurance that we will be successful in achieving the desired results in our anticipated clinical trials for the ReShape Vest or, if we do, that the FDA or other regulatory agencies will approve the product for sale without the need for additional clinical trial data to demonstrate safety and efficacy. We continually evaluate the potential financial benefits and costs of clinical trials and the products being evaluated in them. If we determine that the costs associated with obtaining regulatory approval of a product exceed the potential financial benefits of that product or if the projected development timeline is inconsistent with our investment horizon, we may choose to stop a clinical trial and/or the development of a product. Contents

~~The~~ITEM ~~shares~~1A. ofRISK series C convertible preferred stock issued in connection with our acquisition of ReShape Medical have certain rights and preferences senior to our common stock, including a liquidation preference that is senior to our common stock. FACTORS

~~There~~Summary ~~are currently 95,388 shares~~ of ~~our~~risk series C convertible preferred stock outstanding, which are convertible into 38 shares of our common stock. We issued the shares of our series C convertible preferred stock in connection with our acquisition of ReShape Medical. The series C convertible preferred stock has a liquidation preference of $274.88 per share, or $692,691.05 per underlying share of common stock, or approximately $26.2 million in the aggregate. Holders of the series C convertible preferred stock have the right to convert their shares into shares of common stock instead of receiving the liquidation preference. In general, the series C convertible preferred stock is entitled to receive dividends (on an as-if-converted-to-common stock basis) actually paid on shares of common stock when, as and if such dividends are paid on shares of common stock. No other dividends will be paid on shares of series C convertible preferred stock. While the series C convertible preferred stock generally does not have voting rights, as long as any shares of series C convertible preferred stock remain outstanding, we cannot, without the affirmative vote of holders of a majority of the then-outstanding shares of series C convertible preferred stock, (a) alter or change adversely the powers, preferences or rights given to the series C convertible preferred stock (including by the designation, authorization, or issuance of any shares of preferred stock that purports to have equal rights with, or be senior in rights or preferences to, the series C convertible preferred stock), (b) alter or amend the series C convertible preferred stock certificate of designation, (c) amend our certificate of incorporation or other charter documents in any manner that adversely affects any rights of the holders of series C convertible preferred stock, (d) increase the number of authorized shares of series C convertible preferred stock or (e) enter into any agreement with respect to any of the foregoing. Factors

WeThe ~~are~~following is a ~~medical~~summary ~~device~~of ~~company~~the ~~with~~principal arisks ~~limited~~and ~~history~~uncertainties that could materially adversely affect our business, results of operations, ~~and~~financial ~~sales~~condition, cash flows, prospects and/or wethe ~~cannot~~price ~~assure~~of ~~you~~our ~~that~~outstanding wesecurities, ~~will~~and ~~ever~~make ~~generate~~an ~~substantial~~investment ~~revenue~~in orour besecurities ~~profitable~~speculative or risky. You should read this summary together with the more detailed description of each risk factor contained below.

WeRisks ~~are~~Related ~~a medical device company with a limited operating history upon which you can evaluate our business. The success of our business will depend on our ability~~ to generate increased sales and control costs, as well as our ability to obtain additional regulatory approvals needed to market new versions of our Lap-Band system or regulatory approvals needed to market our ReShape Vest and any other products we may develop in the future, all of which we may be unable to do. If we are unable to successfully market our Lap-Band system for its indicated use or develop and commercialize the ReShape Vest, we may never become profitable and may have to cease operations as a result. Our ~~lack~~Proposed ofMerger awith ~~significant operating history also limits your ability to make a comparative evaluation of us, our products and our prospects.~~ Obalon

~~During~~● Fluctuations in the ~~second~~market ~~quarter~~price of ~~2019~~Obalon weShares ~~recorded~~will aaffect ~~non-cash~~the ~~indefinite-lived~~value ~~intangible assets impairment loss, which significantly impacted our results~~ of ~~operations,~~the ~~and~~Merger ~~we may be exposed to additional impairment losses that could be material~~consideration.

We● ~~conduct~~The ~~our~~Merger ~~annual~~may ~~indefinite-lived~~not ~~intangible~~be ~~assets~~consummated ~~impairment~~unless ~~analysis~~important ~~during~~conditions ~~the~~are ~~fourth~~satisfied ~~quarter of each year~~ or ~~when~~waived ~~circumstances~~and ~~suggest~~there ~~that~~can ~~an indicator for impairment may~~ be ~~present.~~no ~~During~~assurance ~~the~~that ~~second quarter of 2019, we performed a qualitative impairment analysis of~~ the ~~in-process~~Merger ~~research~~will ~~and~~be ~~development (“IPR&D”)~~consummated. Due to delays in the clinical trials experienced during the first six months of 2019, we revised its expectations of when revenues would commence for the ReShape Vest, thus reducing the projected near-term future net cash flows related to the ReShape Vest. As a result, we recorded an impairment charge of approximately $6.6 million of the excess of the carrying value over the estimated fair value. In the future, we may have additional indicators of potential impairment requiring us to record an impairment loss related to our remaining indefinite-lived and finite-lived intangible assets, which could also have a material adverse effect on our results of operations.

14 ● There can be no assurance that the Obalon Shares to be issued in the Merger will be on the Nasdaq Stock Market or, if listed, that the combined company will be able to comply with the continued listing standards.

~~Table~~● The Merger Agreement contains provisions that could discourage a potential competing acquirer of ~~Contents~~ either ReShape or Obalon.

We● ~~will~~The ~~need~~pendency ~~substantial~~of ~~additional~~the ~~funding~~Merger ~~and~~could ~~may~~materially beadversely ~~unable~~affect tothe ~~raise capital when needed~~business, ~~which~~financial ~~would force us to delay~~condition, ~~reduce~~results orof ~~eliminate~~operations ~~our product development programs~~ or ~~liquidate~~cash ~~some~~flows ~~or all~~ of ~~our~~ReShape ~~assets.~~or Obalon.

~~Our~~● operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts on the development and commercialization of our products and on research and development, including conducting current and future clinical trials for our Lap-Band system, ReShape ~~Vest~~directors ~~(if approved for sale)~~ and ~~subsequent~~executive ~~versions~~officers ~~of our products. For the years ended December 31, 2019~~ and ~~2018,~~Obalon ~~net~~directors ~~cash used in operating activities from continuing operations was $14.2 million~~ and ~~$20.1~~executive ~~million,~~officers ~~respectively,~~have ~~and~~interests ~~net cash used~~ in ~~operating~~the ~~activities~~Merger ~~(including discontinued operations) was $17.6 million and $27.5 million, respectively. We expect~~ that ~~our~~may ~~cash used in operations will continue to~~ be ~~significant~~different ~~in the upcoming years~~from, ~~and~~or ~~that~~in weaddition ~~will need~~ to ~~raise additional capital to commercialize our Lap-Band system~~, tothe ~~develop~~interests ~~the~~of ReShape ~~Vest,~~stockholders ~~to continue our research~~ and ~~development~~Obalon ~~programs, and to fund our ongoing operations~~stockholders.

~~Our~~● ~~future~~Failure ~~funding~~to ~~requirements~~consummate ~~will~~the ~~depend~~Merger oncould ~~many~~negatively ~~factors~~impact respective future stock prices, ~~including:~~operations and financial results of ReShape and Obalon.

·● ~~the~~Financial ~~cost~~projections ~~and~~regarding ~~timing~~ReShape ofmay ~~establishing~~not ~~sales,~~prove ~~marketing and distribution capabilities;~~accurate.

·● ~~the~~The ~~cost~~Merger ofmay ~~establishing~~disrupt ~~clinical~~attention ~~and commercial supplies~~ of ~~our Lap-Band system,~~ ReShape ~~Vest~~management and ~~any~~Obalon ~~products~~management ~~that~~from weongoing ~~may~~business ~~develop;~~operations.

·● ~~the~~The ~~rate~~market ofprice ~~market~~for ~~acceptance~~Obalon Shares following completion of ~~our~~the ~~Lap-Band~~Merger ~~system,~~will ~~ReShape~~continue ~~Vest~~to fluctuate and ~~any~~may ~~other~~be ~~product~~affected ~~candidates;~~by factors different from those that historically have affected Obalon Shares and ReShape Shares.

·Risks ~~the~~Related ~~cost~~to ofOur ~~filing~~Business and ~~prosecuting patent applications and defending and enforcing our patent and other intellectual property rights;~~Industry

·● ~~the~~We ~~cost~~may ofbe ~~defending,~~unable into ~~litigation~~attract orand ~~otherwise,~~retain ~~any~~management ~~claims~~and ~~that~~other personnel we ~~infringe~~need ~~third-party~~to ~~patent or other intellectual property rights;~~succeed.

·● Our ReShape Vest product is in the ~~effect~~early stages of ~~competing~~clinical ~~products~~evaluation. If the clinical trial is not successfully completed or any required regulatory approvals are not obtained, the ReShape Vest may not be commercialized and ~~market~~our ~~developments;~~business prospects may suffer.

·● ~~the~~The ~~cost~~shares of ~~explanting~~series ~~clinical~~C ~~devices;~~convertible preferred stock issued in connection with our acquisition of ReShape Medical have certain rights and preferences senior to our common stock, including a liquidation preference that is senior to our common stock.

·● ~~the~~We ~~terms~~are ~~and~~a ~~timing~~medical device company with a limited history of ~~any~~operations ~~collaborative~~and sales, ~~licensing~~and orwe ~~other~~cannot ~~arrangements~~assure you that we ~~may~~will ~~establish;~~ever generate substantial revenue or be profitable.

·● ~~any~~During ~~revenue~~the ~~generated~~second byquarter ~~sales~~ of ~~our~~2019 ~~Lap~~we recorded a non-~~Band~~cash ~~system~~indefinite-lived intangible assets impairment loss, ~~ReShape~~which ~~Vest~~significantly orimpacted our ~~future~~results ~~products;~~of operations, and we may be exposed to additional impairment losses that could be material.

·● ~~the~~We ~~scope,~~will ~~rate~~need ofsubstantial ~~progress,~~additional ~~results~~funding and ~~cost~~may ofbe ~~any~~unable ~~clinical~~to ~~trials~~raise ~~and~~capital ~~other~~when ~~research~~needed, ~~and~~which would force us to delay, reduce or eliminate our product development ~~activities;~~programs or liquidate some or all of our assets.

·● ~~the~~We ~~cost~~incur ~~and~~significant ~~timing~~costs as a result of ~~obtaining~~operating ~~any~~as ~~further~~a public company, and our management is required ~~regulatory~~to ~~approvals;~~devote ~~and~~substantial time to compliance initiatives.

·● ~~the~~General ~~extent~~economic ~~to which we invest in products~~ and ~~technologies,~~political ~~although~~conditions wecould ~~currently~~ have noa ~~commitments~~material oradverse ~~agreements~~effect ~~relating~~on toour ~~these types of transactions~~business.

~~Until~~● ~~the~~We ~~time,~~face ifsignificant ~~ever,~~uncertainty ~~when~~in wethe ~~can~~industry ~~generate~~due ~~a sufficient amount of product revenue, we expect~~ to ~~finance~~government ~~our~~healthcare ~~future cash needs through public or private equity offerings, debt financings or corporate collaboration, licensing arrangements and grants, as well as through interest income earned on cash balances~~reform.

~~Additional~~● ~~capital~~We ~~may~~are ~~not~~subject, bedirectly ~~available~~or onindirectly, ~~terms favorable~~ to ~~us,~~United orStates atfederal ~~all.~~and Ifstate wehealthcare ~~raise~~fraud ~~additional~~and ~~funds~~abuse byand ~~issuing~~false ~~equity~~claims ~~securities,~~laws ~~our~~and ~~stockholders may experience dilution~~regulations. ~~Debt~~Prosecutions ~~financing,~~under ifsuch ~~available,~~laws ~~may~~have ~~involve~~increased ~~restrictive covenants or additional security interests~~ in ~~our~~recent ~~assets.~~years ~~Any~~and ~~additional debt or equity financing that~~ we ~~complete~~ may ~~contain~~become ~~terms~~subject ~~that are not favorable~~ to ussuch ~~or our stockholders~~litigation. If we ~~raise~~are ~~additional~~unable ~~funds through collaboration and licensing arrangements with third parties, it may be necessary~~ to ~~relinquish some rights to our technologies or products~~, or ~~grant~~have ~~licenses on terms that are~~ not ~~favorable~~fully tocomplied ~~us.~~with Ifsuch ~~we are unable to raise adequate funds~~laws, we ~~may~~could ~~have~~face tosubstantial ~~delay, reduce the scope of, or eliminate some or all of, our development programs or liquidate some or all of our assets~~penalties.

15 ● Failure to protect our information technology information technology infrastructure against cyber-based attacks, network security breaches, service interruptions or data corruption could materially disrupt our operations and adversely affect our business.

~~Table of Contents~~ 14

WeTable ~~incur significant costs as a result~~ of ~~operating as a public company, and our management is required to devote substantial time to compliance initiatives.~~ Contents

As● aWe ~~public~~operate ~~company,~~in wea ~~incur~~highly ~~significant~~competitive ~~legal,~~industry ~~accounting~~that ~~and~~is ~~other~~subject ~~expenses.~~to Inrapid ~~addition,~~change. ~~the~~If ~~Sarbanes-Oxley~~our ~~Act~~competitors ofare ~~2002~~able ~~(the~~to ~~“Sarbanes-Oxley~~develop ~~Act”),~~and asmarket ~~well~~products asthat ~~rules~~are ~~subsequently~~safer ~~implemented~~or bymore ~~the SEC have imposed various requirements on public companies, including establishment and maintenance of~~ effective ~~disclosure~~than ~~and~~our ~~financial controls and changes in corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover~~products, ~~these~~our ~~rules~~commercial ~~and~~opportunities ~~regulations result in increased legal and financial compliance costs and~~ will ~~make~~be ~~some~~reduced ~~activities~~or ~~more time-consuming and costly~~eliminated.

~~The~~Risks ~~Sarbanes-Oxley~~Associated ~~Act~~with ~~requires,~~Development ~~among other things, that we maintain effective internal controls for financial reporting~~ and ~~disclosure.~~Commercialization ~~In particular, we are required to perform system and process evaluation and testing~~ of ~~our internal controls over financial reporting to allow management to report on~~ the ~~effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes~~Lap-~~Oxley~~Band Act. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. We have incurred and continue to expect to incur significant expense and devote substantial management effort toward ensuring compliance with Section 404. MoreoverSystem, ~~if we do not comply with the requirements of Section 404~~ReShapeCare, orReShape ifVest ~~we identify deficiencies in our internal controls that are deemed to be material weaknesses, the market price of our stock could decline~~ and weDiabetes ~~could~~Bloc-Stim ~~be subject to sanctions or investigations by the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources.~~ Neuromodulation

~~General~~● ~~economic~~Our efforts to increase revenue from our Lap-Band system and ~~political~~ReShapeCare, ~~conditions~~and ~~could~~commercialize ~~have~~the aReShape ~~material~~Vest, ~~adverse~~Diabetes ~~effect~~Bloc-Stim onNeuromodulation and expanded line of bariatric surgical accessories may not succeed or may encounter delays which could significantly harm our ~~business~~ ability to generate revenue.

~~External~~● ~~factors~~We ~~can~~may ~~affect~~not ~~our~~be ~~financial~~able ~~condition.~~to ~~Such~~obtain ~~external~~required ~~factors~~regulatory ~~include~~approvals ~~general~~for ~~domestic~~our ~~and~~ReShape ~~global~~Vest ~~economic conditions, such as interest rates, tax law including tax rate changes,~~ and/or ~~factors~~Diabetes ~~affecting~~Bloc-Stim ~~global~~Neuromodulation ~~economic stability, and the political environment regarding healthcare~~ in ~~general.~~a Wecost-effective ~~cannot~~manner ~~predict~~or toat ~~what~~all, ~~extent~~which ~~the~~could ~~global~~adversely ~~economic~~affect ~~conditions may negatively impact~~ our business. ~~For example, negative conditions in the credit~~ and ~~capital~~operating ~~markets could impair our ability to access the financial markets for working capital and could negatively impact our ability to borrow~~results.

In● ~~addition,~~We ~~the~~depend ~~coronavirus~~on ~~outbreak~~clinical ~~has~~investigators ~~begun~~and toclinical ~~have~~sites ~~indeterminable~~to ~~adverse~~enroll ~~effects~~patients onin ~~general~~our ~~commercial~~clinical ~~activity~~trials, and ~~the~~on ~~world~~other ~~economy.~~third Ifparties ~~the~~to ~~impact~~manage of the ~~coronavirus~~trials ~~outbreak~~and ~~continues~~to ~~for~~perform anrelated ~~extended~~data ~~period,~~collection itand ~~could~~analysis, ~~materially adversely impact our operating~~ and, ~~clinical activities~~ as a result ~~of the impacts on our supply chain~~, ~~our~~we ~~clinical~~may ~~trial~~face ~~sites,~~costs ~~access to patients~~ and ~~additional~~delays ~~regulatory~~that ~~guidance~~are ~~could~~outside ~~be delayed or impacted. Our business and results~~ of ~~operations~~our ~~could be adversely affected to the extent that this coronavirus or any epidemic harms the global economy~~control.

We● ~~face~~Modifications ~~significant~~to ~~uncertainty~~the inLap-Band ~~the~~system ~~industry~~may ~~due~~require toadditional ~~government~~approval ~~healthcare~~from ~~reform.~~regulatory authorities, which may not be obtained or may delay our commercialization efforts.

In● ~~the~~If ~~United~~we ~~States,~~or ~~there~~our ~~have~~suppliers ~~been~~fail ~~and continue~~ to becomply awith ~~number~~ongoing ofregulatory ~~legislative initiatives to contain healthcare costs. The Patient Protection and Affordable Care Act~~requirements, asor ~~amended,~~if ~~(the~~we ~~“Affordable~~experience ~~Care~~unanticipated ~~Act”)~~product ~~as well as any future healthcare reform legislation~~problems, ~~may have a significant impact on~~ our ~~business.~~Lap-Band ~~The impact of the Affordable Care Act on the health care industry is extensive and includes, among other things, the federal government assuming a larger role in the health care~~ system, ~~expanding~~could ~~healthcare~~be ~~coverage~~subject ~~of United States citizens and mandating basic healthcare benefits. The Affordable Care Act contains many provisions designed~~ to ~~generate~~restrictions ~~the~~or ~~revenues~~withdrawal ~~necessary~~from ~~to fund~~ the ~~coverage expansions and to reduce costs of Medicare and Medicaid, including imposing a 2~~market.3% excise tax on domestic sales of many medical devices by manufacturers that began in 2013. A moratorium was placed on the medical device excise tax through 2019. During December of 2019, the medical device excise tax was permanently repealed.

~~Congress~~● isWe ~~considering~~may ~~legislation~~be tounable replace or repeal elements or all of the Affordable Care Act. In addition, there have been recent public announcements by members of Congress and the current presidential administration regarding their plans to ~~repeal~~manage ~~and~~our ~~replace~~growth ~~the Affordable Care Act~~effectively. Further, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the Affordable Care Act to waive, defer, grant exemptions from, or delay the implementation of any provision of the Affordable Care Act that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. At this time, it is not clear whether the Affordable Care Act will be repealed in whole or in part, and, if it is repealed, whether it will be replaced in whole or in part by another plan and what impact those changes will have on

16 ● We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be able to obtain adequate product liability insurance.

~~Table~~Risks ofRelated ~~Contents~~ to Intellectual Property

~~coverage~~● ~~and~~If ~~reimbursement~~we for healthcare items and services covered by plans that were authorized by the Affordable Care Act. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, and also indirectly affect the amounts that private payers are ~~willing~~unable to ~~pay.~~obtain Inor ~~addition,~~maintain ~~any~~intellectual ~~healthcare~~property ~~reforms~~rights ~~enacted~~relating into ~~the future may, like the Affordable Care Act, be phased in over a number of years but, if enacted, could reduce~~ our ~~revenue,~~technology ~~increase~~and ~~our~~neuroblocking ~~costs~~therapy, ~~or require us to revise~~ the ~~ways~~commercial invalue ~~which we conduct business or put us at risk for loss~~ of ~~business. In addition,~~ our ~~results~~technology ~~of operations, financial position~~ and ~~cash~~any ~~flows~~future ~~could~~products will be ~~materially~~ adversely affected ~~by changes under the Affordable Care Act~~ and ~~changes~~our ~~under~~competitive ~~any~~position ~~federal~~will orbe ~~state legislation adopted in the future~~harmed.

We● ~~are~~Many ~~subject,~~of ~~directly~~our orcompetitors ~~indirectly,~~have tosignificant ~~United~~resources ~~States federal~~ and ~~state~~incentives ~~healthcare~~to ~~fraud~~apply ~~and~~for ~~abuse~~ and ~~false~~obtain ~~claims~~intellectual ~~laws~~property ~~and~~rights ~~regulations.~~that ~~Prosecutions~~could ~~under~~limit ~~such~~or ~~laws~~prevent ~~have~~our ~~increased~~ability ~~in recent years and we may become subject~~ to ~~such~~commercialize ~~litigation.~~our Ifcurrent ~~we are unable to,~~ or ~~have~~future ~~not~~products ~~fully~~in ~~complied~~the ~~with~~United ~~such~~States ~~laws,~~or ~~we could face substantial penalties~~abroad.

~~Our~~● ~~operations~~If we are ~~directly,~~unable orto ~~indirectly~~protect ~~through~~the ~~customers,~~confidentiality ~~subject~~of toour ~~various~~proprietary ~~state~~information and ~~federal fraud and abuse laws~~know-how, ~~including, without limitation,~~ the ~~federal~~value ~~Anti-Kickback~~of ~~Statute~~our technology and ~~federal~~products ~~False~~could ~~Claims~~be ~~Act.~~adversely ~~These laws may impact, among other things, our sales, marketing and education programs~~affected.

~~The~~● ~~federal~~Intellectual ~~Anti-Kickback~~property ~~Statute~~litigation ~~prohibits~~is ~~persons~~a ~~from~~common ~~knowingly~~tactic ~~and~~in ~~willfully~~the ~~soliciting,~~medical ~~offering,~~device ~~receiving~~industry orto ~~providing~~gain ~~remuneration,~~competitive ~~directly~~advantage. orIf ~~indirectly,~~we inbecome ~~exchange~~subject ~~for or~~ to ~~induce either the referral of an individual, or the furnishing or arranging for~~ a ~~good or service~~lawsuit, ~~for~~we ~~which payment~~ may be ~~made~~required ~~under~~to aexpend ~~federal~~significant ~~healthcare~~financial ~~program~~and ~~such~~other asresources ~~the Medicare~~ and ~~Medicaid~~our ~~programs. Several courts have interpreted the statute~~management’s ~~intent~~attention ~~requirement~~may tobe ~~mean~~diverted ~~that~~from ifour ~~any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered~~ business~~, the statute has been violated~~. The Anti-Kickback Statute is broad and, despite a series of narrow safe harbors, prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.

~~The~~Risks ~~federal~~Relating ~~False Claims Act prohibits persons from knowingly filing, or causing~~ to beOwnership ~~filed, a false claim to, or the knowing use~~ of ~~false~~Our ~~statements~~Common toStock obtain payment from the federal government. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. The frequency of filing qui tam actions has increased significantly in recent years, causing greater numbers of medical device, pharmaceutical and healthcare companies to have to defend a False Claim Act action. When an entity is determined to have violated the federal False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Various states have also enacted laws modeled after the federal False Claims Act.

We● ~~are~~Our ~~unable~~common tostock ~~predict~~trades ~~whether~~on wean ~~could be subject to actions under any of these laws, or~~ over-the-counter ~~impact of such actions~~market. If we are found to be in violation of any of the laws described above or other applicable state and federal fraud and abuse laws, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from government healthcare reimbursement programs and the curtailment or restructuring of our operations.

~~Failure~~● toOur ~~protect~~common ~~our~~stock ~~information~~may ~~technology~~be ~~information~~deemed ~~technology~~to ~~infrastructure~~be ~~against~~a ~~cyber-based~~“penny ~~attacks,~~stock” ~~network~~and ~~security~~broker-dealers ~~breaches,~~who ~~service~~make ~~interruptions~~a ormarket ~~data~~in ~~corruption~~our ~~could~~stock ~~materially~~may ~~disrupt~~be ~~our~~subject ~~operations~~to ~~and~~additional ~~adversely~~compliance ~~affect our business~~requirements.

● The ~~operation~~trading price of our ~~business~~common ~~depends~~stock onhas ~~our~~been ~~information~~volatile ~~technology systems. We rely on our information technology systems to, among other things, effectively manage sales~~ and ~~marketing~~is ~~data,~~likely ~~accounting and financial functions, inventory management, product development tasks, clinical data, customer service and technical support functions. Our information technology systems are vulnerable~~ to ~~damage~~be orvolatile ~~interruption~~in ~~from~~the ~~earthquakes, fires, floods and other natural disasters, terrorist attacks, power losses, computer system or data network failures, security breaches, data corruption, and cyber-based attacks~~future. Cyber-based attacks can include computer viruses, computer denial-of-service attacks, phishing attacks, worms, and other malicious software programs or other attacks, covert introduction of malware to computers and networks, impersonation of authorized users, and efforts to discover and exploit any design flaws, bugs, security vulnerabilities, or security weaknesses, as well as intentional or unintentional acts by employees or other

17 ● Sales of a substantial number of shares of our common stock in the public market by existing stockholders, or the perception that they may occur, could cause our stock price to decline.

~~Table~~● We have a significant number of ~~Contents~~ outstanding warrants, 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.

~~insiders~~● ~~with~~You ~~access~~may ~~privileges,~~experience ~~intentional~~future ~~acts~~dilution ~~of vandalism by third parties and sabotage. In addition, federal, state, and international laws and regulations, such~~ as ~~the~~a ~~General Data Protection Regulation adopted by the European Union and European Economic Area countries can expose us to enforcement actions and investigations by regulatory authorities, and potentially~~ result ~~in regulatory penalties and significant legal liability, if our information technology security efforts fail. In addition, a variety~~ of ~~our~~future ~~software~~equity ~~systems are cloud‑based data management applications, hosted by third‑party service providers whose security and information technology systems are subject to similar risks~~offerings.

We● ~~operate~~Since ~~in a highly competitive industry that is subject to rapid change. If~~ our ~~competitors~~securities are ~~able~~quoted toon ~~develop~~the ~~and~~OTCQB market, ~~products~~our ~~that~~stockholders ~~are~~may ~~safer~~face orsignificant ~~more~~restrictions ~~effective~~on ~~than~~the ~~our~~resale ~~products,~~of our ~~commercial~~securities ~~opportunities~~due ~~will~~to bestate ~~reduced~~“blue orsky” ~~eliminated~~laws.

~~The~~● ~~health~~Our ~~care~~organizational ~~industry~~documents ~~is highly competitive, subject to rapid change~~ and ~~significantly~~Delaware ~~affected~~law bymake ~~new~~a ~~product~~takeover ~~introductions and other market activities~~ of ~~industry~~our ~~participants.~~company ~~The~~more ~~obesity~~difficult, ~~treatment market in~~ which wemay ~~operate~~prevent ~~has~~certain ~~grown~~changes ~~significantly~~ in ~~recent~~control ~~years~~ and islimit ~~expected to continue to expand as technology continues to evolve and awareness of~~ the ~~need to treat the obesity epidemic grows. Although we are not aware of any competitors in the neuroblocking~~ market, weprice ~~face potential competition from pharmaceutical and surgical obesity treatments. Many~~ of our ~~competitors~~common in the obesity treatment field have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, clinical trials, obtaining regulatory approvals and marketing approved products than we dostock. Smaller or early-stage companies may also prove to be significant competitors, particularly if they pursue competing solutions through collaborative arrangements with large and established companies, such as Allergan, Apollo Endosurgery, Boston Scientific, LivaNova PLC, Johnson & Johnson, Medtronic or St. Jude Medical. Our competitors may develop and patent processes or products earlier than us, obtain regulatory approvals for competing products more rapidly than we are able to and develop more effective, safer and less expensive products or technologies that would render our products non-competitive or obsolete.

~~Risks~~● ~~Associated~~We ~~with~~have ~~Development~~not ~~and~~paid ~~Commercialization~~dividends ofin the ~~Lap-Band~~past ~~system~~and do not expect to pay dividends in the future, and ~~ReShape~~any ~~Vest~~return on investment may be limited to the value of our common stock.

~~Our efforts to increase revenue from our Lap-Band system and commercialize the ReShape Vest may not succeed or may encounter delays which could significantly harm our ability to generate revenue.~~

Our ability to generate revenue will depend upon the sales of our Lap-Band system and successful commercialization of our ReShape Vest (if approved for sale). Our efforts to commercialize these products may not succeed for a number of reasons, including: 15

·Table weof ~~may not be able to obtain the regulatory approvals required for our ReShape Vest;~~Contents

·RISK ~~our~~FACTORS ~~products may not be accepted in the marketplace by physicians, patients and third-party payers;~~

· the price of our products, associated costs of the surgical procedure and treatment and the availability of sufficient third-party reimbursement for the system implantation and follow-up procedures;

·Risks ~~appropriate~~Related ~~reimbursement and/or coding options may not exist~~ to ~~enable~~Our ~~billing~~Proposed ~~for~~Merger ~~the~~with ~~system implantation and follow-up procedures for our ReShape Vest;~~Obalon

·Fluctuations ~~coverage~~in ~~policies~~the ~~for~~market ~~bariatric~~price ~~surgeries,~~of ~~including~~Obalon ~~Lap-Band~~Shares ~~may~~will beaffect ~~restricted~~the invalue of the ~~future;~~Merger consideration.

