Scott Youngstrom - CFO & Chief Compliance Officer Dan Gladney - Chairman & CEO.

Jeffrey Cohen - Ladenburg Thalmann & Co..

Good day, ladies and gentlemen. And welcome to the ReShape Lifesciences Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Scott Youngstrom, Chief Financial Officer of ReShape Lifesciences. Sir, you may begin..

Thank you and good afternoon. And thank you for joining us on today's call. I am pleased to be joined by Dan Gladney, our Chief Executive Officer and Chairman of the Board; who will provide an overview of the Company's recent activities and business highlights. I will then review our financial results for the third quarter.

After that, Dan will wrap up and following his final remarks, we will be available for questions during the Q&A session.

As a reminder, this conference call as well as ReShape Lifesciences SEC filings and website at www.reshapelifesciences.com, including the investor information section of the website contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Our actual results could differ materially from those discussed due to the known and unknown risks, uncertainties and other factors.

These and additional risks and uncertainties are described more fully in the company's filings with the Securities Exchange Commission, including those factors identified as Risk Factors in exhibit 99.3 of our report on Form 8-K filed on July 26, 2017 and in our quarterly report on Form 10-Q that was filed earlier today.

As an additional reminder, our stock is still listed on NASDAQ, however, is now trading under the Ticker, RSLS. I will now turn the call over to Dan Gladney..

Thank you, Scott. Good afternoon, everyone, and thank you for joining us. We had a very productive third quarter in which we meaningfully moved our platform forward and executed on the strategy to build our organization into a full scale obesity company.

As many of you know, we recently announced the acquisition of ReShape Medical, and subsequently the change of our company name from EnteroMedics to ReShape Lifesciences.

This acquisition represents not only the combination of our stated strategic goal of product expansion but it also shows the strength of our team to execute and deliver on our promises.

We believe that our new name, ReShape Lifesciences, reflects the company we have grown into and our vision as we move forward as a comprehensive provider of solutions, the obesity continuum of care.

On today's call, I will talk in more detail about the direction of ReShape Lifesciences and our strategy, inclusive of our expanded product offering and company integration, and then we'll provide an update on commercial and clinical areas and on our third quarter results. Scott will then provide more detail on our financials.

Finally, I will wrap up and then we will look forward to taking your questions. As we discussed over the past several quarters, the strategic focus of EnteroMedics has been to offer a full suite of transformative technologies for obesity.

With the acquisition of ReShape Medical, we now have two FDA approved products on the market and a third exciting product about the Enter IDE and CE studies. And as we look at the body mass index, or BMI, our products can serve patients across the spectrum.

From our ReShape balloons for patients with BMI between 30 and 40, to the vBloc therapy for patients with BMI between 35 and 45, and finally, our gastric vest which is intended for morbidly obese patients with BMI of 40 and above.

With the product portfolio that has been built over the past six months through our acquisitions of BarioSurg and ReShape, which now includes over 110 issued patents and the transition from a one product company to a full scale provider of medical devices for obesity, a fresh new name that better reflects our mission and value proposition was called for.

Our team concluded that keeping ReShape in the company name was important, because not only does it have name recognition and established equity, as a patient of friendly solution but the name accurately represents the company and the underlying goal of our technologies.

We also felt that the word life sciences plays into obesity as a lifelong disease and the fact that we as a company are committed to our patients and their care for the long-term, and so ReShape Lifesciences was born, and I could not be more excited for our future.

For those of you who are less familiar with the ReShape balloon technology, it is a non-surgical removable dual weight loss balloon that is approved for people with a body mass index between 30 and 40, with one or more related co-morbid conditions, who have failed previous attempts to lose weight through diet and exercise.

The ReShape balloon which is differentiated by its interconnected dual balloon configuration is designed to improve comfort by confirming to the natural shape of the stomach. The dual balloon has more potential fill volume; takes up more stomach space in the stomach compared to other products on the market which aid in patient's weight loss.

