HIND - NASDAQ

Good afternoon, and thank you for joining the ReShape Lifesciences First Quarter 2023 Conference Call. I would like to turn the call over to Michael Miller from Rx Communications.

Good afternoon, and thank you for joining the ReShape Lifesciences first quarter 2023 earnings call. I'm pleased to be joined today by Paul Hickey, President and Chief Executive Officer; and Tom Stankovich, Chief Financial Officer. Paul will provide an overview and update on the company's activities, and Tom will review the financial results for the period. He will then turn the call back over to Paul for some closing remarks, after which, we'll open the call to a question-and-answer session. As a reminder, this conference call as well as ReShape Lifesciences' SEC filings and website, including the Investor Information section of the website, contains 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 the company's most recent annual report on Form 10-K. As an additional reminder, ReShape stock is listed on NASDAQ, trading under the symbol RSLS. I will now turn the call over to Paul Hickey, President and CEO, ReShape. Paul?

Thank you, Mike. I'd like to thank all of you for joining us this afternoon for our first quarter 2023 earnings call. In the first quarter of 2023, we have continued to execute our strategies to become a sustainable and scalable organization on a path towards growth and profitability. Before I delve into our first quarter highlights, I'd like to briefly remind you of our three growth strategies or pillars for growth. Our first pillar is to operate our business with a disciplined metrics-driven approach to drive predictable revenue growth through a sustainable and scalable business model. Key to this first strategy is the revamping of our lead generation initiatives. The second pillar is to continue to expand our product portfolio and pipeline across the care continuum. And our last pillar is to continue to validate our evidence-based weight loss solutions leveraging our scientific advisory board for key insights on strategic initiatives. I'm proud to say that during the first quarter, we had many successes, in particular, before onetime adjustments, we significantly reduced operating expenses by 43% as compared to the first quarter of 2022, allowing us to invest in our growth initiatives, including marketing and R&D. Additionally, these cost reductions, combined with our laser focus on executing on our growth pillars to drive revenue, put us in a strong position to achieve our goals. Before I further detail our highlights and upcoming initiatives, I'd like to mention the enormous market opportunity before us. The global multibillion dollar obesity market opportunity remains largely untapped. Currently, 2.5 billion people or more than 30% of the global population is considered overweight or obese, a figure that's expected to grow by 50% by 2030. The global weight loss and obesity management market is expected to rise an estimated value of $300 billion, representing a substantial compound annual growth rate of 6.7% from 2019 through 2026. Drilling down a bit, the overall bariatrics surgical device market alone is projected to reach $2.8 billion worldwide by 2025, with the U.S. portion accounting for $1.8 billion in the same time frame. Additionally, with 50% of adults in the U.S. trying to lose weight every year, we believe our differentiated suite of weight loss and metabolic health solutions is well positioned to address the entire weight loss continuum. Moreover, according to the FDA, approximately 70% of American adults ROB server weight, resulting in serious health issues and tremendous costs. It's important to remember that weight loss is tied to a dramatic drop in an individual's cancer risk that can help lower blood pressure and manage diabetes. The most recent development in obesity market is the media and recent consumer adoption of GLP-1 agonist for weight loss. The related big pharma marketing efforts have significantly increased the number of obese individuals who are seeking medically managed weight loss. While in the past, obesity has been a sensitive topic and treatment has not been normalized, we are pleased to see a shift in perception as well as a greater awareness and acceptance of how critical obesity care is for both adults and children. Given the known limitations of behavioral modification, the inaccessibility, side effects and durability of pharmaceutical therapy and the anatomy-altering and irreversible nature of other bariatric surgical approaches, we believe more than ever, that there is a substantial need for the less invasive, adjustable and reversible Lap-Band. Our product has proven a safe, effective and durable solution providing long-term weight loss. Now let me turn back to the discussion of our recent highlights and growth initiatives. Based on the cost reductions I previously mentioned, we remain on path to profitability, with the balance sheet bolstered by two capital raises this year totaling $12.7 million in gross proceeds. These funds will allow us to invest in our growth drivers in order to expand awareness of our evidence-based product portfolio, including the Lap-Band. We are steadily increasing visibility for the Lap-Band through our highly targeted direct-to-consumer marketing campaign, which has already helped yield higher-quality and lower-cost patient leads in specific markets that align with our surgeon advocates. Through our experience, we know the primary driver of Lap-Band surgeries is patient engagement. As I mentioned on our last call, we are strategically targeting key touch points in the patient's decision process for surgery including developing an