·At wethe ~~may~~effective ~~not~~time, each share of ReShape common stock and series B preferred stock (the “ReShape Shares”) (other than shares held by Obalon, Merger Sub, any wholly-owned subsidiary of Obalon or ReShape, or by ReShape as treasury shares, which will be ~~able~~canceled and retired and cease to ~~sell~~exist) ~~our~~will ~~products~~be atconverted into the right to receive a ~~price~~number ~~that~~of ~~allows~~Obalon usShares, according to ~~meet~~a ratio determined at least 10 days prior to the ~~revenue~~Obalon ~~targets~~special ~~necessary~~meeting of stockholders to ~~generate~~be ~~enough~~held ~~revenue~~to ~~for~~approve ~~profitability;~~such share issuance, that will result in the holders of such ReShape Shares owning 51% of the outstanding shares of common stock of the combined company immediately after the effective time of the Merger.

·Because the ~~frequency~~exact number of Obalon Shares that will be issued in exchange for each ReShape Share will not be determined until a later date, the market value of the Merger consideration that ReShape stockholders will receive will depend both on the number of Obalon Shares to be issued and ~~severity~~the price per Obalon Share at the effective time of ~~any~~the ~~side~~Merger. ~~effects~~The exact number of ~~our~~Obalon ~~products;~~Shares to be issued and the market price per Obalon Share is not currently known and may be less or more than the current market price.

·Stock ~~physicians~~price changes may result from a variety of factors, including general market, industry and ~~potential~~economic ~~patients~~conditions, ~~may~~changes ~~not~~in bethe ~~aware~~respective businesses, operations and prospects of ReShape and Obalon, regulatory considerations, results of the ~~perceived~~ReShape ~~effectiveness~~Special Meeting and ~~sustainability~~the Obalon Special Meeting, announcements with respect to the Merger or any of the ~~results~~foregoing, and other factors beyond the control of ~~our~~ReShape ~~products;~~or Obalon. You should obtain current market price quotations for ReShape Shares and for Obalon Shares, but as indicated above, the prices at the time the Merger is consummated may be greater than, the same as or less than such price quotations.

·The ~~we,~~Merger ormay ~~the~~not ~~investigators~~be ofconsummated ~~our~~unless ~~products,~~important ~~may~~conditions ~~not~~are besatisfied ~~able~~or towaived ~~have~~and ~~information~~there oncan ~~the~~be ~~outcome~~no ofassurance that the ~~trials~~Merger ~~published~~will inbe ~~medical~~consummated. ~~journals;~~

18 The Merger Agreement contains a number of conditions that must be satisfied or waived (to the extent permitted by applicable law) to consummate the Merger. Those conditions include, among others:

~~Table~~● the required approvals of ~~Contents~~ the Obalon and ReShape stockholders;

·● ~~the~~approval ~~availability~~of ~~and~~the ~~perceived~~ReShape ~~advantages~~Merger ~~and~~Proposal ~~disadvantages~~by ofthe ~~alternative~~ReShape ~~treatments~~stockholders;

·● the absence of any ~~rapid~~adverse ~~technological~~law ~~change~~or ~~may~~order ~~make~~promulgated, ~~our~~entered, ~~products~~enforced, ~~obsolete~~enacted, or issued by any government entity that prohibits, restrains, or makes illegal the consummation of the Merger or the other transactions contemplated by the Merger Agreement;

·● wethe ~~may~~effectiveness ~~not~~of bea ~~able~~registration tostatement ~~have~~on ~~our~~Form ~~products~~S-4, ~~manufactured~~which inshall ~~commercial~~include ~~quantities~~this orjoint atproxy anstatement/prospectus, ~~acceptable~~under ~~cost~~the Securities Act and the absence of any stop order issued by the SEC suspending the use of such registration statement;

·● wethe ~~may~~Obalon ~~not~~Shares ~~have~~to ~~adequate~~be ~~financial~~issued orin ~~other~~the ~~resources~~Merger tobeing ~~complete~~approved ~~the~~for ~~development~~listing on The Nasdaq Capital Market and ~~commercialization~~approval of ~~our~~the ~~products~~combined orcompany’s tocontinued ~~develop~~listing ~~sales~~on ~~and~~The ~~marketing~~Nasdaq ~~capabilities~~Capital ~~for~~Market ~~our~~(certain ~~products;~~risks ~~and~~related to obtaining such approvals are described below);

·● wesubject ~~may~~to becertain ~~sued~~materiality ~~for~~exceptions, ~~infringement~~the accuracy of ~~intellectual~~certain ~~property~~representations ~~rights~~and warranties of each of Obalon and ~~could~~ReShape becontained ~~enjoined~~in ~~from~~the ~~manufacturing~~Merger orAgreement ~~selling~~and ~~our~~the ~~products.~~compliance by each party with the covenants contained in the Merger Agreement; and

~~Besides~~● ~~requiring physician adoption, market acceptance of our products will depend on successfully communicating~~ the ~~benefits~~absence of ~~our products to three additional constituencies involved in deciding whether to treat~~ a ~~particular~~material ~~patient~~adverse ~~using~~effect ~~our~~with ~~products:~~respect (1) the potential patients themselves; (2) institutions such as hospitals, where the procedure would be performed and opinion leaders in these institutions; and (3) third-party payers, such as private healthcare insurers and governmental payers, such as Medicare and Medicaid in the United States, which would ultimately bear most of the costs of the various providers and equipment involved in our Lap-Band system and ReShape Vest (if approved for sale). Marketing to each of ~~these~~Obalon ~~constituencies requires a different marketing approach,~~ and ~~we must convince each of these groups of the efficacy and utility of our products to be successful~~ReShape.

IfThese ~~our~~conditions ~~products,~~to orthe ~~any~~consummation ~~other~~of ~~therapy~~the Merger may not be satisfied or ~~products~~waived ~~for~~(to ~~other~~the ~~gastrointestinal~~extent ~~diseases~~permitted ~~and~~by ~~disorders~~applicable ~~that~~law) weand, ~~may~~as ~~develop~~a result, dothe Merger may not ~~achieve~~be anconsummated ~~adequate~~at ~~level~~the oftime ~~acceptance~~expected, byor ~~the~~at ~~relevant~~all. In ~~constituencies~~addition, weReShape or Obalon may ~~not~~elect ~~generate~~to ~~significant~~terminate ~~product~~the ~~revenue~~Merger ~~and~~Agreement ~~may~~in ~~not~~certain ~~become~~other ~~profitable~~circumstances.

~~We may not be able to obtain required regulatory approvals for our ReShape Vest in a cost-effective manner or at all, which could adversely affect our business and operating results.~~ 16

~~The~~Table ~~production and marketing~~ of our ReShape Vest and our ongoing research and development, preclinical testing and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities both in the United States and abroad. U.S. and foreign regulations applicable to medical devices are wide-ranging and govern, among other things, the development, testing, marketing and premarket review of new medical devices, in addition to regulating manufacturing practices, reporting, advertising, exporting, labeling and record keeping procedures. We are required to obtain regulatory approval before we can market our ReShape Vest in the United States and certain foreign countries. The regulatory process will require significant time, effort and expenditures to bring products to market, and it is possible that our ReShape Vest will not be approved for sale. Even if regulatory approval of our ReShape Vest is granted, it may not be granted within the timeframe that we expect, which could have an adverse effect on our operating results and financial condition. Even after our ReShape Vest is approved by the FDA, we may have ongoing responsibilities under FDA regulations, non-compliance of which could result in the subsequent withdrawal of such approvals, or such approvals could be withdrawn due to the occurrence of unforeseen problems following initial approval. We also are subject to medical device reporting regulations that require us to report to the FDA if any of our products causes or contributes to a death or serious injury or if a malfunction were it to occur might cause or contribute to a death or serious injury. Any failure to obtain regulatory approvals on a timely basis or the subsequent withdrawal of such approvals could prevent us from successfully marketing our products, which could adversely affect our business and operating results. Contents

WeThere ~~depend~~can onbe ~~clinical~~no ~~investigators~~assurance ~~and~~that ~~clinical~~the ~~sites~~Obalon Shares to ~~enroll~~be ~~patients~~issued in ~~our~~the ~~clinical~~Merger ~~trials,~~will ~~and~~be on ~~other third parties to manage~~ the ~~trials~~Nasdaq ~~and~~Stock toMarket ~~perform~~or, ~~related~~if ~~data collection and analysis~~listed, ~~and,~~that asthe acombined ~~result,~~company wewill ~~may~~be ~~face~~able ~~costs~~to ~~and~~comply ~~delays~~with ~~that~~the ~~are~~continued ~~outside~~listing ~~of our control~~standards.

WeNasdaq ~~rely~~has ondetermined ~~clinical~~that ~~investigators~~the ~~and~~proposed ~~clinical~~transaction ~~sites~~constitutes toa ~~enroll~~business ~~patients~~combination inthat ~~our~~results ~~clinical~~in ~~trials~~a ~~and~~change ~~other~~of ~~third~~control ~~parties~~pursuant to ~~manage~~its ~~the~~listing ~~trials~~rules. ~~and~~Accordingly, tothe ~~perform~~combined ~~related~~company ~~data~~will ~~collection~~be ~~and~~required ~~analysis.~~to ~~However,~~satisfy weall ~~may~~of ~~not~~Nasdaq’s beinitial ~~able~~listing tocriteria ~~control~~and ~~the~~to ~~amount~~complete ~~and~~Nasdaq’s ~~timing~~initial oflisting ~~resources~~process ~~that~~in ~~clinical~~order ~~sites~~for ~~may~~the ~~devote~~Obalon Shares to ~~our~~be ~~clinical~~listed ~~trials~~on Nasdaq. IfAn ~~these~~application ~~clinical~~to ~~investigators~~list ~~and~~the ~~clinical~~Obalon ~~sites~~Shares ~~fail~~on toThe ~~enroll~~Nasdaq aCapital ~~sufficient~~Market ~~number~~upon consummation of ~~patients~~the inMerger ~~our~~has ~~clinical~~been ~~trials,~~filed ~~ensure~~as ~~compliance~~required by ~~patients~~The ~~with~~Nasdaq ~~clinical~~Capital ~~protocols~~Market. orSince ~~comply~~Obalon ~~with~~went ~~regulatory~~public ~~requirements~~in 2016, weit ~~will~~has betwice ~~unable~~fallen tobelow ~~complete~~Nasdaq’s ~~these~~minimum ~~trials,~~required ~~which~~level ~~could~~for ~~prevent~~stockholder usequity ~~from~~and ~~obtaining~~minimum orbid ~~maintaining~~price ~~regulatory~~requirement. Obalon ~~approvals~~was ~~for~~downlisted ~~our~~in ~~product.~~November ~~Our~~2020 ~~agreements~~from ~~with~~Nasdaq’s ~~clinical~~Global ~~investigators~~Market ~~and~~to ~~clinical~~its ~~trial~~Capital ~~sites~~Market ~~for~~though ~~clinical~~it ~~testing~~is ~~place~~currently ~~substantial~~in ~~responsibilities~~compliance onwith ~~these~~the ~~parties~~continued ~~and,~~listing ifstandards ~~these~~of ~~parties~~the ~~fail~~Nasdaq toCapital ~~perform~~ Market.

19 Nasdaq’s approval of the listing application is a condition to the closing of the Merger and while ReShape and Obalon can each terminate the Merger Agreement if the condition is not satisfied (in which case, a $1 million termination fee may be payable to Obalon by ReShape), the parties can also each choose to waive the condition and consummate the Merger without Nasdaq’s approval of the listing application. In the event ReShape and Obalon waive that condition and consummate the Merger without Nasdaq’s approval of the listing application, the combined company would not be listed on The Nasdaq Capital Market.

~~Table~~In ofaddition, ~~Contents~~ if after listing, The Nasdaq Capital Market delists the Obalon Shares from trading on its exchange for failure to meet the continued listing standards, the combined company and its stockholders could face significant material adverse consequences including:

as● ~~expected,~~a ~~our~~limited ~~trials~~availability could be delayed or terminated. If these clinical investigators, clinical sites or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of ~~the~~market ~~clinical~~quotations ~~data they obtain is compromised due to their failure to adhere to our clinical protocols, regulatory requirements or~~ for ~~other~~its ~~reasons, our clinical trials may be extended, delayed or terminated, or the clinical data may be rejected by the FDA, adversely affecting our ability to successfully commercialize our product.~~ securities;

~~Modifications~~● toa ~~the~~determination ~~Lap-Band~~that ~~system~~its ~~may~~common stock is a “penny stock” which will require ~~additional~~brokers ~~approval~~trading ~~from~~in ~~regulatory~~its ~~authorities~~common stock to adhere to more stringent rules, ~~which~~possibly ~~may~~resulting ~~not~~in bea ~~obtained~~reduced orlevel ~~may~~of ~~delay~~trading ~~our~~activity ~~commercialization~~in ~~efforts.~~the secondary trading market for its common stock;

~~The~~● ~~FDA and our European Notified Body require medical device companies to initially make and document~~ a ~~determination~~limited amount of ~~whether~~analyst ~~or not a modification requires a new approval, supplement or clearance~~coverage; however, some of these regulatory authorities can review a company’s decision. Any modifications to an approved device that could significantly affect its safety or efficacy, or that would constitute a major change in its intended use could require additional clinical studies and separate regulatory applications. Product changes or revisions will require all the regulatory steps and associated risks discussed above possibly including testing, regulatory filings and clinical study. We may not be able to obtain approval of supplemental regulatory approvals for product modifications, new indications for our product or new products. Delays in obtaining future clearances would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our commercialization efforts and future growth.

If● wea ordecreased ~~our~~ability ~~suppliers fail~~ to ~~comply~~issue ~~with~~additional ~~ongoing~~securities ~~regulatory requirements,~~ or ifobtain weadditional ~~experience~~financing ~~unanticipated~~in ~~product problems, our Lap-Band system could be subject to restrictions or withdrawal from~~ the ~~market~~future.

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continual review and periodic inspections by our European Notified Body and the FDA and other regulatory bodies. In particular we and our manufacturers and suppliers are required to comply with ISO requirements, Good Manufacturing Practices, which for medical devices is called the Quality System Regulation (“QSR”), and other regulations which cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any product for which we obtain marketing approval. The ~~FDA~~Merger ~~enforces~~Agreement ~~the~~contains ~~QSR~~provisions ~~through~~that inspections, which may be unannounced, and the CE system enforces its certification through inspections and audits as well. Our quality system has received certification of compliance to the requirements of ISO 13485:2016 and will have to continue to successfully complete such inspections to maintain regulatory approvals for sales outside of the United States. Failure by us or one of our manufacturers or suppliers to comply with statutes and regulations administered by the FDA, CE authorities and other regulatory bodies, or failure to adequately respond to any observations, could ~~result~~discourage ina ~~enforcement~~potential ~~actions~~competing ~~against~~acquirer ~~us or our manufacturers or suppliers, including, restrictions on our product or manufacturing processes, withdrawal~~ of ~~the~~either ~~product~~ReShape ~~from the market, voluntary~~ or ~~mandatory recall, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties~~Obalon.

IfThe ~~any~~Merger ofAgreement ~~these~~contains ~~actions~~“no ~~were~~shop” toprovisions ~~occur~~that itrestrict ~~would~~each ~~harm~~of ~~our~~Obalon’s ~~reputation~~ and ~~cause~~ReShape’s ~~our~~ability ~~product~~to ~~sales~~solicit, toinitiate ~~suffer.~~or ~~Furthermore~~knowingly encourage and induce, ~~our~~or ~~key~~take ~~component~~any ~~suppliers~~other ~~may~~action ~~not~~designed ~~currently~~to befacilitate orcompeting ~~may~~third-party ~~not~~proposals ~~continue~~relating to bea inmerger, ~~compliance~~reorganization ~~with~~or ~~applicable~~consolidation ~~regulatory~~of ~~requirements.~~the Ifcompany or an acquisition of the ~~FDA~~company’s stock or ~~any~~assets. In addition, the other ~~regulatory~~party ~~body~~generally ~~finds~~has ~~their~~an ~~compliance~~opportunity ~~status~~to offer to bemodify ~~unsatisfactory,~~the ~~our~~terms ~~commercialization~~of ~~efforts~~the ~~could~~Merger bein ~~delayed,~~response ~~which~~to ~~would~~any ~~harm~~competing ~~our~~acquisition ~~business~~proposals ~~and~~before ~~our~~the ~~results~~board of ~~operations.~~directors of the company that has received a third-party proposal may withdraw or qualify its recommendation with respect to the Merger.

~~Additionally,~~The ifMerger ~~the~~Agreement ~~FDA~~does ~~determines~~not ~~that~~permit ~~our~~either ~~promotional~~Obalon ~~materials,~~or ~~training~~ReShape orto ~~other~~terminate ~~activities~~the ~~constitute~~Merger ~~promotion~~Agreement ofin anorder ~~unapproved~~to ~~use,~~pursue wea ~~could~~superior beproposal. ~~subject~~These toprovisions ~~significant~~could ~~liability,~~discourage ~~the~~a ~~FDA~~potential ~~could~~third-party ~~request~~acquirer that wemight ~~cease,~~have ~~correct~~an orinterest ~~modify~~in ~~our~~acquiring ~~training~~all or ~~promotional~~a ~~materials~~significant orportion ~~subject~~of usObalon toor ~~regulatory~~ReShape ~~enforcement~~from ~~actions.~~considering Itor isproposing ~~also~~an ~~possible that other federal~~acquisition, ~~state~~even ~~or foreign enforcement authorities might take action~~ if ~~they~~it ~~consider~~were ~~our~~prepared ~~training or other promotional materials~~ to ~~constitute~~pay ~~promotion~~consideration ofwith ana ~~unapproved~~higher ~~use,~~per ~~which~~share ~~could~~cash ~~result~~or inmarket ~~significant~~value ~~fines~~than orthe ~~penalties~~market ~~under~~value ~~other~~proposed ~~statutory~~to ~~authorities,~~be ~~such~~received asor ~~laws~~realized ~~prohibiting~~in ~~false~~the ~~claims for reimbursement~~Merger.

We are subject to medical device reporting regulations that require us to report to the FDA, Competent Authorities or other governmental authorities in other countries if our products cause or contribute to a death or serious injury or malfunction in a way that would be reasonably likely to contribute to death or serious injury if the malfunction were to recur. The ~~FDA~~pendency ~~and~~of ~~similar governmental authorities in other countries have~~ the ~~authority~~Merger tocould ~~require~~materially ~~the~~adversely ~~recall~~affect ~~of our products in~~ the ~~event of material deficiencies or defects in design or manufacturing. A government mandated~~business, orfinancial ~~voluntary~~condition, ~~recall~~results byof usoperations ~~could~~or ~~occur~~cash asflows ~~a result~~ of ~~component~~ReShape ~~failures, manufacturing errors~~ or ~~design defects, including defects in labeling~~Obalon. ~~Any recall would divert managerial and financial resources and could harm our reputation with~~

20 The announcement and pendency of the Merger could disrupt ReShape’s or Obalon’s businesses, in any of the following ways, among others:

~~Table~~● ofReShape’s ~~Contents~~ employees may experience uncertainty about their future roles with the combined company, which might adversely affect each company’s ability to retain and hire key managers and other employees;

customers. There can be no assurance that there will not be product recalls in the future or that such recalls would not have a material adverse effect on our business. Once the product is approved and implanted in a large number of patients, infrequently occurring adverse events may appear that were not observed in the clinical trials. This could cause health authorities in countries where the product is available to take regulatory action, including marketing suspension and recall. 17

WeTable ~~may~~of ~~be unable to attract and retain management and other personnel we need to succeed.~~ Contents

~~Our~~● ~~success depends on~~ the ~~services~~attention of ~~our~~ReShape ~~senior~~ management ~~and other key employees. The loss of the services of one~~ or ~~more~~Obalon ofmanagement ~~our~~may ~~officers~~be ordirected ~~key~~toward ~~employees could delay or prevent the successful~~ completion of ~~our clinical trials and~~ the ~~commercialization of our Lap-Band system and the development of our ReShape Vest. Our continued growth will require hiring a number of qualified clinical~~Merger, ~~scientific,~~integration ~~commercial~~planning and ~~administrative~~transaction-related ~~personnel.~~considerations ~~Accordingly, recruiting~~ and ~~retaining~~may ~~such~~be ~~personnel~~diverted infrom the ~~future~~company’s ~~will be critical~~ day-to-day ~~our~~business ~~success.~~operations ~~There is intense competition from other companies~~ and, ~~research~~following ~~and academic institutions for qualified personnel in~~ the ~~areas~~completion of ~~our~~the ~~activities. If we fail to identify~~Merger, ~~attract,~~the ~~retain~~attention ~~and~~of ~~motivate~~the ~~these~~combined ~~highly~~company’s ~~skilled~~management ~~personnel, we~~ may also be ~~unable~~diverted to ~~continue~~such ~~our development and commercialization activities.~~ matters;

We● ~~may~~vendors, besuppliers, ~~unable~~business partners or others may seek to ~~manage~~modify ~~our~~or ~~growth~~terminate ~~effectively.~~their business relationship with ReShape or Obalon or the combined company following completion of the Merger;

~~Our~~● ~~business strategy entails significant future growth. For example, we will have to expand existing operations in order to increase revenue from our Lap-Band system and develop our~~ ReShape ~~Vest,~~or ~~conduct additional clinical trials~~Obalon, ~~increase~~or ~~our~~the ~~contract~~combined ~~manufacturing~~company ~~capabilities,~~following ~~hire~~completion ~~and~~of ~~train new personnel to handle~~ the ~~marketing and sales of our product~~Merger, ~~assist patients~~ and ~~healthcare~~their ~~providers~~respective indirectors ~~obtaining~~could ~~reimbursement~~become ~~for~~subject the use of our product and create and develop new applications for our technology. This growth may place significant strain on our management and financial and operational resources. Successful growth is also dependent upon our ability to ~~implement~~lawsuits ~~appropriate~~relating ~~financial and management controls, systems and procedures. Our ability~~ to ~~effectively manage growth depends on our success in attracting and retaining highly qualified personnel, for which~~ the ~~competition~~Merger; ~~may be intense. If we fail to manage these challenges effectively, our business could be harmed.~~ and

We● ~~face~~ReShape ~~the~~or ~~risk~~Obalon ofmay ~~product~~experience ~~liability~~negative ~~claims~~reactions ~~that~~from ~~could~~their bestockholders ~~expensive, divert management’s attention~~ and ~~harm~~the ~~our~~medical ~~reputation~~community, ~~and~~among ~~business~~others. ~~We may not be able to obtain adequate product liability insurance.~~

~~Our~~These ~~business~~disruptions ~~exposes~~could usbe toexacerbated by a ~~risk~~delay ofin ~~product~~the ~~liability~~completion ~~claims~~of ~~that~~the isMerger ~~inherent~~or intermination of the ~~testing~~Merger Agreement. Additionally, ~~manufacturing~~if ~~and~~the ~~marketing~~Merger ofis ~~medical~~not ~~devices.~~consummated, ~~The~~each ~~medical~~company ~~device~~will ~~industry~~have ~~has~~incurred ~~historically~~significant ~~been~~costs ~~subject~~and todiverted ~~extensive~~the ~~litigation~~time ~~over~~and ~~product~~attention ~~liability~~of ~~claims~~management. WeA ~~may~~failure beto ~~subject~~consummate tothe ~~product~~Merger ~~liability~~may ~~claims~~also ifresult ~~our~~in ~~products~~negative ~~cause~~publicity, reputational harm, litigation against ReShape or ~~appear~~Obalon toor ~~have~~their ~~caused~~respective directors and officers, anand ~~injury~~a negative impression of the companies in the financial markets. ~~Claims~~The ~~may~~occurrence beof ~~made~~any byof ~~consumers,~~these ~~healthcare~~events ~~providers,~~individually ~~third-party~~or ~~strategic~~in ~~collaborators~~combination could have a material adverse effect on either or ~~others~~both ~~selling~~companies’ ~~our~~financial ~~products~~statements and stock price.

WeIn ~~have product liability insurance~~addition, ~~which covers~~ the ~~use~~Merger ofAgreement ~~our~~restricts ~~products~~Obalon ~~in our clinical trials~~ and ~~any~~ReShape ~~commercial~~from ~~sales,~~taking incertain anactions ~~amount~~until wethe ~~believe~~Effective isTime ~~appropriate.~~without ~~Our~~the ~~current~~consent ~~product~~of ~~liability~~the ~~insurance~~other ~~may not continue to be available to us on acceptable terms~~party, ~~if at all~~including, ~~and,~~among ifothers: ~~available,~~ the ~~coverage~~payment ~~may~~of ~~not~~dividends; bethe ~~adequate~~issuance toof ~~protect~~equity us(including ~~against~~certain ~~any~~equity ~~future~~incentive ~~product~~awards); ~~liability~~certain ~~claims.~~increases ~~If we are unable~~ to ~~obtain~~employee ~~insurance~~compensation ~~at an acceptable cost~~ and onbenefits; ~~acceptable~~capital ~~terms~~expenditures; ~~for~~the anincurrence ~~adequate~~of ~~coverage~~indebtedness; ~~amount,~~acquisitions orand ~~otherwise~~divestitures; toand ~~protect~~the ~~against~~entry ~~potential~~into ~~product~~or ~~liability~~amending ~~claims,~~certain wematerial ~~could be exposed to significant liabilities, which may harm our business~~contracts. AObalon ~~product~~and ~~liability~~ReShape ~~claim,~~are ~~recall~~required ~~or other claim with respect~~ to ~~uninsured~~conduct ~~liabilities~~business ~~or for amounts~~ in ~~excess~~the ofordinary ~~insured~~course ~~liabilities~~consistent ~~could~~with ~~have~~past apractice. ~~material~~The ~~adverse~~restrictive ~~effect on our business~~covenants, ~~financial~~which ~~condition~~are ~~and~~subject ~~results~~to ofvarious ~~operations.~~specific ~~These~~exceptions, ~~liabilities~~may ~~could~~ prevent Obalon or ~~interfere~~ReShape ~~with~~from ~~our~~pursuing ~~product~~attractive ~~commercialization~~business ~~efforts.~~opportunities ~~Defending~~that amay ~~suit,~~arise ~~regardless~~prior ofto ~~merit,~~the ~~could~~consummation beof ~~costly,~~the ~~could~~Merger. ~~divert~~Although ~~management~~Obalon ~~attention~~ and ~~might~~ReShape ~~result~~may inbe ~~adverse~~able ~~publicity,~~to ~~which~~pursue ~~could~~such ~~result~~activities inwith the ~~withdrawal~~other ~~of,~~company’s ~~or inability to recruit~~consent, ~~clinical~~the ~~trial~~other ~~volunteers~~company ormay ~~result~~not inbe ~~reduced~~willing ~~acceptance~~to ofprovide ~~our~~its ~~products in the market~~consent.

WeReShape ~~may~~directors ~~be subject to product liability claims even if it appears that the claimed injury is due to the actions of others. For example, we rely on the expertise of surgeons~~ and ~~other~~executive ~~associated~~officers ~~medical personnel to perform the medical procedure to implant~~ and ~~remove~~Obalon ~~our~~directors ~~products~~ and toexecutive ~~perform~~officers ~~the~~have ~~related~~interests ~~therapy.~~in ~~If these medical personnel are not properly trained or are negligent,~~ the ~~therapeutic~~Merger ~~effect~~that ~~of our products~~ may be ~~diminished~~different ~~or the patient may suffer critical injury~~from, ~~which~~or ~~may~~in ~~subject~~addition us to ~~liability. In addition~~, ~~an injury that is caused by~~ the ~~negligence~~interests of ~~one~~ReShape ofstockholders ~~our~~and ~~suppliers~~Obalon ~~in supplying us with a defective component that injures a patient could be the basis for a claim against us~~stockholders. ~~A product liability claim, regardless of its merit or eventual outcome, could result in decreased demand for our products;~~

21 Certain of the directors and executive officers of ReShape and certain of the directors and executive officers of Obalon negotiated the terms of the Merger Agreement and these individuals have interests in the Merger that may be different from, or in addition to, those of ReShape stockholders and Obalon stockholders, respectively. These interests include, but are not limited to, the continued service of certain of these ReShape individuals as directors and executive officers of Obalon after the date of the consummation of the Merger, certain other compensation arrangements with the Obalon directors and executive officers, and provisions in the Merger Agreement regarding continued indemnification of and advancement of expenses of the directors and executive officers of ReShape and Obalon.

~~Table~~Failure to consummate the Merger could negatively impact respective future stock prices, operations and financial results of ~~Contents~~ ReShape and Obalon.

