ReShape Lifesciences, Inc.

Good day, and thank you for standing by. Welcome to the Reshape Life Sciences first quarter 2022 earnings webcast. I would now like to hand the conference over to Michael Miller of RX Communications. Please go ahead, sir.

Good morning, and thank you for joining the Reshape Life Sciences first quarter 2022 earnings webcast. I'm pleased to be joined by Bart Bandy, President and Chief Executive Officer of Reshape Life Sciences, Inc. who will provide an overview of the company's activity during the first quarter and milestones to date. Tom Stankovich, Chief Financial Officer of Reshape, will then review the financial results for the quarter and then turn the call back over to Bart to finish. As a reminder, this conference call, as well as Reshape Life Sciences 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's stock is listed on NASDAQ, trading under the ticker symbol RSLS. I will now turn the call over to Bart Bandy, President and CEO of Reshape Life Sciences. Bart?

Thanks, Michael. Good morning, everyone, and thank you for joining us today. As most of you are aware, with the emergence of the fast-spreading COVID-19 Omicron variant in late 2021, which resulted in a marked rise in global cases, elective procedures across the board had literally ground to a halt nationwide. This, in turn, affected revenues across the spectrum of medical technology companies, primarily those with products centered on elective procedures. In line with this undisputable fact, Reshape's first quarter revenues were impacted by the closing of a significant number of bariatric centers during that time. That said, as these restrictions on elective procedures were subsequently lifted late in the first quarter, we began to see a solid uptick in sales. We were particularly encouraged by the revenue generation we saw in March, which eclipsed our sales in January and February combined. Importantly, this positive revenue trend has extended into the second quarter, and we expect sales to continue to grow throughout the year, buoyed by our multi-platform direct-to-consumer advertising campaign. As a reminder, this DTC campaign utilizes strategically placed national television, print, digital media, and public relations in order to market our lap band program, with available aftercare supported through Reshape Care, a reimbursable virtual health coaching platform that can also support weight loss objectives for people who are not surgery candidates. Our goal is to create and build consumer engagement, leading to increased patient demand for our insurance-reimbursed next-generation lap band program and suite of physician-led weight loss support solutions, which also leads to a rise in bariatric surgeon engagement. The results of this campaign have been overwhelmingly positive thus far, and recognizing that the four to six month mandatory wait period imposed by insurers creates a lag between early engagement and actual procedures, we are, right now, just starting to reap the benefits of this strategic outreach, and we are optimistic that revenues will continue to increase through the remainder of 2022 and beyond. Before I go into more detail on what we see as a bright future ahead, I would like to remind our listeners of the massive market opportunity before us. The obesity epidemic is well documented with 2.5 billion people, or more than 30% of the global population considered overweight or obese, and this number is expected to grow to 50% by 2030. As a result, the overall bariatric surgical device market is projected to be a $2.8 billion market worldwide by 2025. The U.S. market alone is estimated to grow to $1.8 billion in this timeframe. Additionally, with 50% of adults in the U.S. trying to lose weight every year, ReShape is positioned to be a leader in addressing the significant effects of this serious health issue. As a reminder, the LapBand is the only FDA-approved laparoscopic weight loss device commercially available in the U.S., with the safest profile of weight loss surgeries and is covered by most major insurance plans, including Medicare. The market that we are building today is ours. Now I would like to outline the success of our recently initiated multi-tiered DTC marketing campaign, which has led to a surge in demand for lap band procedures. As most of you are aware, we launched our national demographic targeted DTC campaign across the highest viewed television channels and print publications. with the goal of effectively communicating the benefits and differentiated advantages of the lap band. The lap band is unrivaled in the market. It is adjustable, reversible, and well proven, with over 1 million bands having been placed in patients globally in the past 20 plus years, demonstrating an incomparable safety profile compared to highly aggressive stomach sleeping procedures or diets. In an outpatient setting, a patient can have their procedure in the morning go home that afternoon, and in a few days be back at work. It's very confidential, and it's not a big disruption to your life or your responsibilities. That's something that's highly desirable to many people looking at