Dan Gladney - Chairman & CEO Scott Youngstrom - CFO.

Jeffrey Cohen - Ladenburg Thalmann.

Good day, ladies and gentlemen and welcome to the ReShape Lifesciences First Quarter 2018 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 follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, CFO Mr. Scott Youngstrom. Sir, you may begin..

Good afternoon and thank you for joining us on today's call. I am pleased to be joined by Dan Gladney, our President, CEO 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 first quarter of 2018.

After, Dan will wrap up and following our 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 our annual report on Form 10-K filed April 2nd 2018. As an additional reminder, our stock is listed on NASDAQ trading under the Ticker, RSLS.

I will now turn the call over to Dan Gladney. Dan..

Good afternoon everybody, thank you for joining us. We've had a productive start to 2018 as we completed integration of the ReShape Medical business that we acquired last October and achieved record revenues in the first quarter.

We have been very pleased with the addition of the ReShape balloon to our portfolio and the ability of our sales force to cross sell the balloon and our vBloc product, in order to meet needs across the care continuum for obesity.

As a small company our limited number of sales reps have some high expectations placed on them and they really delivered in the first quarter. Sales for the three months ended March 31, 2018 totaled 950,000 which again was a record for our organization. We sold 521 balloons in the quarter.

That's an increase of 167 units or 47% over quarter four 2017 and placed 61 vBloc devices most of which supported our vBloc Now program.

Let’s talk first in more detail about our ReShape Balloon business, as you might recall, earlier this year we shared that we had signed an exclusive agreement for the distribution of the ReShape Balloon by Academy Medical to the Department of Defense, or DoD medical facilities in the U.S.

This agreement establishes the ReShape Balloon as the exclusive intra-gastric balloon that Academy Medical will distribute to DoD facilities that are equipped to do balloon procedures with GI scoping capabilities. There are 51 such DoD military treatment facilities in the U.S.

We are excited to also share that we recently signed a supply agreement for the ReShape Balloon with the group purchasing organization of Ascension which is the largest nonprofit health system in the United States and the world's largest gastric health system.

Ascension’s health care division operates 2,500 sites of care including 141 hospitals and more than 30 senior living facilities in 22 states in the District of Columbia. Within these states there’re nearly 23,000 available beds and 36,000 aligned providers. Our U.S.

sales organization is very targeted and deliberate in their sales efforts with the main goal of increasing accounts and top line growth.

The team has implemented targeted awareness campaigns to educate potential customers, such as the DoD, Ascension and the corporate employees at organizations where the ReShape Balloon is a covered benefit in addition to promoting the clinical results and the unique benefits of our products to all potential physician and patient customers.

Last month, we participated in the endoscopic surgery hands-on course that was held as part of the Society of American Gastrointestinal and Endoscopic Surgeons or SAGES, Annual Conference in Seattle, SAGES is one of the most highly attended events among GI and endoscopic surgeons with 2,800 attendants this year.

One objective of the hands-on course was for the participating surgeons to learn to integrate emerging technologies for weight loss into their practices and we were really pleased to have 40 new potential customers be educated and trained on our ReShape Balloon during the course.

We also continue to successfully enroll our post approval study for our balloons. As you might remember, this is the FDA mandated single arm study on 250 patients. We have enrolled 145 patients to-date and look forward to collecting their follow-up which will occur in 48 weeks.

We are excited about the success we've had enrolling the study as it provides us with revenue unlike studies required for approval and also validates the acceptance of our balloon in a real-world environment.

We are optimistic the data from this study will not only confirm our ReShape Balloon as a safe and effective technology for weight loss but that it will also help support future adaption and reimbursement. Internationally we are expanding our footprint in the Middle-East, where their obesity population is amongst the highest in the world.

It's high as 75% according to some reports and where the region and their local Ministries of Health are quite focused on reducing the obesity epidemic. In addition to our existing approvals and distribution agreements in the U.A.E.

and Saudi Arabia, last month we announced the approved registration and simultaneous distribution agreement for the ReShape Balloon in Bahrain where almost half of the Bahraini adult mill population and one third of the Bahraini women are overweight or obese.