~~injury~~If tothe ~~our~~Merger ~~reputation;~~is ~~diversion~~not ofconsummated ~~management’s~~for ~~attention;~~any ~~withdrawal~~reason, ofReShape ~~clinical~~and ~~trial~~Obalon ~~participants;~~may ~~significant~~be ~~costs~~subjected ~~of related litigation; substantial monetary awards~~ to ~~patients;~~a ~~product~~number ~~recalls or market withdrawals; loss~~ of ~~revenue;~~material ~~and~~risks, including the ~~inability~~following: ~~to commercialize our products under development.~~

~~Risks~~● ~~Related~~a decline in the market prices of the shares of ReShape Common Stock or Obalon Shares to ~~Intellectual~~the ~~Property~~extent that their current market prices reflect a market assumption that the Merger will be consummated and will be beneficial to the value of the business of Obalon after the Closing Date;

If● wehaving ~~are unable~~ to ~~obtain~~pay orcertain ~~maintain~~costs ~~intellectual~~related ~~property rights relating~~ to ~~our~~the ~~technology~~proposed ~~and neuroblocking therapy~~Merger, ~~the~~such ~~commercial~~as ~~value~~legal, ofaccounting, ~~our~~financial ~~technology~~advisory, printing and ~~any~~mailing ~~future~~fees, ~~products~~which ~~will~~must be ~~adversely~~paid ~~affected~~regardless ~~and~~of ~~our~~whether ~~competitive~~the ~~position~~Merger ~~will~~is ~~be harmed.~~ consummated;

~~Our~~● ~~commercial~~addressing ~~success depends in part on our ability to obtain protection in~~ the ~~United~~consequences States and other countries for our Lap-Band system and ReShape Vest by establishing and maintaining intellectual property rights relating to or incorporated into our technology and products. We own numerous U.S. and foreign patents and have numerous patent applications pending, most of ~~which~~operational ~~pertain~~decisions tomade ~~treating~~since ~~gastrointestinal disorders and~~ the ~~treatment~~signing of ~~obesity. We have also received or applied for additional patents outside~~ the ~~United~~Merger ~~States. Our pending and future patent applications may not issue as patents or~~Agreement, if issued, may not issue in a form that will provide us any competitive advantage. We expect to incur substantial costs in obtaining patents and, if necessary, defending our proprietary rights. The patent positions of medical device companies, including ~~ours,~~because can be highly uncertain and involve complex and evolving legal and factual questions. We do not know whether we will obtain the patent protection we seek, or that the protection we do obtain will be found valid and enforceable if challenged. If we fail to obtain adequate protection of ~~our~~restrictions ~~intellectual~~on ~~property,~~ReShape’s or if any protection we obtain is reduced or eliminated, others could use our intellectual property without compensating us, resulting in harm to our business. We may also determine that it is in our best interests to voluntarily challenge a third-partyObalon’s ~~products~~operations orimposed ~~patents~~by ~~in litigation or administrative proceedings, including patent interferences, re-examinations or under more recently promulgated Inter Partes Review proceedings, depending on when~~ the ~~patent~~terms ~~application was filed. In the event that we seek to enforce any~~ of ~~our owned or exclusively licensed patents against an infringing party, it is likely that~~ the ~~party~~Merger ~~defending~~Agreement the claim will seek to invalidate the patents we assert, which, if successful could result in the loss of the entire patent or the relevant portion of our patent, which would not be limited to any particular party. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and ~~time-consuming~~decisions ~~and could divert the attention of our management and key personnel from our business operations. Even if we were~~ to ~~prevail~~delay ~~in any litigation, we cannot assure you that we can obtain an injunction that prevents our competitors from practicing our patented technology. Our competitors may independently develop similar~~ or ~~alternative~~defer ~~technologies~~capital ~~or products without infringing any of our patent or other intellectual property rights, or may design around our proprietary technologies.~~ expenditures;

We cannot assure you that we will obtain any patent protection that we seek, that any protection we do obtain will be found valid and enforceable if challenged or that it will confer any significant commercial advantage. U.S. patents and patent applications may also be subject to interference proceedings and U.S. patents may be subject to re-examination proceedings in the U.S. Patent and Trademark Office (“USPTO”), or under more recently promulgated Inter Partes Review proceedings, depending on when the patent application was filed, and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent offices, which proceedings could result in either loss of the patent or denial of the patent application, or loss or reduction in the scope of one or more of the claims of, the patent or patent application. In addition, such interference, re-examination and opposition proceedings may be costly. Moreover, the U.S. patent laws have recently changed with the adoption of the America Invents Act (“AIA”), possibly making it easier to challenge patents. Some of our technology was, and continues to be, developed in conjunction with third parties, and thus there is a risk that such third parties may claim rights in our intellectual property. Thus, any patents that we own or license from others may provide limited or no protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. If issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology. 18

~~Non-payment~~Table ~~or delay in payment~~ of patent fees or annuities, whether intentional or unintentional, may result in loss of patents or patent rights important to our business. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States, particularly in the field of medical products and procedures. Contents

22 ● returning the focus of management and personnel to operating ReShape or Obalon, as applicable, on a standalone basis, without any of the benefits expected to have been provided by the consummation of the Merger; and

~~Table~~● ofnegative ~~Contents~~ reactions from their respective stockholders, suppliers, employees, patients enrolled in our studies and the medical community.

~~Many~~In ofaddition ~~our~~to ~~competitors~~the ~~have~~above ~~significant~~risks, ~~resources~~ReShape ~~and~~may ~~incentives~~be required, under certain circumstances, to ~~apply~~pay ~~for~~to ~~and~~Obalon ~~obtain~~a ~~intellectual~~termination ~~property~~fee ~~rights~~of ~~that~~$1.0 ~~could~~million, ~~limit~~which may materially adversely affect ReShape’s financial condition. The business of ReShape or ~~prevent~~Obalon ~~our~~may ~~ability~~be adversely impacted by the failure to ~~commercialize~~pursue ~~our~~other ~~current~~beneficial oropportunities ~~future~~due ~~products~~to inthe focus of ReShape and Obalon management on the ~~United~~Merger. ~~States~~A failure to consummate the Merger may also result in negative publicity, reputational harm, litigation against ReShape or ~~abroad~~Obalon or their respective directors and officers, and a negative impression of the companies in the financial markets.

~~Many~~If ofthe ~~our~~Merger ~~competitors~~is ~~who~~not ~~have significant resources and have made substantial investments in competing technologies may seek to apply for and obtain patents that will prevent~~consummated, ~~limit~~we orcannot ~~interfere~~assure ~~with our ability to make, use or sell our products either in~~ the ~~U.S.~~Obalon orstockholders ~~in international markets. Our current~~ or ~~future U.S. or foreign patents may be challenged, circumvented by competitors or others or may be found to be invalid, unenforceable or insufficient. In most cases in~~ the ~~United~~ReShape ~~States~~stockholders ~~patent~~that ~~applications~~these ~~are~~risks ~~published~~will 18not ~~months~~materialize ~~after filing the application, or corresponding applications are published in other countries,~~ and ~~since~~will ~~publication~~not ofmaterially ~~discoveries~~adversely inaffect the ~~scientific or patent literature often lags behind actual discoveries~~business, wefinancial ~~cannot~~results beand ~~certain~~stock ~~that~~price ~~we were the first to make the inventions covered by each~~ of ~~our pending patent applications, or that we were~~ the ~~first~~respective ~~to file patent applications for such inventions~~companies.

IfFinancial weprojections ~~are~~regarding ~~unable~~ReShape tomay ~~protect~~not ~~the~~prove ~~confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected~~accurate.

In ~~addition~~connection towith ~~patented~~the ~~technology~~Merger, weReShape ~~rely~~prepared onand ~~our~~considered ~~unpatented~~internal ~~proprietary~~financial ~~technology~~forecasts for ReShape. These financial projections are based on several assumptions, ~~trade~~including ~~secrets~~regarding future operating cash flows, ~~processes~~expenditures and ~~know-how.~~income Weof ~~generally~~ReShape, ~~seek~~including benefits to ~~protect~~be ~~this~~realized ~~information~~from bythe ~~confidentiality~~Merger. ~~agreements~~These ~~with~~financial ~~our~~projections ~~employees,~~were ~~consultants,~~not ~~scientific~~prepared ~~advisors~~with ~~and~~a ~~third~~view ~~parties.~~to ~~These~~public ~~agreements~~disclosure, ~~may~~are besubject ~~breached~~to significant economic, competitive, industry and weother uncertainties and may not ~~have~~be ~~adequate~~achieved ~~remedies~~in ~~for~~full, ~~any~~within ~~such~~projected ~~breach.~~timeframes Inor ~~addition,~~at ~~our~~all. ~~trade~~The ~~secrets~~failure ~~may~~of ~~otherwise~~ReShape ~~become~~to ~~known~~achieve orprojected beresults ~~independently~~could ~~developed~~have bya ~~competitors.~~material Toadverse effect on the ~~extent~~price ~~that~~of ~~our~~the ~~employees~~Obalon Shares, ~~consultants~~the orcombined ~~contractors~~company’s ~~use~~financial ~~intellectual~~position ~~property~~after ~~owned~~the byClosing ~~others~~Date, inand ~~their~~the ~~work~~combined ~~for~~company’s usability to pay dividends, ~~disputes~~and/or ~~may~~pay ~~arise~~dividends asat toor above the ~~rights~~rate incurrently ~~related~~paid by Obalon or ~~resulting~~ReShape, ~~know-how~~following ~~and~~the ~~inventions~~consummation of the Merger.

~~Intellectual~~The ~~property~~Merger ~~litigation is a common tactic in the medical device industry to gain competitive advantage. If we become subject to a lawsuit, we~~ may bedisrupt ~~required~~attention toof ~~expend~~ReShape ~~significant~~management ~~financial~~ and ~~other~~Obalon ~~resources and our~~ management’s ~~attention may be diverted~~ from ~~our~~ongoing business operations.

~~There~~Each ~~has~~of ~~been~~ReShape aand ~~history~~Obalon ofhas ~~frequent~~expended, and ~~extensive~~expects ~~litigation~~to ~~regarding~~continue ~~patent~~to ~~and~~expend, ~~other~~significant ~~intellectual~~management ~~property~~resources ~~rights~~to inconsummate the ~~medical~~Merger. ~~device~~The ~~industry,~~attention ~~and~~of ~~companies~~each incompany’s ~~the~~management ~~medical~~may ~~device~~be ~~industry~~diverted ~~have~~away ~~employed~~from ~~intellectual~~the ~~property~~day-to-day ~~litigation~~operations toof ~~gain~~the abusinesses ~~competitive~~of ~~advantage.~~ReShape ~~Accordingly~~and Obalon, werespectively, ~~may~~including ~~become~~implementing ~~subject~~initiatives to ~~patent~~improve ~~infringement~~performance, ~~claims~~execution orof ~~litigation~~existing inbusiness aplans ~~court~~and ofpursuing ~~law,~~other orbeneficial ~~interference~~opportunities, ~~proceedings~~in ~~declared~~an byeffort ~~the USPTO~~ to ~~determine~~consummate the ~~priority~~Merger. ofThis ~~inventions~~diversion orof anmanagement ~~opposition~~resources tocould adisrupt ~~patent~~ReShape’s ~~grant~~or inObalon’s aoperations ~~foreign~~and ~~jurisdiction.~~may Wehave ~~may~~an ~~also~~adverse ~~become~~effect ~~subject~~on tothe ~~claims~~respective orbusinesses, ~~litigation~~financial ~~seeking~~conditions, ~~payment~~results of ~~royalties~~operations ~~based~~and oncash ~~sales~~flows of ~~our~~the ~~product~~two incompanies ~~connection with licensing~~ or ~~similar~~the ~~joint~~combined ~~development~~company ~~arrangements~~after ~~with~~the ~~third~~effective ~~parties~~time ~~or in connection with claims~~ of ~~patent~~the ~~infringement~~Merger.

The ~~defense~~market ~~and~~price ~~prosecution~~for ofObalon ~~intellectual~~Shares ~~property~~following ~~suits,~~completion USPTO interference proceedings, reexamination proceedings, or under more recently promulgated Inter Partes Review proceedings, depending on when the patent application was filed, or opposition proceedings and related legal and administrative proceedings, are both costly and time consuming and could result in substantial uncertainty to us. Litigation or regulatory proceedings may also be necessary to enforce patent or other intellectual property rights of ~~ours or to determine~~ the ~~scope~~Merger ~~and~~will ~~validity~~continue ~~of other parties’ proprietary rights. Any litigation, opposition or interference proceedings, with or without merit, may result in substantial expense~~ to ~~us,~~fluctuate ~~cause significant strain on our financial resources, divert the attention of our technical~~ and ~~management personnel and harm our reputation. We~~ may ~~not~~be ~~have~~affected ~~the~~by ~~financial~~factors ~~resources~~different ~~to defend our patents~~ from ~~infringement~~those orthat ~~claims~~historically of invalidity. An adverse determination in any litigation could subject us to significant liabilities to third parties, require us to seek licenses from or pay royalties to third parties or prevent us from manufacturing, selling or using our proposed products, any of which could have aaffected ~~material~~Obalon ~~adverse~~Shares ~~effect on our business~~ and ~~prospects~~ReShape Shares.

~~Our~~Following ~~Lap-Band~~the ~~system~~completion orof ~~ReShape~~the ~~Vest~~Merger, ~~may~~Obalon ~~infringe~~stockholders orand beReShape ~~claimed~~stockholders towill ~~infringe~~be ~~patents~~stockholders ~~that we do not own or license, including patents that may issue~~ in the ~~future~~combined ~~based on patent applications of which we are currently aware, as well as applications of which we are unaware~~company. ~~For~~ReShape’s ~~example,~~business wediffers ~~are~~in ~~aware~~important ofrespects ~~other~~from ~~companies~~ that ~~are investigating neurostimulation, including neuroblocking, and~~ of ~~patents~~Obalon and ~~published~~the ~~patent~~combined ~~applications~~company’s ~~held~~business bywill ~~companies~~differ infrom ~~those fields. While we believe~~ that ~~none~~ of ~~such~~Obalon ~~patents~~ and ~~patent~~ReShape ~~applications~~prior ~~are applicable~~ to ~~our~~the ~~products~~completion ~~and~~of ~~technologies~~the ~~under~~Merger. ~~development~~Accordingly, ~~third~~the ~~parties~~results ~~who~~of ~~own~~operations orof ~~control~~the ~~these~~combined ~~patents~~company and ~~patent applications in~~ the ~~United~~market ~~States~~price ~~and~~of ~~abroad~~Obalon ~~could~~Shares ~~bring~~after ~~claims~~the ~~against~~completion usof ~~that~~the ~~would~~Merger ~~cause~~may usbe toaffected ~~incur~~by ~~substantial~~factors ~~expenses~~different ~~and, if such claims are successfully asserted against us, they could cause us to pay substantial damages, could result in an injunction preventing us~~ from ~~selling,~~those ~~manufacturing~~currently oraffecting ~~using our proposed products and would divert management’s attention. Because patent applications in many countries such as~~ the ~~United~~independent ~~States~~results ~~are~~of ~~maintained~~operations ~~under conditions~~ of ~~confidentiality~~each ~~and can take many years to issue, there may be applications now pending~~ of ~~which~~Obalon ~~we are unaware,~~ and ~~which may later result in~~ ReShape.

23 Risks Related to Our Business and Industry

~~Table~~We ofmay ~~Contents~~ be unable to attract and retain management and other personnel we need to succeed.

~~issued~~Our ~~patents~~success ~~that~~depends ~~our~~on ~~products~~the ~~infringe.~~services Ifof aour ~~patent~~senior ~~infringement~~management ~~suit~~and ~~were~~other ~~brought~~key ~~against~~employees. ~~us,~~The weloss ~~could~~of bethe ~~forced~~services toof ~~stop~~one or more of our ~~ongoing~~officers or ~~planned~~key ~~clinical~~employees ~~trials,~~could or delay or ~~abandon~~prevent ~~commercialization~~the successful completion of ~~the~~our ~~product~~clinical ~~that~~trials isand ~~subject~~the commercialization of our Lap-Band system and ReShapeCare, and the ~~suit~~development of our ReShape Vest and Diabetes Bloc-Stim Neuromodulation. Our continued growth will require hiring a number of qualified clinical, scientific,

As a result of patent infringement claims, or to avoid potential claims, we may choose or be required to seek a license from a third-party and be required to pay license fees or royalties, or both. A license may not be available at all or on commercially reasonable terms, and we may not be able to redesign our products to avoid infringement. Modification of our products or development of new products could require us to conduct additional clinical trials and to revise our filings with the FDA and other regulatory bodies, which would be time-consuming and expensive. Even if we were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. This could harm our business significantly. 19

~~Risks~~Table ~~Relating to Ownership~~ of ~~Our Common Stock~~ Contents

~~Our~~commercial ~~common~~and ~~stock~~administrative ~~trades~~personnel. onAccordingly, anrecruiting ~~over-~~and retaining such personnel in the~~-counter~~ ~~market~~future will be critical to our success. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we fail to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our development and commercialization activities.

Our ~~common~~ReShape ~~stock~~Vest ~~trades~~product onis in the ~~OTCQB~~early ~~market~~stages ~~and~~of ~~therefore~~clinical ~~may~~evaluation. ~~have~~If ~~less~~the ~~liquidity~~clinical ~~and~~trial ~~may~~is ~~experience~~not ~~potentially~~successfully ~~more~~completed ~~price~~or ~~volatility~~any ~~than~~required ~~experienced~~regulatory ~~when~~approvals ~~our~~are ~~shares traded on Nasdaq. Stockholders may~~ not ~~be able to sell their shares of common stock on the OTCQB market in the quantities~~obtained, at the ~~times,~~ReShape orVest atmay ~~the~~not ~~prices that could potentially~~ be ~~available~~commercialized onand ~~a more liquid trading market. The delisting of~~ our ~~common~~business ~~stock~~prospects ~~from~~may ~~Nasdaq in 2018 could also adversely affect our ability to obtain financing for our operations and/or result in a loss of confidence by investors or employees~~suffer.

Our ~~common~~ReShape ~~stock~~Vest ~~may~~product beis ~~deemed~~in tothe beearly astages ~~“penny~~of ~~stock”~~development and ~~broker-dealers~~is ~~who~~currently ~~make~~in athe early stages of clinical evaluation. Our ability to market the ReShape Vest in the United States and abroad depends upon our ~~stock~~ability to demonstrate the safety and effectiveness of the product with clinical data to support our requests for regulatory approval. The ReShape Vest may not be ~~subject~~found to ~~additional~~be ~~compliance~~safe ~~requirements~~and, where required, effective in clinical trials and may not ultimately be approved for marketing by U. S. or foreign regulatory authorities, which would have a negative impact on our net sales.

IfThere ~~our~~is ~~common~~no ~~stock~~assurance isthat ~~deemed~~we towill be asuccessful ~~“penny~~in ~~stock”~~achieving asthe ~~defined~~desired results in ~~the~~our ~~Securities~~anticipated ~~Exchange~~clinical ~~Act~~trials offor ~~1934,~~the ~~broker-dealers~~ReShape ~~who~~Vest ~~make~~or, aif ~~market~~we indo, ~~our~~that ~~stock~~the ~~will~~FDA beor ~~subject~~other toregulatory ~~additional~~agencies ~~sales~~will ~~practice~~approve ~~requirements~~the product for ~~selling~~sale ~~our~~without ~~common~~the ~~stock~~need tofor ~~persons~~additional ~~other~~clinical ~~than~~trial ~~established~~data ~~customers~~to ~~and~~demonstrate ~~accredited~~safety ~~investors~~and efficacy. ~~For~~We ~~instance,~~continually evaluate the ~~broker-dealer~~potential ~~must~~financial ~~make~~benefits aand ~~special~~costs ~~suitability~~of ~~determination~~clinical ~~for~~trials ~~the purchaser~~ and ~~receive~~ the ~~purchaser's~~products ~~written~~being ~~agreement~~evaluated toin ~~the~~them. ~~transaction~~If ~~prior~~we todetermine ~~the~~that ~~sale. Consequently,~~ the ~~penny~~costs ~~stock~~associated ~~rules,~~with ifobtaining ~~they~~regulatory ~~were~~approval toof ~~become~~a ~~applicable,~~product ~~would~~exceed ~~affect~~ the ~~ability~~potential orfinancial ~~willingness~~benefits of ~~broker-dealers~~that toproduct ~~sell~~or ~~our~~if ~~securities, and accordingly would affect~~ the ~~ability~~projected ofdevelopment ~~stockholders~~timeline tois ~~sell~~inconsistent ~~their~~with ~~securities~~our ininvestment ~~the~~horizon, ~~public~~we ~~market.~~may ~~These~~choose ~~additional~~to ~~procedures~~stop ~~could~~a ~~also~~clinical ~~limit~~trial ~~our~~and/or ~~ability~~the todevelopment ~~raise~~of ~~additional~~a ~~capital in the future~~product.

The ~~trading~~shares ~~price~~of series C convertible preferred stock issued in connection with our acquisition of ReShape Medical have certain rights and preferences senior to our common stock, ~~has~~including ~~been~~a ~~volatile~~liquidation ~~and~~preference that is ~~likely~~senior to beour ~~volatile~~common ~~in the future~~stock.

~~The~~There ~~trading~~are ~~price~~currently 95,388 shares of our series C convertible preferred stock outstanding, which are convertible into 38 shares of our common stock. ~~has~~We ~~been~~issued ~~highly~~the ~~volatile~~shares of our series C convertible preferred stock in connection with our acquisition of ReShape Medical. The ~~market~~series ~~price~~C ~~for~~convertible ~~our~~preferred stock has a liquidation preference of $274.88 per share, or $692,691.05 per underlying share of common stock, or approximately $26.2 million in the aggregate. Holders of the series C convertible preferred stock have the right to convert their shares into shares of common stock instead of receiving the liquidation preference. In general, the series C convertible preferred stock is entitled to receive dividends (on an as-if-converted-to-common stock basis) actually paid on shares of common stock when, as and if such dividends are paid on shares of common stock. No other dividends will be ~~affected~~paid byon shares of series C convertible preferred stock. While the series C convertible preferred stock generally does not have voting rights, as long as any shares of series C convertible preferred stock remain outstanding, we cannot, without the affirmative vote of holders of a ~~number~~majority of ~~factors~~the then-outstanding shares of series C convertible preferred stock, (a) alter or change adversely the powers, preferences or rights given to the series C convertible preferred stock (including: by the designation, authorization, or issuance of any shares of preferred stock that purports to have equal rights with, or be senior in rights or preferences to, the series C convertible preferred stock), (b) alter or amend the series C convertible preferred stock certificate of designation, (c) amend our certificate of incorporation or other charter documents in any manner that adversely affects any rights of the holders of series C convertible preferred stock, (d) increase the number of authorized shares of series C convertible preferred stock or (e) enter into any agreement with respect to any of the foregoing.

·We ~~the~~are ~~denial~~a ormedical ~~delay~~device ofcompany ~~regulatory~~with ~~clearances~~a orlimited ~~approvals~~history of ~~our~~operations ~~product~~and orsales, ~~receipt~~and ofwe ~~regulatory~~cannot ~~approval~~assure ofyou ~~competing~~that ~~products;~~we will ever generate substantial revenue or be profitable.

·We are a medical device company with a limited operating history upon which you can evaluate our business. The success of our business will depend on our ability to ~~accomplish~~generate ~~clinical~~increased sales and control costs, as well as our ability to obtain additional regulatory approvals needed to market new versions of our Lap-Band system or regulatory approvals needed to market our ReShape Vest, Diabetes Bloc-Stim Neuromodulation and any other ~~product~~products ~~development~~we ~~milestones~~may ~~and~~develop in the future, all of which we may be unable to do. soIf inwe ~~accordance~~are ~~with~~unable to successfully market our Lap-Band system for its indicated use, ReShapeCare, or develop and commercialize the ~~timing~~ReShape ~~estimates~~Vest or Diabetes Bloc-Stim Neuromodulation, we may never become profitable and may have ~~publicly~~to ~~announced;~~cease operations as a result. Our lack of a significant operating history also limits your ability to make a comparative evaluation of us, our products and our prospects.

~~· changes in policies affecting third-party coverage and reimbursement in the United States and other countries;~~20

·Table ~~changes~~of ~~in government regulations and standards affecting the medical device industry and our product;~~Contents

·During ~~ability~~the second quarter of 2019 we recorded a non-cash indefinite-lived intangible assets impairment loss, which significantly impacted our ~~products~~results of operations, and we may be exposed to ~~achieve~~additional ~~market~~impairment ~~success;~~losses that could be material.

·We conduct our annual indefinite-lived intangible assets impairment analysis during the ~~performance~~fourth quarter of ~~third~~each year or when circumstances suggest that an indicator for impairment may be present. During the second quarter of 2019, we performed a qualitative impairment analysis of the in-~~party~~process ~~contract~~research ~~manufacturers~~and development (“IPR&D”). Due to delays in the clinical trials experienced during the first six months of 2019, we revised its expectations of when revenues would commence for the ReShape Vest, thus reducing the projected near-term future net cash flows related to the ReShape Vest. As a result, we recorded an impairment charge of approximately $6.6 million of the excess of the carrying value over the estimated fair value. In the future, we may have additional indicators of potential impairment requiring us to record an impairment loss related to our remaining indefinite-lived and ~~component~~finite-lived ~~suppliers;~~intangible assets, which could also have a material adverse effect on our results of operations.

·We ~~our~~will ~~ability~~need tosubstantial ~~develop~~additional ~~sales~~funding and ~~marketing~~may ~~capabilities;~~be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or liquidate some or all of our assets.

24 Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts on the development and commercialization of our products and on research and development, including conducting current and future clinical trials for our Lap-Band system, ReShapeCare, ReShape Vest (if approved for sale) and Diabetes Bloc-Stim Neuromodulation (if approved for sale) and subsequent versions of our products. In addition, in December 2021 we are obligated to pay Apollo the final $3.0 million installment of the purchase price related to our acquisition of LAP-BAND system. For the years ended December 31, 2020 and 2019, net cash used in operating activities was $8.5 million and $14.2 million, respectively. We expect that our cash used in operations will continue to be significant in the upcoming years, and that we will need to raise additional capital to commercialize our Lap-Band system and ReShapeCare, and to develop the ReShape Vest and Diabetes Bloc-Stim Neuromodulation, and to continue our research and development programs, and to fund our ongoing operations.

~~Table~~Our offuture ~~Contents~~ funding requirements will depend on many factors, including:

·● ~~actual~~the orcost ~~anticipated~~and ~~variations~~timing ~~in our results~~ of ~~operations~~establishing orsales, ~~those~~marketing ofand ~~our~~distribution ~~competitors~~capabilities;

·● ~~announcements~~the cost of ~~new~~establishing ~~products~~clinical and commercial supplies of our Lap-Band system, ~~technological~~ReShapeCare, ~~innovations~~ReShape orVest, ~~product~~Diabetes ~~advancements~~Bloc-Stim byNeuromodulation usand orany ~~our~~products ~~competitors~~that we may develop;

·● ~~developments~~the ~~with~~rate ~~respect~~of tomarket ~~patents~~acceptance of our Lap-Band system, ReShapeCare, ReShape Vest, Diabetes Bloc-Stim Neuromodulation and any other ~~intellectual~~product ~~property rights~~candidates;

·● ~~sales~~the cost of ~~common~~filing ~~stock~~and orprosecuting ~~other~~patent ~~securities~~applications byand usdefending orand enforcing our ~~stockholders~~patent inand ~~the~~other ~~future~~intellectual property rights;

·● ~~additions~~the cost of defending, in litigation or ~~departures~~otherwise, ofany ~~key~~claims ~~scientific~~that we infringe third-party patent or ~~management~~other ~~personnel~~intellectual property rights;

·● ~~disputes~~the oreffect ~~other~~of ~~developments~~competing ~~relating~~products ~~to proprietary rights, including patents, litigation matters~~ and ~~our~~market ~~ability to obtain patent protection for our technologies~~developments;

·● the ~~trading~~cost ~~volume~~ of ~~our~~explanting ~~common~~clinical ~~stock~~devices;

·● ~~changes~~the interms ~~earnings~~and ~~estimates~~timing orof ~~recommendations~~any ~~by securities analysts~~collaborative, ~~failure~~licensing ~~to obtain~~ or ~~maintain~~other ~~analyst~~arrangements ~~coverage~~that ofwe ~~our~~may ~~common stock or our failure to achieve analyst earnings estimates~~establish;

·● ~~public~~any ~~statements~~revenue generated by ~~analysts~~sales orof ~~clinicians~~our ~~regarding~~Lap-Band ~~their~~system, ~~perceptions~~ReShapeCare, ofReShape ~~our~~Vest ~~clinical~~and ~~results~~Diabetes orBloc-Stim ~~the~~Neuromodulation ~~effectiveness~~or of our future products;

·● ~~decreases~~the inscope, ~~market~~rate ~~valuations~~of progress, results and cost of ~~medical~~any ~~device~~clinical ~~companies;~~trials and other research and development activities;

·● ~~general~~the ~~market~~cost ~~conditions~~ and ~~other~~timing ~~factors~~of ~~unrelated~~obtaining toany ~~our~~further ~~operating~~required ~~performance~~regulatory orapprovals; ~~the operating performance of our competitors.~~and

The stock prices of many companies in the medical device industry have experienced wide fluctuations that have often been unrelated to the operating performance of these companies. Following periods of volatility in the market price of a company’s securities, securities class action litigation often has been initiated against a company. If class action litigation is initiated against us, we may incur substantial costs and our management’s attention may be diverted from our operations, which could significantly harm our business. 21

~~Sales~~Table of ~~a substantial number of shares of our common stock in the public market by existing stockholders, or the perception that they may occur, could cause our stock price to decline.~~ Contents

~~Sales~~● ~~of substantial amounts of our common stock by us or by our stockholders, announcements of~~ the ~~proposed~~extent ~~sales of substantial amounts of our common stock or the perception that substantial sales may be made, could cause the market price of our common stock~~ to ~~decline.~~which Wewe ~~may~~invest ~~issue additional shares of our common stock~~ in ~~follow-on~~products ~~offerings~~and ~~to raise additional capital~~technologies, ~~upon~~although ~~the~~we ~~exercise~~currently ofhave ~~options~~no orcommitments ~~warrants,~~ or inagreements ~~connection~~relating ~~with acquisitions or corporate alliances. We also plan~~ to issue additional shares to our employees, directors or consultants in connection with their services to us. All of the currently outstanding shares of our common stock are freely tradable under federal and state securities laws, except for shares held by our directors, officers and certain greater than five percent stockholders, which may be subject to holding period, volume and other limitations under Rule 144. Due to these ~~factors,~~types ~~sales~~ of ~~a substantial number of shares of our common stock in the public market could occur at any time and could reduce the market price of our common stock~~transactions.