Studies have shown fewer early retrievals due to intolerance of ReShape versus other sailing balloons, as well as shorter duration of negative symptoms such as nausea and vomiting.

The ReShape balloon, which is the only inter-gastric balloon design to increase safety by mitigating the potential for migration is inserted through the mouth endoscopically during a 20-minute outpatient procedure with no incisions and no scars.

As you may know, more than one in three adults in the United States are considered obese, yet currently only approximately 200,000 surgeries a year are done to address obesity in the United States. This implies a surgical penetration of less than 1% of the obese population.

Clearly, there is a market need that is not being meet and there is a significant obesity treatment gap between medical management and the current surgical standards-of-care for treatment, bariatric surgery, which is invasive, complex and has multiple associated complications.

And having just come off Obesity Week, which is the largest national conference focused on obesity, it became even clear to us that this market need exist. In addition to a strong presence that included three presentations on ReShape products, our booth was one of the busiest on the convention floor.

Interest is high and the market is looking for new minimally invasive durable solutions. With the acquisition of ReShape Medical, we now have another product to help fill the treatment gap.

The addition of the ReShape balloon expands our addressable market, both in terms of patient profile and price point and complements our existing vBloc and recently acquired Gastric Vest technologies.

We can now offer to bariatric surgeons and GI specialists a tool box of patient-friendly transformative alternatives to traditional bariatric surgery to offer better outcomes and to reduce cost to the healthcare system.

With the building blocks in place and having delivered on our goal of adding technologies to address different market segments within obesity, our internal focus is on customer acquisition, operational execution and market expansion.

I have strong confidence in our products and in the team that we have in place to execute and expand the footprint of ReShape Lifesciences.

We began recognizing ReShape revenues at the beginning of our fourth quarter and plan to build on the organizations established sales relationship as we integrate our teams and work together to maximize value for our patients, customers and shareholders.

Turning to the integration; we're off to a strong start and have initiated focused integration efforts with highly engaged team members for both, EnteroMedics and ReShape, working towards a common vision.

As we refine our commercialization strategy, we are retaining ReShape's dedicated sales team and combining it with our sales force under common leadership while ensuring steady focus on vBloc and ReShape. And we believe we have the right leadership team and structure in place to set us up for success.

In sales, we are putting into place a very deliberate strategy that groups our team into three strategic areas of focus. Sales to the Veterans Administrations Hospitals, which as you know are pivotal relationship for vBloc. Sales into international markets and all non-VA hospital sales are products within the United States.

We are incredibly excited about the operational and potential revenue synergies of our ReShape and EnteroMedic sales organizations. With similar call points and customer education requirements, we expect cross-selling opportunities to benefit sales of both, ReShape and vBloc products.

As we head into 2018, we will have a team of 14 sales reps, an increase of about 40% from the ReShape team at the time of the acquisition, and we expect to grow the team to 16 in early 2018. Our direct sales representatives will be complemented by seven clinical field trainers and three field marketing managers.

The marketing teams at ReShape and EnteroMedics are also very synergistic with similar existing structures and marketing programs in place which are being cross-trained to handle all customer leads.

Both organizations utilize direct-to-consumer marketing for products that are currently not reimbursed and therefore the marketing strategies are very different and very much in sync with the integration and has been smooth and straightforward so far.

From a cost saving standpoint, we expect to recognize synergies in marketing and G&A, as well as back office operations as we evaluate and develop plans to leverage resources and infrastructure. Scott will provide more details on synergies, as well as costs associated with the acquisition later in the call.

Finally, while we will maintain a satellite office in Minnesota, we are excited to be moving our corporate headquarters to the ReShape offices in San Clemente, California. The team at ReShape Medical has been commercializing product for almost two years with a reputable experienced sales force and in-house manufacturing capabilities.

With these already established pillars of commercialization, the move to ReShape Medical's existing headquarters made operational sense and affords us additional cost saving opportunities as we continue to integrate our two exciting organizations.

On the clinical front as you know, we have several ongoing studies to support marketing and reimbursement of vBloc.

