Dan Gladney - Chairman, President & CEO Scott Youngstrom - CFO, Senior VP of Finance & Secretary.

Good day, and thank you for joining us on today's call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. [Operator Instructions]. As a reminder, this conference call is being recorded today, August 14, 2018.

I would now like to turn the conference call over to Scott Youngstrom, CFO of ReShape Lifesciences. Please go ahead..

Good afternoon, and thank you for joining us on today's call. I'm pleased to be joined by Dan Gladney, our President, CEO and Chairman of the Board, who'll provide an overview of the company's recent activities and business highlights. I will then review our financial results for the second 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 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 and Exchange Commission, including those factors identified as Risk Factors in our annual report on Form 10-K filed April 2, 2018, and our quarterly report on Form 10-Q filed May 15, 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?.

Thank you, Scott. Good afternoon, everyone. And thank you for joining us. I'm very proud of our accomplishments at ReShape in the second quarter of 2018.

Despite some challenges during the quarter, we made real strides, particularly, on the technology front where we have pushed forward with a focus not just on existing products but on expanding our platform through broadening our intellectual property, advancing our efforts in R&D and making good progress on the regulatory front.

I would like to take this time to first address and clarify recent developments in our financing strategy. Since June, we have completed four registered direct offerings of our common stock, using up just over 6 million of 125 million registered under our shelf registration statement on Form S-3.

Because our public float earlier this summer calculated as specified in Form S-3 was less than 75 million, the so-called Baby Shelf Rules limited the amount of additional funds we could raise under the Form S-3. These rules cap the amount we could raise at any one time to one-third of our public float.

On August 7th, we announced a firm commitment underwritten public offering of our common stock, which resulted in investment commitments for over 1 million at a public offering price of $0.085 per share.

Together with conversions of outstanding convertible preferred stock, upon completion of this offering, we would've had enough shares of common stock outstanding so that using the 60 day stock price look back permitted by From S-3, we would've had a public float of 75 million and would no longer be subject to the baby shelf limitations on the amount of money we could raise.

Unfortunately, NASDAQ determined that the offering did not qualify as a public offering under the NASDAQ rules, which means that it could not be completed without shareholder approval. Therefore, the offering had to be terminated.

Following the announcement of the offering, the holders of a significant number of shares of our preferred stock elected to convert into shares of common stock. In fact, so many preferred shares converted that as of August 10th, our public float exceeded 75 million even though we had not completed a public offering.

This means that through at least March of next year, we are no longer subject to the Baby Shelf Rules and can now offer and sell up to the full 125 million available under our shelf S-3, less approximately 6 million we've already raised.

Now I know this sounds like a lot to digest, but the upshot here is that we have had a well thought-out financing strategy that has unfolded over the past few months, and we are pleased to have increased our financing flexibility going forward. Now, turning to our results.

Sales for the three months ended June 30, 2018, totaled just under $700,000 -- $650,000. We sold 680 balloons in the quarter, a decrease of about 12% in quarter one, and placed 8 vBloc devices to finish our vBloc Now program.

Now please keep in mind, for comparison purposes only, that following the holiday season, quarter one is generally a seasonably high quarter for weight loss intervention. As you know, earlier this year, we set a goal to drive our operating expenses down substantially.

And in the first half of the year, we took our cash burn from over $3.5 million a month in the first quarter to approximately $2 million a month in quarter two. In order to meet this goal, we had to cut a number of areas, including reducing our sales force by 50%, going from 14 sales reps to seven reps.

With that in mind, I want to highlight that our current sales team of professionals did an outstanding job this quarter as they carried substantially increased responsibility and geographical coverage areas.

Taking into consideration that the team also had to navigate the FDA healthcare advisory letter that came out in the beginning of June, which in effect stalled sales for that month. I could not be more proud and encouraged by this team and their progress. Now, I will first talk in more detail about our ReShapee Balloon.

Our balloon business has had some exciting developments in the past few months. During the quarter, the first ever implant of the ReShape Balloon for a veteran as part of the Academy Medical program was performed at the VA Harbor hospital in New York.

As you might recall, earlier this year, we signed an exclusive agreement for distribution of the ReShape Balloon by Academy Medical to the Department of Defense, DoD, medical facilities in the US.