WeUntil ~~have~~the atime, ~~significant~~if ~~number of outstanding warrants~~ever, ~~options~~when ~~and~~we ~~shares~~can ofgenerate ~~convertible~~a ~~preferred~~sufficient ~~stock,~~amount ~~some~~ of ~~which~~product ~~contain full-ratchet anti-dilution protection~~revenue, ~~which~~we ~~may~~expect ~~cause~~to ~~significant~~finance ~~dilution~~our tofuture ~~our~~cash ~~stockholders,~~needs ~~have~~through apublic ~~material~~or ~~adverse~~private ~~impact~~equity onofferings, ~~the~~debt ~~market~~financings ~~price~~or ofcorporate ~~our~~collaboration, ~~common~~licensing ~~stock~~arrangements and ~~make~~grants, itas ~~more~~well ~~difficult~~as ~~for~~through usinterest toincome ~~raise~~earned ~~funds~~on ~~through~~cash ~~future equity offerings~~balances.

AsAdditional ofcapital ~~December~~may ~~31,~~not ~~2019~~be available on terms favorable to us, or at all. If we ~~had~~raise ~~outstanding~~additional ~~391~~funds by issuing equity securities,~~793~~ ~~shares~~our ofstockholders ~~common~~may ~~stock~~experience dilution. InDebt ~~addition~~financing, asif ofavailable, ~~that~~may ~~date~~involve werestrictive ~~had~~covenants ~~outstanding~~or ~~warrants~~additional tosecurity ~~acquire~~interests ~~13,609,929 shares~~in ofour ~~common~~assets. ~~stock,~~Any ~~options~~additional todebt ~~acquire~~or 46equity ~~shares~~financing ofthat ~~common~~we ~~stock~~complete ~~and~~may ~~shares~~contain ofterms ~~convertible~~that ~~preferred~~are ~~stock~~not ~~convertible~~favorable ~~into~~to anus ~~aggregate~~or ofour ~~1,288~~stockholders. ~~shares~~If ofwe ~~common~~raise ~~stock.~~additional ~~The~~funds ~~issuance~~through ofcollaboration ~~shares~~and oflicensing ~~common~~arrangements ~~stock~~with ~~upon~~third ~~the~~parties, ~~exercise~~it ofmay ~~warrants~~be ornecessary ~~options~~to orrelinquish ~~conversion~~some ofrights ~~preferred~~to ~~stock~~our ~~would~~technologies ~~dilute~~or ~~the~~products, ~~percentage~~or ~~ownership~~grant ~~interest~~licenses ofon ~~all~~terms ~~stockholders,~~that ~~might~~are ~~dilute~~not ~~the~~favorable ~~book~~to ~~value~~us. ~~per~~If ~~share~~we ofare ~~our~~unable ~~common~~to ~~stock~~raise ~~and~~adequate ~~would~~funds, ~~increase~~we may have to delay, reduce the ~~number~~scope of, ~~our~~or ~~publicly~~eliminate ~~traded~~some ~~shares~~or all of, ~~which~~our ~~could~~development ~~depress~~programs ~~the~~or ~~market~~liquidate ~~price~~some or all of our ~~common stock~~assets.

25 We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to compliance initiatives.

~~Table~~As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of ~~Contents~~ 2002 (the “Sarbanes-Oxley Act”), as well as rules subsequently implemented by the SEC have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations result in increased legal and financial compliance costs and will make some activities more time-consuming and costly.

InThe ~~addition,~~Sarbanes-Oxley aAct ~~substantial~~requires, ~~number~~among ofother ~~our~~things, ~~outstanding~~that ~~warrants~~we ~~and~~maintain ~~shares~~effective ofinternal ~~convertible~~controls ~~preferred~~for ~~stock~~financial ~~contain~~reporting ~~so-called~~and ~~full-ratchet~~disclosure. ~~anti-dilution~~In ~~provisions which~~particular, ~~subject~~we toare ~~limited~~required ~~exceptions,~~to ~~would~~perform ~~reduce~~system ~~the~~and ~~exercise~~process ~~price~~evaluation ofand ~~the~~testing ~~warrants (but not increase the number~~ of ~~shares~~our ~~issuable)~~internal ~~and~~controls ~~reduce~~over ~~the~~financial ~~conversion~~reporting ~~price~~to ofallow ~~the~~management ~~convertible~~to ~~preferred~~report ~~stock~~on ~~(and increase~~ the ~~number~~effectiveness of ~~shares~~our ~~issuable)~~internal incontrols ~~the~~over ~~event~~financial ~~that we in the future issue common stock~~reporting, oras ~~securities~~required ~~convertible~~by ~~into~~Section or404 ~~exercisable~~of tothe ~~purchase~~Sarbanes-Oxley ~~common~~Act. ~~stock,~~Our attesting amay ~~lower~~reveal ~~price~~deficiencies ~~per~~in ~~share, to such lower price. Of~~ our ~~outstanding~~internal ~~warrants~~controls asover offinancial ~~December~~reporting ~~31,~~that ~~2019,~~are ~~warrants~~deemed ~~exercisable~~ to ~~purchase~~be ~~350~~material ~~shares of common stock with an exercise price of $150~~weaknesses.00 ~~per~~We ~~share~~have ~~contained~~incurred ~~a full-ratchet anti-dilution provision,~~ and ~~shares~~continue ofto ~~convertible~~expect ~~preferred~~to ~~stock~~incur ~~convertible~~significant ~~into~~expense ~~1,060~~and ~~shares~~devote ofsubstantial ~~common~~management ~~stock~~effort attoward aensuring ~~conversion~~compliance ~~price~~with ofSection ~~$150~~404.00 ~~per~~Moreover, ~~share~~if ~~contained~~we ado ~~full-ratchet~~not ~~anti-dilution~~comply ~~provision.~~with ~~These full ratchet anti-dilution provisions would be triggered by~~ the ~~future~~requirements ~~issuances by us~~ of ~~shares~~Section of404, ~~our common stock~~ or ~~common~~if ~~stock~~we ~~equivalents~~identify atdeficiencies ain ~~price~~our ~~per~~internal ~~share~~controls ~~below~~that ~~the~~are ~~then-exercise~~deemed ~~price of the warrants and the then-conversion price of the convertible preferred stock, subject~~ to ~~limited~~be ~~exceptions.~~material ~~In the event of a liquidation~~weaknesses, the ~~holders~~market ofprice ~~shares~~ of ~~series C~~our ~~convertible preferred~~ stock ~~are~~could ~~entitled~~decline toand bewe ~~paid,~~could ~~before any payments are to~~ be ~~made~~subject to ~~the~~sanctions ~~holders of common stock~~ or ~~any~~investigations ~~other~~by ~~series of preferred stock, an amount per share equal to~~ the ~~greater~~SEC ~~of (i) $692,691.05 per share (on an as-converted-to-common stock basis),~~ or another ~~aggregate~~regulatory ~~of approximately $26.2 million~~authorities, ~~plus~~which ~~any dividends declared but unpaid thereon, or (ii) such amount per share as~~ would ~~have~~entail ~~been~~expenditure ~~payable had all shares~~ of ~~series C~~additional ~~convertible~~financial ~~preferred~~and ~~stock~~management ~~been converted to common stock immediately prior to such liquidation~~resources.

InGeneral ~~addition~~economic ~~to the dilutive effects described above, the perceived risk of dilution as a result of the significant number of outstanding warrants, options~~ and ~~shares~~political ofconditions ~~convertible~~could ~~preferred~~have ~~stock may cause our common stockholders to be more inclined to sell their shares, which would contribute to~~ a ~~downward~~material ~~movement~~adverse ineffect ~~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~~business. 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.

~~You~~External ~~may~~factors ~~experience~~can ~~future~~affect ~~dilution~~our financial condition. Such external factors include general domestic and global economic conditions, such as ainterest ~~result~~rates, oftax ~~future~~law ~~equity~~including ~~offerings~~tax rate changes, and factors affecting global economic stability, and the political environment regarding healthcare in general. We cannot predict to what extent the global economic conditions may negatively impact our business. For example, negative conditions in the credit and capital markets could impair our ability to access the financial markets for working capital and could negatively impact our ability to borrow.

In ~~order to raise additional capital for general corporate purposes~~addition, in the ~~future~~coronavirus weoutbreak ~~may~~has ~~offer~~begun ~~additional~~to ~~shares~~have ofindeterminable ~~our~~adverse ~~common~~effects ~~stock~~on orgeneral ~~other~~commercial ~~securities~~activity ~~convertible~~and ~~into~~the orworld ~~exchangeable~~economy. ~~for~~If ~~our~~the ~~common~~impact ~~stock~~of atthe ~~prices~~coronavirus ~~that~~outbreak ~~may~~continues befor ~~lower~~an ~~than~~extended ~~the~~period, ~~current~~it ~~price~~could ~~per~~materially ~~share~~adversely ofimpact our ~~common~~operating ~~stock.~~and Inclinical ~~addition,~~activities ~~investors~~as ~~purchasing~~a ~~shares~~result orof ~~other securities in~~ the ~~future~~impacts ~~could~~on ~~have~~our ~~rights~~supply ~~superior~~chain, toour ~~existing~~clinical ~~stockholders.~~trial ~~The~~sites, ~~price~~access ~~per~~to ~~share~~patients atand ~~which we sell~~ additional ~~shares~~regulatory ofguidance ~~our~~could ~~common~~be ~~stock,~~delayed or ~~securities~~impacted. ~~convertible~~Our orbusiness ~~exchangeable~~and ~~into~~results ~~common~~of ~~stock,~~operations incould ~~future transactions may~~ be ~~higher~~adversely oraffected ~~lower~~to ~~than~~ the ~~price~~extent ~~per~~that ~~share~~this ~~paid~~coronavirus byor ~~investors~~any inepidemic ~~prior~~harms ~~offerings.~~the global economy.

~~Since our securities are quoted on the OTCQB market, our stockholders may face significant restrictions on the resale of our securities due to state “blue sky” laws.~~

Each state has its own securities laws, often called “blue sky” laws, which (i) limit sales of securities to a state’s residents unless the securities are registered in that state or qualify for an exemption from registration, and (ii) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or the transaction must be exempt from registration. The applicable broker must be registered in that state. We do not know whether our common stock will be registered or exempt from registration under the laws of any state. Since our common stock is currently quoted on the OTCQB, a determination regarding registration will be made by those broker-dealers, if any, who agree to serve as the market-makers for our common stock. There may be significant state blue sky law restrictions on the ability of investors to sell, and on purchasers to buy, our common stock. Investors should therefore consider the resale market for our common stock to be limited, as they may be unable to resell your common stock without the significant expense of state registration or qualification. 22

26 Table of Contents

~~Table~~We offace ~~Contents~~ significant uncertainty in the industry due to government healthcare reform.

~~Our~~In ~~organizational~~the ~~documents~~United States, there have been and ~~Delaware~~continue ~~law~~to ~~make~~be a ~~takeover~~number of ~~our~~legislative ~~company~~initiatives ~~more~~to ~~difficult~~contain healthcare costs. The Patient Protection and Affordable Care Act, ~~which~~as amended, (the “Affordable Care Act”) as well as any future healthcare reform legislation, may ~~prevent~~have ~~certain~~a ~~changes~~significant impact on our business. The impact of the Affordable Care Act on the health care industry is extensive and includes, among other things, the federal government assuming a larger role in ~~control~~the health care system, expanding healthcare coverage of United States citizens and ~~limit~~mandating basic healthcare benefits. The Affordable Care Act contains many provisions designed to generate the ~~market~~revenues ~~price~~necessary to fund the coverage expansions and to reduce costs of ~~our~~Medicare ~~common~~and ~~stock~~Medicaid, including imposing a 2.3% excise tax on domestic sales of many medical devices by manufacturers that began in 2013. A moratorium was placed on the medical device excise tax through 2019. During December of 2019, the medical device excise tax was permanently repealed.

~~Our~~Congress ~~certificate~~is considering legislation to replace or repeal elements or all of ~~incorporation~~the Affordable Care Act. In addition, there have been recent public announcements by members of Congress and ~~bylaws~~the current presidential administration regarding their plans to repeal and ~~Section~~replace ~~203~~the Affordable Care Act. Further, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the Affordable Care Act to waive, defer, grant exemptions from, or delay the implementation of any provision of the ~~Delaware~~Affordable ~~General~~Care ~~Corporation~~Act ~~Law~~that ~~contain~~would ~~provisions~~impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. At this time, it is not clear whether the Affordable Care Act will be repealed in whole or in part, and, if it is repealed, whether it will be replaced in whole or in part by another plan and what impact those changes will have on coverage and reimbursement for healthcare items and services covered by plans that were authorized by the Affordable Care Act. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, and also indirectly affect the amounts that private payers are willing to pay. In addition, any healthcare reforms enacted in the future may, ~~have~~like the ~~effect~~Affordable Care Act, be phased in over a number of ~~deterring~~years orbut, ~~delaying~~if ~~attempts~~enacted, bycould reduce our ~~stockholders~~revenue, increase our costs, or require us to ~~remove~~revise the ways in which we conduct business or ~~replace~~put ~~management~~us at risk for loss of business. In addition, ~~engage~~our inresults ~~proxy~~of ~~contests~~operations, financial position and ~~effect~~cash flows could be materially adversely affected by changes inunder ~~control.~~the ~~These~~Affordable ~~provisions~~Care ~~include:~~Act and changes under any federal or state legislation adopted in the future.

·We ~~the~~are ~~ability~~subject, ofdirectly ~~our~~or ~~board~~indirectly, ofto ~~directors~~United toStates ~~create~~federal and ~~issue~~state ~~preferred~~healthcare ~~stock~~fraud ~~without~~and ~~stockholder~~abuse ~~approval,~~and ~~which~~false ~~could~~claims belaws ~~used~~and regulations. Prosecutions under such laws have increased in recent years and we may become subject to ~~implement~~such ~~anti-takeover~~litigation. ~~devices;~~If we are unable to, or have not fully complied with such laws, we could face substantial penalties.

·Our ~~the~~operations ~~authority~~are ~~for~~directly, ~~our~~or ~~board~~indirectly ofthrough ~~directors~~customers, subject to ~~issue~~various ~~without~~state ~~stockholder~~and ~~approval~~federal upfraud toand abuse laws, including, without limitation, the ~~number~~federal ofAnti-Kickback ~~shares~~Statute ofand ~~common~~federal ~~stock~~False ~~authorized~~Claims inAct. ~~our~~These ~~certificate~~laws ofmay ~~incorporation~~impact, ~~that,~~among ifother ~~issued~~things, ~~would~~our ~~dilute~~sales, ~~the~~marketing ~~ownership~~and ofeducation ~~our~~programs. ~~stockholders;~~

·The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the ~~advance~~referral ~~notice~~of ~~requirement~~an individual, or the furnishing or arranging for ~~director~~a ~~nominations~~good or service, for ~~proposals~~which ~~that~~payment ~~can~~may be ~~acted~~made ~~upon~~under ata ~~stockholder~~federal ~~meetings;~~healthcare program such as the Medicare and Medicaid programs. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. The Anti-Kickback Statute is broad and, despite a series of narrow safe harbors, prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.

·The federal False Claims Act prohibits persons from knowingly filing, or causing to be filed, a ~~classified~~false ~~and~~claim ~~staggered~~to, ~~board~~or the knowing use of ~~directors~~false statements to obtain payment from the federal government. Suits filed under the False Claims Act, ~~which~~known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may ~~make~~share itin ~~more~~any ~~difficult~~amounts ~~for~~paid aby ~~person~~the ~~who~~entity ~~acquires~~to ~~control~~the government in fines or settlement. The frequency of afiling ~~majority~~qui tam actions has increased significantly in recent years, causing greater numbers of ~~our~~medical ~~outstanding~~device, ~~voting~~pharmaceutical ~~stock~~and healthcare companies to ~~replace~~have ~~all~~to ordefend a ~~majority~~False ofClaim ~~our~~Act ~~directors;~~action. When an entity is determined to have violated the federal False Claims Act, it may be required to pay up to three times the actual

~~· the prohibition on actions by written consent of our stockholders;~~23

·Table ~~the limitation on who may call a special meeting~~ of ~~stockholders;~~Contents

·damages ~~the~~sustained ~~prohibition~~by onthe ~~stockholders~~government, ~~accumulating~~plus ~~their~~civil ~~votes~~penalties for each separate false claim. Various states have also enacted laws modeled after the ~~election~~federal ofFalse ~~directors;~~Claims ~~and~~Act.

·We ~~the~~are ~~ability~~unable ofto ~~stockholders~~predict towhether ~~amend~~we ~~our~~could ~~bylaws~~be ~~only~~subject ~~upon~~to ~~receiving~~actions aunder ~~majority~~any of these laws, or the ~~votes~~impact ~~entitled~~of such actions. If we are found to be ~~cast~~in byviolation ~~holders~~of any of ~~all~~the ~~outstanding~~laws ~~shares~~described ~~then~~above ~~entitled~~or other applicable state and federal fraud and abuse laws, we may be subject to ~~vote~~penalties, ~~generally~~including incivil ~~the~~and ~~election~~criminal ofpenalties, ~~directors~~damages, ~~voting~~fines, ~~together~~exclusion asfrom agovernment ~~single~~healthcare ~~class~~reimbursement programs and the curtailment or restructuring of our operations.

InFailure ~~addition, as a Delaware corporation, we are subject~~ to ~~Delaware~~protect ~~law,~~our ~~including~~information ~~Section~~technology ~~203~~information oftechnology ~~the~~infrastructure ~~Delaware~~against ~~General~~cyber-based ~~Corporation Law. In general~~attacks, ~~Section~~network ~~203~~security prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder unless certain specific requirements are met as set forth in Section 203. These provisionsbreaches, ~~alone~~service orinterruptions ~~together, could have the effect of deterring~~ or ~~delaying~~data ~~changes~~corruption incould ~~incumbent~~materially ~~management,~~disrupt ~~proxy~~our ~~contests~~operations orand ~~changes~~adversely inaffect ~~control.~~our business.

~~These~~The ~~provisions~~operation ~~also~~of ~~could~~our ~~discourage~~business ~~proxy~~depends ~~contests~~on our information technology systems. We rely on our information technology systems to, among other things, effectively manage sales and ~~make~~marketing itdata, ~~more~~accounting ~~difficult~~and ~~for~~financial ~~you~~functions, inventory management, product development tasks, clinical data, customer service and ~~other~~technical ~~stockholders~~support functions. Our information technology systems are vulnerable to ~~elect~~damage ~~directors~~or ~~and~~interruption ~~take~~from earthquakes, fires, floods and other ~~corporate~~natural ~~actions~~disasters, terrorist attacks, power losses, computer system or data network failures, security breaches, data corruption, and cyber-based attacks. ~~The~~Cyber-based ~~existence~~attacks can include computer viruses, computer denial-of-service ~~these~~attacks, ~~provisions~~phishing ~~could~~attacks, ~~limit~~worms, ~~the~~and ~~price~~other ~~that~~malicious ~~investors~~software ~~might~~programs beor ~~willing~~other attacks, covert introduction of malware to ~~pay~~computers inand ~~the~~networks, ~~future~~impersonation ~~for~~of ~~shares~~authorized users, and efforts to discover and exploit any design flaws, bugs, security vulnerabilities, or security weaknesses, as well as intentional or unintentional acts by employees or other insiders with access privileges, intentional acts of ~~our~~vandalism ~~common~~by ~~stock~~third parties and sabotage. ~~Some~~In ~~provisions~~addition, infederal, ~~our~~state, ~~certificate~~and ofinternational ~~incorporation~~laws and ~~bylaws~~regulations, ~~may~~such ~~deter~~as ~~third~~the ~~parties~~General ~~from~~Data ~~acquiring~~Protection Regulation adopted by the European Union and EEA countries can expose us to enforcement actions and investigations by regulatory authorities, ~~which~~and ~~may~~potentially ~~limit~~result ~~the~~in ~~market~~regulatory ~~price~~penalties and significant legal liability, if our information technology security efforts fail. In addition, a variety of our ~~common~~software ~~stock~~systems are cloud-based data management applications, hosted by third-party service providers whose security and information technology systems are subject to similar risks.

We ~~have~~operate ~~not~~in ~~paid~~a ~~dividends~~highly incompetitive ~~the~~industry ~~past~~that ~~and~~is dosubject ~~not~~to ~~expect~~rapid tochange. ~~pay~~If ~~dividends~~our incompetitors ~~the~~are ~~future,~~able to develop and ~~any~~market ~~return~~products onthat ~~investment~~are ~~may~~safer beor ~~limited~~more toeffective ~~the~~than ~~value~~our ofproducts, our ~~common~~commercial ~~stock~~opportunities will be reduced or eliminated.

WeThe ~~have~~health ~~never~~care ~~paid~~industry ~~dividends~~is onhighly ~~our~~competitive, ~~common~~subject ~~stock~~to rapid change and dosignificantly ~~not~~affected ~~anticipate~~by ~~paying~~new ~~dividends~~product onintroductions ~~our~~and ~~common~~other ~~stock~~market activities of industry participants. The obesity treatment market in which we operate has grown significantly in recent years and is expected to continue to expand as technology continues to evolve and awareness of the ~~foreseeable~~need ~~future~~to treat the obesity epidemic grows. ~~The~~Although ~~payment~~we are not aware of ~~dividends~~any oncompetitors ~~our~~in ~~common~~the ~~stock~~neuroblocking ~~will~~market, ~~depend~~we onface potential competition from pharmaceutical and surgical obesity treatments. Many of our ~~earnings,~~competitors in the obesity treatment field have significantly greater financial ~~condition~~resources and ~~other~~expertise ~~business~~in research and ~~economic~~development, ~~factors~~manufacturing, ~~affecting~~preclinical ustesting, atclinical ~~such~~trials, ~~time~~obtaining asregulatory ~~our~~approvals ~~board~~and ofmarketing ~~directors~~approved ~~may~~products ~~consider~~than ~~relevant~~we do. IfSmaller weor doearly-stage ~~not~~companies ~~pay~~may ~~dividends~~also prove to be significant competitors, ~~our~~particularly ~~common~~if ~~stock~~they pursue competing solutions through collaborative arrangements with large and established companies, such as Allergan, Apollo Endosurgery, Boston Scientific, LivaNova PLC, Johnson & Johnson, Medtronic or St. Jude Medical. Our competitors may bedevelop ~~less~~and ~~valuable~~patent ~~because~~processes aor ~~return~~products onearlier ~~your~~than ~~investment~~us, ~~will~~obtain ~~only~~regulatory ~~occur~~approvals iffor competing products more rapidly than we are able to and develop more effective, safer and less expensive products or technologies that would render our ~~stock~~products ~~price~~non-competitive ~~appreciates~~or obsolete.

~~ITEM 1B. UNRESOLVED~~Risks ~~STAFF~~Associated ~~COMMENTS~~ with Development and Commercialization of the Lap-Band System, ReShapeCare, ReShape Vest and Diabetes Bloc-Stim Neuromodulation

~~Not~~Our ~~applicable~~efforts to increase revenue from our Lap-Band system and ReShapeCare, and commercialize the ReShape Vest, Diabetes Bloc-Stim Neuromodulation and expanded line of bariatric surgical accessories may not succeed or may encounter delays which could significantly harm our ability to generate revenue.

~~ITEM 2. PROPERTIES~~ Our ability to generate revenue will depend upon the sales of our Lap-Band system, expanded line of bariatric surgical accessories, and ReShapeCare and successful commercialization of our ReShape Vest (if approved for sale) and

~~We lease approximately 14,479 square feet of office/warehouse space in San Clemente, California under an operating lease that expires June 30, 2022.~~ 24

27 Table of Contents

~~Table~~Diabetes Bloc-Stim Neuromodulation (if approved for sale). Our efforts to commercialize these products may not succeed for a number of ~~Contents~~ reasons, including:

~~ITEM 3. LEGAL~~● ~~PROCEEDINGS~~ we may not be able to obtain the regulatory approvals required for our ReShape Vest and/or Diabetes Bloc-Stim Neuromodulation;

~~The~~● ~~Company~~our isproducts ~~not~~may ~~currently a party to any material litigation and the Company is~~ not ~~aware~~be ofaccepted ~~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~~marketplace ~~operates is characterized~~ by ~~frequent claims and litigation~~physicians, ~~including~~patients ~~claims regarding patent~~ and ~~other~~third-party ~~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.~~ payers;

~~ITEM 4. MINE~~● ~~SAFETY~~the ~~DISCLOSURES~~ price of our products, associated costs of the surgical procedure and treatment and the availability of sufficient third-party reimbursement for the system implantation and follow-up procedures;

~~Not~~● ~~applicable.~~appropriate reimbursement and/or coding options may not exist to enable billing for the system implantation and follow-up procedures for our ReShape Vest;

~~PART~~● ~~II.~~ coverage policies for bariatric surgeries, including Lap-Band may be restricted in the future;

~~ITEM~~● ~~5. MARKET~~we ~~FOR~~may ~~REGISTRANT’S~~not ~~COMMON~~be ~~EQUITY,~~able ~~RELATED~~to ~~STOCKHOLDER~~sell ~~MATTERS~~our ~~AND~~products ~~ISSUER~~at ~~PURCHASES~~a OFprice ~~EQUITY~~that ~~SECURITIES~~ allows us to meet the revenue targets necessary to generate enough revenue for profitability;

~~Market~~● ~~Information~~ the frequency and severity of any side effects of our products;

~~Our~~● ~~common~~physicians ~~stock~~and ispotential ~~traded~~patients onmay ~~the~~not ~~OTCQB~~be ~~Market~~aware ~~under~~of the ~~symbol~~perceived ~~RSLS.~~effectiveness ~~Price~~and ~~quotations~~sustainability onof the ~~OTCQB~~results ~~reflect~~of ~~inter-dealer~~our ~~prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.~~ products;

~~Number~~● we, or the investigators of ~~Stockholders~~ our products, may not be able to have information on the outcome of the trials published in medical journals;

As● ofthe ~~March~~availability ~~27,~~and ~~2020,~~perceived ~~there~~advantages ~~were~~and ~~approximately~~disadvantages ~~20 holders~~ of ~~record~~alternative ~~of our common stock.~~ treatments;

~~Securities~~● ~~Authorized~~any ~~for~~rapid ~~Issuance~~technological ~~Under~~change ~~Equity~~may ~~Compensation~~make ~~Plans~~our products obsolete;

~~The~~● ~~information~~we ~~required~~may bynot ~~this~~be ~~Item~~able ~~regarding equity compensation plans is incorporated by reference~~ to ~~the~~have ~~information~~our ~~set~~products ~~forth~~manufactured in ~~Part~~commercial ~~III,~~quantities ~~Item 12~~or ofat ~~this~~an ~~Annual~~acceptable ~~Report on Form 10-K.~~ cost;

~~Unregistered~~● ~~Sales~~we may not have adequate financial or other resources to complete the development and commercialization of ~~Equity~~our ~~Securities~~products or to develop sales and marketing capabilities for our products; and

~~During~~● ~~the~~we ~~period~~may ~~covered~~be bysued ~~this~~for ~~report,~~infringement weof ~~did~~intellectual ~~not~~property ~~sell~~rights ~~any~~and ~~securities~~could ~~which~~be ~~were~~enjoined ~~not~~from ~~registered~~manufacturing ~~under~~or ~~the~~selling ~~Securities~~our ~~Act of 1933, as amended~~products.

~~Uses~~Besides requiring physician adoption, market acceptance of ~~Proceeds~~our ~~from~~products ~~Sale~~will depend on successfully communicating the benefits of ~~Registered~~our ~~Securities~~products to three additional constituencies involved in deciding whether to treat a particular patient using our products: (1) the potential patients themselves; (2) institutions such as hospitals, where the procedure would be performed and opinion leaders in these institutions; and (3) third-party payers, such as private healthcare insurers and governmental payers, such as Medicare and Medicaid in the United States, which would ultimately bear most of the costs of the various providers and equipment involved in our Lap-Band system, ReShape Care, ReShape Vest (if approved for sale) and Diabetes Bloc-Stim Neuromodulation (if approved for sale). Marketing to each of these constituencies requires a different marketing approach, and we must convince each of these groups of the efficacy and utility of our products to be successful.

~~None~~If our products, or any other therapy or products for other gastrointestinal diseases and disorders that we may develop, do not achieve an adequate level of acceptance by the relevant constituencies, we may not generate significant product revenue and may not become profitable.

~~Dividend Policy~~ 25

WeTable ~~have never paid cash dividends on our common stock. The board~~ of directors presently intends to retain all earnings for use in our business and does not anticipate paying cash dividends in the foreseeable future. We do not have a dividend reinvestment plan or a direct stock purchase plan. Contents

~~Issuer~~We ~~Purchases~~may ofnot ~~Equity~~be ~~Securities~~able to obtain required regulatory approvals for our ReShape Vest and/or Diabetes Bloc-Stim Neuromodulation in a cost-effective manner or at all, which could adversely affect our business and operating results.

~~None~~The production and marketing of our ReShape Vest and Diabetes Bloc-Stim Neuromodulation, and our ongoing research and development, preclinical testing and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities both in the United States and abroad. U.S. and foreign regulations applicable to medical devices are wide-ranging and govern, among other things, the development, testing, marketing and premarket review of new medical devices, in addition to regulating manufacturing practices, reporting, advertising, exporting, labeling and record keeping procedures. We are required to obtain regulatory approval before we can market our ReShape Vest and Diabetes Bloc-Stim Neuromodulation in the United States and certain foreign countries. The regulatory process will require significant time, effort and expenditures to bring products to market, and it is possible that our ReShape Vest and/or Diabetes Bloc-Stim Neuromodulation will not be approved for sale. Even if regulatory approval of our ReShape Vest and/or Diabetes Bloc-Stim Neuromodulation is granted, it may not be granted within the timeframe that we expect, which could have an adverse effect on our operating results and financial condition. Even after our ReShape Vest and/or Diabetes Bloc-Stim Neuromodulation is approved by the FDA, we may have ongoing responsibilities under FDA regulations, non-compliance of which could result in the subsequent withdrawal of such approvals, or such approvals could be withdrawn due to the occurrence of unforeseen problems following initial approval. We also are subject to medical device reporting regulations that require us to report to the FDA if any of our products causes or contributes to a death or serious injury or if a malfunction were it to occur might cause or contribute to a death or serious injury. Any failure to obtain regulatory approvals on a timely basis or the subsequent withdrawal of such approvals could prevent us from successfully marketing our products, which could adversely affect our business and operating results.