First, is a 60-patient Type 2 Diabetes study that is being done in collaboration with Kaiser Permanente; the goal of which is to validate vBloc therapy for the treatment and possible prevention of Type 2 Diabetes in moderate to morbidly obese patients. The second study is our FDA post-approval renew study that was kicked off in September.

As a reminder, this five-year multi-center study will evaluate the long-term safety and efficacy of the vBloc system for weight loss in obese patients in a real world clinical setting.

While both of these studies continue to move forward and interests are strong, an enrollment was put on temporarily on hold during the quarter due to an issue at our sterilization supplier.

The supplier's inability to sterilize our products led to a short-term inventory shortage of vBloc units and subsequently enrollment in our trials was on-hold for approximately three months. The supplier has resolved the issue and we are currently preparing to resume shipping units.

Turning to the Gastric Vest, we plan to kick-off the CE Mark study for this product in early 2018. We are currently in discussions with the CE authority on study design and the number of patients.

As previously announced, we do already have approval from the Ministry of Health, Social Services and Equality in Spain, and are in the process of evaluating additional sites in Europe.

Additionally, we are finalizing protocol development for our IDE study for the Gastric Vest in the United States and expect to initiate our formal discussions with the FDA in the first quarter of 2018. Now turning to our third quarter performance; our underlying business is showing solid traction.

We are seeing strong interest in our vBloc Now program, our company's subsidized program that we believe will provide us with real world published data on vBloc to support reimbursement.

While this program was also impacted by our inventory issue, we were able to implement 22 vBloc Now units during the third quarter bringing total vBloc Now implants to 58 with a strong backlog of demand.

With our supply situation now resolved, we expect our two implanting vBloc Now centers will be able to meet pent-up demand and get our product back on-track. Our goal to implant 125 to 150 patients remains intact, and we believe we will achieve this by the end of the first quarter of 2018.

Our third quarter revenue totaled $360,000 comprised of $110,000 in revenue from vBloc and $250,000 related to our previously announced partnership with Galvani. Including the 22 vBloc Now units, we implanted a total of 30 vBloc devices in the third quarter of 2017 compared to 22 units in the third quarter of 2016.

Finally, we were excited to complete $20 million financing early in the third quarter and our cash position remains strong with $23.4 million on the balance sheet at the end of the third quarter. Please note, that this cash balance does not reflect a $5 million cash consideration related to the ReShape Medical acquisition in early October.

Before handing the call over to Scott, I wanted to reiterate three key points. One, with our recent successes in executing our strata strategic goals we have grown from a single-product company to a full-scale medical device company with multiple technological solutions that address the obesity continuum of care.

Two, as we focus on execution, we intend to leverage our footprint, market expertise and commercial infrastructure which we believe will help both expand the market and accelerate our topline growth. And three, we will leverage our intellectual property footprint with strategic opportunities.

I will now turn the call over to Scott Youngstrom, our CFO, to provide more details on our financial results.

Scott?.

Thanks, Dan.

As you know, on October 2 we announced the acquisition of ReShape Medical for a total transaction value of approximately $61 million, comprised of 2,356,729 shares of common stock, 187,772 shares of Series C convertible preferred stock, and approximately $5 million in cash which was immediately used to repay ReShape Medical's outstanding senior secured debt as well as transaction expenses.

We expect to have a special shareholder meeting on December 19 to seek the required approval of the conversion of the Series C convertible preferred stock into 18,777,200 shares of common stock. We began consolidating ReShape Medical's revenues on October 2 and these will be reflected starting in our fourth quarter results.

Turning to vBloc; as Dan has stated, our team placed 30 units in the third quarter of 2017, representing an increase of 36% compared to 22 units in the third quarter of 2016, bringing our nine month total to 80 as compared to 63 for the entire 2016 calendar year.

For the three months ended September 30, 2017, we reported sales of $360,000, with gross profit totaling $146,000. This compares to revenues of $297,000 and gross profit of $150,000 for the three months ended September 30, 2016. Included in this quarter's revenue amount is $250,000 of service revenue related to our development agreements.