This agreement establishes the ReShape Balloon as the exclusive intragastric 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 US, including the VA Harbor in New York where this recent implant was successfully completed. We were also excited to announce last month the first ReShape Balloon case at Brigham and Women's Hospital, a world-renowned academic medical center in Boston.

As we expand our customer base across a mix of hospitals and geographies, we're finding a high level of interest building around our technology that is helping us to expand our reach. In June, we exhibited and participated at DDW, The Annual Digestive Disease Week Conference.

ReShape Lifesciences precipitated in two hands-on workshops for physicians that provided an opportunity for an estimated 80 physician participants to interact with ReShape Balloon experts as they demonstrated our balloon for weight loss.

DDW is the world's largest gathering of physicians, researchers and industry in the fields of gastroenterology, hepatology, endoscopy, gastrointestinal surgery. Attendance at this meeting was estimated to be 15,000. On the regulatory front, we continued to successfully enroll our post-approval study for our balloons.

As a reminder, this is the FDA-mandated single-arm study on 250 patients. We have enrolled 170 patients to date and look forward to collecting their follow-up, which will occur at 48 weeks.

We are optimistic that the data from this study will not only confirm our ReShape Balloon as a safe and effective technology for weight loss, but it will also help support future adoption and reimbursement. Internationally, we are focused on expanding our business from the five countries in the Middle East to both Canada and UK.

In May, we submitted an amendment to the Health Canada license for our current generation of the ReShape Balloon and expect to receive approval before the end of this calendar year. Canada has been estimated to have the seventh highest obesity rate amongst developed countries, with just under 30% of the adult population being obese.

In addition, relative to the UK, we submitted an amendment to support CE Marking of our current ReShape Balloon technology, and expect approval of this by the beginning of 2004 -- excuse me, by the beginning of quarter four. Turning to vBloc.

Our vBloc Now study has come to a close, and we have begun to collect follow-up data on some of the earlier patients.

While weight loss on an early subset of the first 31 vBloc Now patients at one year has not been what we had hoped, with an average weight loss of 6.6%, we are hopeful that the data from the full cohort of 125 patients will be stronger.

Once we have accumulated a full set of follow-up data, it is our intention to then present the findings to payers in order to support future reimbursements of vBloc therapy. We made great progress in the second quarter with our third product the ReShape Vest, which is currently under clinical investigation.

This product, which is implanted laparoscopically in a minimally invasive procedure, is wrapped around the stomach and is designed to emulate conventional bariatric surgery without permanent anatomical changes.

Our single-arm perspective multicenter trial in Europe to support CE Marking of the Vest will seek to enroll up to 95 patients, who will be followed for two years, with the primary endpoint of percent excess body weight loss at 12 months.

As we announced last month, we have commenced site initiation training for the first clinical site, and we are in final stages of contract negotiations and regulatory approvals for eight investigational sites in five countries, Spain, Germany, Belgium, the Netherlands and the Czech Republic.

We expect enrollment to begin in the fall and anticipate CE Mark approval of the Gastric Vest in late 2020. In the US, we expect FDA to approve our protocol for the IDE study for the Vest before the end of 2018. And we expect to start the IDE study in the first half of 2019.

On the IP front, we were notified in June that the United States Patent and Trademark Office issued a notification to us for a patent-entitled gastric restriction device for treating obesity, which has broad claims, directed to a skirt or wrap that is shaped to form fit and securely fasten around the stomach of a patient to prevent expansion of the stomach.

This patent, which is directed towards covering the ReShape Vest, is expected to be valid through 2028. I am also particularly proud of the great progress we have made on the product development front on the Vest as well as our overall progress of the company in research and development.

Our team is currently working on a smaller, next-generation vBloc that will not only serve as a standalone vBloc product but it will be the base technology to be used in our previously announced neuromodulation stimulation/blocking combination product.

We have made great strides on this combination technology, which utilizes our existing know-how and IP in developing a system to treat patients with type 2 diabetes.

In May, the United States Patent and Trademark Office granted a method and device patent that expands the ReShape Lifesciences' neuromodulation intellectual property portfolio and covers this technology concept as proprietary to ReShape Lifesciences.