~~ITEM 6. SELECTED~~We ~~FINANCIAL~~depend ~~DATA~~ on clinical investigators and clinical sites to enroll patients in our clinical trials, and on other third parties to manage the trials and to perform related data collection and analysis, and, as a result, we may face costs and delays that are outside of our control.

~~Not~~We ~~applicable~~rely on clinical investigators and clinical sites to enroll patients in our clinical trials and other third parties to manage the trials and to perform related data collection and analysis. However, we may not be able to control the amount and timing of resources that clinical sites may devote to our clinical trials. If these clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials, ensure compliance by patients with clinical protocols or comply with regulatory requirements, we will be unable to complete these trials, which could prevent us from obtaining or maintaining regulatory approvals for our product. Our agreements with clinical investigators and clinical trial sites for clinical testing place substantial responsibilities on these parties and, if these parties fail to perform as expected, our trials could be delayed or terminated. If these clinical investigators, clinical sites or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated, or the clinical data may be rejected by the FDA, adversely affecting our ability to successfully commercialize our product.

28 Modifications to the Lap-Band system may require additional approval from regulatory authorities, which may not be obtained or may delay our commercialization efforts.

~~Table~~The FDA and our European Notified Body require medical device companies to initially make and document a determination of ~~Contents~~ whether or not a modification requires a new approval, supplement or clearance; however, some of these regulatory authorities can review a company’s decision. Any modifications to an approved device that could significantly affect its safety or efficacy, or that would constitute a major change in its intended use could require additional clinical studies and separate regulatory applications. Product changes or revisions will require all the regulatory steps and associated risks discussed above possibly including testing, regulatory filings and clinical study. We may not be able to obtain approval of supplemental regulatory approvals for product modifications, new indications for our product or new products. Delays in obtaining future clearances would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our commercialization efforts and future growth.

~~ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~ 26

~~Except~~Table ~~for the historical information contained herein, the matters discussed in this “Management’s Discussion and Analysis~~ of Financial Condition and Results of Operations,” and elsewhere in this Form 10-K are forward-looking statements that involve risks and uncertainties. The factors listed in Item 1A “Risk Factors,” as well as any cautionary language in this Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from those projected. 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. Contents

~~Overview~~If we or our suppliers fail to comply with ongoing regulatory requirements, or if we experience unanticipated product problems, our Lap-Band system could be subject to restrictions or withdrawal from the market.

WeAny ~~are~~product afor ~~developer~~which ofwe ~~minimally~~obtain ~~invasive~~marketing ~~medical~~approval, ~~devices~~along ~~that~~with ~~advance~~the ~~bariatric~~manufacturing ~~surgery~~processes, post-approval clinical data and promotional activities for such product, will be subject to ~~treat~~continual ~~obesity~~review and ~~metabolic~~periodic ~~diseases.~~inspections ~~Our~~by ~~current~~our ~~portfolio~~European ~~includes~~Notified Body and the ~~LAP-BAND®~~FDA ~~Adjustable~~and ~~Gastric~~other ~~Banding~~regulatory bodies. In particular we and our manufacturers and suppliers are required to comply with ISO requirements, Good Manufacturing Practices, which for medical devices is called the Quality System Regulation (“QSR”), and other regulations which cover the ~~ReShape~~methods ~~VestTM~~and documentation of the design, antesting, ~~investigational~~production, ~~device~~control, toquality ~~help~~assurance, ~~treat~~labeling, ~~more~~packaging, ~~patients~~storage ~~with~~and ~~obesity~~shipping of any product for which we obtain marketing approval. ~~There~~The ~~has~~FDA ~~been~~enforces nothe ~~revenue~~QSR ~~recorded~~through ~~for~~inspections, which may be unannounced, and the ~~ReShape~~CE ~~Vest~~system enforces its certification through inspections and audits as well. Our quality system has received certification of compliance to the ~~product~~requirements isof ~~still~~ISO in13485:2016 and will have to continue to successfully complete such inspections to maintain regulatory approvals for sales outside of the ~~development~~United ~~stage~~States. ~~Following~~Failure ~~our~~by ~~acquisition~~us or one of our manufacturers or suppliers to comply with statutes and regulations administered by the ~~Lap-Band~~FDA, ~~product~~CE ~~line~~authorities inand ~~December~~other ~~2018~~regulatory bodies, weor ~~are~~failure noto ~~longer~~adequately ~~actively~~respond ~~marketing~~to ~~the~~any ~~ReShape~~observations, ~~vBloc~~could ~~product.~~result ~~There~~in ~~have~~enforcement ~~been~~actions noagainst ~~revenues~~us or ~~gross~~our ~~profits~~manufacturers ~~associated~~or ~~with~~suppliers, ~~the~~including, ~~ReShape~~restrictions ~~vBloc~~on our product ~~since~~or ~~September~~manufacturing 30processes, ~~2018~~withdrawal of the product from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties.

~~Financial~~If ~~Overview~~any of these actions were to occur it would harm our reputation and cause our product sales to suffer. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with applicable regulatory requirements. If the FDA or any other regulatory body finds their compliance status to be unsatisfactory, our commercialization efforts could be delayed, which would harm our business and our results of operations.

~~Results~~Additionally, if the FDA determines that our promotional materials, training or other activities constitute promotion of ~~Operations~~an –unapproved ~~Continuing~~use, ~~Operations~~ we could be subject to significant liability, the FDA could request that we cease, correct or modify our training or promotional materials or subject us to regulatory enforcement actions. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our training or other promotional materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement.

~~The~~We ~~following~~are ~~table~~subject ~~sets~~to ~~forth~~medical ~~certain~~device ~~data~~reporting ~~from~~regulations that require us to report to the FDA, Competent Authorities or other governmental authorities in other countries if our ~~operating~~products ~~results~~cause ~~from~~or contribute to a death or serious injury or malfunction in a way that would be reasonably likely to contribute to death or serious injury if the ~~years~~malfunction ~~ended~~were ~~December~~to ~~31,~~recur. ~~2019~~The FDA and ~~2018~~similar governmental authorities in other countries have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacturing. A government mandated, ~~expressed~~or voluntary, recall by us could occur as ~~percentages~~a result of ~~net~~component ~~revenue~~failures, (manufacturing errors or design defects, including defects in ~~thousands):~~ labeling. Any recall would divert managerial and financial resources and could harm our reputation with customers. There can be no assurance that there will not be product recalls in the future or that such recalls would not have a material adverse effect on our business. Once the product is approved and implanted in a large number of patients, infrequently occurring adverse events may appear that were not observed in the clinical trials. This could cause health authorities in countries where the product is available to take regulatory action, including marketing suspension and recall.

	Years Ended December 31,
	2019				2018
Revenue	$	15,089	100.0	%	$	607	100.0	%
Cost of goods sold		5,784	38.3	%		164	27.0	%
Gross profit		9,305	61.7	%		443	73.0	%
Operating expenses:							-
Sales and marketing		4,847	32.1	%		5,237	862.8	%
General and administrative		17,224	114.1	%		14,025	2,310.5	%
Research and development		3,121	20.7	%		5,722	942.7	%
Impairment of intangible assets and goodwill		6,588	43.7	%		14,005	2,307.2	%
Legal settlement		1,500	9.9	%		—	—	%
Loss on disposal of assets		486	3.2	%		—	—	%
Total operating expenses		33,766	223.8	%		38,989	6,423.2	%
Operating loss		(24,461)	(162.1)	%		(38,546)	(6,350.2)	%
Other expense (income), net:
Interest expense, net		451	3.0	%		12	2.0	%
Loss on extinguishment of debt		71	0.5	%		-	-	%
Warrant expense		49,027	324.9	%		145	23.9	%
(Gain) on foreign currency exchange		(247)	(1.6)	%		-	-	%
Other, net		1,337	8.9	%		11	1.8	%
Loss from continuing operations before income taxes		(75,100)	(497.7)	%		(38,714)	(6,377.9)	%
Income tax benefit		893	5.9	%		3,447	567.9	%
Loss from continuing operations		(74,207)	(491.8)	%		(35,267)	(5,810.0)	%
Loss from discontinued operations, net of tax		-	-	%		(45,885)	(7,559.3)	%
Net loss		(74,207)	(491.8)	%		(81,152)	(13,369.4)	%
Less: Down round adjustments for convertible preferred stock and warrants		-	-	%		(3,079)	(507.2)	%
Net loss attributable to common shareholders	$	(74,207)	(491.8)	%	$	(84,231)	(13,876.6)	%

We may be unable to manage our growth effectively.

29 Our business strategy entails significant future growth. For example, we will have to expand existing operations in order to increase revenue from our Lap-Band system and ReShapeCare, and develop our ReShape Vest and Diabetes Bloc-Stim Neuromodulation, conduct additional clinical trials, increase our contract manufacturing capabilities, hire and train new personnel to handle the marketing and sales of our product, assist patients and healthcare providers in obtaining reimbursement for the use of our product and create and develop new applications for our technology. This growth may place significant strain on our management and financial and operational resources. Successful growth is also dependent upon our ability to implement appropriate financial and management controls, systems and procedures. Our ability to effectively manage growth depends on our success in attracting and retaining highly qualified personnel, for which the competition may be intense. If we fail to manage these challenges effectively, our business could be harmed.

~~Table of Contents~~ 27

~~The~~Table ~~following table sets forth certain data from our operating results for each~~ of ~~the fiscal quarters of 2019 (in thousands):~~ Contents

	For the three months ended
(Unaudited)		March 31,2019		June 30,2019		September 30,2019		December 31,2019
Revenue	$	3,074	$	4,450	$	3,515	$	4,050
Cost of goods sold		843		1,593		1,413		1,935
Gross profit		2,231		2,857		2,102		2,115
Operating expenses:
Sales and marketing		1,117		1,271		950		1,509
General and administrative		4,304		5,521		4,412		2,987
Research and development		1,056		960		858		247
Impairment of intangible assets		—		6,588		—		—
Legal settlement		—		—		1,500		—
Loss on disposal of assets		—		—		—		486
Total operating expenses		6,477		14,340		7,720		5,229
Operating loss		(4,246)		(11,483)		(5,618)		(3,114)
Other expense (income), net:
Interest expense, net		103		213		74		61
Loss on extinguishment of debt		—		71		—		—
Warrant expense		130		4,127		22,564		22,206
(Gain) loss on foreign currency transactions		—		—		(229)		(18)
Other, net		(3)		612		727		1
Loss from continuing operations before income taxes		(4,476)		(16,506)		(28,754)		(25,364)
Income tax benefit		—		586		—		307
Net loss attributable to common shareholders	$	(4,476)	$	(15,920)	$	(28,754)	$	(25,057)

We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be able to obtain adequate product liability insurance.

30 Our business exposes us to a risk of product liability claims that is inherent in the testing, manufacturing and marketing of medical devices. The medical device industry has historically been subject to extensive litigation over product liability claims. We may be subject to product liability claims if our products cause, or appear to have caused, an injury. Claims may be made by consumers, healthcare providers, third-party strategic collaborators or others selling our products.

~~Table~~We have product liability insurance, which covers the use of ~~Contents~~ our products in our clinical trials and any commercial sales, in an amount we believe is appropriate. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, the coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost and on acceptable terms for an adequate coverage amount, or otherwise to protect against potential product liability claims, we could be exposed to significant liabilities, which may harm our business. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business, financial condition and results of operations. These liabilities could prevent or interfere with our product commercialization efforts. Defending a suit, regardless of merit, could be costly, could divert management attention and might result in adverse publicity, which could result in the withdrawal of, or inability to recruit, clinical trial volunteers or result in reduced acceptance of our products in the market.

~~Non-GAAP~~We ~~Disclosures~~ may be subject to product liability claims even if it appears that the claimed injury is due to the actions of others. For example, we rely on the expertise of surgeons and other associated medical personnel to perform the medical procedure to implant and remove our products and to perform the related therapy. If these medical personnel are not properly trained or are negligent, the therapeutic effect of our products may be diminished or the patient may suffer critical injury, which may subject us to liability. In addition, an injury that is caused by the negligence of one of our suppliers in supplying us with a defective component that injures a patient could be the basis for a claim against us. A product liability claim, regardless of its merit or eventual outcome, could result in decreased demand for our products; injury to our reputation; diversion of management’s attention; withdrawal of clinical trial participants; significant costs of related litigation; substantial monetary awards to patients; product recalls or market withdrawals; loss of revenue; and the inability to commercialize our products under development.

In addition to the financial information prepared in conformity with GAAP, we provide certain historical non-GAAP financial information. Management believes that these non-GAAP financial measures assist investors in making comparisons of period-to-period operating results and that, in some respects, these non-GAAP financial measures are more indicative of the Company’s ongoing core operating performance than their GAAP equivalents.

~~Management~~Risks ~~believes~~Related that the presentation of this non-GAAP financial information provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, and amortization methods, which provides a more complete understanding of our financial performance, competitive position, and prospects for the future. However, the non-GAAP financial measures presented in this Form 10-K have certain limitations in that they do not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. Therefore, investors should consider non-GAAP financial measures in addition to, ~~and~~Intellectual ~~not~~Property as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, the non-GAAP financial measures presented by the Company may be different from similarly named non-GAAP financial measures used by other companies.

~~Adjusted~~If ~~EBITDA~~ we are unable to obtain or maintain intellectual property rights relating to our technology and neuroblocking therapy, the commercial value of our technology and any future products will be adversely affected and our competitive position will be harmed.

~~Management~~Our ~~uses~~commercial ~~Adjusted~~success ~~EBITDA~~depends in ~~its~~part ~~evaluation~~on ofour ability to obtain protection in the ~~Company’s~~United ~~core~~States ~~results~~and ofother ~~operations~~countries for our Lap-Band system, ReShapeCare, ReShape Vest and ~~trends~~Diabetes ~~between~~Bloc-Stim ~~fiscal~~Neuromodulation ~~periods~~by establishing and ~~believes~~maintaining ~~that~~intellectual ~~these~~property ~~measures~~rights ~~are~~relating ~~important~~to ~~components~~or ofincorporated ~~its~~into ~~internal~~our ~~performance~~technology ~~measurement~~and ~~process~~products. ~~Adjusted~~We ~~EBITDA~~own isnumerous ~~defined~~U.S. asand ~~net~~foreign ~~loss~~patents ~~before~~and ~~interest,~~have ~~taxes~~numerous patent applications pending, ~~depreciation~~most of which pertain to treating gastrointestinal disorders and ~~amortization~~the treatment of obesity. We have also received or applied for additional patents outside the United States. Our pending and future patent applications may not issue as patents or, ~~stock-based~~if ~~compensation~~issued, ~~changes~~may not issue in ~~fair~~a ~~value~~form ofthat ~~liability~~will ~~warrants~~provide ~~and~~us ~~other~~any ~~one-time~~competitive ~~costs~~advantage. ~~Management~~We ~~uses~~expect ~~Adjusted~~to ~~EBITDA~~incur substantial costs in ~~its~~obtaining ~~evaluation~~patents ofand, ~~the~~if ~~Company’s~~necessary, ~~core~~defending ~~results~~our proprietary rights. The patent positions of ~~operations~~medical device companies, including ours, can be highly uncertain and ~~trends~~involve ~~between~~complex ~~fiscal~~and ~~periods~~evolving legal and ~~believes~~factual questions. We do not know whether we will obtain the patent protection we seek, or that ~~these~~the ~~measures~~protection ~~are~~we ~~important~~do ~~components~~obtain ofwill ~~its~~be ~~internal~~found ~~performance~~valid ~~measurement~~and ~~process~~enforceable if challenged. ~~Therefore~~If we fail to obtain adequate protection of our intellectual property, ~~investors should~~or ~~consider~~if ~~non-GAAP~~any ~~financial~~protection ~~measures~~we obtain is reduced or eliminated, others could use our intellectual property without compensating us, resulting in ~~addition~~harm to, ~~and~~our ~~not~~business. asWe may also determine that it is in our best interests to voluntarily challenge a ~~substitute~~third-party’s ~~for~~products or patents in litigation or administrative proceedings, including patent interferences, re-examinations or asunder ~~superior~~more torecently promulgated Inter Partes Review proceedings, ~~measures~~depending on when the patent application was filed. In the event that we seek to enforce any of ~~financial~~our ~~performance~~owned ~~prepared~~or inexclusively ~~accordance~~licensed ~~with~~patents ~~GAAP.~~against ~~Further~~an infringing party, it is likely that the ~~non-GAAP~~party ~~financial~~defending ~~measures~~the ~~presented~~claim bywill seek to invalidate the ~~Company~~patents ~~may~~we assert, which, if successful could result in the loss of the entire patent or the relevant portion of our patent, which would not be ~~different~~limited ~~from~~to ~~similarly~~any ~~named~~particular ~~non~~party. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-~~GAAP~~consuming ~~financial~~and ~~measures~~could ~~used~~divert bythe ~~other~~attention ~~companies.~~ of our

31 28

Table of Contents

~~The~~management ~~following~~and ~~table~~key ~~contains~~personnel afrom ~~reconciliation~~our ofbusiness ~~non-GAAP~~operations. ~~net~~Even ~~loss~~if we were to ~~GAAP~~prevail ~~net~~in ~~loss~~any ~~attributable~~litigation, towe ~~common~~cannot ~~stockholders~~assure ~~for~~you ~~the~~that ~~years~~we ~~ended~~can ~~December~~obtain 31an injunction that prevents our competitors from practicing our patented technology. Our competitors may independently develop similar or alternative technologies or products without infringing any of our patent or other intellectual property rights, ~~2019~~or ~~and~~may ~~2018~~design ~~(in~~around ~~thousands)~~our proprietary technologies.

	Years Ended December 31,
		2019		2018
GAAP net loss attributable to common stockholders	$	(74,207)	$	(35,267)
Adjustments:
Interest expense (income) net:		451		12
Income tax provision (benefit)		(893)		(3,447)
Depreciation and amortization		1,706		440
Stock compensation expense		2,311		3,098
Loss on debt extinguishment		71		—
Liability warrant expense		49,027		145
Loss on litigation settlement		1,500		—
Impairment of intangible assets and goodwill		6,588		14,005
Loss on disposal of assets		486		—
Other		1,337		11
Non-GAAP loss	$	(11,623)	$	(21,003)

~~The~~Non-payment ~~following~~or ~~table~~delay ~~contains~~in apayment ~~reconciliation~~ of ~~non-GAAP~~patent ~~net~~fees or annuities, whether intentional or unintentional, may result in loss of patents or patent rights important to ~~GAAP~~our ~~net~~business. ~~loss~~Many ~~attributable~~countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to ~~common~~grant ~~stockholders~~licenses ~~for~~to ~~each~~third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, the ~~fiscal~~patent ~~quarters~~owner may have limited remedies, which could materially diminish the value of ~~2019~~the (patent. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States, particularly in ~~thousands):~~ the field of medical products and procedures.

	For the three months ended
(Unaudited)		March 31,2019		June 30,2019		September 30,2019		December 31,2019
GAAP net loss attributable to common stockholders	$	(4,476)	$	(15,920)	$	(28,754)	$	(25,057)
Adjustments:
Interest expense (income) net:		103		213		74		61
Income tax provision (benefit)		—		(586)		—		(307)
Depreciation and amortization		433		430		423		420
Stock compensation expense		1,256		727		(497)		825
Loss on debt extinguishment		—		71		—		—
Liability warrant expense		130		4,127		22,564		22,206
Loss on litigation settlement		—		—		1,500		—
Impairment of intangible assets		—		6,588		—		—
Loss on disposal of assets		—		—		—		486
Other		(3)		612		727		1
Non-GAAP loss	$	(2,557)	$	(3,738)	$	(3,963)	$	(1,365)

Many of our competitors have significant resources and incentives to apply for and obtain intellectual property rights that could limit or prevent our ability to commercialize our current or future products in the United States or abroad.

~~Results~~Many of ~~operations~~ our competitors who have significant resources and have made substantial investments in competing technologies may seek to apply for and obtain patents that will prevent, limit or interfere with our ability to make, use or sell our products either in the U.S. or in international markets. Our current or future U.S. or foreign patents may be challenged, circumvented by competitors or others or may be found to be invalid, unenforceable or insufficient. In most cases in the United States patent applications are published 18 months after filing the application, or corresponding applications are published in other countries, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first to make the inventions covered by each of our pending patent applications, or that we were the first to file patent applications for such inventions.

~~Revenue.~~If ~~Revenue~~we ~~totaled~~are ~~$15.1~~unable ~~million~~to ~~for~~protect the ~~year~~confidentiality ~~ended December 31, 2019. For the year ended December 31, 2018 revenue was $0.6 million. During 2019, revenue included sales~~ of ~~Lap-Band~~our inproprietary ~~the~~information ~~U.S.~~ and ~~beginning in April and September 2019~~know-how, ~~in Australia and select countries throughout Europe, respectively. The Company made significant progress, increasing revenue $14.5 million over~~ the ~~same~~value ~~period last year. Revenue for the fourth quarter 2019 was approximately $4.1 million, an increase~~ of ~~$0.6 million over the third quarter, which was in line with~~ our ~~expectations. The~~technology ~~primary reason for the increase is due to lower sales during July~~ and ~~August~~products ~~from~~could ~~seasonality~~be ~~that~~adversely ~~had also been seen industry-wide~~affected.

~~Revenue~~In ~~from~~addition ~~continuing~~to ~~operations~~patented ~~totaled~~technology, ~~$0.6~~we ~~million~~rely ~~for~~on ~~the~~our ~~year~~unpatented ~~ended~~proprietary ~~December~~technology, 31trade secrets, ~~2018~~processes and know-how. ~~During~~We ~~2018,~~generally ~~revenue~~seek ~~included~~to ~~sales~~protect ofthis information by confidentiality agreements with our ~~recently~~employees, ~~acquired~~consultants, ~~Lap-Band~~scientific ~~product~~advisors ofand $0third parties.4 ~~million~~These agreements may be breached, and ~~sales~~we ofmay not have adequate remedies for any such breach. In addition, our ~~ReShape~~trade ~~vBloc~~secrets ~~product~~may ofotherwise $0become known or be independently developed by competitors.2 ~~million~~To the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

32 Intellectual property litigation is a common tactic in the medical device industry to gain competitive advantage. If we become subject to a lawsuit, we may be required to expend significant financial and other resources and our management’s attention may be diverted from our business.

~~Table~~There has been a history of ~~Contents~~ frequent and extensive litigation regarding patent and other intellectual property rights in the medical device industry, and companies in the medical device industry have employed intellectual property

Gross profit. Gross profit for the fourth quarter and year ended December 31, 2019, was $2.1 million and $9.3 million, respectively, reflecting cost of sales associated with the established Lap-Band product line. Gross profit as a percentage of total revenue for the three months and year ended December 31, 2019 was 52 percent and 62 percent, respectively. Gross profit was 60 percent for the third quarter ended September 30, 2019, 64 percent for the second quarter ended June 30, 2019, and 73 percent for the first three months of 2019. The lower gross profit rate is primarily the result of increased international sales which have lower margins than domestically. Also negatively affecting gross profit were various inventory write offs and reserves associated with the December 2018 Lap-Band purchase. 29

~~Sales~~Table and Marketing Expense. Sales and marketing expense for the year ended December 31, 2019 decreased by $0.4 million or 7% to $4.8 million, as compared to $5.2 million for the same period last year. During the fourth quarter of 2019 sales and marketing expense was $1.5 million compared to $0.9 million during the third quarter of 2019, $1.3 million during the second quarter of 2019 and $1.1 million during the first quarter of 2019. The increase of sales and marketing expense during the fourth quarter of 2019 is partially due to the Company increasing its sales force late in the third quarter resulting in higher payroll related expenses, including sales commissions. Additionally, during the fourth quarter the Company attended multiple trade conventions, both domestic and international, and began its digital advertising initiative. Contents

~~General~~litigation ~~and~~to ~~Administrative~~gain ~~Expense. General~~a ~~and~~competitive ~~administrative expense for the year ended December 31, 2019 increased by $3~~advantage.2 ~~million~~Accordingly, or ~~23%~~we ~~to $17.2 million,~~may asbecome ~~compared~~subject to ~~$14.0~~patent ~~million~~infringement ~~for~~claims ~~the~~or ~~same~~litigation ~~period~~in ~~last~~a ~~year.~~court ~~General~~of ~~and administrative expense was $3.0 million~~law, ~~the~~or ~~lowest~~interference ofproceedings ~~the~~declared ~~year,~~by ~~for~~ the ~~fourth~~USPTO ~~quarter of 2019, compared~~ to ~~$4.4 million~~determine ~~for~~ the ~~third~~priority ~~quarter~~ of ~~2019,~~inventions ~~$5.5~~or ~~million~~an ~~for~~opposition ~~the~~to ~~second~~a ~~quarter~~patent ofgrant ~~2019~~in ~~and~~a ~~$4.3~~foreign ~~million for the first quarter of 2019~~jurisdiction. ~~During~~We ~~the~~may ~~fourth~~also ~~quarter~~become ~~the~~subject ~~Company began~~ to ~~realize~~claims ~~the~~or ~~cost cutting efforts that have been implemented, which include changing various professional service providers, consolidating offices, and settling all~~ litigation ~~matters. During~~seeking ~~the~~payment ~~first nine months~~ of ~~2019,~~royalties ~~the~~based ~~Company~~on ~~transitioned~~sales ~~managerial~~of ~~and~~our ~~operational~~product ~~operations from Minnesota to California, which resulted~~ in ~~moving~~connection ~~expenses~~with ~~and~~licensing ~~approximately~~or ~~$1.0~~similar ~~million~~joint ofdevelopment ~~severance~~arrangements ~~costs~~with ~~primarily~~third ~~incurred~~parties ~~during~~or ~~the~~in ~~second~~connection ~~quarter.~~with ~~Additionally,~~claims ~~during fiscal 2019, the Company incurred $0.6 million for a new ERP implementation and over $2.0 million~~ of ~~one-time~~patent ~~litigation related expenditures~~infringement.

~~Research~~The defense and ~~Development~~prosecution ~~Expense.~~of ~~Research~~intellectual ~~and~~property ~~development~~suits, ~~expense~~USPTO ~~for~~interference ~~the~~proceedings, ~~year~~reexamination ~~ended~~proceedings, ~~December~~or 31under more recently promulgated Inter Partes Review proceedings, ~~2019~~depending ~~decreased~~on bywhen ~~$2.6~~the ~~million~~patent application was filed, or ~~45%~~opposition proceedings and related legal and administrative proceedings, are both costly and time consuming and could result in substantial uncertainty to $3us.1 ~~million,~~Litigation asor ~~compared~~regulatory ~~with~~proceedings ~~$5.7~~may ~~million~~also ~~for~~be ~~the~~necessary ~~same~~to ~~period~~enforce ~~last~~patent ~~year.~~or ~~Research~~other ~~and~~intellectual ~~development~~property ~~expense~~rights ~~for~~of ours or to determine the ~~fourth~~scope ~~quarter~~and validity of ~~2019~~other ~~was~~parties’ ~~approximately~~proprietary $0rights.2 ~~million~~Any ~~compared~~litigation, toopposition ~~$0.8 million~~or ~~for~~interference ~~the~~proceedings, ~~third~~with ~~quarter~~or without merit, ~~$1.0~~may ~~million~~result ~~for~~in substantial expense to us, cause significant strain on our financial resources, divert the ~~second~~attention ~~quarter~~of our technical and $1management personnel and harm our reputation.~~1 million~~ ~~for~~We may not have the ~~first~~financial ~~quarter~~resources to defend our patents from infringement or claims of invalidity. ~~Research~~An ~~and~~adverse ~~development~~determination ~~expenses were primarily~~in ~~related~~any litigation could subject us to ~~payroll~~significant ~~related~~liabilities ~~expenses~~to ~~and~~third ~~clinical~~parties, ~~trial~~require ~~expenses~~us ~~for~~to ~~the~~seek ~~ReShape~~licenses ~~Vest~~from or pay royalties to third parties or prevent us from manufacturing, selling or using our proposed products, any of which could have a material adverse effect on our business and prospects.