weight loss options. Additionally, as surgery centers reopen, we're seeing that patients continue to be drawn to the adjustability, reduced risk of procedure adverse events, and mitigation of nutritional deficiencies associated with anatomy-altering procedures. People also understand that the lap bands gives them control. They are using a tool to help them achieve their weight loss and health goals as opposed to just having something done to them. And mentally, that has a big impact on people making these decisions. Being in control and still participating through using a tool versus having something permanently done to you can be a big, big impact in the evaluation process. If something down the road comes out that is a better option for individuals, the lap band can also be removed with no changes to the patient's anatomy. We had an early launch of the DCC at the end of last year, adding select television networks and magazines throughout the fourth quarter. After gaining medical review committee approvals, we were able to follow up with major investments into the campaign in the first quarter of this year. Since the beginning of the marketing campaign, LabBan has been featured in over 15 major magazine publications, including People, Good Housekeeping, and Better Homes and Gardens, and over 28 national cable stations, including Bravo, Lifetime, USA, A&E, and Hallmark that all focus on our target audience. We have continuously improved on these marketing efforts through diligent metric analysis and adaptation, while also incorporating co-op marketing programs, local digital media, and a national social media influencer campaign. We are now seeing procedures directly tracked to the campaign, and we remain positive that we will continue to see the benefits and potential of this strategy through execution as the year goes on. The significant increase in potential patient and bariatric surgeon engagement that we have experienced so far indicates that our message is clearly resonating with the consumer and professional markets. In January of this year, we had the opportunity to present the LapBand program and expand awareness to a range of key bariatric surgery providers at the American Society for Metabolic and Bariatric Surgery's Leadership Academy and Reunited Meeting, where we received overwhelmingly positive feedback on the need for training and inclusivity of the lap band procedure for bariatric practices. This year, over 40 bariatric surgeons have approached us for recertification. Keep in mind that this is additive to our existing accounts, and we are only targeting 200 to achieve our immediate objectives. And we are receiving a steady flow of requests for refresher courses every week. As noted in today's press release, we are truly fortunate to have Vern Vincent, the ASMBS's 2022 Distinguished Industry Partner Award winner leading this effort, and we are delighted that he will be facilitating the training of the next generation of bariatric surgeons, including today's bariatric fellows, on the benefits of the lap band. Given the level of renewed interest in the lap band from key industry organizations such as ASMBS, bariatric surgeons, and consumers alike, we are enthusiastic about the potential for continued increased demand and sales going forward. In addition to reengaging surgeons who haven't used the lap band in years, we are likewise keenly focused on engaging new physicians, and we are seeing growth across the nation, including in key underserved markets. Doctors are enthusiastic that we are not necessarily competing against more aggressive stay-at-home procedures. We are creating a new market for people that don't want those procedures and may have given up on diets. So it's a whole new twist. the blue ocean theory versus the red ocean theory, and we're really excited about this opportunity. Moreover, we are receiving a steady stream of anecdotal feedback from surgeons on the positive impact our DTC campaign is having on their practices. For example, numerous physicians have told us that they have never seen marketing work so well, and they have mentioned receiving more inbound calls requesting the lap band than they have seen for years. Some have told us that they've seen as much as a 500% increase in patient interest, And others are working hard to catch up from the demand backlog the marketing created while surgery centers were shut down. Several are reporting that they were even performing surgery on Saturdays. This tells us that our strategy is on target. And as I noted earlier, as scheduled procedures are starting to flow, we're very excited to envisage what the next few quarters should look like based on the positive feedback and metrics that we are tracking from the DTC campaign. we can track website traffic, leads, and warm transfers of qualified patients to practices with a high level of confidence. This will all lead to increased lap band procedures and thus potentially a significant increase in revenues for reshaped life sciences over time. It is important to mention, again, the four to six month mandatory wait period required by insurers for bariatric or weight