As Dan mentioned, we did incur a product shortage during the quarter due to a supplier issue but that has been resolved and we anticipate being back to normal inventory levels by the end of the fourth quarter.

Selling, general and administrative expenses or SG&A for the quarter were $4.6 million, as compared to $3.4 million for the third quarter of 2016. Including in SG&A this quarter were $361,000 related to the ReShape acquisitions.

Research and development expenses of $1.1 million for the three months ended September 30, 2017, were comparable to the $1.3 million for the same quarter in 2016. As of September 30, 2017, the company's cash, cash equivalents and short-term investments totaled $23.4 million and the company remains without any debt on its balance sheet.

The increase in our cash balance reflects our $20 million equity financing round completed in August, however, it does not reflect the $5 million we used in the ReShape Medical acquisition in early October. Our monthly cash burn at EnteroMedics' has been $1.8 million and at ReShape it has averaged approximately $1.5 million per month.

Together with integration efficiencies and synergies, we are targeting our monthly burn in 2018 to be approximately $2.4 million to $2.5 million per month. This would be excluding our integration-related cost such as severance. With that, I will turn the call back over to Dan..

Thank you, Scott. As we move into the last quarter of 2017, we now have the building blocks in place to execute and our position for top line growth. We've broadened our market opportunities significantly with acquisitions, transforming from a one-product company to a full-scale rollup of technologies to address the obesity continuum of care.

We are energized about our new direction as ReShape Lifesciences, I could not be more optimistic about the exciting value creation opportunities that I believe are in-store for us as we drive doctors and patients to our products expanding both the addressable market for surgical obesity solutions and the growth potential of ReShape Lifesciences as a company.

We have a great market with significant unmet needs, novel products backed by solid clinical evidence of strong commercial organization and customers who are increasingly recognizing the value we can bring to them, their patients and the healthcare system.

We greatly appreciate the hard work of all the employees at both, EnteroMedics' and ReShape Medical, and the continued interest and support of our investors. We are excited for the future of ReShape Lifesciences and for how we can impact lives of our customers and patients. With that, we are now open for questions.

Operator?.

[Operator Instructions] I'm showing no questions in queue at this time. I apologize, it looks like we do have a question from the line of Jeffrey Cohen with Ladenburg Thalmann. Your line is now open..

So I guess I wanted to go through couple of questions on each of the program.

So firstly on vBloc, it looks like 30 were implanted, 22 on the program, so 8 more sold; and can you talk a little bit about marketing efforts that are continuing on the sold units and how that looks going forward?.

Sure. Well, there is really kind of two things here.

One is that we are moving forward of course with the -- with our contract, with academy medical through the VA Hospitals and as I mentioned on our last call, we're -- we are training and certifying those hospitals that have bariatric programs and off the 200 -- excessive 200 Veterans Administration Hospitals in the United States, only about 10% of them have bariatric programs and we've got about 20%, 25% of those hospitals now that are trained, certified for vBloc and are recruiting patients; so that's where the sold units come from.

The other units were of course placed into our vBloc Now program and two hospitals that are running that program for us that -- the plan there is to get 125 to 150 patients implanted, no later than the end of quarter one of 2018, and then be able to turn that data over to the private payers who are looking for six months of data from commercialized patients, that number of patients.

So even with the backlog that we had because of a sterilization issue from one of our suppliers, we still placed more units in the third quarter than we did in the third quarter of last year, and we -- literally, we have another 30 that are on backlog with the vBloc Now program. So we would expect in December to implant those patients..

Okay.

And could you give us a sense for how many physicians have been trained thus far through the academy in the VA network? And are there more to be trained for the next few months?.

Yes, there is others -- total right now, if I believe, it's -- I think it's six hospitals and I think we're averaging like 1.5 per hospital. So I would guess somewhere around 10 surgeons. Again, that represents six hospitals out of about 20, so it's about roughly 30% of both hospitals.