~~Impairment~~Our ofLap-Band ~~Intangible~~system, ~~Assets~~ReShapeCare, ~~and~~ReShape ~~Goodwill. The~~Vest ~~Company~~or ~~incurred~~Diabetes anBloc-Stim ~~impairment~~Neuromodulation ~~charge~~may ofinfringe ~~$6.6~~or ~~million~~be ~~for~~claimed ~~the~~to ~~year~~infringe ~~ended~~patents ~~December~~that 31we do not own or license, ~~2019~~including patents that may issue in the future based on patent applications of which we are currently aware, as ~~compared~~well ~~with~~as anapplications ~~impairment~~of ~~charge~~which ofwe ~~$14~~are unaware.0 ~~million~~For ~~for~~example, ~~the~~we ~~same~~are ~~period~~aware ~~last~~of ~~year.~~other Ascompanies athat ~~result~~are investigating neurostimulation, including neuroblocking, and of anpatents ~~impairment~~and ~~analysis~~published ~~performed~~patent ~~during~~applications ~~the~~held ~~second~~by ~~quarter~~companies in those fields. While we believe that none of ~~2019~~such patents and patent applications are applicable to our products and technologies under development, ~~the~~third ~~Company~~parties ~~determined~~who ~~there~~own ~~was~~or ancontrol ~~impairment~~these ofpatents and patent applications in the ~~indefinite-lived~~United ~~intangible~~States ~~asset~~and ~~recorded~~abroad could bring claims against us that would cause us to incur substantial expenses and, if such claims are successfully asserted against us, they could cause us to pay substantial damages, could result in ~~connection~~an ~~with~~injunction ~~our~~preventing ~~acquisition~~us offrom ~~BarioSurg~~selling, ~~Inc.~~manufacturing ~~(“BarioSurg”)~~or using our proposed products and would divert management’s attention. WeBecause ~~also~~patent ~~assessed~~applications in many countries such as the ~~recoverability~~United States are maintained under conditions of ~~finite-lived~~confidentiality ~~intangible~~and ~~assets~~can ~~during~~take ~~the~~many ~~second~~years ~~quarter~~to issue, there may be applications now pending of ~~2019~~which we are unaware, and ~~did~~which ~~not~~may ~~identify~~later ~~any~~result ~~impairment~~in asissued patents that our products infringe. If a ~~result~~patent infringement suit were brought against us, we could be forced to stop our ongoing or planned clinical trials, or delay or abandon commercialization of the ~~performance~~product that is subject of ~~this~~the ~~analysis~~suit.

~~Based~~As ona anresult ~~impairment~~of ~~analysis~~patent ofinfringement ~~our~~claims, ~~goodwill~~or ~~and~~to ~~intangible~~avoid ~~assets~~potential ~~performed~~claims, ~~during~~we ~~the~~may ~~second~~choose ~~quarter~~or ofbe ~~2018,~~required ~~impairment~~to ofseek ~~intangible~~a ~~assets~~license ~~for~~from ~~the~~a ~~year~~third-party ~~ended~~and ~~December~~be 31required to pay license fees or royalties, ~~2018~~or isboth. ~~related~~A tolicense amay ~~goodwill~~not ~~impairment~~be ~~loss~~available ofat ~~$14.0~~all ~~million~~or on commercially reasonable terms, ~~which~~and ~~eliminated~~we ~~the~~may ~~goodwill~~not ~~balance~~be ~~related~~able to redesign our ~~acquisition~~products ofto ~~BarioSurg~~avoid infringement. ~~There~~Modification ~~were~~of noour ~~impairment~~products ~~charges~~or ~~recorded~~development ~~relative~~of new products could require us to conduct additional clinical trials and to revise our filings with the ~~indefinite~~FDA and ~~finite~~other regulatory bodies, which would be time-~~lived~~consuming ~~intangible~~and ~~assets~~expensive. Even if we were able to obtain a license, the rights may be nonexclusive, which could result in ~~2018.~~our ~~Refer~~competitors gaining access to ~~Note~~the 9same intellectual property. Ultimately, we could be forced to ~~our~~cease ~~Consolidated~~some ~~Financial~~aspect ~~statements~~of ~~for~~our ~~additional~~business ~~information~~operations ~~about~~if, ~~impairment~~as a result of ~~intangible~~actual ~~assets~~or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. This could harm our business significantly.

~~Legal~~Risks ~~Settlement.~~Relating ~~During~~to ~~the~~Ownership ~~quarter ended September 30, 2019, the Company recognized a contingent loss~~ of ~~$1.5~~Our ~~million~~Common ~~relating~~Stock ~~to the patent infringement claim with Fulfillium. Under the Settlement Agreement, Fulfillium agreed to dismiss with prejudice the previously disclosed lawsuits by Fulfillium.~~

~~Loss~~Our oncommon ~~Disposal~~stock oftrades ~~Assets. The~~on ~~Company~~an ~~recorded a $0.5 million loss related to the disposal of long~~over-~~term assets acquired in connection with~~ the ~~lap~~-~~band~~counter ~~purchase~~market.

~~Net~~Our ~~Interest~~common ~~Expense~~stock trades on the OTCQB market and ~~Loss~~therefore onmay ~~Extinguishment~~have ofless ~~Debt~~liquidity and may experience potentially more price volatility than experienced when our shares traded on Nasdaq. ~~Net~~Stockholders ~~interest~~may ~~expense~~not ~~for~~be able to sell their shares of common stock on the ~~year~~OTCQB ~~ended~~market ~~December~~in 31the quantities, ~~2019~~at the times, ~~increased~~or ~~from~~at ~~$12 thousand~~the toprices ~~$0.5 million~~that ascould ~~compared~~potentially ~~with~~be ~~the~~available ~~same~~on ~~period~~a ~~last~~more ~~year~~liquid trading market. ItThe ~~included~~delisting ~~accretion~~of our common stock from Nasdaq in 2018 could also adversely affect our ability to obtain financing for our operations and/or result in a loss of confidence by investors or employees.

33 30

Table of Contents

~~interest~~Our ~~expense~~common onstock ~~the~~may ~~net~~be ~~present~~deemed ~~value~~to ofbe ~~the~~a ~~asset~~“penny ~~purchase~~stock” ~~consideration payable of $0.3 million~~ and the discount and deferred financing costs on the convertible subordinated debentures of $0.7 million. The noncash interest expense for the year ended December 31, 2019 was reduced by $0.5 million for the writebroker-~~off~~dealers ofwho anmake ~~embedded derivative liability recorded for the conversion features of the debentures that were eliminated as~~ a ~~result~~market ~~of the repayment of the debentures prior to their maturity date. In connection with the early repayment of the debentures~~ in ~~June~~our ~~2019,~~stock wemay ~~recorded~~be asubject ~~loss on extinguishment of debt of $0.1 million, which consisted of the unamortized debt discount and deferred financing costs. Refer~~ to ~~Note 10 to our Consolidated Financial statements for~~ additional ~~information~~compliance ~~about the asset purchase consideration payable and the convertible subordinated debentures~~requirements.

~~Warrant~~If ~~Expense. Warrant~~our ~~expense~~common ~~for~~stock ~~the~~is ~~year~~deemed ~~ended~~to ~~December~~be ~~31,~~a ~~2019~~“penny ~~includes~~stock” ~~noncash~~as ~~expense~~defined ofin ~~approximately~~the ~~$49.0~~Securities ~~million~~Exchange ~~for~~Act ~~the~~of ~~value~~1934, ofbroker-dealers ~~the~~who ~~liability~~make ~~warrants~~a ~~issued~~market in ~~connection~~our ~~with~~stock ~~our~~will ~~equity~~be ~~financing~~subject ~~completed~~to inadditional ~~June~~sales ~~2019~~practice ~~and~~requirements ~~September~~for ~~2019~~selling inour ~~excess~~common ofstock ~~the~~to ~~proceeds~~persons ~~received~~other ~~and~~than ~~changes~~established incustomers ~~fair~~and ~~value~~accredited ofinvestors. For instance, the ~~warrant~~broker-dealer ~~liability.~~must Asmake a ~~result~~special ofsuitability ~~the~~determination ~~reverse~~for ~~stock~~the ~~split~~purchaser onand ~~November~~receive ~~12,~~the ~~2019,~~purchaser's ~~the~~written ~~Company~~agreement ~~reclassified~~to the ~~warrant~~transaction ~~liability~~prior to ~~equity~~the sale. ~~During~~Consequently, ~~2018~~the penny stock rules, weif ~~recorded~~they ~~warrant~~were ~~expense~~to ofbecome ~~$0.1~~applicable, ~~million~~would ~~for~~affect the ~~change~~ability inor ~~fair~~willingness ~~value~~ of ~~certain~~broker-dealers ~~warrants~~to ~~held~~sell byour ~~certain~~securities, ~~institutional~~and ~~investors~~accordingly ~~for~~would ~~which~~affect the ~~exercise~~ability ~~price~~of ~~was~~stockholders ~~reduced~~to insell ~~connection~~their ~~with~~securities in the ~~sale~~public ofmarket. ~~convertible~~These ~~subordinated~~additional ~~debentures~~procedures could also limit our ability to ~~those~~raise ~~investors.~~additional capital in the future.

~~Other,~~The ~~Net.~~trading ~~Other,~~price ~~net~~of ~~for~~our ~~the~~common ~~year~~stock ~~ended~~has ~~December 31,~~been ~~2019~~volatile ~~includes~~and ~~$1.3~~is ~~million~~likely ~~of transaction costs required~~ to be ~~expensed~~volatile ~~as a result of the liability treatment for the warrants issued~~ in ~~connection with our June and September equity financings. See Note 12 to our Consolidated Financial statements for additional information about our June and September equity financings. For~~ the ~~year ended December 31, 2018, $11 thousand was expensed~~future.

Income Tax Benefit. We recorded an income tax benefit of $0.9 million for the year ended December 31, 2019 for the reduction in the deferred tax liability associated with an indefinite-lived intangible asset, for which we recorded an impairment charge of $6.6 million during the three months ended June 30, 2019. The ~~income~~trading ~~tax~~price ~~benefit is net~~ of anour ~~increase~~common tostock ~~the~~has ~~deferred tax valuation allowance of $1.1 million for the portion of the deferred tax liability reversal that had~~ been ~~netted~~highly ~~with the deferred tax asset associated with U~~volatile.S. ~~federal net operating loss carryforwards that do not expire.~~ The ~~income~~market ~~tax~~price ~~benefit from continuing operation of $3.4 million~~ for ~~the~~our ~~year~~common ~~ended~~stock ~~December~~will ~~31,~~be ~~2018 is~~affected ~~attributable~~by toa ~~the~~number ~~losses for U.S. federal income tax purposes, which, effective with the enactment~~ of ~~the 2017 Tax Cuts and Jobs Act~~factors, ~~have~~including: ~~an unlimited carryforward period.~~

~~Results~~● the denial or delay of ~~Operations~~regulatory –clearances ~~Discontinued~~or ~~Operations~~ approvals of our product or receipt of regulatory approval of competing products;

~~Results~~● ~~of operations from discontinued operations reflect the activities of~~ our ~~Reshape~~ability ~~Balloon~~to ~~product~~accomplish ~~line~~clinical, ~~which~~regulatory ~~we acquired as part of our acquisition of ReShape Medical, Inc. in October 2017~~ and ~~sold~~other ~~in December 2018 in connection with our acquisition of the Lap-Band~~ product ~~line~~development ~~assets.~~milestones ~~Loss~~and ~~from~~to ~~discontinued~~do ~~operations~~so ~~was $45.9 million for the year ended December 31, 2018. The loss~~ in ~~2018~~accordance ~~includes an impairment charge of $13.2 million for the full write-down of the goodwill recorded in connection~~ with ~~our acquisition of ReShape Medical. In addition, in connection with~~ the ~~determination~~timing ofestimates ~~the~~we ~~fair~~have ~~value~~publicly of the Lap-Band assets acquired, no value was assigned to the ReShape Balloon product line assets sold as projections updated during the fourth quarter of 2018 indicated negative cash flows. Accordingly, the loss from discontinued operations for the year ended December 31, 2018 includes an impairment charge of $22.6 million for the full write-down of the ReShape Balloon product line assets disposed of. There was no income tax expense or benefit for discontinued operations. announced;

~~Liquidity~~● changes in policies affecting third-party coverage and ~~Capital~~reimbursement ~~Resources~~in the United States and other countries;

We● ~~have~~changes ~~financed~~in ~~our~~government ~~operations~~regulations ~~to date principally through the sale of equity securities~~ and ~~debt~~standards ~~financing. During~~affecting the ~~years~~medical ~~ended~~device ~~December~~industry ~~31, 2019~~ and ~~2018,~~our we received aggregate net proceeds of $15.0 million and $33.2 million, respectively, from equity offerings, and $0.3 million and $0.5 million, respectively, from the exercise of warrants to purchase common stock. As of December 31, 2019, we had $3.0 million of cash and cash equivalents, including $50 thousand of restricted cash. product;

~~Our~~● ~~anticipated~~ability ~~operations include plans to (i) integrate the sales and operations~~ of the Company with the newly acquired Lap-Band product line in order to expand sales domestically and internationally as well as to obtain cost savings synergies, (ii) continue development of the ReShape Vest, (iii) seek opportunities to leverage our ~~intellectual~~products ~~property portfolio and custom development services~~ to ~~provide~~achieve ~~third-party~~market ~~sales and licensing opportunities, and (iv) explore and capitalize on synergistic opportunities to expand our portfolio and offer future minimally invasive treatments~~ success;

34 ● the performance of third-party contract manufacturers and component suppliers;

~~Table~~● ofour ~~Contents~~ ability to develop sales and marketing capabilities;

~~and~~● ~~therapies~~actual inor ~~the~~anticipated ~~obesity~~variations ~~continuum~~in ofour ~~care.~~results ~~The Company believes that it has the flexibility to manage the growth~~ of ~~its expenditures and~~ operations ~~depending~~or onthose ~~the amount~~ of ~~available~~our 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. competitors;

~~Management~~● isannouncements ~~currently~~of ~~pursuing~~new ~~various funding options~~products, ~~including~~technological ~~seeking~~innovations ~~additional equity~~ or ~~debt financing as well as a strategic merger or other transaction to obtain additional funding to support the expansion of Lap-Band~~ product ~~sales~~advancements ~~and~~by tous continue the development of, and to successfully commercialize, the ReShape Vest. While the acquisition of Lap-Band product line does provide incremental revenues to the Company, total costs, including support for the European clinical trial of the ReShape Vest, are expected to 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, results 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~~our ~~operations to continue as a going concern.~~ competitors;

~~The~~● ~~following~~developments ~~table~~with ~~summarizes~~respect ~~our~~to ~~change~~patents ~~in cash~~ and ~~cash~~other ~~equivalents~~intellectual ~~(in~~property ~~thousands):~~ rights;

	Year Ended
	December 31,
	2019		2018
Net cash used by operating activities - continuing operations	$	(14,200)	$	(20,076)
Net cash used by operating activities - discontinued operations		—		(7,414)
Net cash used by investing activates		(2,014)		(10,328)
Cash provided by financing activities		13,659		33,203
Effect of exchange rate changes		(8)		—
Net change in cash and cash equivalents	$	(2,563)	$	(4,615)

●

sales of common stock or other securities by us or our stockholders in the future;

~~Net~~● ~~Cash~~additions ~~Used~~or indepartures ~~Operating~~of ~~Activities~~key -scientific ~~Continuing~~or ~~Operations~~ management personnel;

~~Net~~● ~~cash~~disputes ~~used~~or inother ~~operating~~developments ~~activities~~relating ~~from~~to ~~continuing~~proprietary ~~operations was $14.2 million and $20.1 million for the years ended December 31~~rights, ~~2019~~including ~~and 2018~~patents, ~~respectively.~~litigation ~~Net~~matters ~~cash~~and ~~used~~our inability ~~operating~~to ~~activities~~obtain ~~from~~patent ~~continuing~~protection ~~operations~~ for ~~the year ended December 31, 2019, was primarily the result of~~ our net loss of $74.2 million, partially offset by non-cash adjustments for amortization of intangible assets of $1.7 million, impairment of intangible assets of $6.6 million, stock-based compensation of $2.3 million, warrant expenses of $49.0 million and warrant issuance costs of $1.4 million. Increases to accounts receivable of $3.6 million, inventory of $0.3 million and prepaid expenses and other of $0.4 million resulted in cash used, partially offset by cash savings due to an increase in accounts payable, accrued liabilities and warranty liability of $3.0 million. technologies;

~~Net~~● ~~cash used in operating activities from continuing operations for~~ the ~~year~~trading ~~ended~~volume ~~December 31, 2018, was primarily a result~~ of our ~~net~~common ~~loss of $35.3 million, partially offset by non-cash adjustments for amortization of intangible assets of $0.2 million, impairment of intangible assets of $14.0 million and~~ stock-based compensation of $3.1 million. Increases to accounts and other receivables of $0.5 million and prepaid expenses of $0.8 million resulted in cash used, offset by a decrease in inventory of $2.0 million and an increase in accounts payable and accrued liabilities of $0.8 million. ;

~~Net~~● ~~Cash~~changes ~~Used~~ in ~~Investing~~earnings ~~Activities~~estimates or recommendations by securities analysts, failure to obtain or maintain analyst coverage of our common stock or our failure to achieve analyst earnings estimates;

~~Net~~● ~~cash~~public ~~used~~statements inby ~~investing~~analysts ~~activities~~or ~~from~~clinicians ~~continuing~~regarding ~~operations~~their ~~was~~perceptions ~~$2.0 million for the year ended December 31, 2019, as compared with $10.3 million for the year ended December 31, 2018. The investing activities in 2019 primarily reflects the first annual payment~~ of ~~$2.0 million paid in connection with~~ our ~~acquisition~~clinical ofresults ~~the~~or ~~lap-band product line. Investing activities for 2018 reflect our acquisition of~~ the ~~Lap-Band~~effectiveness ~~product line, which included asset purchase consideration paid~~ of ~~$10.0~~our ~~million and transaction costs paid of $0.3 million.~~ products;

35 ● decreases in market valuations of medical device companies; and

~~Table~~● general market conditions and other factors unrelated to our operating performance or the operating performance of ~~Contents~~ our competitors.

~~Net Cash Provided by Financing~~ 31

~~Net~~Table cash provided by financing activities from continuing operations was $13.7 million and $33.2 million for the years ended December 31, 2019 and 2018, respectively. During the years ended December 31, 2019 and 2018, we received aggregate net proceeds of $13.7 million and $33.2 million, respectively, from equity offerings and $0.1 million and $0.5 million, respectively, from the exercise of warrants to purchase common stock. In connection with these equity transactions, we paid an aggregate of $40 thousand and $4.6 million of related transaction costs in 2019 and 2018, respectively. In 2019, we used a net $0.2 million related to issuance and pay down of the convertible subordinate debentures. In 2018, we used cash of $0.5 million to redeem 500 shares of our series D convertible preferred stock. Contents

AThe ~~portion~~stock prices of many companies in the ~~net~~medical ~~proceeds~~device ~~from~~industry ~~the~~have ~~June~~experienced ~~2019~~wide ~~equity~~fluctuations ~~financing~~that ~~was~~have ~~used~~often tobeen ~~repay~~unrelated to the $2operating performance of these companies.2 ~~million~~Following ~~face~~periods ~~amount~~of volatility in the market price of ~~convertible~~a ~~subordinated~~company’s ~~debentures~~securities, ~~that~~securities ~~were~~class ~~issued~~action atlitigation anoften ~~original~~has ~~issue~~been ~~discount~~initiated ofagainst 10a ~~percent~~company. inIf ~~March~~class ~~2019~~action litigation is initiated against us, we may incur substantial costs and our management’s attention may be diverted from our operations, which could significantly harm our business.

~~Discontinued~~Sales ~~Operations~~ of a substantial number of shares of our common stock in the public market by existing stockholders, or the perception that they may occur, could cause our stock price to decline.

~~There~~Sales ~~were~~of nosubstantial ~~activities~~amounts ~~related~~of toour ~~discontinued~~common ~~operations~~stock ~~for~~by ~~the~~us ~~year~~or ~~ended~~by ~~December~~our 31stockholders, ~~2019.~~announcements ~~Net~~of ~~cash~~the ~~used~~proposed insales ~~operating activities~~ of ~~discontinued~~substantial ~~operations~~amounts of ~~$7.4~~our ~~million~~common ~~for~~stock or the ~~year~~perception ~~ended~~that ~~December~~substantial ~~31,~~sales ~~2018~~may be made, ~~reflects~~could ~~activities~~cause the market price of ~~the~~our ~~ReShape~~common ~~Balloon~~stock ~~product~~to ~~line~~decline. ~~until~~We ~~its~~may ~~disposal~~issue additional shares of our common stock in follow-on ~~December~~offerings 17to raise additional capital, ~~2018~~upon the exercise of options or warrants, or in connection with acquisitions or corporate alliances. ~~There~~We ~~were~~also noplan ~~investing~~to issue additional shares to our employees, directors or ~~financing~~consultants ~~activities~~in ~~related~~connection with their services to ~~discontinued~~us. ~~operations~~All ~~for~~of the ~~year~~currently ~~ended~~outstanding ~~December~~shares 31of our common stock are freely tradable under federal and state securities laws, ~~2018~~except for shares held by our directors, officers and certain greater than five percent stockholders, which may be subject to holding period, volume and other limitations under Rule 144. Due to these factors, sales of a substantial number of shares of our common stock in the public market could occur at any time and could reduce the market price of our common stock.

~~Operating~~We ~~Capital~~have a significant number of outstanding warrants, which may cause significant dilution to our stockholders, have a material adverse impact on the market price of our common stock and ~~Capital~~make ~~Expenditure~~it ~~Requirements~~more difficult for us to raise funds through future equity offerings.

~~Our~~As ~~anticipated~~of ~~operations~~December ~~include~~31, ~~plans~~2020, towe ~~(i)~~had ~~integrate~~outstanding ~~the~~6,166,554 ~~sales~~shares ~~and operations~~ of ~~the~~common ~~Company~~stock. ~~with~~In ~~the newly acquired Lap-Band product line~~addition, ~~(ii)~~as ~~continue development~~ of ~~the~~that ~~ReShape~~date ~~Vest,~~we ~~(iii)~~had ~~seek~~outstanding ~~opportunities~~warrants to ~~leverage~~acquire ~~the Company’s intellectual property portfolio and custom development services to provide third-party sales and licensing opportunities~~14,285,113 ~~and~~shares ~~(iv)~~of ~~explore~~common ~~and~~stock. ~~capitalize~~The onissuance ~~synergistic~~of ~~opportunities~~shares toof ~~expand~~common ~~our~~stock ~~portfolio~~upon ~~and~~the ~~offer~~exercise ~~future~~of ~~minimally~~warrants ~~invasive~~would ~~treatments~~dilute ~~and therapies in~~ the ~~obesity~~percentage ~~continuum~~ownership interest of ~~care.~~all ~~The~~stockholders, ~~Company~~might ~~believes~~dilute ~~that it has~~ the ~~flexibility~~book tovalue ~~manage~~per ~~the~~share ~~growth~~ of ~~its~~our ~~expenditures~~common stock and ~~operations~~would ~~depending~~increase on the ~~amount~~number of ~~available~~our ~~cash~~publicly ~~flows~~traded shares, which could ~~include~~depress ~~reducing expenditures for marketing, clinical and product development activities. However,~~ the ~~Company~~market ~~will~~price ~~ultimately~~of ~~need~~our tocommon ~~achieve sufficient revenues from product sales and obtain additional equity or debt financing to support its operations~~stock.

~~Obtaining~~In ~~funds~~addition ~~through~~to the ~~sale~~dilutive ofeffects ~~additional~~described ~~equity~~above, ~~and~~the ~~debt~~perceived ~~securities~~risk orof ~~the~~dilution ~~warrant~~as ~~holders’~~a ~~exercise~~result of ~~outstanding~~the ~~common~~significant ~~stock~~number of outstanding warrants may ~~result~~cause ~~in dilution to~~ our common stockholders. Ifto webe ~~raise~~more ~~additional~~inclined ~~funds~~to ~~through~~sell ~~the~~their ~~issuance~~shares, ofwhich ~~debt~~would ~~securities,~~contribute ~~these~~to ~~securities~~a ~~could~~downward ~~have~~movement ~~rights~~in ~~senior~~the toprice ~~those~~ of our common stock. ~~and~~Moreover, ~~could~~the ~~contain~~perceived ~~covenants~~risk ~~that~~of ~~would~~dilution ~~restrict~~and ~~our~~the ~~operations.~~resulting ~~The~~downward ~~sale~~pressure ofon ~~additional~~our ~~equity~~common ~~may~~stock ~~require~~price uscould toencourage ~~obtain~~investors ~~approval from our stockholders~~ to ~~increase~~engage ~~the~~in ~~number~~short ofsales ~~shares~~ of our common stock, wewhich ~~have~~could ~~authorized~~further ~~under~~contribute ~~our~~to ~~certificate~~price ofdeclines ~~incorporation.~~in ~~We may require additional capital beyond~~ our ~~currently~~common ~~forecasted amounts~~stock. ~~Any~~The ~~such~~fact ~~required~~that ~~additional~~our ~~capital~~stockholders ~~may~~and ~~not~~warrant beholders ~~available~~can onsell ~~reasonable~~substantial ~~terms,~~amounts ifof atour ~~all.~~common Ifstock wein ~~are unable to obtain additional financing, we may be required to reduce~~ the ~~scope~~public ofmarket, ~~delay,~~whether or ~~eliminate~~not ~~some~~sales orhave ~~all~~occurred ~~of,~~or ~~our~~are ~~planned research~~occurring, ~~development and commercialization activities, which~~ could ~~materially~~make ~~harm~~it ~~our~~more ~~business.~~difficult Infor ~~addition,~~us ifto we raise additional funds through ~~collaboration,~~the ~~licensing~~sale of equity or ~~other~~equity-related ~~similar~~securities ~~arrangements,~~in itthe ~~may~~future beat ~~necessary~~a totime ~~relinquish~~and ~~valuable~~price ~~rights~~that towe ~~products~~deem reasonable or ~~proprietary technologies~~appropriate, or ~~grant~~at ~~licenses on terms that are not favorable~~all.

~~Our~~You ~~forecast~~may ofexperience ~~the~~future ~~period~~dilution 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 afuture ~~number~~equity ~~of factors, including the factors discussed in Part I, Item 1A, Risk Factors~~offerings. ~~We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.~~

~~The~~In ~~Company’s~~order ~~acquisition~~to ofraise ~~the~~additional ~~Lap-Band~~capital ~~product~~for ~~line~~general ~~provides~~corporate ~~incremental~~purposes, ~~revenues~~in ~~and~~the ~~does~~future ~~not~~we ~~require~~may ~~further~~offer ~~product~~additional ~~development.~~shares Inof ~~order~~our tocommon ~~continue~~stock ~~the~~or ~~development~~other ~~of,~~securities ~~and~~convertible tointo ~~successfully~~or ~~commercialize~~exchangeable ~~the~~for ~~Lap-Band~~our ~~and~~common ~~provide~~stock ~~clinical~~at ~~support~~prices ~~for~~that ~~the~~may ~~ReShape~~be ~~Vest,~~lower than the ~~Company’s~~current ~~management~~price isper ~~currently~~share ~~pursuing~~of ~~various~~our ~~funding~~common ~~options,~~stock. ~~including~~In ~~seeking~~addition, ~~additional~~investors ~~equity~~purchasing shares or ~~debt~~other ~~financing~~securities asin ~~well~~the asfuture acould ~~strategic~~have ~~merger~~rights orsuperior ~~other transaction~~ to ~~obtain~~existing ~~additional funding~~stockholders. The ~~Company~~price ~~has~~per ashare ~~long~~at ~~history~~which we sell additional shares of ~~raising~~our ~~equity~~common ~~financing~~stock, toor ~~fund~~securities ~~its~~convertible ~~development~~or ~~activities;~~exchangeable ~~however~~into common stock, ~~there~~in ~~can~~future transactions may be nohigher ~~assurance~~or ~~that~~lower than the ~~Company~~price ~~will~~per ~~continue~~share topaid beby ~~successful~~investors in ~~its~~prior ~~efforts~~offerings. ~~Should the~~

36 Since our securities are quoted on the OTCQB market, our stockholders may face significant restrictions on the resale of our securities due to state “blue sky” laws.

~~Table~~Each state has its own securities laws, often called “blue sky” laws, which (i) limit sales of ~~Contents~~ securities to a state’s residents unless the securities are registered in that state or qualify for an exemption from registration, and (ii) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or the transaction must be exempt from registration. The applicable broker must be registered in that state. We do not know whether our common stock will be registered or exempt from registration under the laws of any state. Since our common stock is currently quoted on the OTCQB, a determination regarding registration will be made by those broker-dealers, if any, who agree to serve as the market-makers for our common stock. There may be significant state blue sky law restrictions on the ability of investors to sell,

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. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. 32

~~Because~~Table of the numerous risks and uncertainties associated with the development of medical devices, such as our ReShape Vest, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to complete the development of the ReShape Vest or other additional 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: Contents

·and on purchasers to buy, our common stock. Investors should therefore consider the ~~cost~~resale ~~and~~market ~~timing~~for ofour ~~establishing~~common ~~sales~~stock to be limited, ~~marketing~~as ~~and~~they ~~distribution~~may ~~capabilities;~~be unable to resell your common stock without the significant expense of state registration or qualification.

·Our ~~the~~organizational ~~cost~~documents ofand ~~establishing~~Delaware ~~clinical~~law ~~and~~make ~~commercial~~a ~~supplies~~takeover of our ~~ReShape~~company ~~Vest~~more difficult, which may prevent certain changes in control and ~~any~~limit ~~products~~the ~~that~~market weprice ~~may~~of ~~develop;~~our common stock.

