Ladies and gentlemen, thank you for standing by, and welcome to the RSLS Third Quarter 2020 Earnings Call. .

I will now turn the conference over to your host, Mr. James Salierno. .

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 2020 and then turn the call back over to Bart to finish. .

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, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those discussed due to 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 and in our quarterly report on Form 10-Q. As an additional reminder, our stock is listed OTC, trading under the ticker RSLS. .

I will now turn the call over to CEO, Bart Bandy.

Bart?.

Thanks, James. Good afternoon, everyone, and thank you for joining us today. The third quarter proved to be pivotal for our team at ReShape as we continued to deliver on our milestones and successfully executed on our strategic plan.

Despite seeing second quarter revenues impacted as a result of the global pandemic, we are very encouraged by the traction we started to see in May and June with increased gains this quarter. .

As a result of our efforts, we were able to increase third quarter revenues to $3.6 million for the 3 months ended September 30, 2020, as compared to $3.5 million for the same period in 2019.

We believe the year-over-year growth in revenues despite headwinds from the global pandemic is a testament to the hard work of our sales team and our ability to execute on the initiatives through a difficult market environment. .

Specifically, we continued to observe an acceleration in U.S.

purchase patterns demonstrated by increased LAP-BAND numbers from the previous quarter, which we believe to be the result of our unique ambulatory surgery setting for the LAP-BAND, amplified attention on the increased COVID risk factors associated with obesity and the return of elective procedures in some states.

In fact, we have seen several previously withdrawn accounts come back online over the past month to continue supporting their patients with this unique surgical venue option.

We have also seen increased interest demonstrated through excellent participation levels in our recently conducted educational webinars by key clinical opinion leaders on the factual data of efficacy and safety profiles for the LAP-BAND as well as our increased efforts on digital and social media marketing. .

We were also equally as encouraged by the continued growth in our international sales. Notably, we saw large growth in the U.K. where their prime minister and government have provided strong support for more obesity surgeries to enhance the health of their population, with specific mention of gastric banding. .

Following up on the positive sales trends we were reporting for the third quarter, we continue to monitor and analyze the impact COVID-19 has had both on domestic and foreign markets.

Recently, several European countries began implementing tighter restrictions, including a partial shutdown in Germany, with new protocols in France, Greece, England and Austria. These controls follow a large spike in the number of new cases in those countries.

While this may potentially impact the number of LAP-BAND procedures in this region, we continue to plan for anticipated sustained headwinds as the pandemic enters the winter season, and we will monitor its impact internationally and domestically. .

As we assess the impact of COVID-19 on our business, we are also very mindful of conditions that put the public at a higher risk. The Centers for Disease Control recently noted that obesity, which is defined as a BMI of 30 or above, increases a person's risk of severe illness from COVID-19.

The current population with this condition represents roughly 1/3 of the adult population in the U.S. This concern is emphasized by the high prevalence of COVID-19 hospitalizations among those with obesity.

Furthermore, research indicates that people with obesity have higher risk with COVID-19 infection, including respiratory failure, need for mechanical ventilation and higher mortality. .

Unfortunately, surgical treatment for obesity and its complications has been reduced or postponed in many states and international countries due to the current pandemic.

However, the American Society for Metabolic and Bariatric Surgery argues that metabolic and bariatric surgery should be resumed as it is medically necessary and the best treatment for those with life-threatening and life-limiting disease associated with obesity.

Currently, our LAP-BAND adjustable gastric banding system is the only FDA-approved outpatient, insurance-covered laparoscopic weight loss device indicated for a BMI of 30 or higher in the U.S. .

While we place a continued emphasis on accelerating the LAP-BAND growth, we are very encouraged by the progress we achieved in recently launching our ReShapeCare service.

ReShapeCare is a telehealth-enabled and customizable platform that provides physicians with a reimbursed resource -- that's reimbursed resource for enhanced patient engagement and improved outcomes.

Its unique patient aftercare model provides live and virtual support for clinicians and their patients regardless of the patient's type of medically managed weight loss procedure or therapy. .

helping patients adjust to necessary lifestyle changes after weight loss surgery, supporting patients enrolled in non-surgically, medically supervised weight loss programs, providing support to patients who may have lost contact with their previous health care professionals, facilitating engagement of patients by simplifying access and reducing hurdles.

.

After launching ReShapeCare in June of 2020, we continue to see a growing need for virtual services given the current health care climate as the pandemic has created an increased demand for patients to speak to their physicians in a safe and virtual environment.

We are confident that this new paradigm will continue to demonstrate benefits post-COVID and continue to demonstrate benefits and adoption far into the future. .

During the soft launch this quarter, we were excited to see early momentum in the program as the first 25 health care professionals quickly enrolled with ReShapeCare.

We believe the full launch and continued physician incorporation of this service will help strengthen our relationships with these health care providers, enhance our overall position in the weight loss market and have an immediate positive impact on our top line. .

Our operations, quality, financial and regulatory teams completed 4 separate audits over the past quarter. And we are very proud to announce that our company had 0 nonconformities identified. On the operations front, we continue to make excellent progress on the manufacturing transfer of the LAP-BAND technology following that acquisition.

We are on track to finish this process at the end of this year with our first independent production in Q1 of 2021. .

Our research and development efforts also remain a key focus and an area where we were able to offer additional shareholder value through an expansion of our services and product offerings.