loss procedures, including the lap band, as it means that after we transfer a warm lead to the doctors from our DTC campaign, insurers will require a patient to go through several steps, which may include behavioral analysis, physical analysis, perhaps trying to medically manage weight loss program one more time to make sure that they can't lose weight and that they actually need surgery. So this represents a lag between the preliminary investment towards our marketing efforts, initial patient engagement, and scheduled procedures. What this means is that we are just now at the cusp of reaping the benefits of our DTC marketing campaign. While focusing on the visibility of the LapBand program, we also continue to build our proprietary ecosystem of unique weight loss solutions that provide more revenue-producing pathways, keeping patients in our sales channel longer. Chief among these is Reshape Care, our proprietary digital therapeutic weight loss and wellness program, which is reimbursed by major insurance plans, making it an effective and convenient virtual health coaching program to help our medically managed and bariatric surgery patients achieve and maintain their weight loss goals. Since the program is accessed through a prescription, it is physician led. We have board certified health coaches that work on behalf of the doctors and his or her practice to help patients with their behavior changes, nutrition or exercise, or whatever they might need to help them achieve and maintain their weight loss goals. Although originally developed as an aftercare support program for bariatric patients, We have also realized the opportunity to support patients desiring to lose weight who are not surgical candidates. Through Reshape Care, we are able to enter into the virtual healthcare delivery space, enabling us to tap into a market that is expected to reach $95 billion by 2026. Reshape Care and its extension, Reshape Marketplace, provide an e-commerce platform to access a collection of healthcare providers, recommended, competitively priced weight loss and wellness programs, that support the vital areas of nutrition, exercise, sleep, and stress. This e-commerce-based offering includes our new advanced line of premium supplements to optimize health and well-being, specifically for bariatric surgery and medical weight loss patients. Before I turn the call over to Tom to go over the financial results, I'd like to take a moment to review our pipeline. We plan to resume our EU-based clinical trial for ReshapeVest. a laparoscopic implantable technology designed to support and enhance the weight loss journey for patients with a stomach reduction surgery. ReshapeVest has the potential to replace or complement current stomach-reducing parax procedures once the European hospitals again permit access for studies and we communicate our go-forward plans with regulators. We remain in contact with the clinicians and clinical sites regarding this trial, where access to facilities and patients was precluded by COVID-19 pandemic measures. With the assistance of a grant from the NIH, we completed and met the necessary endpoints in order to complete the preclinical development of reshaped diabetes block stem neuromodulation technology, a novel investigational device using neuromodulation to control insulin production and potentially treat type 2 diabetes. We have submitted for a second grant for which we have responded to requests for additional information from the NIH committee and hope to hear back over the next few months. This platform is backed by a strong intellectual property portfolio and will remain committed to evaluating potential through a non-diluted funding strategy. Additionally, we continue to explore the compliance and regulatory requirements, manufacturing viability, market perception, and quality system controls necessary for reintroduction of the Obalon balloon system, which we gained through our merger with Obalon. The technology is first and only swallowable, gas-filled, FDA-approved balloon system introduced into the U.S. weight loss market as a non-surgical, minimally invasive product. Finally, we continue to evaluate M&A opportunities that align with our commitment to the physician-led weight loss and metabolic solutions market, which can enhance our current product portfolio and be accretive to our value. We are optimistic that the upward trend in sales we are experiencing in the second quarter will continue as we expand visibility and demand for the lap bands. along with the rest of our portfolio of physician-led weight loss solutions. We will maintain focus on marketing the proven advantages of our next-generation lap-bound program, celebrating its 21st year as the only FDA-approved, insurance-reimbursed surgical weight loss device, and will continue the evaluation, development, and prioritization of our portfolio and external opportunities that can bring additional value-creating weight loss solutions to our company. I look forward to providing further updates on our progress in the quarters to come. I will now turn the presentation over to Tom for a review of our financial performance.