·Our ~~the~~certificate ~~rate~~of incorporation and bylaws and Section 203 of ~~market~~the ~~acceptance~~Delaware General Corporation Law contain provisions that may have the effect of deterring or delaying attempts by our ~~ReShape~~stockholders ~~Vest~~to remove or replace management, engage in proxy contests and ~~any~~effect ~~other~~changes ~~product~~in ~~candidates;~~control. These provisions include:

·● the ~~cost~~ability of ~~filing~~our ~~and~~board ~~prosecuting~~of ~~patent~~directors ~~applications~~to create and ~~defending~~issue ~~and~~preferred ~~enforcing~~stock ~~our~~without ~~patent~~stockholder ~~and~~approval, ~~other~~which ~~intellectual~~could ~~property~~be ~~rights~~used to implement anti-takeover devices;

·● the ~~cost~~authority for our board of ~~defending,~~directors into ~~litigation~~issue orwithout ~~otherwise,~~stockholder ~~any~~approval ~~claims~~up to the number of shares of common stock authorized in our certificate of incorporation, that, weif ~~infringe~~issued, ~~third-party~~would ~~patent~~dilute orthe ~~other~~ownership ~~intellectual~~of ~~property~~our ~~rights~~stockholders;

·● the ~~effect~~advance ofnotice ~~competing~~requirement ~~products~~for ~~and~~director ~~market~~nominations ~~developments~~or for proposals that can be acted upon at stockholder meetings;

·● ~~the~~a ~~cost~~classified and staggered board of ~~explanting~~directors, ~~clinical~~which ~~devices~~may make it more difficult for a person who acquires control of a majority of our outstanding voting stock to replace all or a majority of our directors;

·● the ~~terms~~prohibition ~~and~~on ~~timing~~actions ofby ~~any~~written ~~collaborative,~~consent ~~licensing~~of orour ~~other arrangements that we may establish~~stockholders;

·● ~~any~~the ~~revenue~~limitation ~~generated~~on bywho ~~sales~~may ofcall ~~our~~a ~~Lap-Band,~~special ~~ReShape~~meeting ~~Vest~~of ~~or our future products~~stockholders;

·● the ~~scope,~~prohibition ~~rate~~on ofstockholders ~~progress,~~accumulating ~~results~~their ~~and~~votes ~~cost~~for ofthe ~~our~~election ~~clinical~~of ~~trials~~directors; and ~~other research and development activities;~~

·● the ~~cost~~ability ~~and~~of ~~timing~~stockholders to amend our bylaws only upon receiving a majority of ~~obtaining~~the ~~any~~votes ~~further~~entitled ~~required~~to ~~regulatory~~be ~~approvals;~~cast ~~and~~by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class.

·In ~~the~~addition, ~~extent~~as toa ~~which~~Delaware corporation, we ~~invest~~are insubject ~~products~~to ~~and~~Delaware ~~technologies~~law, ~~although~~including weSection ~~currently~~203 ~~have~~of nothe ~~commitments~~Delaware orGeneral ~~agreements~~Corporation ~~relating~~Law. toIn general, Section 203 prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of ~~these~~three ~~types~~years following the date that the stockholder became an interested stockholder unless certain specific requirements are met as set forth in Section 203. These provisions, alone or together, could have the effect of ~~transactions~~deterring or delaying changes in incumbent management, proxy contests or changes in control.

~~Off-balance-sheet~~These ~~Arrangements~~provisions also could discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. Some provisions in our certificate of incorporation and bylaws may deter third parties from acquiring us, which may limit the market price of our common stock.

~~Since~~Our ~~our~~ability ~~inception,~~to ~~we have not engaged in any off-balance-sheet arrangements, including the~~ use ofnet ~~structured~~operating ~~finance,~~losses ~~special~~(“NOL”) ~~purpose~~carryforwards ~~entities~~may orbe variable interest entities as defined by rules enacted by the SEC and FASB, and accordingly, no such arrangements are likely to have a current or future effect on our financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resourceslimited.

~~Critical~~Our ~~Accounting~~ability ~~Policies~~to use our federal and ~~Significant~~state ~~Judgments~~NOL carryforwards to offset potential future taxable income is dependent upon our generation of future taxable income before the expiration dates of the NOL carryforwards, and ~~Estimates~~we cannot predict with certainty when, or whether we will generate sufficient taxable income to use all of our NOL carryforwards. As of December 31, 2020, the Company had U.S. federal net operating loss carryforwards of $77.2 million. Of the total U.S. federal net operating loss carryforwards at December 31, 2020, $1.2 million is subject to a 20 year carryover period and will begin expiring in 2021. Losses generated beginning in 2018 will carryover indefinitely. The Company had state net operating loss carryforwards of $222.4 million at December 31, 2020, and had foreign net operating loss carryforwards of $0.3 million at December 31, 2020. Net operating loss carryforwards of the Company are subject to review and possible adjustment by the taxing authorities. With certain exceptions (e.g. the net operating loss carryforwards), the Company is no longer subject to U.S. federal, state or local examinations by tax authorities for years prior to 2016. There are no tax examinations currently in progress.

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported expenses during the reporting periods. We evaluate our 33

37 Table of Contents

~~Table~~The Company’s ability to utilize its net operating loss carryforwards, tax credits, and built-in items of ~~Contents~~ deduction, including capitalized start-up costs and research and development costs, has been, and may continue to be substantially limited due to ownership changes. These ownership changes limit the amount of net operating loss carryforwards, credits and built-in items of deduction that can be utilized annually to offset future taxable income. In general, an ownership change, as defined in IRC Section 382, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups. Due to the valuation allowance against deferred tax assets at December 31, 2020, the net effect of any further limitation will have no impact on results of operations.

~~estimates~~We have not paid dividends in the past and ~~judgments~~do onnot anexpect ~~ongoing~~to ~~basis.~~pay ~~Actual~~dividends ~~results~~in ~~may~~the ~~differ~~future, ~~materially~~and ~~from~~any ~~these~~return ~~estimates~~on ~~under~~investment ~~different~~may ~~assumptions~~be orlimited ~~conditions~~to the value of our common stock.

~~While~~We ~~our~~have ~~significant~~never ~~accounting~~paid ~~policies~~dividends ~~are~~on ~~more~~our ~~fully~~common ~~described~~stock inand ~~Note~~do 2not toanticipate ~~our~~paying ~~consolidated~~dividends ~~financial~~on ~~statements~~our ~~included~~common stock in ~~Item~~the 8foreseeable future. The payment of ~~this~~dividends ~~Annual~~on ~~Report~~our common stock will depend on ~~Form~~our ~~10-K~~earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we ~~believe~~do ~~that~~not ~~the~~pay ~~following~~dividends, ~~accounting~~our ~~policies~~common ~~and~~stock ~~estimates~~may ~~are~~be ~~most~~less ~~critical~~valuable tobecause a ~~full~~return ~~understanding~~on ~~and~~your ~~evaluation~~investment ofwill only occur if our ~~reported~~stock ~~financial~~price ~~results~~appreciates.

~~Revenue Recognition~~

~~When~~ITEM we recognize revenue from the sale of our products, the amount of consideration we ultimately receive may vary depending upon the return terms and any sales rebates that we may offer, which are accounted for as variable consideration when estimating the amount of revenue to recognize1B. AsUNRESOLVED ~~discussed~~STAFF ~~in Note 14 to the Consolidated Financial Statements, such variable consideration to date has not been material.~~ COMMENTS

~~Intangible~~Not ~~Assets~~applicable. ~~and Long-Lived Assets~~

We acquire intangible assets in connection with business combinations and asset purchases. The acquired intangible assets are recorded at fair value, which is determined based on a discounted cash flow analysis. The determination of fair value requires significant estimates, including, but not limited to, the amount and timing of projected future cash flows, the discount rate used to discount those cash flows, the assessment of the asset's life cycle, including the timing and expected costs to complete in-process projects, and the consideration of legal, technical, regulatory, economic, and competitive risks.

~~IPR&D~~ITEM ~~acquired in business combinations is reviewed for impairment annually, or whenever an event occurs or circumstances change that would indicate the carrying amount may be impaired~~2. Additionally, management reviews the carrying amounts of other intangible and long-lived assets whenever events or circumstances indicate that the carrying amounts of an asset may not be recoverable. The impairment reviews require significant estimates about fair value, including estimation of future cash flows, selection of an appropriate discount rate, and estimates of long-term growth rates. PROPERTIES

~~Research~~We ~~and~~lease ~~Development~~approximately ~~Expenses~~14,479 square feet of office/warehouse space in San Clemente, California under an operating lease that expires June 30, 2022.

We record the estimated costs of research and development activities performed by third-party service providers based upon the estimated services provided but not yet invoiced and include these costs in accrued expenses and other payables in the Consolidated Balance Sheets and within research and development expense in the consolidated statements of operations. We accrue for these costs based on factors such as estimates of the work completed and in accordance with agreements established with its third-party service providers. As actual costs become known, the Company adjusts its accrued liabilities.

~~The~~ITEM ~~Company’s CRO arrangement generally requires payments in advance of services~~3. ~~Upon~~LEGAL making a payment, the Company makes a determination as to the amount to record as a deferred charge and the amount of research and development expense. The amount of CRO related costs included in research and development expense each period is based upon the Company’s estimate of the time period over which services will be performed, enrollment of patients, number of sites activated and level of effort to be expended. Any amount of advances paid in excess of expense recognized is included in prepaid expenses and other current assets on the Consolidated Balance Sheets. If the actual timing of the CRO’s performance of services or the level of effort varies from the Company’s estimate, the amount of prepaid CRO expense is adjusted accordingly. PROCEEDINGS

WeThe ~~make~~Company ~~significant~~is ~~judgments~~not ~~and~~currently ~~estimates~~a inparty ~~determining~~to ~~the~~any ~~accrued~~material ~~balance~~litigation and the Company is not aware of any ~~deferred~~pending ~~charges~~or inthreatened ~~each~~litigation ~~reporting~~against ~~period. Our~~it ~~understanding~~that ofcould ~~factors~~have ~~such~~a asmaterial adverse effect on the ~~status~~Company’s ~~and~~business, ~~timing~~operating ofresults ~~services~~or ~~performed,~~financial ~~the~~condition. ~~number~~The ofmedical ~~patients~~device ~~enrolled~~industry ~~and~~in which the ~~rate~~Company ofoperates ~~patient~~is ~~enrollment~~characterized ~~may~~by ~~vary~~frequent ~~from~~claims ~~our~~and ~~estimates~~litigation, including claims regarding patent and ~~could~~other ~~result~~intellectual inproperty usrights ~~reporting~~as ~~amounts~~well ~~that~~as ~~are~~improper ~~too~~hiring ~~high~~practices. orAs ~~too~~a ~~low~~result, the Company may be involved in ~~any~~various ~~particular~~legal ~~period~~proceedings from time to time.

~~Table~~ITEM of4. ~~Contents~~ MINE SAFETY DISCLOSURES

~~Income~~Not ~~Taxes~~ applicable.

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’s policy is to classify interest and penalties related to income taxes as income tax expense in the consolidated statements of operations.

~~Recent~~PART ~~Accounting~~II. ~~Pronouncements~~

~~See~~ITEM ~~Note~~5. 2MARKET toFOR ~~the~~REGISTRANT’S ~~Consolidated~~COMMON ~~Financial Statements~~EQUITY, ~~for~~RELATED aSTOCKHOLDER ~~discussion~~MATTERS ofAND ~~new~~ISSUER ~~accounting~~PURCHASES ~~standards~~OF ~~that~~EQUITY ~~have been adopted and those not yet adopted.~~ SECURITIES

39 Market Information

~~Table~~Our ofcommon ~~Contents~~ stock is traded on the OTCQB Market under the symbol RSLS. Price quotations on the OTCQB reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.

~~ITEM~~Number ~~8. FINANCIAL~~of ~~STATEMENTS AND SUPPLEMENTARY DATA~~ Stockholders

~~Index~~As toof ~~Financial~~March ~~Statements~~8, 2020, there were approximately 19 holders of record of our common stock.

	Page
Report of Independent Registered Public Accounting Firms	41
Financial Statements
Consolidated Balance Sheets	43
Consolidated Statements of Operations	44
Consolidated Statements of Comprehensive Loss	45
Consolidated Statements of Stockholders’ Equity	46
Consolidated Statements of Cash Flows	47
Notes to Consolidated Financial Statements	48

Securities Authorized for Issuance Under Equity Compensation Plans

40 The information required by this Item regarding equity compensation plans is incorporated by reference to the information set forth in Part III, Item 12 of this Annual Report on Form 10-K.

~~Table of Contents~~ 34

~~Report~~Table of ~~Independent Registered Public Accounting Firm~~ Contents

~~Shareholders~~Unregistered ~~and~~Sales ~~the~~of ~~Board~~Equity ofSecurities ~~Directors~~

~~ReShape Lifesciences Inc~~None.

~~San~~Uses ~~Clemente,~~of ~~California~~ Proceeds from Sale of Registered Securities

~~Opinion~~None. ~~on the Consolidated Financial Statements~~

WeDividend ~~have~~Policy audited the accompanying consolidated balance sheet of ReShape Lifesciences Inc. (the "Company") as of December 31, 2019, the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows, for the year then ended, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

We ~~also~~ have ~~audited~~never ~~the~~paid ~~adjustments~~cash todividends ~~the~~on ~~2018~~our ~~consolidated~~common ~~financial statements to retrospectively apply the 1-for-120 reverse~~ stock. ~~split~~The inboard ~~November~~of ~~2019,~~directors aspresently ~~described~~intends ~~in Note 2~~ to ~~the~~retain ~~consolidated~~all ~~financial~~earnings ~~statements.~~for Inuse in our ~~opinion,~~business ~~such adjustments are appropriate~~ and ~~have~~does ~~been properly applied. We were~~ not ~~engaged~~anticipate topaying ~~audit,~~cash ~~review,~~dividends orin ~~apply any procedures to~~ the ~~2018~~foreseeable ~~consolidated~~future. ~~financial~~We ~~statements of the Company other than with respect to the adjustments and, accordingly, we~~ do not ~~express~~have ana ~~opinion~~dividend orreinvestment ~~any~~plan ~~other~~or ~~form~~a ofdirect ~~assurance~~stock onpurchase ~~the 2018 consolidated financial statements taken as a whole~~plan.

~~Going~~Issuer ~~Concern~~Purchases ~~Uncertainty~~ of Equity Securities

~~The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern~~None. As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring losses that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

~~Changes in Accounting Method Related to Leases~~

AsITEM ~~discussed~~6. inSELECTED ~~Notes~~FINANCIAL 2 and 11 to the consolidated financial statements, the Company has changed its method for accounting for leases due to the adoption of Accounting Standards Codification 842 – Leases effective January 1, 2019 under the modified retrospective approach. DATA

~~Basis~~Not ~~for Opinion~~ applicable.

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 35

~~Our~~Table ~~audit included performing procedures to assess the risks~~ of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Contents

~~/s/ BDO~~ITEM ~~USA,~~7. ~~LLP~~ MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

WeExcept ~~have~~for ~~served~~the ashistorical information contained herein, the ~~Company~~matters discussed in this “Management’s ~~auditor~~Discussion ~~since~~and ~~2019~~Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-K are forward-looking statements that involve risks and uncertainties. The factors listed in Item 1A “Risk Factors,” as well as any cautionary language in this Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from those projected. 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.

~~Costa~~Overview ~~Mesa, California~~

~~April~~We 30are the premier global weight-loss solutions company, ~~2020~~ offering an integrated portfolio of proven products and services that manage and treat obesity and associated metabolic disease. Our primary operations are in the following geographical areas: United States, Australia and certain European and Middle Eastern countries. Our current portfolio includes the LAP-BAND Adjustable Gastric Banding System, ReShapeCare virtual health coaching program, the ReShape Vest an investigational device to help treat more patients with obesity, and Diabetes Bloc-Stim Neuromodulation device, a technology under development as a new treatment for type 2 diabetes mellitus. There has been no revenue recorded for the ReShape Vest or the Diabetes Bloc-Stim Neuromodulation as these products are still in the development stage.

41 Recent Developments

~~Table~~On January 30, 2020, WHO announced a global health emergency because of ~~Contents~~ a new strain of coronavirus and the risks to the international community as the virus spreads globally beyond its points of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally and on March 13, 2020, the United States declared a national emergency with respect to the coronavirus outbreak. In response to the COVID-19 pandemic, on March 27, 2020, President Trump signed into law the CARES Act, which provides for the PPP. The Company received a PPP Loan of $1.0 million dollars. On March 1, 2021, the Company received notice of forgiveness in the full amount of the loan including all accrued interest. See Note 8 to the consolidated financial statements.

~~REPORT~~On OFMarch ~~INDEPENDENT~~25, ~~REGISTERED~~2020, ~~PUBLIC~~the ~~ACCOUNTING~~Company ~~FIRM~~ executed a credit agreement with an institutional investor to borrow up to $3.5 million, of which $2.5 million was received up front and on June 23, 2020, the Company received the first draw down of $500 thousand. See Note 8 to the consolidated financial statements.

ToOn April 16, 2020, the ~~shareholders~~Company implemented various short-term cost reductions and cash flow improvement actions, such as reducing the ~~Board~~compensation for executives, management and key employees and decreasing operating expenses where possible. In addition, the Company also identified temporary headcount reductions and made the decision to furlough a portion of ~~Directors~~its workforce. During the second quarter of ~~ReShape~~2020, ~~Lifesciences~~certain ~~Inc~~government-mandated closures began to ease and many areas throughout the world and within the United States began to allow elective surgeries. As a result of the easing, the Company did see sales volumes improve as we progressed through the third quarter. During the fourth quarter of 2020, there was another surge in COVID-19 cases resulting in a slowdown, or in some cases a shutdown, of elective surgeries. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impact on our financial condition and results of operations. Additionally, on June 15, 2020, the Company ended the temporary pay reductions and the furloughed employees returned to work.

~~Opinion~~On onSeptember 14, 2020, the ~~Financial~~Company ~~Statements~~ entered into the second amendment to the credit agreement that increased the amount available under delayed draw term loans by $2.0 million, of which $1.0 million was received upfront. In addition, to the increase in the amount available under delayed draw term loans, the maturity date of the loans under the credit agreement, including those under the amendment, was extended from September 24, 2020 to March 31, 2021.

WeOn ~~have~~December ~~audited~~16, ~~before the effects of the adjustments to retrospectively apply the effects of the November 2019 reverse stock split discussed in Note 2 to the consolidated financial statements~~2020, the ~~consolidated balance sheet of ReShape Lifesciences Inc. and subsidiaries (the "~~Company") asentered ofinto ~~December 31, 2018,~~ the ~~related~~third ~~consolidated~~amendment ~~statements of operations, comprehensive loss, stockholders’ equity, and cash flows, for the year ended December 31, 2018, and the related notes (collectively referred~~ to as the ~~"financial~~credit ~~statements")~~agreement ~~(the~~that ~~2018~~increased ~~financial statements before~~ the ~~effects~~amount ofavailable ~~the~~under ~~retrospective~~delayed ~~adjustments~~draw ~~discussed~~term inloans ~~Note~~by ~~2 to the financial statements are not presented herein)~~$4.0 ~~In our opinion~~million, ~~the 2018 financial statements, before the effects~~ of ~~the~~which ~~adjustments~~all ~~to retrospectively apply~~ the ~~effects~~funds ofwere ~~the~~received ~~November~~upfront. ~~2019~~See ~~reverse stock split discussed in~~ Note 8 2 to the consolidated financial statements, ~~present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows~~ for ~~the~~further ~~years ended December 31, 2018, in conformity with principles generally accepted in the United States of America~~details.

We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the effects of the November 2019 reverse stock split discussed in Note 2 to the financial statements, and accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those retrospective adjustments were audited by other auditors. 36

~~Basis~~Table ~~for~~of ~~Opinion~~ Contents

~~These~~During ~~financial statements are~~ the ~~responsibility~~third quarter of 2020, the Company's ~~management~~launched ReShapeCare. ~~Our~~ReShapeCare ~~responsibility~~ is ~~to express~~ an ~~opinion~~effective, onconvenient ~~the~~telehealth ~~Company's~~based ~~financial~~coaching ~~statements~~program ~~based~~and onis ~~our~~typically ~~audits.~~covered Weby ~~are~~insurance aproviders. ~~public~~It ~~accounting~~works ~~firm~~in ~~registered~~partnership with ~~the~~patients ~~Public~~and ~~Company~~doctors, ~~Accounting~~helping ~~Oversight~~patients ~~Board~~treat, ~~(United~~manage, ~~States) (PCAOB)~~ and ~~are~~improve ~~required~~the tochronic, bemetabolic ~~independent~~disease ~~with~~of ~~respect~~obesity tothrough ~~the~~a ~~Company~~customizable inprogram ~~accordance~~utilizing ~~with~~board ~~the~~certified ~~U.S.~~clinical ~~federal~~health ~~securities~~coaches ~~laws~~with ~~and~~ the ~~applicable~~direction ~~rules and regulations~~ of ~~the~~their ~~Securities and Exchange Commission and the PCAOB~~physician.

WeOn ~~conducted~~January 19, ~~our~~2021, ~~audit in accordance with~~ the ~~standards~~Company ofentered ~~the~~into ~~PCAOB.~~an ~~Those~~Agreement ~~standards~~and ~~require~~Plan ~~that~~of weMerger ~~plan and perform~~ (the ~~audit~~“Merger toAgreement”) ~~obtain~~with ~~reasonable~~Obalon ~~assurance~~Therapeutics, Inc., ~~about~~a ~~whether~~Delaware ~~the~~corporation ~~financial~~(“Obalon”), ~~statements~~and ~~are~~Optimus ~~free~~Merger ~~of material misstatement~~Sub, Inc., ~~whether~~a ~~due~~Delaware tocorporation ~~error~~and ora ~~fraud.~~wholly-owned ~~The~~subsidiary ~~Company~~of isObalon ~~not~~(“Merger ~~required to have~~Sub”), ~~nor~~pursuant ~~were we engaged~~ to ~~perform,~~which anMerger ~~audit~~Sub ofwill ~~its~~merge ~~internal~~with ~~control~~and ~~over~~into ~~financial~~ReShape, ~~reporting.~~with AsReShape ~~part~~as ofthe ~~our~~surviving ~~audit,~~corporation weand ~~are~~a ~~required~~wholly-owned tosubsidiary ~~obtain an understanding~~ of ~~internal~~Obalon ~~control~~(the ~~over~~“Merger”). ~~financial~~As ~~reporting~~a ~~but~~result ~~not~~of ~~for~~ the ~~purpose~~Merger, ofObalon ~~expressing~~will anbe ~~opinion~~renamed on“ReShape ~~the~~Lifesciences Inc.” ~~effectiveness~~See ofNote ~~the~~16 ~~Company’s~~to ~~internal~~the ~~control~~consolidated ~~over~~ financial ~~reporting.~~statements ~~Accordingly,~~for wefurther ~~express no such opinion~~details.

~~Our~~On ~~audit~~January 19, ~~included~~2021, ~~performing~~concurrently ~~procedures~~with tothe ~~assess~~execution of the ~~risks~~Merger ofAgreement, ~~material~~ReShape ~~misstatement~~entered ofinto ~~the~~a ~~financial~~Credit ~~statements,~~Facility ~~whether~~Agreement ~~due~~(“Credit toFacility ~~error~~Agreement”) orwith ~~fraud~~Armistice, which is ReShape’s existing secured lender and ~~performing~~majority ~~procedures~~stockholder, ~~that~~pursuant ~~respond~~to which Armistice agreed to ~~those~~provide ~~risks~~ReShape with a $15.0 ~~Such~~million ~~procedures~~line ~~included~~of ~~examining,~~credit onthat aReShape ~~test~~may ~~basis~~access from time to time until December 31, ~~evidence~~2022. ~~regarding~~ReShape ~~the~~has ~~amounts~~not ~~and~~drawn ~~disclosures~~down inany amounts under the ~~financial~~Credit ~~statements.~~Facility ~~Our~~Agreement, ~~audit~~but ~~also~~any ~~included~~advances ~~evaluating~~will ~~the~~bear ~~accounting~~interest ~~principles~~at ~~used~~a ~~and~~rate ~~significant~~per ~~estimates~~annum ~~made~~equal byto ~~management,~~the asLIBOR ~~well~~rate asplus ~~evaluating~~2.5%. Any advances under the ~~overall~~Credit ~~presentation~~Facility ofAgreement would be subject to the ~~financial~~Guarantee ~~statements.~~and WeCollateral ~~believe~~Agreement ~~that~~between ~~our~~ReShape ~~audit~~and ~~provides~~Armistice adated ~~reasonable~~March 25, ~~basis~~2020. See Note 16 to the consolidated financial statements for ~~our~~further ~~opinion~~details.

~~/s/~~On ~~Deloitte~~March &10, ~~Touche~~2021, ~~LLP~~ the Company and the Lender entered into the fifth amendment to the credit agreement. As part of this amendment the maturity date was amended from March 31, 2021 to March 31, 2022 or, if earlier, the date that is 15 days after the Company completes a capital raising transaction resulting in gross proceeds of at least $15 million. For further details see Note 16.

~~Minneapolis,~~Financial ~~Minnesota~~ Overview

~~May~~Results ~~16,~~of ~~2019~~ Operations

WeThe ~~began~~following ~~serving~~table assets forth certain data from our operating results from the ~~Company’s~~years ~~auditor~~ended inDecember ~~2006.~~31, In2020 and 2019, weexpressed ~~became~~as ~~the~~percentages ~~predecessor~~of ~~auditor.~~ net revenue (in thousands):


	Year Ended December 31,
	2020				2019
Revenue	$	11,299	100.0	%	$	15,089	100.0	%
Cost of goods sold		5,037	44.6	%		5,784	38.3	%
Gross profit		6,262	55.4	%		9,305	61.7	%
Operating expenses:
Sales and marketing		4,694	41.5	%		4,847	32.1	%
General and administrative		10,527	93.2	%		17,224	114.1	%
Research and development		3,498	31.0	%		3,121	20.7	%
Impairment of intangible assets		—	—	%		6,588	43.7	%
Loss on litigation settlement		—	—	%		1,500	9.9	%
Loss on disposal of assets		—	—	%		486	3.2	%
Total operating expenses		18,719	165.7	%		33,766	223.8	%
Operating loss		(12,457)	(110.2)	%		(24,461)	(162.1)	%
Other expense (income), net:
Interest expense, net		2,049	18.1	%		451	3.0	%
Loss on extinguishment of debt		7,715	68.3	%		71	0.5	%
Warrant expense		—	—	%		49,027	324.9	%
(Gain) loss on foreign currency		(410)	(3.6)	%		(247)	(2)	%
Other, net		—	—	%		1,337	8.9	%
Loss from continuing operations before income taxes		(21,811)	(193.0)	%		(75,100)	(497.7)	%
Income tax benefit		(181)	(1.6)	%		(893)	(5.9)	%
Net loss	$	(21,630)	(191.4)	%	$	(74,207)	(491.8)	%

~~Table of Contents~~

~~RESHAPE LIFESCIENCES INC.~~ 37

~~Consolidated~~Table ~~Balance~~of ~~Sheets~~ Contents

~~(in~~Non-GAAP ~~thousands, except share and per share amounts)~~ Disclosures

	December 31,		December 31,
	2019		2018
ASSETS
Current assets:
Cash and cash equivalents	$	2,935	$	5,548
Restricted cash		50		—
Accounts and other receivables (net of allowance for bad debts of $709 at December 31, 2019 and $236 at December 31, 2018)		4,096		917
Finished goods inventory		1,317		985
Prepaid expenses and other current assets (Note 6)		1,711		1,269
Total current assets		10,109		8,719
Property and equipment, net		16		64
Operating lease right-of-use assets (Note 11)		758		—
Other intangible assets, net (Note 8)		28,674		36,927
Other assets		99		563
Total assets	$	39,656	$	46,273
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,263	$	1,627
Accrued and other liabilities (Note 6)		3,821		4,829
Warranty liability, current (Note 14)		105		—
Asset purchase consideration payable, current (Note 10)		1,909		1,907
Operating lease liabilities, current (Note 11)		291		—
Total current liabilities		10,389		8,363
Asset purchase consideration payable, noncurrent (Note 10)		2,728		4,403
Operating lease liabilities, noncurrent (Note 11)		477		—
Warranty liability, noncurrent (Note 14)		1,253		—
Deferred income taxes		702		1,844
Total liabilities		15,549		14,610
Commitments and contingencies (Note 17)
Stockholders’ equity:
Preferred stock, 5,000,000 shares authorized:
Series B convertible preferred stock, $0.01 par value; 3 and 159 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively		—		—
Series C convertible preferred stock, $0.01 par value; 95,388 shares issued and outstanding at December 31, 2019 and December 31, 2018		1		1
Common stock, $0.001 par value; 275,000,000 shares authorized at December 31, 2019 and December 31, 2018; 391,739 and 73,092 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively		—		—
Additional paid-in capital		517,311		450,652
Accumulated deficit		(493,197)		(418,990)
Accumulated other comprehensive loss		(8)		—
Total stockholders’ equity		24,107		31,663
Total liabilities and stockholders’ equity	$	39,656	$	46,273

~~See~~Management ~~accompanying~~believes ~~notes~~that the presentation of this non-GAAP financial information provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, and amortization methods, which provides a more complete understanding of our financial performance, competitive position, and prospects for the future. However, the non-GAAP financial measures presented in this Form 10-K have certain limitations in that they do not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. Therefore, investors should consider non-GAAP financial measures in addition to, ~~consolidated~~and not as a substitute for, or as superior to, measures of financial ~~statements~~performance prepared in accordance with GAAP. Further, the non-GAAP financial measures presented by the Company may be different from similarly named non-GAAP financial measures used by other companies.

43 Adjusted EBITDA

~~Table~~Management uses Adjusted EBITDA in its evaluation of ~~Contents~~ the Company’s core results of operations and trends between fiscal periods and believes that these measures are important components of its internal performance measurement process. Adjusted EBITDA is defined as net loss before interest, taxes, depreciation and amortization, stock-based compensation, changes in fair value of liability warrants and other one-time costs. Management uses Adjusted EBITDA in its evaluation of the Company’s core results of operations and trends between fiscal periods and believes that these measures are important components of its internal performance measurement process. Therefore, investors should consider non-GAAP financial measures in addition to, and not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. Further, the non-GAAP financial measures presented by the Company may be different from similarly named non-GAAP financial measures used by other companies.

~~RESHAPE~~The ~~LIFESCIENCES~~following ~~INC.~~table contains a reconciliation of non-GAAP net loss to GAAP net loss attributable to common stockholders for the years ended December 31, 2020 and 2019 (in thousands).

