Ladies and gentlemen, thank you for standing by, and welcome to the ReShape Lifesciences Third Quarter of 2019 Earnings Conference Call. At this time all participants are in a listen-only mode, and please be advised that today's conference is being recorded. [Operator Instructions] Thank you.

Now I'd like to hand the conference over to your first speaker today, Mr. Philip Taylor. Sir, you may begin..

Good afternoon, and thank you for joining us on today's call. I'm pleased to be joined by Bart Bandy, Chief Executive Officer of ReShape Lifesciences, who will provide an overview of the Company's recent activities and business highlights.

Tom Stankovich, Chief Financial Officer of ReShape, will then review the financial results for the third quarter of 2019, and then turn the call back over to Bart to wrap up.

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 and Exchange Commission, including those factors identified as Risk Factors in our annual report on Form 10-K that was filed May 14, 2019, and in our quarterly report on Form 10-Q that was filed today.

As an additional reminder, our stock is listed OTC, trading under the ticker RSLS. I will now turn the call over to our CEO, Bart Bandy.

Bart?.

Thanks, Trip. Good afternoon, everyone, and thank you for dialing into our call today. I'm pleased to be hosting the ReShape Lifesciences’ third quarter earnings call and excited to share the continued progress we have made since our last call, and then introduce you to our new CFO, Tom Stankovich, who will share our financial results.

And then I will wrap things up. Starting with our top line. Total revenues in the third quarter were $3.5 million. While July and August experienced some seasonality that has been seen industry-wide, September numbers were in line with previous quarters and expectations, and we are seeing this trend continue.

While as a result of this seasonality, and our revenues in the third quarter representing a decrease of $0.9 million from $4.4 million in revenues in the second quarter of 2019, what we think is more important and telling is that year-to-date data through September, our revenues in the U.S. are showing a continued positive trend. As a reminder, U.S.

revenue has represented the majority of our sales and has the highest margins.

We have come a long way in a short time since acquiring the LAP-BAND just nine months ago, and we look forward to our continued progress in the fourth quarter, particularly with the addition of all international commercial activity now that we have fully transitioned that business from Apollo.

As you know, since joining ReShape, one of my top priorities has been to hone in on and optimize our commercial organization and strategy, which is integral to the future of ReShape Lifesciences. In this last quarter, we continued connecting with customers both in the U.S.

and abroad, through site visits and participation in several high-profile industry conferences. As we push forward our strategy to reestablish the presence of ReShape Lifesciences and the LAP-BAND. As just mentioned, we are very pleased to have completed the transition of LAP-BAND revenue internationally.

And as of October 1, we are now recognizing all LAP-BAND sales worldwide. We are fully prepared to execute with our teams in the U.S. and abroad with sales reps, clinical field support and a network of experienced distributors, all led by a new executive team that I'm really excited about.

I will share some more on our international progress and strategy later in the call. For now, let's start with our progress during the quarter from our U.S. commercial organization. During the quarter, we rightsized and strengthened the U.S. sales team, hiring deliberately and strategically. We filled senior field positions across the U.S.

and now have one of the most experienced and known bariatric commercial teams in the industry, averaging 10 years of relevant experience across our sales organization.

In fact, our two most recent hires were each successful regional managers selling LAP-BAND in the past, and they bring to ReShape their significant experience, relationships and knowledge of the product and its market.

Our customer model continues to be one of depth, whereby many of our key account relationships include LAP-BAND as a significant part of their business. And in turn, these customers account for a nice portion of our sales.

Supporting patient access for our clinicians is a top priority, and we have found that the more time we spend with our accounts, developing programs and enhanced consumer awareness, the more LAP-BAND interest comes into those practices.

Given this dynamic, our sales approach focuses on working with top-tier sales sites through a model of collaborative patient focus, while also continuing to develop accounts in targeted geographic markets.

We have also worked to strengthen our presence in the bariatric market through partnerships and alliances with clinical peer associations, patient advocates and strategic industry participants.

I'm also pleased to share that we established our European legal entity in the Netherlands, finalized distributor contract negotiations in several countries, conducted our inaugural EU commercial meeting in Madrid, established a multilingual customer partner – customer service partner and launched our ERP in that region.

Our company also successfully completed an MDSAP and ISO 13485 audit to become the direct manufacturer as we continue to transition the final aspects of our LAP-BAND acquisition.

On the marketing side, we have demonstrated that consumer advertising is very effective for driving patient interest in LAP-BAND, and we are, therefore, investing in tools to evaluate and enhance our performance metrics for patient pull-through and to identify how to best direct our resources and efforts.

