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…

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…

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.