The patent covers a combination of blocking and stimulating the vagus and celiac nerve branches using specific bioelectronic parameters to treat gastrointestinal disorders, including obesity, diabetes and various combinations thereof, enabling life changing interventions, such as a modulation of blood glucose levels for patients with type 2 diabetes.

You may remember that early in the quarter, we attended a neuromodulation conference where we presented the results that utilize this intellectual property in a diabetic rat study.

The study involved using our technology to simultaneously stimulate and neuroblock two branches of the vagus nerve innervating the pancreas and blocking the liver in rats with elevated glucose. The treatment was followed by continuous measurement of plasma glucose, and the results were very promising.

The ability to control glucose in the rats that were treated with the ReShape technology was significantly higher than in the rats in the non-treatment group. We recently followed up the rat study with a larger animal group as we evolve our research to understand the potential impact of our technology on humans.

In this second study, we tested our combo blocking/stimulation technology on type 2 diabetic pigs, and what we saw was even better results than in the rats. As we examined these results to-date, we conclude that blocking the liver and stimulating the pancreas simultaneously can have a direct impact on glucose control and on the production of insulin.

According to the Centers of Disease Control and Prevention, the CDC, over 30 million Americans, or 9.4% of the US population have diabetes, with type 2 diabetes accounting for 90% to 95% of all diabetes cases.

The American Diabetic Association reports the total estimated cost of diagnosed diabetes in 2017 was $327 billion, including $237 billion in direct medical costs and $90 billion in reduced productivity. It is important to note that type 2 diabetes is a disease that is very tangential to and often linked to obesity.

It is a huge market that has had and continues to support significant investment dollars and returns. In fact, data results and technological advances coming out of the most recent Annual American Diabetes Association Meeting in June were very positive, and the sector has been the subject of a lot of attention in recent months.

With its ability to control glucose, we believe that our vBloc combination product could be very impactful, possibly game-changing in the field of type 2 diabetes. Turning to our sales organization. In the US, our team continues to be very targeted and deliver their sales effort, employing awareness campaigns to educate potential customers.

With such a small sales team, our strategy is to focus on customers where our products are reimbursed.

While promoting the clinical results and the unique benefits of our product to all potential physician and patient customers, our team focuses on customer organizations where the ReShape Balloon is a covered benefit and where sales of our products can be supported.

Currently, our team is only actively marketing and promoting the Balloon until further progress is made relative to vBloc reimbursement.

With the significant cash requirements of vBloc, we have made the near-term strategic decision that until we collect more data to support reimbursement of vBloc, we will prioritize higher return areas of our cash allocation, such as Balloon sales, Vest approval and development of our exciting new vBloc combination product for diabetes.

Turning to some organizational news. I'm happy to share that last week, our Board of Directors elected Dr. Arda Minocherhomjee, PhD, as a new Director, increasing the size of our Board from four to five members. Arda is the managing partner at Chicago Growth Partners where he focuses on the healthcare sector.

He was previously an equity analyst for several Wall Street firms. We are excited to welcome Arda to our Board where he will initially serve on the Audit Committee and Compensation Committee. Finally, I am very pleased about the recent formation of our Scientific Advisory Board this quarter.

This group of preeminent minds in obesity, each of whom is a past president of the ASMBS, will be actively involved as the company continues to grow and expand.

As we aggressively move forward in Europe with the Vest study and also here in the US with R&D on the type 2 diabetes stem-blocking technology, this Board, with their experience and insights, will be invaluable. I will now turn the call back over to Scott Youngstrom, our CFO, who will walk you through our financial results.

Scott?.

Thanks, Dan. Moving to our financial results for the second quarter of 2018. For the three months ended June 30, 2018, we reported sales of $653,000, a 31% decrease compared to revenues of $950,000 in the three months ended March 31, 2018.

Our second quarter revenues are an increase over the $93,000 of revenue reported for the three months ended June 30, 2017. However, our 2017 second quarter did not include revenue from balloon sales.

We reported gross profit of $19,000 in the second quarter of 2018 compared to $121,000 in the three months ended March 31, 2018, and compared to $39,000 for the three months ended June 30, 2017.