improved patient-centric website experience, which we're on target to launch in the third quarter. This will also be combined with the launch of a marketing automation initiative to improve this process with automated e-mail text call and web retargeting to ensure that every patient inquiry has the highest possible chance of transferring to a surgeon. We are building these core competencies in-house, including our call center to align with the marketing automation and lead nurturing efforts. Even when considering the new technology, implementation and headcount associated with these efforts, we believe we can save money while ensuring ongoing optimization and nimble marketing to responsive to the market. In summary, we're improving our marketing efforts to better address patient needs with the intent of increasing conversions on the website driving more brand engagement and ultimately, more Lap-Band surgeries. At the upcoming ASMBS meeting in June, we will have the first full meeting of our recently formed Global Scientific Advisory Board comprised of internationally recognized experts and surgeons in the obesity and metabolic disease fields. ReShape's SAB provides us access to an extensive and unparalleled knowledge base as well as relationships and insights that will be invaluable as our SAB members provide feedback on our growth initiatives. We expect that each member will be integral in helping us expand access for patients to safe and effective treatments for durable weight loss. This is critical as we continue to execute our disciplined approach to drive revenue and expand our product pipeline. To that end, one of our newly launched products is the redesigned calibration tubes with 3 new sizes, which are used in a broad range of rate procedures such as laparoscopic sleeve gastrectomy and gastric bypass. We expect to reship calibration to add incremental new customer revenue this year. It is important to reiterate this product is used in procedures other than the Lap-Band and therefore, provides a great opportunity for us to increase future revenues. Further, in the coming weeks, we intend to submit a PMA supplement to the FDA for the next-generation enhanced Lap-Band 2.0, which was developed with physician feedback to improve the patient experience. Similar to our current Lap-Band, the Lap-Band 2.0 is adjustable postoperatively to increase or decrease the opening of the band in order to optimize an individual's comfort, thereby improving the therapy effectiveness. At the same time, a unique feature of the Lap-Band 2.0 is an enhanced band reservoir technology that serves as a relief valve designed to alleviate this comfort from swallowing large pieces of food that may require in-office patient band adjustments. We expect feedback from the FDA by year-end and if approved, we believe based on discussions we've had with physicians that there will be broad adoption by existing and new surgeons. As I've noted in the past, surgeons I have spoken with about the improved product believe the Lap-Band 2.0 will allow us to engage new surgeons and reengage many of those who have used the Lap-Band historically. At the same time, we continue to engage with health care professionals to expand awareness and use of personalized treatments, including both our proprietary Lap-Band and the HIPAA-compliant novel weight management program, ReShapeCare to ensure that patients can achieve durable weight loss goals, improvements in obesity-related commodities and quality of life. Additionally, we continue to engage several large self-insured employers to provide reshape care to the employees in order to positively impact overall employee health and thus reduce employers' health care costs. The reception from our discussions have been very positive. As a reminder, ReshapeCare weight management program supports healthy lifestyle changes for all persons, not just individuals who qualify for Lap-Band surgery. We look forward to sharing updates on this exciting program in the future. Well, one of our most compelling pipeline products is our proprietary Diabetes Black Stim Neuromodulation, or DBSN device. The DBSN dual Vegas nerve neuromodulation selectively modulates vegablock and stimulation to the liver and pancreas respectively, to manage insulin and blood glucose levels. We had the opportunity to present compelling preclinical evidence on the DBSN at the recent Keystone Symposium on type 2 diabetes, demonstrating that this technology may be able to reduce diabetes dependent -- diabetic patients, dependence on medications in a very individualized manner. As a reminder, the DBSN has been funded with non-dilutive NIH grants, and we'll continue to collaborate with leading researchers and industry-leading strategic corporate partners, while seeking additional NIH grant support. We believe that if approved for commercial use, the DBSN device will further enhance our differentiated medical device offerings. Now before I wrap up my opening remarks, I want to remind our listeners that one of reshapes many assets is our strong intellectual property portfolio of 155 patents surrounding all of our products, including the Lap-Band ReShape DBSN device and ReShape Obalon balloon system. We have worked diligently to strengthen our IP position, most recently evidenced by the noticeable allowance from the U.S. patent office for an additional patent covering the ReShape Obalon Balloon System. As always, we will continue to build offensive mode around our product portfolio and commercialization efforts and also take offensive action when it is appropriate. I would now like to turn the call over to Tom Stankovich to provide a recap of our financial performance. Tom?