We are also excited to share that last month we submitted an application to the Medical Devices Bureau in Canada that seeks to update and expand our existing license to include our current generation of ReShape Balloon.

Canada has been estimated to have the 7th highest obese rate amongst developed countries with just under 30% of the adult population being obese and we believe the time is right to start offering our product to these patients and physicians.

Turning to vBloc, our vBloc Now study is coming to a close, but we expect to have a follow-up data on a number of these earlier patients during the latter months of the summer. Once we have accumulated a full set of follow-up data it is our hope to then present the findings to payers in order to support future reimbursement of vBloc therapy.

We continue to be enthused about our third product, the ReShapeV. As you will remember we are in the beginning phases of our single arm perspective multicenter trial to Europe. In Europe we support for CE mark approval of the Vest.

The trial will seek to enroll up to 85 subjects and will be followed for two years with the primary endpoint of percent total body weight loss at 12 months. We expect enrollment to begin this summer and anticipate you CE In the U.S., we anticipate submitting our IDE for the Vest in the second half of 2018.

As a reminder last quarter, we made the strategic decision as we strive to reduce our spend to have a more focused approach to our sales and marketing efforts with the concentration on our areas that are expected to directly support the sales on a bench shore reimbursement of our products.

Our reps cover eight territories and within those territories they spend the predominance of their time calling in accounts the highest potential volume. We believe that our salesforce is now the right size to support our current level of sales and we will continue to assess and align this organization as we grow.

Again, we are pleased to have achieved record revenues during the first quarter particularly given that we're in the midst of transition, integration and training.

We sold 521 balloons during the quarter, which represents a 47% increase over the prior quarter and we also experienced strong interest in our vBloc Now program implanting 49 vBloc units during the first quarter of 2018.

I will now turn the call back over to Scott Youngstrom, our CFO, who will walk you through our integration and our financial results.

Scott?.

Thanks, Dan. Moving to our financial results for the first quarter of 2018. For the 3 months ended March 31, 2018, we reported sales of $950,000 a 20% increase compared to revenues of $794,000 for the three months ended December 31st, 2017 and compared to revenues of $40,000 from the three months ended March 31, 2017.

We reported gross profit of $121,000 in the first quarter of 2018 compared to $156,000 for the three months ended December 31, 2017 and $11,000 for the three months ended March 31st, 2017. Our gross margins are lower in the current quarter as they were impacted by deferred revenues associated with our promotional programs.

Please note that the Q1 2017 numbers do not include any financial impact from ReShape Medical. Our teams sold 521 balloons in the first quarter of 2018, an increase of 47% over the fourth quarter of 2017 which as a reminder was the first quarter that we were selling the ReShape balloon after our October 2017 acquisition of ReShape Medical.

The team also placed 61 vBloc units in the first quarter of 2018, representing a significant increase when compared to 21 units in the fourth quarter of 2017 and eight units in the first quarter of 2017. 49 of the 61 vBloc units placed in this first quarter of 2018, were part of the vBloc Now program.

Selling, general and administrative expenses for the quarter were $10 million as compared to $9.9 million for the fourth quarter of 2017 and compared to $5.9 million for the first quarter of 2017.

Included in the SG&A expenses this quarter were $2.9 million of non-cash expenses consisting of $1 million of a write down of vBloc inventory, $682,000 in stock-based compensation, $675,000 of amortization of intangibles expense and $540,000 of severance and onetime accruals and acquisition related expenses.

SG&A expenses in Q1 2018 were significantly greater than in the first quarter of 2017, primarily due to the 2017 acquisitions of both BarioSurg and ReShape Medical. We anticipate that our SG&A spend will decrease as we progress through our integration of the three companies.

Research and development expenses of $2.7 million for the three months ended March 31, 2018 are compared with $2.2 million for the fourth quarter of 2017 and $1.1 million for the same quarter in 2017.

This increase was primarily the result of the additional R&D expense on our ReShape vest product and the additional gastric balloon R&D expense associated with the ReShape medical acquisition. We anticipate our R&D expense will decrease as a result of our integration efforts.

