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Edited Transcript of ETRM earnings conference call or presentation 14-Nov-18 9:30pm GMT

Q3 2018 ReShape Lifesciences Inc Earnings Call

ST. PAUL Nov 15, 2018 (Thomson StreetEvents) -- Edited Transcript of ReShape Lifesciences Inc earnings conference call or presentation Wednesday, November 14, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dan W. Gladney

ReShape Lifesciences Inc. - Chairman, President & CEO

* Scott P. Youngstrom

ReShape Lifesciences Inc. - CFO, Senior VP of Finance & Secretary

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Presentation

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Operator [1]

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Good afternoon, and thank you for joining us on today's call. (Operator Instructions) As a reminder, this conference call is being recorded today, November 14, 2018.

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

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Scott P. Youngstrom, ReShape Lifesciences Inc. - CFO, Senior VP of Finance & Secretary [2]

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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 third quarter of 2018 and then turn the call back over to Dan 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 filed April 2, 2018, and our quarterly report on Form 10-Q, filed today, November 14, 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?

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Dan W. Gladney, ReShape Lifesciences Inc. - Chairman, President & CEO [3]

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Thanks, Scott. Good afternoon, everyone, and thank you for joining us. On today's call, we look forward to updating you on our results for the third quarter and on progress we made in the business.

We've had some challenges in the last few months here at ReShape Lifesciences as difficulties raising capital in the quarter had an impact on our ability to invest in the organization and sell our products to their full potential. However, Scott and I, and our team have been working hard to push forward on a mission and on a company that we truly believe in. And I'm very pleased to share with you that over the course of last month, we have raised $7.8 million in net cash through our at-the-market financing offering or ATM.

I would like to start by addressing the capital structure and cash position at ReShape. One of our major areas of focus this quarter has been to simplify our capital structure so that we could further fund the company and get on track with executing our strategy and selling our valued products. We were excited to announce a few weeks ago that our series D preferred shares have been retired, removing most of the overhang on our stock. And as of today, the only remaining preferred shares outstanding are some series B and C preferred shares that are convertible into 61,328 shares of the company's common stock.

Additionally, late last month, our shareholders voted in favor of a Reverse Stock Split, an approval, which we believe was crucial to opening up access to capital for ReShape Lifesciences.

As I mentioned earlier, we raised $7.8 million in net proceeds since October, the majority of which was raised after the Reverse Split was approved. With this capital and the hard work of our team, we believe we can now get our business back on the road to success. We would like to thank our shareholders for approving the Reverse Split and helping us to achieve our goal.

Let's go into a bit more detail regarding the Reverse Split and why it was so important. Over the past several months, as we financed the company, along with the financings came a significant increase in our share count. While we and our Board knew this was necessary in order to keep ReShape Lifesciences funded, we also knew that the increase in share count combined with our low stock price was going to make it difficult for us to raise additional capital for the future. We believe that the combination of a reduced share count and the higher stock price that resulted from the Reverse Split were instrumental in helping us raise a $7.8 million in capital that we will in turn -- that will in turn enable us to invest in sales and marketing and in our clinical development programs as we grow.

On an additional positive note, as promised last quarter, we have reduced our monthly burn from $3.5 million at the end of the first quarter of this year to just under $1.8 million at the end of the third quarter. Even with this significant reduction and with limited ability to invest in marketing of our products, our sales force continues to market hard to sell our balloons.

Additionally, our internal development teams also continue to push forward to help build the future of ReShape Lifesciences in the form of both the ReShape Vest and its advancement as well as the development of a proprietary vBloc combination, block-stem device for diabetes.

As you might recall, in June 2018, the FDA unexpectedly published an updated advisory letter on fluid-filled intragastric balloons. This letter had a negative effect on the fluid-filled balloon market in the months after its publication, which did impact our third quarter revenues as well.

With the advisory letter now behind us, combined with the ability to support additional sales and marketing efforts for the balloons, now that we are financed, we expect to see a 25% to 35% increase in revenue in quarter 4 compared to quarter 3, 2018.

I will now give you a brief update on each of our product areas. Last month, we were excited to finalize an agreement, whereby the ReShape Balloon system is now available as a covered technology and procedure at the U.S. Department of Veterans Affairs, VA Medical Facilities through the previously announced ReShape Lifesciences' partnership with Academy Medical.

As a reminder, Academy is a certified service-disabled veteran owned small business specializing in the distribution of medical products to VA and Department of Defense facilities. As of October 9, 2018, the ReShape Balloon has been added to Academy Medical's 5-year sole-source agreement with the U.S. Department of Veterans Affairs, which allows any VA surgeon in the U.S. to purchase the ReShape Balloon system from Academy Medical under a national contract that pays for both the device and the procedure.

The Veterans Health Administration operates one of the largest healthcare systems in the world, and this agreement opens up the opportunity for the ReShape Balloon to be in a 150 VA hospitals that serve nearly 6 million patients annually.

Internationally, as you know, in May, we submitted in both the U.K. and Canada for approvals of our ReShape Balloon, and we are in the process of working through some customary questions with both authorities.

Turning to the ReShape Vest, our minimally invasive non-anatomy altering obesity solution. We are really excited for the initiation of the clinical trials for this device. As you might remember, initial pilot study results of 30% total body weight loss at one year with the ReShape Vest rivaled weight loss results of traditional bariatric surgery, which despite being invasive and anatomy changing is the current standard of care in weight loss surgery.