Thanks, Paul. And once again, thank you all for joining our webcast this afternoon. As a reminder, a full discussion of our financials is available in our press release and 10-Q. Before I discuss some of our financial details, I want to point out that before onetime adjustments, our $4 million or 43% reduction in operating expenses reported in the first quarter of 2023 as compared to the first quarter of 2022 and was consistent across all expense categories and is evidence of our focus on achieving greater operating efficiencies. These reductions, combined with our expectation for increased revenue resulting from our targeted digital media campaign focused on geographies near bariatric surgery centers that sell the Lap-Band system and the recently launched and redesigned reshape calibration tubes are expected to positively impact revenue for the remainder of 2023 and move ReShape closer to cash flow breakeven. Moving on to other key financial metrics for the first quarter ended March 31, 2023. Our revenue totaled $2.3 million for the three months ended March 31, 2023, which represents a contraction of 6.3% or $200,000 compared to the same period in 2022. The primary reason for the slight decline is a decrease in sales throughout Europe. Our expectation that revenue will continue to increase through the remainder of 2023 and as we focus on a targeted digital media campaign near bariatric surgical centers that sell the Lap-Band system and have fully launched the three new sizes of calibration tubes. Gross profit for the three months ended March 31, 2023, and 2022 was $1.2 million. Gross profit as a percentage of total revenue for the three months ended March 31, 2023, and with 53.5% compared to 49.9% for the same period in 2022. The increase in gross profit percentage is due to the company becoming more efficient and continuously looking for further cost reductions within our manufacturing processes. Sales and marketing expenses for the three months ended March 31, 2023, decreased $2.5 million or 53.5% and to $2.2 million compared to $4.7 million for the same period in 2022. The decline is primarily due to a decrease of $2.4 million in advertising and marketing expenses as we have reevaluated our marketing approach and moved to a targeted digital marketing campaign, resulting in a reduction of costs. There were also reductions in sales personnel and stock-based compensation, partially offset by increases due to the development of the ReShapeCare platform. General and administrative expenses for the three months ended March 31, 2023, decreased by $1.2 million or 30.7% and to $2.7 million compared to $3.9 million for the same period in 2022 before onetime adjustments of $1.7 million for professional services related to our fundraising activities in February 2023. The decrease is primarily due to a decline in stock-based compensation and payroll expenses, along with a decreased amortization costs and rent. There were also many miscellaneous reductions in G&A expenses as we continue to see work on efficiencies and cost reduction efforts. Research and development expenses for the three months ended March 31, 2023, and decreased by $300,000 or 39.2% to $500,000 compared to $800,000 for the same period in 2022. The decrease is primarily due to a reduction in payroll expenses along with consulting and clinical related costs. We ended the quarter with $9.1 million of cash and cash equivalents and remain debt free on our balance sheet. As we continue in 2023, we anticipate our revenues increasing steadily and continue our control and reduction of operating expenses, and we believe there is sufficient cash on hand to fund our current operations into 2024. With that, I will now turn the call back over to Paul.