As of March 31, 2018, the company's cash, cash equivalents and short-term investments totaled $842,000 and the company remains without any debt on its balance sheet. This cash does not account for the net $5.1 million financing that closed on April 3, 2018.

We’re targeting our burn in 2018 to be no more than $1.5 million per month, on an ongoing basis. As mentioned previously we’ve reduced our headcount to better align our cost structure with our anticipated revenues.

Lastly, the earlier discussed reductions in our sales force and other areas of our business, we want to reiterate that our strategy is one of controlled expansion has drove into our markets while at the same time preserving cash to support the clinical programs around our suite of products including the ReShape Vest clinical trial.

As such, we anticipate top line growth of 10% to 20% during 2018 supporting $4 million to $4.3 million revenue target. With that I will turn the call back over to Dan..

Thank you, Scott. We are pleased with the progress we've made in the first quarter as we continue to execute goal of increasing top line sales of our life-changing products and to provide solutions across the continuum of care for obesity. To recap our successes in the first quarter.

First, we achieved record revenues and our team is working hard to help patients and providers successfully combat obesity and its associated comorbidities. Next, we continue to collect and share clinical evidence that supports the efficacy and safety of our products and solutions for weight loss.

Third, we’ve strong relationships and contacts that support and promote our products as effective solutions. And lastly, we have completed integration and the rightsizing of our organization, to position us well financially and operationally as we grow.

We thank our employees and our investors for your support and look forward to sharing continued success with you in the future. With that we will now open it up for questions.

Operator?.

So, I guess firstly you talked about perhaps can you walk me through the FTEs now and how many are in the commercialization force, is it eight that you told previously on the call?.

Yes, that’s correct. We’ve eight full sales reps, and they’re supported by three clinical trainers in the marketplace..

And total employee count in the Q1 or current is what?.

It’s about 75..

So, I guess, so firstly on vBloc so you rounded out the vBloc Now program, so was it a 125 that you finished up with or what was…?.

125 in the plan, right..

So, that concluded the 125, completed with the 49 this quarter?.

Yes absolutely, I believe we’ve got eight that are in the surgery schedule to complete here in the next week or so, we had a number of cancellations at the end of last month that due to everything from patients being sick to patients not making the surgery but we've got them back on the schedule so they should be done here in the next couple of weeks.

.

And then the inventories to go, 1 million write downs of the employee as of March 31st was 2.8, [signatory] all vBloc?.

No, it's not all vBloc the write down was all vBloc yes Jeff, but the ending inventory is a mix of both balloons and vBloc inventory. .

And I am just going to jump over to the Vest now. Can you talk about sort of enroll up to 85 subjects, how many have been enrolled so far and you expect your inside of your -- you said start this summer, so you haven't enrolled yet or you have..

Yes, so we've gotten, as I mentioned on our last call, we've done our protocol approved and we've been recruiting up the market place as of right now we've got approvals for one sight that's one in Spain and we're working with another four sights around Europe to get them onboard and country approved.

So right now, we have one site that will plan to begin implanting we believe in the July time frame. .

And then, Scott you gave some further clarity on the revenue composition, which I didn’t catch of the 950 it was 120 for vBloc is that right did I hear correctly?.

That was 139 for vBloc. .

I should assume then the balance is on the Balloons..

That's correct..

And then could you talk a little bit about balance sheet and cash flow going forward. I guess SG&A I was thinking that 2018 in totality would be somewhere in the low 20s and millions of dollars plus 4 or 5 on the R&D line.

Could you talk about that a little bit I know that you are about three over on some onetime items in Q1 and what do you expect on the recurring end of that if any?.

Our target is kind of go forward basis at 1.5 a month that includes the R&D and includes SG&A. There may be some non-cash items in there and again like the stock-based comp some of those things but taking into kind of the true SG&A and R&D going forward we're going to really work hard to keep it at 1.5 million and below..

Thank you, and that concludes our question-and-answer session for today's call. I would now like to turn the call back over to Dan Gladney for any further remarks..

Thank you everybody for joining us today and have a great afternoon. Thank you..

Ladies and gentlemen, thank you for participation in today's conference. This does conclude today's program. And you may all disconnect. Everybody have a wonderful day..