Consolidated Statements of Operations


	Years Ended December 31,
	2020		2019
GAAP net loss attributable to common stockholders	$	(21,630)	$	(74,207)
Adjustments:
Interest expense, net:		2,049		451
Income tax benefit		(181)		(893)
Depreciation and amortization		1,667		1,706
Stock-based compensation expense		1,323		2,311
Loss on extinguishment of debt		7,715		71
Warrant expense		—		49,027
Loss on litigation settlement		—		1,500
Impairment of intangible assets and goodwill		—		6,588
Loss on disposal of assets		—		486
Other, net		—		1,337
Non-GAAP loss	$	(9,057)	$	(11,623)

~~(in thousands, except share and per share amounts)~~

	Year Ended December 31,
	2019		2018
Revenue	$	15,089	$	607
Cost of revenue		5,784		164
Gross profit		9,305		443
Operating expenses:
Sales and marketing		4,847		5,237
General and administrative		17,224		14,025
Research and development		3,121		5,722
Impairment of intangible assets and goodwill (Note 9)		6,588		14,005
Legal settlement		1,500		—
Loss on disposal of assets		486		—
Total operating expenses		33,766		38,989
Operating loss		(24,461)		(38,546)
Other expense (income), net:
Interest expense, net		451		12
Loss on extinguishment of debt (Note 10)		71		—
Warrant expense (Note 13)		49,027		145
Gain on foreign currency exchange		(247)		—
Offering costs and other, net		1,337		11
Loss from continuing operations before income taxes		(75,100)		(38,714)
Income tax benefit		893		3,447
Loss from continuing operations		(74,207)		(35,267)
Loss from discontinued operations, net of tax		—		(45,885)
Net loss		(74,207)		(81,152)
Less: Down round adjustments for convertible preferred stock and warrants		—		(3,079)
Net loss attributable to common shareholders	$	(74,207)	$	(84,231)
Net loss per share - basic and diluted:
Continuing operations	$	(42.93)	$	(4,107.77)
Discontinued operations		—		(4,915.37)
Net loss per share - basic and diluted	$	(42.93)	$	(9,023.14)
Shares used to compute basic and diluted net loss per share		1,728,722		9,335

~~See accompanying notes to consolidated financial statements.~~

44 38

Table of Contents

~~RESHAPE~~Comparison ~~LIFESCIENCES~~of ~~INC.~~Results of Operations

~~Consolidated~~Net ~~Statements~~Revenue. The following table summarizes our net revenue by geographic location based on the location of ~~Comprehensive~~customers ~~Loss~~ for the years ended December 31, 2020 and 2019, as well as the percentage by location of total revenue and the amount of change and percentage of change (dollars in thousands):

(in thousands)


	Year Ended December 31,								Amount		Percentage
	2020				2019				Change		Change
United States	$	8,275	73.2	%	$	13,309	88.2	%	$	(5,034)	(37.8)	%
Australia		1,086	9.6	%		1,167	7.7	%		(81)	(6.9)	%
Europe		1,824	16.1	%		613	4.1	%		1,211	197.6	%
Rest of World		114	1.0	%		—	—	%		114	100.0	%
Total net revenue	$	11,299	100.0	%	$	15,089	100.0	%	$	(3,790)	(25.1)	%

	Year Ended December 31,
	2019		2018
Net loss	$	(74,207)	$	(81,152)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(8)		—
Other comprehensive income (loss), net of tax		(8)		—
Comprehensive loss	$	(74,215)	$	(81,152)

~~See~~Net ~~accompanying~~revenue ~~notes~~for the year ended December 31, 2020 was $11.3 million, a decrease of $3.8 million, or 25%, as compared to ~~consolidated~~net ~~financial~~revenue ~~statements~~of $15. 1 million for the year ended December 31, 2019. The primary reason for the overall decrease in net revenue is due to a reduction in sales from the COVID-19 pandemic, which caused elective surgeries to be shut down throughout the world at the end of the first quarter of 2020. Late in the second quarter of 2020, sales volumes began to improve and continued to improve through the beginning of the fourth quarter as select geographical regions began to open back up. During the fourth quarter of 2020, there was another surge in COVID-19 cases resulting in a slowdown, or in some cases a shutdown, of elective surgeries. Despite this, there was a 198% increase in revenue in Europe for the year ended December 31, 2020 as compared to the year ended December 31, 2019, which saw significant growth particularly in the UK. Although, many centers were closed, there was a push for bariatric surgery as obesity was called out as a major contributor to COVID-19 complications.

45 Cost of Goods Sold and Gross Profit: The following table summarizes our cost of goods sold and gross profit for the years ended December 31, 2020 and 2019, as well as percentage of total revenue and the amount of change and percentage of change (dollars in thousands):

Table of Contents


	Year Ended December 31,								Amount		Percentage
	2020				2019				Change		Change
Revenue	$	11,299	100.0	%	$	15,089	100.0	%	$	(3,790)	(25.1)	%
Cost of goods sold		5,037	44.6	%		5,784	38.3	%		(747)	(12.9)	%
Gross profit	$	6,262	55.4	%	$	9,305	61.7	%	$	(3,043)	(32.7)	%

~~RESHAPE LIFESCIENCES INC.~~

~~Consolidated~~Gross ~~Statements~~profit. Gross profit for the year ended December 31, 2020 was $6.3 million, a decrease of ~~Stockholders’~~$3.0 ~~Equity~~ million, or 33%, as compared to gross profit of $9.3 million for the year ended December 31, 2019. Gross profit as a percentage of total revenue for the year ended December 31, 2020 was 55.4% compared to 61.7% for the same period in 2019. The decrease in gross profit margin is primarily due to reduced overall sales from the COVID-19 pandemic, coupled with an increase in international sales, which have a lower gross profit percentage than domestic sales.

~~(in thousands, except share amounts)~~

	Series B Convertible			Series C Convertible			Series D Convertible			Series E Convertible						Additional				Accumulated Other		Total
	Preferred Stock			Preferred Stock			Preferred Stock			Preferred Stock			Common Stock			Paid-in		Accumulated		Comprehensive		Stockholders’
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Capital		Deficit		Income (Loss)		Equity
Balance December 31, 2017	6,055	$	—	95,388	$	1	—	$	—	—	$	—	123	$	—	$	411,125	$	(334,759)	$	—	$	76,367
Net loss	—		—	—		—	—		—	—		—	—		—		—		(81,152)		—		(81,152)
Stock-based compensation expense	—		—	—		—	—		—	—		—	—		—		3,098		—		—		3,098
Down round adjustments for convertible preferred stock and warrants	—		—	—		—	—		—	—		—	—		—		3,079		(3,079)		—		—
April 2018 institutional sale of convertible preferred stock and warrants, net of issuance costs	—		—	—		—	6,000		—	—		—	—		—		5,081		—		—		5,081
2018 institutional sales of common stock and warrants, net of issuance costs	—		—	—		—	—		—	—		—	5,768		—		14,316		—		—		14,316
Issuance of common stock and warrants in September 2018 public offering	—		—	—		—	—		—	—		—	696		—		447		—		—		447
Issuance of common stock and warrants in an at-the-market public offering, net of issuance costs	—		—	—		—	—		—	—		—	52,197		—		13,385		—		—		13,385
Redemption of convertible preferred stock	—		—	—		—	(500)		—	—		—	—		—		(500)		—		—		(500)
Conversion of convertible preferred stock into common stock	(5,896)		—	—		—	(5,500)		—	—		—	4,873		—		—		—		—		—
Issuance of common stock upon exercise of warrants, net of transaction costs	—		—	—		—	—		—	—		—	9,435		—		621		—		—		621
Balance December 31, 2018	159	$	—	95,388	$	1	—	$	—	—	$	—	73,092	$	—	$	450,652	$	(418,990)	$	—	$	31,663
Net loss	—		—	—		—	—		—	—		—	—		—		—		(74,207)		—		(74,207)
Other comprehensive income (loss), net of tax	—		—	—		—	—		—	—		—	—		—		—		—		(8)		(8)
Stock-based compensation expense, net	—		—	—		—	—		—	—		—	—		—		2,311		—		—		2,311
Warrant expense	—		—	—		—	—		—	—		—	—		—	—	130		—		—		130
Sales of common stock and warrants, net of issuance and other costs	—		—	—		—	—		—	—		—	199,167		—		434		—		—		434
Warrant adjustment	—		—	—		—	—		—	—		—	—		—		(312)		—		—		(312)
Conversion of common stock into convertible preferred stock	—		—	—		—	—		—	1,192,000		12	(9,933)		—		(12)		—		—		—
Conversion of convertible preferred stock into common stock	(156)		—	—		—	—		—	(1,192,000)		(12)	10,973		—		12		—		—		—
Warrant liability reclassified to equity	—		—	—		—	—		—	—		—	—		—		63,954		—		—		63,954
Issuance of common stock upon exercise of warrants, net of transaction costs	—		—	—		—	—		—	—		—	118,440		—		142		—		—		142
Balance December 31, 2019	3	$	—	95,388	$	1	—	$	—	—	$	—	391,739	$	—	$	517,311	$	(493,197)	$	(8)	$	24,107

~~See~~Table ~~accompanying~~of ~~notes to consolidated financial statements.~~ Contents

46 Operating Expenses: The following table summarizes our operating expenses for the years ended December 31, 2020 and 2019, as well as the percentage of total revenue, and the amount of changes and percentage of change (dollars in thousands):

Table of Contents


	Year Ended December 31,								Amount		Percentage
	2020				2019				Change		Change
Sales and marketing	$	4,694	41.5	%	$	4,847	32.1	%	$	(153)	(3.2)	%
General and administrative		10,527	93.2	%		17,224	114.1	%		(6,697)	(38.9)	%
Research and development		3,498	31.0	%		3,121	20.7	%		377	12.1	%
Impairment of intangible assets		—	—	%		6,588	43.7	%		(6,588)	(100.0)	%
Loss on litigation settlement		—	—	%		1,500	9.9	%		(1,500)	(100.0)	%
Loss on disposal of assets		—	—	%		486	3.2	%		(486)	(100.0)	%
Total operating expenses	$	18,719	165.7	%	$	33,766	223.8	%	$	(15,047)	(44.6)	%

~~RESHAPE LIFESCIENCES INC.~~

~~Consolidated~~Sales ~~Statements~~and Marketing Expense. Sales and marketing expenses were $4.7 million for the year ended December 31, 2020, a decrease of ~~Cash~~$0.1 ~~Flows~~ million, or 3%, from $4.8 million for the year ended December 31, 2019. The primary reason for the decrease is a reduction in travel and entertainment expenses of $0.3 million, as the Company decreased travel in 2020 due to the COVID-19 pandemic, and a reduction in stock-based compensation expense of $0.2 million. These decreases were offset by an increase in consulting fees of $0.2 million, due to the roll out of ReShapeCare during the third quarter of 2020, and an increase in commissions from greater International sales and a larger Domestic sales force.

(General and Administrative Expense. General and administrative expenses were $10.5 million for the year ended December 31, 2020, a decrease of $6.7 million, or 39%, from $17.2 million. The decrease is primarily due to decreases in ~~thousands)~~ audit, consulting, and other professional service provider expenses of $3.4 million, as a result of the Company changing many of its services providers late in 2019 in an effort across the board to reduce unnecessary and overinflated expenses; legal fees of $2.3 million, primarily a result of settled litigation in 2019; stock-based compensation expense of $0.7 million, from normal employee attrition and lack of stock options being granted since 2018; and bad debt expense of $0.2 million.

	Year Ended December 31,
	2019		2018
Cash flows from operating activities:
Net loss	$	(74,207)	$	(81,152)
Loss from discontinued operations, net of tax		—		45,885
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		40		242
Amortization of intangible assets		1,666		198
Impairment of intangible assets		6,588		14,005
Bad debt expense		439		80
Noncash interest expense		451		14
Loss on extinguishment of debt		71		—
Stock-based compensation		2,311		3,098
Warrant expense		49,027		145
Deferred income tax benefit		(1,143)		(3,448)
Loss on disposal of asset		486		—
Common stock warrant liability issuance costs		1,442		—
Other noncash items		57		—
Change in operating assets and liabilities:
Accounts and other receivables		(3,619)		(508)
Finished goods inventory		(332)		1,978
Prepaid expenses and other current assets		(442)		(802)
Accounts payable and accrued liabilities		1,629		(810)
Warranty liability		1,358		—
Other		(22)		999
Net cash used in operating activities - continuing operations		(14,200)		(20,076)
Net cash used in operating activities - discontinued operations		—		(7,414)
Net cash used in operating activities		(14,200)		(27,490)
Cash flows from investing activities:
Acquisition of LAP-BAND product line assets, including transaction costs		(2,000)		(10,279)
Purchases of property and equipment		(14)		(49)
Net cash used in investing activities - continuing operations		(2,014)		(10,328)
Net cash used in investing activities		(2,014)		(10,328)
Cash flows from financing activities:
Proceeds from issuance of subordinated convertible debentures		2,000		—
Payments of debt financing costs		(21)		—
Repayment of subordinated convertible debentures		(2,200)		—
Proceeds from warrants exercised		142		513
Proceeds from sale and issuance of equity securities		478		37,745
Proceeds from issuance of common stock warrant liabilities, net of issuance costs of $1,442		13,304		—
Payments of equity issuance costs		(44)		(4,555)
Preferred stock redemption		—		(500)
Net cash provided by financing activities - continuing operations		13,659		33,203
Net cash provided by financing activities		13,659		33,203
Effect of currency exchange rate changes on cash and cash equivalents		(8)		—
Net decrease in cash, cash equivalents and restricted cash		(2,563)		(4,615)
Cash, cash equivalents and restricted cash at beginning of period		5,548		10,163
Cash, cash equivalents and restricted cash at end of period	$	2,985	$	5,548
Noncash investing and financing activities:
Acquisition of LAP-BAND product line assets, asset purchase consideration payable	$	—	$	6,297
Down round adjustment for convertible preferred stock and warrants		—		3,079
Conversion of common stock to convertible preferred stock	$	(1)	$	—
Common stock warrant liabilities reclassified to equity		63,954		—

Research and Development Expense. Research and development expenses were $3.5 million for the year ended December 31, 2020, an increase of $0.4 million, or 12%, from $3.1 million for the year ended December 31, 2019. The primary reason is due to an increase in payroll related expenses of $0.2 million from greater headcount and consulting fees of $0.2 million, due to escalated efforts with the ReShape Vest and Diabetes Bloc-Stim Neuromodulation. The Company continues to focus on supreme innovation which includes developing the ReShape Vest and the investigational Diabetes Bloc-Stim Neuromodulation, and expanding and improving our current LAP-BAND portfolio.

~~See~~Impairment ~~accompanying~~of ~~notes~~Intangible toAssets. ~~consolidated~~During ~~financial~~the ~~statements~~year ended December 31, 2020, the Company did not have an impairment of intangible assets. The Company incurred an impairment charge of $6.6 million for the year ended December 31, 2019. As a result of an impairment analysis performed during the second quarter of 2019, the Company determined there was an impairment of the indefinite-lived intangible asset recorded in connection with our acquisition of BarioSurg, Inc. (“BarioSurg”). We also assessed the recoverability of finite-lived intangible assets during the second quarter of 2019 and did not identify any impairment as a result of the performance of this analysis.

47 Legal Settlement. During the quarter ended September 30, 2019, the Company recognized a contingent loss of $1.5 million relating to the patent infringement claim with Fulfillium. Under the Settlement Agreement, Fulfillium agreed to dismiss with prejudice the previously disclosed lawsuits by Fulfillium.

~~Table~~Loss on Disposal of ~~Contents~~ Assets. The Company did not have any losses related to the disposal of long-term assets for the year ended December 31, 2020. During the year ended December 31, 2019, the Company recorded a $0.5 million loss related to the disposal of long-term assets acquired in connection with the lap-band purchase.

~~ReShape~~Interest ~~Lifesciences~~Expense, ~~Inc~~Net. Net interest expense for the year ended December 31, 2020 was $2.0 million compared to $0.5 million for the year ended December 31, 2019. The primary reason for the increase of $1.5 million is due to the amortization of deferred issuance costs and the debt discount recorded as interest expense, related to the credit

~~Notes to Consolidated Financial Statements~~ 40

~~(1)Description~~Table of ~~the Business and Risks and Uncertainties~~ Contents

~~Description~~agreement ofwith ~~Business~~ an institutional investor, slightly offset by the interest expense related to the subordinated debentures in 2019.

~~ReShape~~Loss ~~Lifesciences~~on ~~Inc~~Extinguishment of Debt. ~~(the~~The “Company”) ~~was~~recognized ~~originally~~a ~~incorporated~~loss inon ~~the~~extinguishment ~~state~~ of ~~Minnesota~~debt infor ~~December~~the ~~2002~~year ~~and~~ended ~~reincorporated~~December in31, ~~the~~2020, ~~state~~ of ~~Delaware in July 2004~~$7. ~~In 2017~~7 million, ~~the~~related ~~Company changed its name from EnteroMedics Inc.~~ to ~~ReShape~~the ~~Lifesciences~~fair ~~Inc.~~value ~~The~~of ~~Company~~the iswarrants ~~headquartered~~issued in ~~San~~connection ~~Clemente,~~with ~~California.~~the ~~The~~third ~~Company is a developer of minimally invasive medical devices that advance bariatric surgery to treat obesity~~ and ~~metabolic~~fourth ~~diseases.~~amendments ~~The Company’s current portfolio and operating segments consist~~ of the ~~LAP-BAND®~~credit ~~Adjustable~~agreement ~~Gastric Banding System~~ and ~~the~~discounts ~~ReShape~~related ~~VestTM, an investigational device,~~ to ~~help~~the ~~treat more patients with obesity~~amendments. ~~Refer to Note 14 for additional information about operating segments.~~

~~Risks~~Warrant Expense. The Company did not have a warrant expense for the year ended December 31, 2020. Warrant expense for the year ended December 31, 2019 includes noncash expense of approximately $49.0 million for the value of the liability warrants issued in connection with our equity financing completed in June 2019 and ~~Uncertainties~~ September 2019 in excess of the proceeds received and changes in fair value of the warrant liability. As a result of the reverse stock split on November 12, 2019, the Company reclassified the warrant liability to equity.

~~The Company continues to devote significant resources to developing its product technology~~Other, ~~commercialization activities and raising capital~~Net. ~~These~~There ~~activities~~were ~~are~~no ~~subject~~other, tonet ~~significant~~expenses ~~risks~~for ~~and uncertainties, including~~ the ~~ability~~year toended ~~obtain~~December ~~additional financing~~31, ~~and~~2020. ~~there~~Other, ~~can~~net beexpenses nofor ~~assurance that~~ the ~~Company~~year ~~will~~ended beDecember ~~successful in obtaining additional financing on favorable terms~~31, or2019 atincludes ~~all~~$1.3 Ifmillion ~~adequate~~of ~~funds~~transaction ~~are~~costs ~~not~~required ~~available, the Company may have~~ to ~~further~~be ~~reduce~~expensed ~~its~~as ~~cost~~a ~~structure~~result ~~until financing is obtained and/or delay development, or commercialization~~ of ~~products, or license to third parties~~ the ~~rights~~liability totreatment ~~commercialize~~for ~~products, or technologies that~~ the ~~Company~~warrants ~~would~~issued ~~otherwise~~in ~~seek~~connection towith ~~commercialize.~~our ~~Refer~~June ~~to Note 3 for additional information about the Company’s liquidity, going concern~~ and ~~management’s~~September ~~plans~~equity financings.

~~The~~Income ~~medical~~Tax ~~device~~Benefit. ~~industry~~There iswas ~~characterized~~an byincome ~~frequent~~tax ~~and~~benefit ~~extensive~~of ~~litigation~~$0.2 ~~and~~million ~~administrative~~for ~~proceedings~~the ~~over~~year ~~patent~~ended ~~and~~December ~~other~~31, ~~intellectual~~2020, ~~property~~while ~~rights.~~there ~~Whether~~was aan ~~product~~income ~~infringes~~tax abenefit ~~patent~~of ~~involves~~$0.9 ~~complex~~million ~~legal~~for ~~and~~the ~~factual~~year ~~issues~~ended December 31, ~~the~~2019 ~~determination~~for ofthe ~~which~~reduction isin ~~often~~the ~~difficult~~deferred totax ~~predict,~~liability ~~and~~associated ~~the~~with ~~outcome~~an ~~may~~indefinite-lived beintangible ~~uncertain~~asset, ~~until~~for ~~the~~which ~~court~~we ~~has~~recorded ~~entered~~an ~~final~~impairment ~~judgment~~charge ~~and~~of ~~all~~$6.6 million ~~appeals~~during ~~are~~the ~~exhausted.~~three ~~The~~months ~~Company’s~~ended ~~competitors~~June ~~may~~30, ~~assert~~2019. ~~that~~The ~~its~~income ~~products~~tax orbenefit is the ~~use~~result of the ~~Company’s~~indefinite ~~products~~lived ~~are~~deferred ~~covered~~tax byliability Uthat had been netted with certain indefinite lived deferred tax assets.S. orIt ~~foreign~~is ~~patents~~also ~~held~~net byof ~~them~~an increase to the deferred tax valuation allowance of $3.5 ~~Refer~~million that was primarily due to ~~Note~~an 17increase ~~for~~in ~~additional~~the ~~information~~net ~~about~~operating ~~contingencies~~loss ~~and~~carryforward ~~litigation~~deferred ~~matters~~tax asset.

~~(2)Summary~~Liquidity ofand ~~Significant~~Capital ~~Accounting~~Resources ~~Policies~~

~~Basis~~We have financed our operations to date principally through the sale of ~~Presentation~~ equity securities and debt financing. During the years ended December 31, 2020 and 2019, we received aggregate net proceeds of $10.5 million and $15.0 million, respectively, from debt and equity offerings, and $0.7 million and $0.3 million, respectively, from the exercise of warrants to purchase common stock. As of December 31, 2020, we had $3.0 million of cash and cash equivalents, including $50 thousand of restricted cash.

~~The~~Subsequent ~~Company~~to year end management has ~~prepared~~successfully ~~the~~obtained ~~accompanying~~a ~~consolidated~~$15.0 ~~financial~~million ~~statements~~line inof ~~conformity~~credit and has agreed to merge with ~~accounting~~Obalon ~~principles~~as ~~generally~~filed ~~accepted~~on January 19, 2021, which the Company anticipates will result in the ~~United~~combined ~~States~~company’s common stock being traded on the NASDAQ Stock Market Exchange. The Company is also pursuing further funding options, including seeking additional equity or debt financing to support the expansion of ~~America~~the ~~(“GAAP”)~~Lap-Band product line, the introduction of ReShapeCare to the market place; and the continued development and, successful commercialization of the ReShape Vest and the ReShape Diabetes Bloc-Stim Neuromodulation.

~~Reverse~~The ~~Stock~~following ~~Splits~~ table summarizes our change in cash and cash equivalents (in thousands):

During the years ended December 31, 2019 and 2018, the Company’s board of directors and stockholders approved the following reverse stock splits:


	Year Ended
	December 31,
	2020		2019
Net cash used in operating activities	$	(8,550)	$	(14,200)
Net cash used in investing activates		(2,390)		(2,014)
Net cash provided in financing activities		11,075		13,659
Effect of exchange rate changes		(113)		(8)
Net change in cash and cash equivalents	$	22	$	(2,563)

· 1-for-120 reverse split of the Company’s outstanding common stock that became effective after the close of market on November 11, 2019. In addition, the Company’s certificate of incorporation was amended to change the common stock par value from $0.01 per share to $0.001 per share. The par value of the Company’s preferred stock was not changed.

~~· 1-for-15 reverse split of the Company’s outstanding common stock that became effective after the close of market on June 1, 2018.~~41

48 Table of Contents

~~Table~~Net ofCash ~~Contents~~ Used in Operating Activities

·Net 1cash used in operating activities was $8.6 million and $14.2 million for the years ended December 31, 2020 and 2019, respectively. Net cash used in operating activities for the year ended December 31, 2020, was primarily the result of our net loss of $21.6 million, partially offset by non-cash adjustments for amortization of intangible assets of $1.7 million, stock-~~140~~based ~~reverse~~compensation ~~split~~of $1.3 million, loss on extinguishment of debt of $7.7 million, amortization of debt discount and deferred debt issuance costs of $1.7 million, noncash interest expense of $0.2 million, bad debt expense of $0.3 million, and provision for inventory in excess and obsolescence of $0.2 million. In addition, the Company’s ~~outstanding~~has ~~common~~focused ~~stock~~efforts ~~that~~on ~~became~~collection ~~effective~~of ~~after~~accounts ~~the~~receivable, ~~close~~which resulted in an increase to cash of ~~market~~$1.2 onmillion, ~~November~~offset 7by an increase in change of inventory of $1.2 million, ~~2018~~primarily due to expected inventory buildup related to our impending manufacturing transfer and a decrease in accounts payable and accrued liabilities of $1.0 million.

~~Neither~~Net ofcash ~~the~~used ~~reverse stock splits~~ in ~~2018~~operating ~~altered~~activities ~~the~~from ~~par~~continuing ~~value~~operations offor the ~~Company’s~~year ~~common~~ended ~~stock~~December or31, ~~preferred~~2019, ~~stock.~~was Inprimarily ~~connection with~~ the ~~reverse~~result ~~stock~~of ~~splits,~~our ~~proportional~~net ~~adjustments~~loss ~~were made to the number~~ of ~~shares~~$74.2 ofmillion, ~~common~~partially ~~stock~~offset ~~issuable~~by ~~upon~~non-cash ~~exercise~~adjustments orfor ~~conversion,~~amortization ~~and~~of ~~the~~intangible ~~per~~assets ~~share~~of ~~exercise~~$1.7 ~~or conversion price~~million, impairment of ~~the~~intangible ~~Company’s~~assets ~~outstanding~~of ~~warrants~~$6.6 million, stock-based ~~options~~compensation ~~and~~of ~~convertible~~$2.3 ~~preferred stock~~million, inwarrant ~~each~~expenses ~~case~~of in$49.0 ~~accordance~~million ~~with~~and ~~their~~warrant ~~terms.~~issuance ~~The~~costs ~~reverse~~of ~~stock~~$1.4 ~~splits~~million. inIncreases ~~2019~~to ~~and~~accounts ~~2018~~receivable ~~did~~of ~~not~~$3.6 ~~change~~million, ~~the~~inventory ~~number~~ of ~~common~~$0.3 ormillion ~~preferred~~and ~~shares~~prepaid ~~authorized~~expenses byand ~~the~~other ~~Company’s certificate~~ of ~~incorporation~~$0.4 ~~All~~million ~~par~~were ~~value,~~partially ~~share~~offset ~~and~~by ~~per-share~~cash ~~amounts~~savings ~~have~~due ~~been~~to ~~retroactively~~an ~~adjusted~~increase toin ~~reflect~~accounts ~~the~~payable, ~~reverse~~accrued ~~stock~~liabilities ~~splits~~and ~~for~~warranty ~~all~~liability ~~periods~~of ~~presented~~$3.0 million.

~~Principles~~ ofNet ~~Consolidation~~ Cash Used in Investing Activities

Net cash used in investing activities was $2.4 million for the year ended December 31, 2020, as compared with $2.0 million for the year ended December 31, 2019. The ~~accompanying~~investing ~~consolidated~~activities ~~financial~~in ~~statements~~2020 ~~include~~reflects the ~~accounts~~second annual payment of ~~the~~$2.0 ~~Company~~million ~~and~~paid ~~its~~in ~~wholly~~connection with our acquisition of the lap-~~owned~~band ~~subsidiaries~~product line, as well as $0.4 ~~All~~million ~~intercompany~~of ~~transactions~~capital ~~and~~expenditures ~~accounts~~related ~~have~~to ~~been~~the ~~eliminated~~process inof ~~consolidation~~ moving manufacturing transfer Costa Rica to the United States.

~~Use~~Net cash used in investing activities for the year ended December 31, 2019 reflected the first annual payment of ~~Estimates~~$2.0 million paid in connection with our acquisition of the LAP-BAND product line.

~~The~~Net ~~preparation~~Cash ofProvided ~~financial~~by ~~statements~~Financing in conformity with GAAP 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.

~~Discontinued~~Net ~~Operations~~ cash provided by financing of $11.1 million for the year ended December 31, 2020, consisted of proceeds from the credit agreement with an institutional investor of $9.5 million, $1.0 million received under the CARES Act in the form of a PPP Loan and $0.7 million in cash received from the exercise of warrants, offset by approximately $0.1 million of debt issuance costs.

~~The~~Net ~~operating~~cash ~~results~~provided by financing activities of $13.7 million for the ~~ReShape~~year ~~Balloon~~ended ~~product~~December ~~line~~31, ~~prior~~2019, toconsisted ~~disposal~~of ~~have~~proceeds ~~been~~of ~~reflected~~$13.7 asmillion ~~discontinued~~from ~~operations~~equity inofferings and $0.1 million from the ~~Consolidated~~exercise ~~Financial~~of ~~Statements~~warrants ~~(see~~to ~~Note~~purchase 5)common stock. In ~~addition,~~connection ~~the~~with ~~cash~~these ~~flows~~equity ~~associated~~transactions, ~~with~~we ~~discontinued~~paid ~~operations~~an ~~are~~immaterial ~~presented~~amount ~~separately~~of inrelated ~~the~~transaction ~~accompanying~~costs. ~~Consolidated~~A ~~Statements~~portion of ~~Cash~~the ~~Flows.~~net ~~Unless~~proceeds ~~otherwise~~from ~~noted,~~the ~~amounts~~June in2019 ~~these~~equity ~~Notes~~

Filing Compare · ReShape Weightloss Inc.