Thank you, Tom. Before we open the call up for Q&A, it's important to reiterate that we are committed to continuously improving our marketing systems and bringing critical components in-house to ensure optimal lead generation, lead nurturing, and lead conversion, while further reducing lead generation costs. And finally, we will work closely with our world-class Scientific Advisory Board to continue executing on our plan for success in a global market that is changing in historic fashion to normalize safe and effective treatments for obesity. As Tom detailed, we have significantly reduced operating expenses across all categories, so we can invest in growth initiatives. We're laser focused on executing on our growth pillars to drive revenue with an expanded portfolio of transformative technologies that consists of a selection of patient-friendly, not anatomy changing lifestyle enhancing products, programs and services to treat obesity and metabolic diseases across the entire care continuum. This concludes our prepared remarks. So now we'd like to open the call for your questions. Operator?

Certainly. [Operator Instructions] And our first question will come from Jeremy Pearlman of Maxim. Your line is open.

Hi. This is -- I'm actually on the line for Anthony Vendetti. Thank you for taking my question. So the first question is, if you could share any of the metrics that you're using to gauge the success of this new marketing campaign and how can we see, may when can we see maybe -- I know you said earlier on earlier calls, there was about a six-month weight until from when a patient goes into the doctor to you actually has the surgery. When can we see some of that the benefits of this new marketing approach?

Great question, Jeremy. Thanks for joining today. I think you'll hear updates every quarter going forward. As you bring, for example, the call center in-house, it allows us to have metrics to whatever level of detail that we need to have to manage the program and improve it on an ongoing basis. And then as appropriate, we'll share those metrics with you and others. I know on our website as well to look at or before and after as we launched our patient-centric website here in the third quarter as we watch the improvements, we'll be able to track those measurements and again share those. Probably most importantly, it gets into the overall marketing cost as a part of our P&L. And as you watch -- as we watch revenue grow and we watch our marketing dollars stay consistent or increased less than obviously revenue, we've hit the sort of the sweet spot, if you will. So yeah, I can't emphasize enough moving the marketing competencies inside how much that allows us to track patient leads from initial contact through the nurturing process ultimately to the transfer to the physician. And the last metric that you'll hear out in the industry, it's the warm transfer. It's the percent of needs that you have on the top of funnel that you ultimately get down to where they want to be transferred to a physician. And we've seen with our most recent marketing enhancements that we've actually had an increase -- a substantial increase in our lead transfer warmly transfers to physician practices in a pilot study that we did with an SMS texting technology. So in other words, as we engage a lead instead of calling them or sending them an e-mail, they get a text message like whether if you went to a dentist or some other appointment. That same technology used in bariatrics allows us to catch that patient when they're ready to make that decision. And that's the key with any leads just making sure you're -- when they want to make the decision to see the surgeon that they have the chance to do that with a click of a button or a response yes to attacks.

Okay. Great. And then I know you mentioned earlier on the call in the beginning of the call about the new weight loss drugs and how popular they are in the media, and it's opened the conversation to many patients, I guess, about how they could lose waiter and help attack or help their obesity. Question is, have you spoken to any bariatric surgeons and have they seen any hesitation from some of the patients because now this is such a popular option and maybe patients who would want to do the surgery, but maybe are holding off or would like to try, let's say, the drugs before they go -- takes on surgery? Is there anything you could share that you've been hearing from the surgery?