Our recently announced partnership with Sequence Health, a leading patient engagement platform, strongly supports our goals of increasing awareness, driving demand, expediting qualification processes and getting patients promptly connected with the best practices to enhance their experience.

The current marketing programs continue to gain traction as we are seeing a notable increase in leads to LAP-BAND-dedicated sites. Our digital patient engagement test-and-learn program is also underway, and more news on this program will be provided as this rolls out.

Finally, we made significant progress in professional education this quarter with several well-attended events for our employees and distributors as well as surgeons and health care professionals, and we have more planned for the remainder of the year.

We are pleased to participate in several conferences this past quarter, where we increased our presence and helped rebuild our brand.

We had a great showing at IFSO, the International Federation for the Surgery of Obesity and Metabolic Disorders conference in Madrid with LAP-BAND presentations included data on 3,566 patients with up to 20-year follow-up and long-term results on the internationally approved treatment of adolescents.

Additionally, three gastric Vest sessions included a presentation of very promising early data by Doctors Pujol and Osorio, who are from the first site of our EU study. During the quarter, we also attended the national obesity congresses in Mexico and Australia and New Zealand.

And just last week, we attended ObesityWeek in Las Vegas, where we had very encouraging attendants from prominent bariatric surgeons at our Dispelling the Myths program. This program has continued to grow in attendance from its inception in June of this year.

The LAP-BAND and ReShape Lifesciences were also prominently and positively published in two journals that came out at the ObesityWeek congress. So overall, we had a continued great showing and reception across the industry. On the topic of the ReShape Vest, we continue to conduct our study outside the U.S.

and have been quite pleased with the results to date. We are currently monitoring the patients who have been enrolled in the study thus far at our site in Spain, where we are working closely with those investigators. We expect to have six and twelve-month data from our first patient cohorts in mid-2020.

Finally, touching more broadly on infrastructure and human resources, the fuel of our company, we consolidated our Minnesota and original Southern California facilities during the quarter for targeted cost reductions and moved our finance, quality, regulatory and clinical teams out to California, housing our company in one primary location and adding to the strength of our team through better communication and synergistic collaboration.

We are also recruiting and bringing in top talent. We recently added Dov Gal, our VP of Clinical and Regulatory, who brings over 25 years of in-house and consulting experience developing and executing regulatory, clinical, quality and marketing experience at both medical device start-ups and with multinational medical device companies.

We are also excited to have recently announced that Tom Stankovich has joined ReShape as our CFO and member of our executive team. Tom brings with him over 25 years of experience as a CFO, both for public and private companies across the life sciences sector, and he will add significant strength as a strategic leader for the company.

Joining Tom, we're also pleased to have Brendan O'Connell as our VP of Finance and Corporate Controller, who also has strong medical device public company experience and has already made great progress with getting our transitional costs in line and our monthly expenses reduced.

We are strongly encouraged by the progress we have made this quarter as we put all the mechanisms of our strategy into place to establish our new brand and culture while continuing to build the structure and programs that will drive the ongoing and future successes of ReShape Lifesciences.

I am now very pleased to introduce you to Tom, who has just joined us as our CFO and who has jumped in head first. Tom will walk you through our financial results..

Thanks, Bart, and good afternoon to everybody. Before I dive into the financial details, I will provide updates on several significant developments regarding ReShape's financial position and operations.

In the third quarter, we completed an early warrant exercise transaction as part of the June 2019 private placement, raising an additional $7.6 million of gross proceeds.

As a result of this cumulative funding, which has strengthened our financial position and allowed us to improve our debt status, we were able to remove Apollo's leans on all our assets.

In other efforts to strengthen our balance sheet and with the goal to support a future relisting of ReShape shares on NASDAQ, at the end of October, a 1-for-120 reverse stock split was approved at a special meeting of stockholders. As announced earlier this week, the reverse split was effective November 12.

We would like to reiterate that the market value of the company and the total value of shareholders' positions remains unchanged. The reverse split is simply a mechanism to reduce the total number of shares outstanding and to increase our share price, further improving our financial attractiveness to investors.

Separately, we reached a $1.5 million settlement agreement in our final litigation case with Fulfillium. This has been recorded as an expense in our third quarter.

Under the settlement agreement, Fulfillium agreed to dismiss, with prejudice, the previously disclosed lawsuits filed by Fulfillium, thus, putting the situation to rest and allowing our management team to get back to focusing 100% of our efforts on running the business.