The gross margins are lower in the current quarter as they were impacted by deferred revenues associated with our promotional programs and aggressive pricing programs with our international distributors as we bring new countries onboard. Please note that the Q2 2017 numbers do not include any financial impact from ReShape Medical.

Our team sold 680 balloons in the second quarter of 2018, a decrease of 12% from the first quarter of 2018. We had strong sales of balloons outside the US, with a 59% increase from Q1, but this was offset by a 42% decline in US balloon sales.

The team also placed eight vBloc units in the second quarter of 2018 to wrap up the enrollment of the vBloc Now program. This compares to 61 units in the first quarter of 2018, of which 49 were part of the vBloc Now program, and compares to 42 vBloc units placed in the second quarter of 2017, 34 of which were part of the vBloc Now program.

It should be noted that the decline in vBloc placements was fully anticipated as a majority of our placements in the past year have been for our subsidized vBloc Now program, which is now complete.

Selling, general and administrative expenses for the quarter were $6.5 million as compared to $10 million for the first quarter of 2018 and compared to $5.6 million for the second quarter of 2017.

Included in SG&A expenses this quarter were $2.5 million of non-cash expenses consisting of $889,000 of a write-down of vBloc inventory, $810,000 in stock-based compensation and $675,000 of amortization of intangibles expense.

SG&A expenses in Q2 2018 were significantly lower than in the first quarter of 2018, due primarily to the cost reduction programs implemented as part of the integration strategy. We anticipate that our SG&A spend will continue to decrease as we progress through the cost side of finalizing the integration of our three companies.

Research and development expenses were $2.4 million for the three months ended June 30, 2018, compared with $2.7 million for the first quarter of 2018 and $1.4 million for the same quarter in 2017. The decrease in this quarter is primarily due to reduced R&D spending on the vBloc product.

We continued to invest in R&D related to the Gastric Vest and next-generation balloon products. We anticipate our R&D expense will continue to decrease as a result of our integration efforts.

As previously discussed in our quarterly report on Form 10-Q for the quarter ended March 31, 2018, during the second quarter of 2018, our management performed an impairment analysis, including all tangible and intangible assets of our business.

Management has completed that analysis and will record a $27 million non-cash goodwill impairment loss in our quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2018. Turning to our cash position and strategy.

As Dan mentioned earlier, the company has utilized our funding availability under our baby shelf to raise money during the past several months. We have utilized this vehicle as we felt it was the best way for us to clean up our capitalization table and to open up opportunities for future financings.

As of June 30, 2018, the company's cash, cash equivalents and short-term investments totaled $1.9 million, and the company remains without any debt on its balance sheet. This cash balance accounts for the net $8.5 million that were raised during the quarter.

We are targeting our burn for the remainder of 2018 to be no more than $1.8 million per month on a go-forward basis. As mentioned previously, we have reduced our headcount to better align our cost structure with our anticipated revenues.

Lastly, with 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 as we grow 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 a $3.6 million to $4 million revenue target for the full year 2018. With that, I will turn the call back over to you Dan..

Thank you, Scott. We were faced with some real challenges at ReShape this quarter, and despite these hurdles, team pulled together and made progress that I'm truly proud of. To recap our successes in the second quarter.

First, we worked very hard to reduce our cash burn from averaging $3.5 million a month in the first quarter to an average of $2 million a month in quarter two. We expect to further reduce the cash burn to an average of $1.8 million a month in quarter three and quarter four of this year. Next, we continued to make good progress on our ReShape Vest.

Having just initiated our first trial site in Europe and with the recent issuance of key intellectual property, we are well on our way to helping patients fight obesity with this novel, proprietary minimally invasive solution.

Third, our new vBloc combination product is showing great promise with solid early results and IP granted, we are excited to move forward with this technology to serve the large type 2 diabetes market.

Finally, we have been busy and worked hard to clean up our capital structure during these past few months, and I believe, we have set our company up for success by opening the opportunity for more financial flexibility as we move forward.

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

Operator?.

I'm showing no questions over the phone line. I would like to turn the call back to Dan Gladney for any further remarks..

Thank you, everybody. And thank you for joining us today, and have a great evening. That's it..

Thank you, everyone, for joining us today, and have a great evening..