Tom? Thanks, Bart. And once again, thank you all for joining our webcast this morning. Our revenue totaled $2.4 million for the three months ended March 31, 2022, which represents a contraction of 24.2% or $800,000 for the same period in 2021. As Bart explained, the primary reason for this decline is due to the COVID-19 Omicron variant, which caused a significant number of bariatric centers to close from December 2021 through February 2022. During March 2022, we did experience a significant increase in revenue compared to January and February 2022 as the Omicron variant began to subside. We expect our revenue will continue to increase through the remainder of 2022, as we have witnessed a significant growth in web traffic and doctor consultations attributable to our direct-to-consumer marketing campaign that we launched during the fourth quarter of 2021. We reported gross profit of $1.2 million compared to $2.3 million for the three months ended March 31st, 2021, a decrease of $1.1 million. Gross profit as a percentage of total revenue for the three months ended March 31st, 2022 was 50%, compared to 71% for the same period in 2021. The decrease in growth profit margin is primarily due to the reduction in revenue for the quarter combined with other department expenses which are more fixed in nature such as payroll related expenses, consulting fees, depreciation along with increased freight costs. Sales and marketing expenses for the three months ended March 31st, 2022 increased by 3.5 million to 4.7 million compared to $1.2 million for the same period in 2021. The increase is primarily due to an increase in advertising and marketing costs of $3 million after having launched the direct-to-consumer marketing campaign during the fourth quarter of 2021 and expanding this campaign during the first quarter of 2022. There were also increases related to strengthening the commercial organization as well as other smaller increases such as travel-related expenses as markets began to open up again. General and administrative expenses were $4.1 million for the three months ended March 31, 2022, compared to $2.7 million for the same period in 2021, an increase of $1.4 million. In addition to an increase in stock-based compensation of $500,000, this increase also reflects increases totaling $900,000 of insurance, professional services, payroll-related expenses, and an increase in rent and facility expenses associated with the Obalon merger. Research and development expenses were $800,000 for the three months ended March 31, 2022, compared to $600,000 for the same period in 2021. The increase is primarily due to increased payroll and payroll-related expenses. On a non-GAAP adjusted EBITDA basis, which included an increase in stock-based compensation The loss was $7 million for the three months ended March 31, 2022, compared to a loss of $1.7 million for the same period last year, which includes a non-cash $2 million loss on extinguishment of debt. The $7 million loss also includes our previously announced upfront marketing investment of $3 million for our direct consumer advertising campaign. As a result of our upfront marketing investment, Revenues were delayed due to the mandatory wait period of a minimum of four to six months for insurance verification purposes. Turning to the balance sheet, the company's cash and cash equivalents total approximately $15.5 million as of March 31st, 2022. Of note, we continue to strengthen our balance sheet as we have eliminated all debt including $10.5 million term debt with an institutional investor and our final $3 million obligation to Apollo Endosurgery for the purchase of the lap band in December of 2018. Additionally, $6 million was incurred in professional service and investment banking fees related to the Obalon merger. As mentioned in previous quarters, we continue to save and optimize costs as we strive to increase revenue and pursue significant ROI opportunities. As COVID-19 restrictions continue to be lifted and elective procedures continue to rise, our efforts around product visibility and demand for our products are expected to show increasing incremental returns, and we look forward to reporting positive, progressive results in the coming quarters. With that, I will now turn the call back over to Bart.

I hope we have been successful in relaying how excited we are about the future of the LAPBAM program. The results we saw in just the months of March, April, and to date in May are a testament to the value that this program and the company can bring to the weight loss market. We believe wholeheartedly that the proven benefits offered by the FDA-approved, minimally invasive, safe and effective lap band and suite of weight loss solutions will continue to attract interest as our DTC and other visibility campaigns expand and achieve more market penetration and thus improved revenue for Reshape as we help the millions of patients seeking physician-led weight loss solutions and an improved quality of life. Thank you to our board members, executive leadership team, employees, customers, vendors, existing and new shareholders for your continued support of Reshape as we progress on our mission to become the premier physician-led weight loss company. We look forward to reporting our results over the coming quarters.