Lastly, as part of cost control initiatives to reduce cash burn and extend our cash runway, as Bart previously mentioned, we have consolidated facilities to our headquarters in San Clemente, California by terminating previous leases in Minnesota and Southern California. This creates significant savings in our operating expenses.

In measures to control costs, we have reviewed and evaluated service provider and vendor relationships. And through renegotiations and new agreements, we believe we are now positioned to operate most efficiently. This includes changing certain professional service providers, which will generate annual savings of nearly $1 million alone.

Transitioning to our third quarter results.

For purposes of this quarterly financial update, we will be comparing our quarter ended September 30, 2019 results to our quarter ended June 30, 2019 results for both revenue and gross margins, as any comparison to prior year is not comparable due to the acquisition of LAP-BAND product line and the discontinuance of the intragastric balloon product line in December of 2018.

For the three months ended September 30, 2019, we reported $3.5 million of sales as compared to $4.4 million of sales in the three months ended June 30, 2019, representing a decrease of $900,000.

The decrease is reflective of seasonality of the summer months when our customers tend to take time off, therefore, reducing the amount of procedures done in these months. Our third quarter revenue numbers reflect $3.1 million in U.S. shipments and $400,000 from shipments to Australia. As a reminder, our outside U.S.

revenue consisted of direct sales to our Australian customers, while transfer price sales to Apollo for customers in Europe were included in our U.S. revenue. In quarter four, we will recognize European revenues through distributors as outside U.S. sales. Total revenue for the nine months ended September 30, 2019 was just over $11 million.

It is important to note that for the entire year of 2018, ReShape's revenue was less than $1 million, showing the significant progress we have achieved by making the strategic acquisition of LAP-BAND.

We reported gross profit of $2.1 million in the third quarter of 2019, representing a gross margin of 60% compared to $2.9 million in the three months ended June 30, 2019 at a gross margin of 64%. The lower gross margin is primarily the result of lower volume of overall sales.

For purposes of our operating expense discussion, we will be comparing our third quarter 2019 results to both the second quarter 2019 and the third quarter of 2018.

Selling, general and administrative expenses for the third quarter of 2019 were $5.4 million as compared to $6.8 million in the second quarter of 2019 and $4.3 million for the third quarter of 2018.

For the nine months ended September 30, 2019, selling, general and administrative costs were $17.6 million, up $2.6 million from $15 million for the year ago nine-month period. Included in SG&A expenses for the nine months ended September 30, 2019 were $1 million of severance costs and $2 million of one-time, litigation-related expenses.

The severance and legal expenses as well as an increase in personnel and higher commissions associated with the LAP-BAND revenues accounted for the increase in SG&A.

Research and development expenses were $900,000 for the three months ended September 30, 2019, compared with $1 million for the quarter ended June 30, 2019 and $1 million for the quarter ended – third quarter ended of 2018.

For the nine months ended September 30, 2019, our R&D expense totaled $2.9 million as compared to $5.5 million for the same nine-month period in 2018. The 2018 R&D expenses included development expense associated with both Gastric Vest and IP support for the vBloc products. Turning to the balance sheet.

As of September 30, 2019, the company's cash and cash equivalents totaled $7.7 million. As mentioned earlier, we continue to focus on increasing our revenue and decreasing our cash burn as we monitor our monthly spend in operations for further potential cost reductions.

As our leadership team transitions into their new roles over the next couple of months, this will be a pivotal time for the company, and I look forward to the opportunity of building our culture and having a direct impact on the future progress and growth of ReShape Lifesciences. With that, I will turn the call back over to Bart..

Thanks, Tom. In closing, our accomplishments in this period reflect the continued commitment of each member of the ReShape team to our company and mission. The efforts to rebuild and reestablish ReShape Lifesciences has not been without challenge, but we have made significant progress in a short time with limited resources.

In just nine months, ReShape Lifesciences has evolved into a revenue-producing company with a new management team leading a global business. We have fully integrated the LAP-BAND product and have a strategic plan that supports our success in the short-term and the long-term.

We have focused on quality and have built best-in-class commercial, operation, regulatory and financial organizations that have been restructured over the past month and that are poised to successfully execute our plan into the fourth quarter and beyond.

We still have some work ahead of us as we continue to strengthen what we are confident is a strong foundation that will establish ReShape Lifesciences as a leading provider of solutions for patients battling obesity.

And I have the utmost confidence that our people, our can-do culture and our commitment to the market, patients and health care providers will enable us to achieve that goal. Thank you to our investors, Board, employees and customers who continue to support our mission and for listening to our call today..

Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now all disconnect..

Q - :.