Our CE Mark approval process for the Vest is under way, and we are targeting 8 investigational sites in 5 countries; Spain, Germany, Belgium, the Netherlands and the Czech Republic. Last week, we held a one-day investigator meeting in Germany, where 10 bariatric surgeons left with our team from ReShape Lifesciences to discuss the ReShape Vest technology and its proper surgical technique for use in the trial. And the group also reviewed the trial protocol in anticipation of initiating study enrollment.

We have received favorable IRB approvals from several ethics committees and are now awaiting final approvals from the health authorities of each country.

We're also excited to continue work on our proprietary technology that is designed for type 2 diabetes. The technology utilizes our ReShape vBloc to stimulate nerves feeding into the pancreas, while at the same time blocking nerves feeding into the liver. The goal of the procedure is to lower blood glucose by increasing the release of the body's natural insulin through this proprietary combination procedure. Early data, which looks very promising, is being presented this week through a poster presentation at the ObesityWeek conference, and we look forward to continued development of this exciting program.

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

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Scott P. Youngstrom, ReShape Lifesciences Inc. - CFO, Senior VP of Finance & Secretary [4]

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Thanks, Dan. Moving to our financial results for the third quarter of 2018.

For the 3 months ended September 30, 2018, we reported sales of $350,000, a 46% decrease compared to revenues of $653,000 in the 3 months ended June 30, 2018 and a 3% decrease versus the $360,000 of revenue reported for the 3 months ended September 30, 2017.

For 2017 amounts, I'll remind that revenue included the $250,000 of service revenue related to an engineering services contract and does not include any revenue from gastric balloon sales.

We reported gross profit of $86,000 for the 3 months ended September 30, 2018 compared to $19,000 in the second quarter of 2018 and $145,000 for the 3 months ended September 30, 2017. The $250,000 of service revenue in 2017 generated over $90,000 of gross margin for that period.

Our team sold 218 balloons in the third quarter of 2018 as compared to the 414 units sold in the second quarter of 2018, representing a 48% decrease. We sold 110 balloons OUS, a similar 47% decrease from quarter 2. This was primarily due to our reduced spending -- marketing spend and the follow-on FDA advisory letter that Dan mentioned earlier.

Selling, general and administrative expenses for the quarter were $6.4 million as compared to $6.7 million for the second quarter of 2018 and compared to $4.6 million for the third quarter of 2017. Included in SG&A expenses this quarter were $2.9 million of noncash expenses, consisting of $1.3 million of the write-down of vBloc inventory, $756,000 in stock-based compensation and $675,000 of amortization of intangibles expense.

Included in SG&A expenses in the second quarter of 2018 were over $1.9 million of similar noncash expenses. These were both significantly lower than the $10 million in the first quarter of 2018, due primarily to the cost-reduction programs implemented as a part of our integration strategy.

SG&A expenses in the third quarter of 2017 totaled $4.6 million, but did not include the SG&A expenses of the intragastric balloon business, which was acquired in Q4 of 2017. We anticipate that our cash SG&A spend will continue to decrease in the fourth quarter due to integration efficiencies and lower overall headcount.

Research and development expenses were $1.3 million for the 3 months ended September 30, 2018 as compared with $2.4 million for the second quarter of 2018 and $1.1 million for the same quarter in 2017. This decrease was primarily due to reduced R&D spending on the vBloc product. Our third quarter 2017 R&D expenses did not include expenses from the intragastric balloon business.

We anticipate our R&D expense will remain at or near this level as we continue development on the Gastric Vest and the combination block-stem vBloc technology in the type 2 diabetes.

As of September 30, 2018, the company's cash, cash equivalents and short-term investments totaled $473,000.

As Dan mentioned, since October 2018, the company has raised approximately $7.8 million net of commission and fees through an at-the-market public offering. For more details on our recent ATM financing, please refer to our recently filed 10-Q. ReShape Lifesciences remains without any debt on its balance sheet.

Our current capital structure and common shares outstanding shows that as of November 13, 2018, we had approximately 3.1 million shares of common stock outstanding. And on a fully diluted basis, we have approximately 3.5 million shares outstanding.

We're targeting our cash burn for the fourth quarter of 2018 and on a go-forward basis to be no more than $1.5 million per month, and we anticipate a $2.4 million to $2.6 million revenue target for the full year 2018. This assumes a fourth quarter revenue increase of 25% to 35% over our third quarter revenues.

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

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Dan W. Gladney, ReShape Lifesciences Inc. - Chairman, President & CEO [5]

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Thank you, Scott. While we are faced with some challenges at ReShape this quarter due to significant capital constraints, the good news is that most recently we've made great progress on funding our company and simplifying our capital structure. And operationally, we are in a solid position, and are now ready to forge ahead.

With this recent successful capital infusion of $7.8 million, we can now get back on track, execute our strategic plan and bring our revenues back to normalized levels. The entire team at ReShape Lifesciences continues to be committed to fight against obesity, and we are dedicated to becoming a premier provider of anatomy-friendly minimally-invasive technologies designed to treat patients battling this epidemic disease.

We thank our employees and investors for your support. Thank you everyone for joining us today, and have a great evening.