So we'd like to train them all, it's just a question of -- their program is ready for vBloc system certification. So, we're aggressively going after all of them but my guess is that the six we have right now, we're going to work very closely with them in identifying -- getting them to identify patients.

So we'll see this pickup in first quarter, I think the rest of this year is just getting those six hospitals up and running..

Okay.

And then onto the Gastric Vests and your approval in Spain to start the study, could you give us a little sense, did you mention 110 patients and when might these study start and how many centers would you expect and what type of primary endpoint or endpoints will you be going after?.

Well, we'll be looking for -- at a low end, probably three centers in Europe, and Spain is the first to get country approval. We're going to be in terms of patients, we're still negotiating that with the CE authority but our guess it's going to be somewhere between 65 and 100 patients but that hasn't been set yet.

And we would expect to hopefully by late quarter one, early quarter two, to kick that study off..

Okay. And then as far as, could you talk about -- go ahead..

I was just going to say, as far as endpoints go, we're still negotiating that with the CE authority, I'll have more information on that. I think at our next call we're little back and forth on that one but we believe we'll get that result here pretty quick..

Okay.

And Scott, could you address the $250,000 from Galvani? Do you expect that to be one-time in nature or should we be thinking about that as additional line item that comes through here and there?.

It's going to be an additional line item that comes here and there. We certainly anticipate in 2018 that that number will be higher in total. I can't guarantee that it will be every quarter because a lot it is determined based on milestones, and once we accomplish milestones.

So we're working very closely with those guys and it's a great relationship so far and it was good timing to be able to recognize some revenue at this time..

Okay.

And I guess lastly, on ReShape; will that also be an additional line item? And can you talk a little bit about -- again, a follow through from a BC [ph] week as far as interests out there and some of the data you presented and some of the pretty positive comparisons that I saw in some of the posters?.

Yes, there was a poster session that was presented that showed that the dual balloons which are a little bigger than -- when they are filled a little bigger than oranges, as compared to other fluid filled balloons in the market are little more comfortable for the patient and I think we showed a poster session on over 100 patients that the patients had less nausea and vomiting, and then with a single fluid filled balloon.

So we think from a comfort perspective and from a weight loss perspective, there is real advantages to this. And as far as the traffic at the booth, you know, we were told by a number of folks on the floor that we are the busiest booth on the convention floor. There was a lot of interest in both, ReShape balloons, as well as the vBloc.

So I think the idea of being able to offer this toolbox of minimally invasive patient-friendly devices as devices as alternatives to bariatric surgery was certainly something that was ringing positive in the ears of many of the surgeons and doctors that attended..

Okay, got it.

And then lastly, just to clarify on the share count, the shares for Q3 included the $2.366 million and then we should see the additional 18.7 [ph] next quarter?.

What was the cut-off?.

2.3..

No, that would not have been in there either but I think we have posted something; Jeff, we're out there at 21.2 million common shares right now..

Okay. Just the….

So it's not included but it would now. So -- because the transaction happened on the Monday after the 30th..

So for Q4, you're talking about 21.2 and that does include the 18.7 or does not?.

Does not include the 18.7 but it would include the 2.3; again, I'm getting the reporting timing down; at the end of September it was not included, by the time we filed, we list how many are currently outstanding which would include.

And then the 18 million we're targeting by the end of the quarter, we will have that both and then that would be added in on top of what's out there now..

By the end of quarter four..

End of quarter four, yes, I'm sorry..

Okay.

So 21.2 plus 18 at the end of the year, approximately?.

Yes, sir..

Okay. That does it for me. Thank you very much..

Thank you. I am showing no further questions in queue at this time. I would like to turn the conference back over Dan Gladney, Chief Executive Officer, for closing remarks..

Thank you, everyone, for your time this evening, and thank you for joining us today and have a great evening. Thank you very much..

Ladies and gentlemen, thank you for participation in today's conference. This concludes today's program. You may now disconnect. Everyone have a great day..