Yeah. Again, we're watching this very closely. And I think in the last update we did a similar question from Anthony. We did reach out to, I think, our top 25 accounts and ask them, did they feel like the weight loss drugs were affecting their practice and all but I think one or two said no, they didn't feel like the weight loss drugs were impacting their procedure volume, okay? That said, we're getting anecdotal information from other physicians that are not part of our lead generation programs that say that they've been feeling a slowdown. And I think there's going to be articles out to look at the overall impact of the weight loss drugs, but I think I stand by my position that there's going to be an overall increase in the pool of patients that is a result of the marketing efforts. In other words, people are getting off the sidelines and approaching health care professionals, which just wasn't done. I mean I know a few people on the weight loss drugs, they would have a number of contemplated that, certainly weren't contemplating surgery. So I think engaging in the discussions a healthy component. The one interesting piece for me, Jeremy, is that I did mention like some that are not related to our call centers and our lead generation are seeing an impact on ours are not. I think it kind of leads me to believe that the marketing efforts are paying off in a way that we have headwind potentially with the weight loss drugs. But because we're engaging leads with e-mails, texts and/or live sort of customer service calls. We're able to retain those patients and get them to see a surgeon to ultimately be considered for surgery. And then the longer term, I think what we're going to find is most all of the surgeons are going to be trying combination therapies where you may be on the weight loss drug, but you're plateauing or it's cost prohibitive, so you might have the surgery. And as you end up plateauing on your weight loss goals for whatever surgery may have, surgeons have been contemplating how to -- as they do today, but with the new drugs, they can get patients back on their weight loss plan with a combination therapy with surgery and prescription drugs.

All right. Okay. Understood. Great. And actually, that egress my last question about the ReShapeCare. So I don't know how many do you have any patients that are signed up what has been the reception? And I know you're focused more on the -- on private health company health insurers. But are you -- when you do speak to a surgeon about the Lap-Band, is it a cross-selling opportunity, do the sales reps also bring up how that can be combined with the ReShapeCare to be a really powerful weight loss tool?

Yeah. And I think I've been transparent in the past about ReShapeCare was kind of surprised us with the interest that the larger self-insured employers have, and I'm not going to say caused by surprise, but in the end, it offers one sort of call point in terms of selling ReShapeCare with an employer and their health and wellness director whoever that leadership decision maker is. And once we pitch ReShapeCare, it allows us to have during their annual enrollment time frame allows ReShapeCare to be positioned in some of these employers that vary in size. And so kind of the midrange employers are -- seem to be a really good target for us where they don't have the resources to come up with programs like this and ours is fairly comprehensive. And that doesn't mean that we're not doing the ReShapeCare marketing efforts for individuals who are just looking for something else in weight loss and and/or part of our Lap-Band lead nurturing program. Specific to accounts. There's -- we find several accounts of ours have their own dietitians and their own sort of coaches, if you will, and they're not needing -- there's no gap to fill, but ReShapeCare. So we're being sensitive and appropriately so with making sure that we're -- when we approach our physicians that are partnering with us on the lead nurturing efforts that if they need to have ReShapeCare to augment their either parapet or sort of postoperative support for their patients it's there for them. So in terms of quantities and a number of patients, I think we're in the early stages. And honestly, there's -- if it's not weight loss strikes, you're also seeing a lot of things on television commercial ads and whatnot for Noon or whatever other type of virtual weight loss management tools. We're still differentiated by all that's offered out there in the industry by the fact that we have actually live coaches and the other programs do not. So I would say stay tuned on the numbers as we continue to build both the employer base side of the business and the individual or I guess, it would be just the average Joe and Jane public part of the business.

Understood. Okay, great. Thank you for all that information. I'll hop back in queue.

[Operator Instructions] And I'm showing no further questions. I would now like to hand the call back to Paul Hickey for closing remarks.

Thank you. Well, I hope we've been successful in relaying the progress we have made towards rightsizing organization to be a sustainable, scalable company and how excited we are to remain excited to remain about the future. We'll continue to work diligently to build our commitment to provide evidence-based personalized devices and therapeutics, including the FDA-approved minimal base Lap-Band. I want to. Thank our employees, our board members, our customers, vendors, existing and new shareholders for your continued support of ReShape. It is truly an exciting time as we continue to solidify our position as a premier physician-led weight loss and metabolic health solutions company. I look forward to further engaging all of our stakeholders, health care partners and shareholders. Thank you.