We are particularly encouraged by the positive preclinical results demonstrated by our investigational Diabetes Bloc-Stim Neuromodulation device for the treatment of type 2 diabetes, which we announced in September. The device was shown to be safe and well tolerated, meeting all end points for the study. .

Based on these positive results from the preclinical study, we have successfully completed the goals of the National Institutes of Health Small Business Innovation Research Phase I grant.

We look forward to further investigating this unique innovation and believe our exploration of neuromodulation for diabetes provides a strong complement to our portfolio and pipeline, focused on improving the treatment of obesity and metabolic diseases. .

We're also very optimistic about the potential our ReShape Gastric Vest offers as we continue to support its European clinical trial. Unfortunately, we did experience a slowdown in the clinical trials for the ReShape Vest as a result of hospital-based clinical investigation sites being closed during the -- due to COVID-19.

However, patients currently enrolled in this trial have continued to be monitored virtually, and we expect to have milestone reports in the coming months.

We will continue to work with additional sites to keep them engaged for the trial, continuing outside of Spain, and have maintained the necessary preparations to ensure that these sites are prepared and that patients are available as soon as elective surgeries return to those countries. .

In addition to the efforts and progress we have made in driving revenue and advancing our clinical programs, we maintain a continued emphasis on our initiatives to reduce expenses and manage costs.

During the quarter, we were able to execute on this initiative and reduced total operating expenses by approximately $3.2 million on a year-over-year basis without significantly reducing our research and development expenses. .

We are encouraged by the momentum we have gained during the third quarter and believe the company remains well positioned for continued growth of our product and service platform, efficiently executing on these associated milestones and time lines as we head into the remaining months of 2020 and the coming year. .

And with that, I'll now turn it over to Tom for our detailed financial results. .

Thanks, Bart, and good afternoon, everyone. As Bart mentioned, we were very encouraged by our third quarter growth in year-over-year revenue despite the slowdown from COVID-19. Additionally, we continue to reduce our cash burn to improve our overall operations and financial condition. .

Revenue for the 3 months ended September 30, 2020, was $3.6 million compared to $3.5 million in revenue for the 3 months ended September 30, 2019. The primary reason for the increase in revenue was due to increased sales in Europe. .

Gross profit for the third quarter of 2020 was $2.3 million, representing a gross profit margin of 63.3% compared to $2.1 million for the 3 months ended September 30, 2019, at a gross margin of 59.8%. The increase in gross margin was primarily due to increased average selling prices and reduced period expenses. .

Sales and marketing expenses for the 3 months ended September 30, 2020, were $1.2 million compared to $1 million for the 3 months ended September 30, 2019. The increase was primarily due to higher payroll-related expenses, global sales commissions and stock-based compensation.

These expenses were partially offset by a reduction of approximately $100,000 in travel expenses due to reduced travel from the COVID-19 pandemic. .

General and administrative expenses were $2.4 million for the third quarter of 2020 compared to $4.4 million for the 3 months ended September 30, 2019.

The decrease was primarily driven by our continued emphasis in decreasing our costs specifically related to audit, consulting and other professional service provider expenses of $1.2 million, legal fees of $1.2 million and a reduction in bad debt expense of $200,000 and partially offset by an increase in stock-based compensation expense. .

Research and development expenses were $900,000 for the third quarter of 2020 compared to $900,000 for the 3 months ended September 30, 2019.

The company decreased its research and development expenses due to the slowdown in clinical trials for the ReShape Vest as a result of the COVID-19 pandemic, partially offset by an increase in payroll-related expenses. .

Total operating expenses were $4.5 million for the third quarter of 2020 compared to $7.7 million for the 3 months ended September 30, 2019, for an overall reduction of $3.2 million. .

On a non-GAAP adjusted EBITDA basis, where we add back stock-based compensation expense, depreciation and amortization and warrant expense, amongst other items, the loss was $1.4 million for the third quarter of 2020 compared to a loss of $4.4 million for the 3 months ended September 30, 2019. .

Our cost-cutting initiatives continue to be a key priority for the company. And we were excited to achieve this reduction in operating expenses without significantly compromising our development programs. .

Turning to the balance sheet. As of September 30, 2020, we had total cash of $1.9 million compared to $3 million as of December 31, 2019. On September 14, 2020, the company entered into an amendment to an existing credit agreement that increased the amount available under delayed-draw term loans by $2 million, of which $1 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 to March 31, 2021. .

Looking back at the third quarter, we continue to successfully reduce our cash burn and operating expenses to better position the company for future savings during this time of uncertainty related to COVID.

For the remainder of this year, we expect to further strengthen our balance sheet, and we will continue to prioritize growing revenues while monitoring operating expenses to improve our overall financial condition. .

With that, I will turn the call back over to Bart. .

Thanks, Tom. As we are beginning to see spikes in COVID-19 cases in Europe and subsequent restrictions, we will continue to monitor and adjust to that impact. We remain optimistic and believe that this is a fluid situation, which will require vigilance and adaptations to strategy and execution as needed.

I am extremely pleased by our company's ability to overcome these challenging market dynamics in the third quarter and remain confident that ReShape will continue to execute upon our objectives with persistent diligence towards driving shareholder value as we head into the final months of 2020. .

We will continue to keep everyone updated as we work determinedly towards our goal of being the trusted and preferred clinical weight loss company for clinicians and patients. .

Thank you to our investors, Board, employees and customers for your continued support. We look forward to sharing our future with you. .

Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may all disconnect. Have a great day..